Stories Driving the Week
DFAST 2021 Stress Tests: Banks Remain Highly Resilient but Bank-Specific Results are Hard to Predict
This week, the Federal Reserve Board released the highly anticipated 2021 DFAST stress test results. The results have proved again that large banks are extremely well capitalized. The aggregate common equity tier 1 (CET1) capital ratio declined from 13 percent in the fourth quarter of 2020 to a minimum of 10.6 percent, or a 2.4-percent maximum decline in the ratio. As the Federal Reserve observes in its summary, “the average minimum CET1 capital ratio is more than double the banks’ minimum requirement of 4½ percent.” While the average peak decline in the CET1 ratio was little changed across the December 2020 and June 2021 stress tests, we observe material moves in the peak-to-trough decline of CET1 capital ratios of individual banks. The large variability in firm performance in the tests shows that stress test results of individual firms are not easy to predict. In addition, the large variability in results leads to significant volatility in capital requirements and may induce banks to increase their own capital buffers for precautionary reasons, according to BPI’s analysis of the stress test results authored by Head of Research Francisco Covas and Vice President of Research Gonzalo Fernandez Dionis.
Coverage of BPI’s statement on the stress test results was featured in The New York Times, and the issue of stress tests and capital distributions was also covered in an op-ed by Financial Services Forum CEO Kevin Fromer.
Banking Regulators Highlight Strong Conditions in Biden Meeting
Top financial regulators told President Joe Biden this week in a meeting that the financial system is strong and resilient, according to a White House readout. The officials said financial risks are being mitigated by strong capital and liquidity in the banking system and healthy household balance sheets as the economy reopens. They also discussed how they are making progress on Biden’s executive order on climate-related risk and how to promote financial inclusion.
CFPB Shouldn’t Limit Small-Business Data Collection to Banks
As the CFPB prepares to implement a Dodd-Frank requirement to collect demographic data on small-business lending, it should ensure that such requirements apply to both banks and nonbank lenders, a new BPI blog post by Paul Calem and Paige Paridon says. Transparency around all types of small-business lenders would enable the CFPB to achieve the goals of the requirement – to learn more about the demographic characteristics of small business owners and therefore facilitate enforcement of fair lending laws and identify investment opportunities for women-owned, minority-owned and small businesses. FinTechs are a source of credit for small businesses, particularly minority-owned companies and firms of relatively higher credit risk – and complaints against FinTechs are surging – so it’s increasingly important to shine light on their business practices. The issue is taking on growing urgency as the CFPB anticipated in its recent Regulatory Agenda that it would issue a notice of proposed rulemaking on the requirement set forth in section 1071 of the DFA this September. If banks and nonbanks are to be held to the same fair lending and consumer protection standards, as they should be, then the CFPB must employ a consistent approach to information gathering from small business lenders across lender categories, through data collection pursuant to section 1071 and through any nonpublic data gathering efforts of the Bureau.
BPI to Banking Agencies: AI Has Similar Risks and Promises to Any New Technology
Banks’ use of artificial intelligence, including machine learning, entails the same cost-benefit calculation as any new technology, and can be handled within existing regulatory requirements, which should be applied consistently across banks and nonbanks, BPI said in a letter this week in response to the federal banking agencies and CFPB’s request for information on how banks use AI. Regulators are seeking more information on how financial institutions use the technology, including its benefits, risks and challenges. AI offers promising potential to enhance customer experiences, such as tailoring digital banking apps to a customer’s needs or harnessing “alternative data” other than FICO scores to provide responsible credit to underserved consumers, BPI said in the letter. Banks are thoughtfully weighing the potential challenges against the benefits of the technology, consistent with banks’ extensive experience managing risks to ensure consumer protections.
BPI’s Lauren Anderson: Any Climate Disclosures Should Be ‘Open-Source Problem Solving’
A POLITICO Pro article this week featured an interview with BPI Senior Vice President and Associate General Counsel Lauren Anderson on climate disclosures, which the SEC is currently considering for public companies. “When information is provided by a third party, it’s outside your control,” Anderson said in the article. “Given that we’re at the early stage, really what you want this to be is open-source problem solving.” A safe harbor from legal liability would allow companies to share information in an uncertain environment without fearing litigation – especially necessary as companies gather climate risk information from third-party ESG data providers.
Treasury TFI Nominee Nelson Flags Crypto as AML Priority
Brian Nelson, the nominee to head Treasury’s terrorism and financial intelligence division, said he would prioritize implementing new AML legislation, including around cryptocurrency, according to Bloomberg coverage of his confirmation hearing this week. Nelson appeared alongside Elizabeth Rosenberg, nominee for Treasury assistant secretary for terrorist financing.
In Case You Missed It
Banks Don’t Need New Labels to Guard Against Cyberattacks, Joint Trades Say
The banking industry has been defending itself against cyberattacks effectively for years before ransomware became a dinner-table topic, a group of financial trades including BPI said in a letter to lawmakers recently covered in CyberScoop. The letter centers on a proposal to label private-sector industries like banks, hospitals and power plants “systemically important critical infrastructure” (SICI) entities whose hacking could affect the overall economy, in an echo of the Dodd-Frank designation “SIFI” for large global banks. While banks welcome encouraging other sectors to improve their cybersecurity standards, the prospect of new mandatory cybersecurity performance standards for the financial sector fails to recognize the existing layers of requirements it already has, the letter says. The prominent ransomware attacks on Colonial Pipeline and major meat supplier JBS have sparked interest on Capitol Hill in new obligations for critical-infrastructure firms – for example, Sen. Mark Warner recently circulated draft legislation that would require such firms, along with certain cybersecurity firms and federal contractors, to report cyber breaches to the federal government within 24 hours.
BPI Issues Statement on HFSC Markup of “Greater Supervision in Banking Act of 2021”
BPI Head of Government Affairs Ed Hill issued the following statement this week in response to a U.S. House Committee on Financial Services markup of H.R. 3948, the “Greater Supervision in Banking Act of 2021”: “The Greater Supervision in Banking Act would require a host of disclosures by U.S.-based Global Systemically Important Banks. The information required to be disclosed by the bill is already readily available to regulators; thus, the only effect of the bill would be to provide confidential and proprietary information to hedge funds and others that trade or compete against banks. The banking industry is among the most regulated industries in our economy and targeting one subset of banks, while ignoring other broad segments of the non-bank financial sector and the corporate community for many of these disclosures attempts to solve a problem that doesn’t appear to exist.”
SCOTUS Overturns 2nd Circuit Ruling in Goldman Investor Suit
The Supreme Court this week vacated a lower-court decision that enabled the Arkansas Teacher Retirement System to file a class-action suit against Goldman Sachs over generic statements that the retirement system said affected Goldman’s stock price. The lawsuit hinged on whether the bank’s share price was inflated by making generic positive public statements about company policy ahead of a government enforcement action against the bank. The court, which held that it was unclear if the 2nd Circuit properly considered the generic nature of such statements as it weighed their stock-price impact, vacated the lower court’s decision and directed it to reconsider. BPI along with other financial trades had filed an amici curiae brief in support of Goldman in the case. The ruling could have important implications for firms facing class-action suits from shareholders based on public statements. The opinion was delivered by Justice Amy Coney Barrett, with Justices Roberts, Kagan, Breyer and Kavanaugh concurring and Justices Thomas, Alito, Sotomayor and Gorsuch concurring partially and dissenting in part.