BPInsights: June 19, 2021

Stories Driving the Week

As FinTechs Seek Payments System Keys, Here’s What to Consider

On May 5, 2021, the Federal Reserve issued for public comment a set of proposed guidelines intended to govern how Federal Reserve Banks would review and assess account applications by firms with novel charters. 
The proposed guidelines are in part a reflection of the ongoing efforts by Big Tech and FinTech firms to engage in banking activities without being subject to bank regulation and supervision. Federal and state authorities have begun creating novel types of charters that permit various forms of lending, deposit-taking and payments activities, while avoiding most federal bank regulation and supervision (notably, the BHC Act). Once armed with novel charters, these firms will seek accounts at Federal Reserve Banks in order to, among other things, gain direct access to the Fed’s payment systems (i.e., without the requirement to partner with a regulated bank). 
The key elements of the proposal are outlined here; however, serious policy questions remain unaddressed. BPI developed the following series of posts and analyses in an effort to address some of the complexities and implications that would be introduced by allowing nonbanks Fed accounts access.  

Coverage of the series can be found in POLITICO Pro and Protocol

Powell: Fed is ‘Looking Hard’ at Potential SLR Adaptations

The supplementary leverage ratio, a bank capital metric that treats all assets as equally risky, should be a backstop to risk-based capital requirements, Federal Reserve Chair Jerome  Powell said at the press conference following this week’s FOMC meeting. “[B]ecause of this substantial increase in reserves, Treasuries, and other safe assets in the banking system, the SLR is rapidly ceasing to become—ceasing to be the intended backstop for our big firms that we want it to be,” Powell said. “So, we do think it’s appropriate to consider ways to adapt it to this new high-reserves environment, and we’re looking hard at the issue.” Powell said any central-bank actions will not erode the strength of bank capital requirements.

The measure is particularly binding for banks amid strong stimulus measures from the Fed and the Treasury – the Fed’s bond-buying efforts flood bank balance sheets with reserves, and they’re expected to continue increasing.  BPI research has previously shown that a calibration that appeared reasonable back in 2014 when the enhanced or eSLR was adopted is now considerably tighter. The Fed announced in a March press release it is looking at ways to adapt the ratio to an environment of high reserve balances. Since the expiration of the SLR relief in March, banks have been pushing deposits to MMFs resulting in a persistent and record-level take-up at the Fed’s overnight RRP facility. This is not what the Fed intended when it created the facility back in 2014. 

A Very Different Federal Reserve Funding  Model

Most people never consider how the Federal Reserve is funded, or actually think of it as funded at all. But Federal Reserve funding has important consequences, and a quiet revolution in that funding has occurred over the past dozen years, a new BPI blog by Chief Economist Bill Nelson says. Whereas the Fed used to be funded almost entirely by currency, funding from banks is now nearly twice as important as currency, and funding from Treasury and foreign official institutions is considerable as well. Perhaps most revolutionary, beginning in April the Fed has relied on funding from money market mutual funds to finance its continued growth. 

BPI Releases Statement in Advance of CBDC Hearing 

BPI released a statement in advance of the House Financial Services Committee’s Task Force on Financial Technology hearing this week on central bank digital currency. “The push for CBDCs is oddly timed given the revolution in real-time payments that is already underway, and its proponents ignore or minimize the reduction in lending and economic growth that would come if consumers and businesses could instantly move their money from bank deposits into a digital mattress,” BPI CEO Greg Baer said. 

BPI Climate Disclosure Letter Featured in MarketWatch 

BPI’s comment letter to the SEC urging the agency to separate any new climate disclosure requirements from regular securities filingswas featured in a MarketWatch article this week highlighting views from lawmakers and business trades on the SEC effort. The article referred to BPI’s argument that any climate disclosure rules should avoid an overly prescriptive approach.  

The House this week passed legislation that would require public companies to report ESG metrics such as climate risk measures. The bill passed 215-214.  

