BPInsights: June 18, 2022

Stories Driving the Week

Overly Broad and Prescriptive Climate Disclosure Requirements Risk Leaving Investors Confused, Not Informed

BPI this week commented on the SEC’s climate disclosure proposal. The measure would impose broad requirements on registrants, including detailed financial accounting of climate-related risks, information on indirect emissions and numerous requirements for disclosure of risk management policies and practices.  Despite many banks already voluntarily disclosing climate information on their own, such an overly prescriptive approach from the SEC could undermine the goal of providing useful information to investors. Furthermore, the proposal fails to account for the interaction with the prudential bank regulatory framework.
What BPI is saying: “Banks share the SEC’s goal of communicating material climate risks transparently to investors and managing those risks in a prudent manner. However, the proposal’s overly detailed requirements would lead to a mountain of information that would be misleading and of little use to investors.  This is particularly the case given the significant limits of climate data today. It is important to ensure that the climate-related disclosures produced are useful to investors.” – Lauren Anderson, BPI senior vice president and associate general counsel.
Why it matters: Investors are increasingly seeking more information on how firms will be affected by climate-related risks, but climate risk data is in the early stages of development, with significant data gaps and inaccuracies. Despite the fact that many banks are fairly advanced in producing voluntary climate disclosures, the data challenges are even more problematic for them as banks must rely on data from their clients to produce their climate disclosures. Taking a highly prescriptive approach to incorporating climate risk data into disclosures could lead to a false sense of precision when it comes to climate reporting and end up misleading investors.  Given the data challenges and associated risks, it is important that regulators recognize the need for a flexible framework that will allow disclosures to improve over time.

To Serve Communities, Banks Need the Ability to Grow

Bank growth through M&A is facing scrutiny from federal policymakers, and its effect on communities is quite rightly an important focus. Analysis shows that consolidation has enabled banks to serve those communities better, and that a current revolution in the business of banking will only continue that trend. A new American Banker op-ed by BPI CEO Greg Baer outlines how banking consolidation empowers banks to enhance their customer service and efficiency and how regulators can pursue the worthy goal of expanding credit access without undermining banks’ ability to achieve necessary scale.

Blanket Capital Distribution Bans Raise Cost of Capital

Regulatory bans on banks paying dividends or repurchasing stock during economic stress can constrain the real economy. The higher cost of capital resulting from uncertainty around banks’ dividend payments could create a constant drag on credit creation and economic activity, according to a new BPI blog post that cites research on the subject. The bans and restrictions on capital distributions during the onset of the pandemic, such as those in the EU and the U.K., were inconsistent with the post-crisis regulatory regime, which uses stringent capital requirements and stress tests to determine whether a bank is permitted to make capital distributions. Such actions also have more subtle, but nonetheless consequential, implications for banks’ future behavior. If banks believe such a ban could be imposed again, they may perceive an extra cost in raising capital and expanding lending in good times because they could be prevented from responding to lower customer demand in bad times by shrinking and returning capital to shareholders.

France Unveils Basel Compromise

France, which is currently holding the EU Presidency, this week released its Basel III compromise package. Here are some key takeaways from the release.

  • Solo regime remains: The compromise suggests applying Basel III reforms at the solo level, rather than at the consolidated level as initially proposed by the European Commission, as a compromise to host member states while leaving the option open for countries to apply reforms at the consolidated level if desired, according to POLITICO.
  • Cross-border restriction dropped: The French compromise package scraps a proposed cross-border banking services ban, as well as proposals for uniform EU rules on when foreign banks must convert branches into separately capitalized subsidiaries. Each country would be able to determine that threshold under the French plan.
  • Directors: The French plan would defer to each country on fit-and-proper checks on bank directors.
  • Open questions: It remains to be seen how the EU – and the U.S. — will ultimately implement the global Basel standards. The implementation will wield important consequences for the cost of credit for businesses and households worldwide.

The Crypto Ledger

Chaos roiled the crypto ecosystem again this week as high-yield lenders halted withdrawals, major exchanges cut staff and policymakers eyed crypto legislation.

  • Exits slam shut: Crypto lender Celsius Network sparked turmoil as it suspended customer withdrawals due to “extreme market conditions,” leaving customers in the lurch. Such lenders fear a regulatory crackdown in the wake of the episode, POLITICO reported. Crypto exchange Binance also paused bitcoin withdrawals on Monday, citing a transaction backlog.
  • Binance lawsuit: Binance.US faces a class-action lawsuit over allegations that it misled investors about the stability of stablecoin UST, which recently crashed.
  • Stablecoin tulip mania: The risk of stablecoins, like the “tulip mania” of Dutch history, is limited to a small group of speculators and does not pose a risk to the wider financial system, Niall Ferguson and Manny Rincon-Cruz wrote in a Wall Street Journal opinion piece this week. “The true lesson from Terra—as from tulip mania—is that roulette games for rich speculators pose no systemic risk,” they wrote.
  • Layoffs: Crypto exchanges are cutting staff, in some cases significantly, as a downturn grips their markets. Gemini, Crypto.com, BlockFi and Coinbase are among firms slashing their workforces, with Coinbase announcing plans to lay off nearly a fifth of its employees.
  • Gensler’s view: SEC Chairman Gary Gensler suggested this week that legislation targeting cryptocurrencies could undermine protections in the capital markets. “Like behaviors should have like treatment,” Gensler said at a Wall Street Journal event. Legislation recently introduced by Sens. Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) would remove some cryptocurrencies from the SEC’s jurisdiction.

Basel Committee Issues Climate Principles

The Basel Committee on Banking Supervision this week released principles for the effective management and supervision of climate-related financial risk. The principles strongly resemble their previous iteration, with a few changes. They encourage banks to incorporate climate into capital and liquidity planning and to take climate into account in compensation structures. They also clarify the distinction between scenario analysis and stress testing.

In Case You Missed It

Broad Group of Trades Supports Bill to Close ILC Loophole

A bipartisan bill to close the ILC loophole would prevent large tech companies and other commercial firms from accessing the privileges of a bank without the full-fledged oversight that governs banks, a broad group of financial and consumer groups including BPI wrote in a letter to Congress this week. “Although ILCs have the powers of a commercial bank, their corporate owners – unlike the owners of commercial banks – are not subject to consolidated supervision and regulation by a federal banking agency, which can allow risks to build up in the organization outside the view of any federal supervisor,” the groups wrote, expressing support for H.R. 5912. The legislation was slated to be considered this week by the House Financial Services Committee, but the markup was postponed due to COVID.

JPMorgan to Hire Ukrainian Refugees

JPMorgan Chase plans to hire as many as 50 Ukrainian refugees in its Warsaw office, according to Bloomberg. The plan, which would also offer job training and help accessing housing and childcare, is part of its humanitarian support efforts for Ukraine.

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.