BPInsights: June 4, 2022 - Bank Policy Institute

Stories Driving the Week

On Bank Mergers, the Benefits of a Competitive Industry Are Clear and the Regulatory Standards Are Appropriately Stringent

Mergers enable many banks to achieve the benefits of scale – lower loan costs, innovative services and fortified cybersecurity safeguards – and pass them on to consumers, underlined BPI in its response this week to the FDIC on its request for information regarding the federal bank merger framework. The FDIC’s review calls into question the longstanding, bipartisan approach to bank merger evaluation that has supported a thriving and competitive banking sector.

What’s missing: The empirical analysis in the FDIC’s introduction to the RFI overstates the effect of mergers on banking competition and the financial stability of the U.S. economy.

Most of the decline in the number of smaller banks was driven by 1994 legislation that removed barriers to interstate banking, and by the collapse in the number of new banks chartered since the 2008 global financial crisis.
The analysis exaggerates the increase in the number of large banks by failing to adjust bank size for general economic growth and inflation.
The analysis excludes the increase in the number of bank branches, decline in the unbanked population and the rapid growth of nonbank, “near-bank” competitors like fintechs, nonbank mortgage lenders and money market funds.

To read the full response, please click here.

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Crypto Scrutiny Grows: Coalition of Prominent Technologists Warn Crypto Fails to Serve Public Good or Offer ‘Real-Economy Uses’

A coalition of 26 prominent technologists submitted a letter to Congress this week warning lawmakers that the supposed benefits of cryptocurrency have been oversold and misrepresented, reported the FT. The group rejected claims that these solutions serve the public good and argued that these assets not only offer no benefit over existing financial services solutions but in many cases, present risks to consumers. Further, these alternatives fail to offer any “real-economy uses.”

The coalition specifically targets public blockchains — such as the blockchain that enables Bitcoin — arguing that they are “forever unsuitable as a foundation for large-scale economic activity.” Unlike privately operated blockchains designed for scale and efficiency, public blockchains have been criticized for harmful energy consumption as a result of mining, enabling money laundering through the use of mixers and security vulnerabilities such as a 51% attack. The letter states:

By its very design, blockchain technology, specifically so-called “public blockchains”, are poorly suited for just about every purpose currently touted as a present or potential source of public benefit. From its inception, this technology has been a solution in search of a problem and has now latched onto concepts such as financial inclusion and data transparency to justify its existence, despite far better solutions already in use. After more than thirteen years of development, it has severe limitations and design flaws that preclude almost all applications that deal with public customer data and regulated financial transactions and are not an improvement on existing non-blockchain solutions.

The coalition asserts that cryptoassets are actively promoted to retail investors without adequately disclosing the risk. They also raise concerns about the risk that cryptoassets pose to “national security through money laundering and ransomware attacks, financial stability from high price volatility, speculation and susceptibility to run risk,” which remains at the forefront of public interest given recent chaos in cryptocurrency markets.

While scrutiny continues to mount and consumers face substantial losses, crypto advocates are turning toward major new investments in lobbying, campaign contributions and stadium sponsorships.

The Crypto Ledger

Conversations regarding what role, if any, digital assets should play in the modern financial system remains an area of considerable interest both in the U.S. and abroad, as lawmakers and regulators work to determine what legal and regulatory frameworks apply.

FDIC Pauses Its Participation in Joint Interagency Crypto Sprint: According to POLITICO, the FDIC is reconsidering its support for an interagency effort to address cryptocurrency matters as part of a “Sprint Initiative” announced in 2021. While efforts to implement capital and liquidity requirements are reportedly ongoing, this could have serious implications for the near-term completion of other policy priorities outlined in the Sprint, such as guidance on banks acting as custodians for crypto assets.
Basel Working to Finalize Crypto Prudential Framework: The Basel Committee on Banking Supervision recently announced that it would seek to finalize, by the end of the year, prudential standards for banks engaging in crypto activities, including a framework for capital treatment.
Kansas City Fed Assessment Highlights Limited Scope for Retail CBDC: The Kansas City Fed published an assessment late last week of retail CBDC highlighting that “[n]o central bank in an advanced economy has yet introduced a retail CBDC, which may reflect relatively limited scope for retail CBDCs to improve the payments systems in these countries. In advanced economies, most consumers use less cash and already have access to financial services and well- developed payment systems.”
Crypto Bill Anticipated to Drop Tuesday. Legislation by Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) is expected to be introduced on Tuesday, according to a report by POLITICO. The legislation, which leaked in late May, hints at some of the provisions that may be included in the final bill text, such as a framework around how cryptoassets would be taxed, a requirement for the CFTC and the SEC to establish a self-regulatory organization for digital asset markets and rules regulating cybersecurity and investor protections.
Meet Luna 2.0:Extreme volatility in crypto markets resulted in the loss of an estimated $500 billion in market value in late May following the crash of algorithmic stablecoin TerraUSD and its sister coin Luna. Despite extraordinary losses, Terraform Labs — the company behind it all — announced the relaunch of Luna 2.0. Molly Roberts, editorial writer with the Washington Post, criticized these recent actions in her latest article: “Fool me once, shame on you. Fool me twice — well, that’s exactly what keeps the cryptocurrency game going.”
CBDC Adoption Could Affect How the Fed Conducts Monetary Policy. New York Federal Reserve President John Williams addressed the prospects of a CBDC at an event this week hosted at Columbia University, according to Reuters. In his remarks, Williams stated that the adoption of a CBDC could “have implications on markets and for our interactions with counterparties” and would alter the Fed’s approach to conducting monetary policy. To learn more about the specific monetary policy implications, check out an analysis developed by BPI Chief Economist Bill Nelson.