IRS Reporting Proposal Under Scrutiny at Yellen Budget Hearing 

At the Senate Banking Committee’s budget hearing this week with Treasury Secretary Janet Yellen, Republican lawmakers called for more clarity on a proposal to require banks to report account flow information to the IRS to target tax evaders. Sen. James Lankford (R-OK) questioned how gathering data on gross inflows and outflows of $600 or more would provide useful information to the IRS to combat tax evasion.  Sen. John Thune (R-SD) said the proposal would be a “significant new intrusion in taxpayers’ lives” that comes amid a recent IRS data leak, a point echoed by Ranking Member Mike Crapo (R-ID). 

In Case You Missed It

Regulators Urge LIBOR Transition in FSOC Remarks 

Treasury Secretary Janet Yellen and other financial regulators at the Financial Stability Oversight Council meeting on June 11 urged market participants to move away from the London Interbank Offered Rate, which is being phased out by mid-2023. The “most critical step” in the transition away from the ubiquitous reference rate is moving toward robust alternatives, such as SOFR, Yellen said in remarks at the meeting. Many banks and market participants are hoping for a “term SOFR” that is tied to longer periods of borrowing, such as three months or six months, versus overnight borrowing costs. Wider use of SOFR will provide the transaction data that underpins such forward-looking rates, smoothing the path forward for a term SOFR, Yellen said. Some market participants are also using other rates, such as BSBY or Ameribor, that are sensitive to credit risk and may be more in sync with corporates’ borrowing costs.  

BPI, Trades File Brief Supporting BofA Argument that National Law Preempts N.Y. Mortgage Escrow Rate Requirements 

BPI and other financial trades recently filed an amici curiae brief supporting Bank of America’s appeal to the Second Circuit in Hymes v. Bank of America.  The specific question at issue is whether the National Bank Act preempts a New York state law setting minimum interest rates that lenders must pay on borrower mortgage escrow accounts.  Bank of America is seeking reversal of the District Court judgment that held that the state law is not preempted by the NBA notwithstanding an OCC regulation on point that states that national banks should not be subject to state interest-on-escrow account laws.  BPI’s brief notes that the lower court’s precedent-defying ruling exposes national banks to uneven state mortgage lending requirements and interferes with banks’ ability to do business in a safe, sound manner.   The brief also points out that the New York Department of Financial Services acknowledged that national banks can establish escrow accounts without interest-payment restrictions under the law aligning with the OCC’s stance. 
The OCC also filed its own brief supporting Bank of America, arguing that the District Court erred in its interpretation that the state law was not superseded by the NBA.  The OCC’s brief weighs in on the degree of deference that courts should give to its preemption regulation thereby defending the OCC’s own rule in the case.  The OCC “has reasonably concluded that state interest-on-escrow laws significantly interfere with national banks’ exercise of their power to establish the terms and conditions of mortgage loans, including the terms on which they will establish and service escrow accounts,” the agency wrote in its brief. 

Waters Launches Digital Asset Working Group 

House Financial Services Committee Chairwoman Maxine Waters (D-CA) this week announced a new Democratic working group on digital assets. The group, which includes Reps. Brad Sherman (D-CA), Al Green (D-TX) and Jim Himes (D-CT), will “consider how to devise legislation to support responsible innovation that protects consumers and investors while promoting greater financial inclusion,” Waters said in a statement.  

BPI to Banking Agencies, FinCEN: Ensure Flexibility of AML and Sanctions Tools through Enhanced Examiner Training

BPI called on the federal banking agencies and FinCEN in a recent comment letter to consider changes to how they examine institutions for risk management of internal AML and sanctions models and tools. The letter lauds regulators for their recent Interagency Statement on Model Risk Management for Bank Systems Supporting Bank Secrecy Act/Anti-Money Laundering Compliance and urges them to:  (i) amend the FFIEC Examination Manual to include the Interagency Statement, making clear that banks have flexibility and discretion to develop their own BSA/AML and sanctions programs, even if those programs deviate substantially from the MRMG in some program elements; and (ii) provide robust training to bank examiners on the Interagency Statement. The letter also encourages FinCEN to recognize this flexibility in the testing methods rulemaking required under the AMLA.

Bank of America Launches $4.2M Pledge to Boost Tech Career Prospects for Students of Color

Bank of America this week announced a $4.2 million grant in partnership with NPower and Urban Alliance to connect students in communities of color to technical skills and jobs. The effort aligns with Bank of America’s commitment to advancing racial equity and economic opportunities for underserved communities.  

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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.