U.S. Regulators Consider Path Forward on Basel III Endgame

The implementation of the Basel III framework could have serious implications on U.S. bank capital levels and — in turn — the cost of loans for businesses and households, according to a recent Risk.net article. U.S. regulators will need to consider various implementation strategies, some of which could result in a 20 percent increase in the capital requirements of the largest banks.

The article discusses some of the choices the U.S. agencies will have to make to avoid a significant increase in capital requirements. One option would be adopting a two-stack approach, by letting the stress capital buffer continue to apply to the current U.S. standardized approach. However, there is no agreement among banks around this solution. Alternatively, the Fed could follow-up on their promise to revisit the calibration of the GSIB surcharge to reflect current conditions and the expansion of the Fed’s balance sheet. The piece also describes other adjustments to the capital framework that would help avoid a significant increase in capital requirements. Namely, the agencies could follow the EU and relax the requirement for corporate borrowers to receive a lower risk weight and make use of the flexibility embedded in the new standardized approach for operational risk.

The article quotes BPI Head of Research Francisco Covas on some of the options and cites the research BPI presented to the U.S. banking agencies. To learn more about the implementation of Basel III endgame and how it will affect the cost of credit for American businesses, please click here.

Administration Weighs Additional Sanctions Versus Potential Implications to Global Economy

Treasury Department, State Department and the National Security Council are grappling over whether additional sanctions on Russia are warranted and whether economic punishments imposed on Russia have reached their limits, according to a recent Bloomberg report. The report notes that some officials remain concerned that sanctions have not gone far enough in deterring Russian aggression in Ukraine, while others worry that additional sanctions could result in repercussions on global supply chains and the economy. Daleep Singh, former deputy national security advisor, was responsible for managing the sanction’s rollout; however, his recent departure has generated additional uncertainty regarding the path forward. The Administration is reportedly considering imposing a price cap on oil — targeting the price that can be paid for it but not restricting its flow. However, international dynamics, including keeping the coalition of U.S. allies and partners together, are playing a role in the Administration’s considerations.

In Case You Missed It

Rep. Clarke Recognizes Value of CISA Serving as Primary Agency Responsible for Cyber Incident Reporting

In remarks delivered at a WSJ Pro Cybersecurity Forum on Wednesday, Rep. Yvette Clarke (D-NY) reiterated Congress’s recent success in passing bicameral, bipartisan legislation to establish clear rules and expectations for how the private sector and its government partners should share information following a cyber incident. According to reporting by Inside Cybersecurity, she recognized recent efforts by SEC and TSA, and reiterated the value of having CISA as the primary agency responsible for leading these efforts. Such an approach, as Clarke remarked, would help streamline reporting efforts and reduce the potential burdens of reporting to multiple entities. “That is the last thing we need when trying to respond to a cyber incident of epic proportions or of a magnitude that can cause harm to the American people,” stated Clarke.

FDIC Study Examines Local Economic and Banking Conditions Following Severe Weather Events

The FDIC released a staff study on “Severe Weather Events and Local Economic Conditions,” available here. The study found that Hurricane Katrina in 2005 reduced loan performance at community banks in the affected area for a time but no banks failed. The study also found no impact on banks from Harvey (2017), Irma (2017), the Midwest drought in 2012-2013, the Camp Wildfire (2018) or the Tubbs Wildfire (2017).

Jamie Dimon Offers Insight into the State of the Economy, Nonbank Competition and New Investments in Technology

Jamie Dimon, JPMorgan Chase & Co. CEO, made headlines following conference remarks made earlier this week providing insight on a range of topics, including the economic outlook, growing competition from nonbanks and investments in new technology. To access a copy of the transcript, please click here.