BPInsights: March 06, 2021

Stories Driving the Week

Large, Midsize Banks Outperformed Small Banks, Nonbank Rivals in Focus on Minority-Neighborhood Businesses

Large and midsize banks’ PPP lending was more concentrated in neighborhoods with high minority populations than that of their smaller and nonbank counterparts, BPI research found.

Thirty percent of PPP loans from the nine largest retail banks went to areas with more than 50 percent minority population, versus 23 percent of loans made by smaller and nonbank PPP lenders. About 28 percent of loans originated by all banks larger than $50 billion in assets went to majority-minority neighborhoods. This metric is important as the PPP aims to expand credit to historically underserved communities.

Lending patterns among large and midsize banks also aligned strongly with the original goal of the pandemic-relief program: to preserve small-business jobs by encouraging business owners to retain or rehire their employees. BPI research showed that PPP dollars per employee tended to be higher in areas experiencing more severe economic disruption in the pandemic, as shown by Google data that observed traffic flow to and from workplaces. Also, more PPP dollars per employee were distributed to neighborhoods with a relatively high minority population share.

Regulators Need to Revisit the Calibration of Leverage Ratios

The Fed adopted the enhanced supplementary leverage ratio in 2014 despite concerns expressed by several board members that the eSLR would reduce demand for safe assets and disincentivize banks from providing liquidity to U.S. Treasury markets. Fed staff indicated that these unintended consequences would be offset by a decline in reserve balances, which subsequently did not occur. Instead, reserve balances have ballooned since the onset of COVID-19 event and are expected to surpass $5 trillion by the end of 2021, and remain elevated for the foreseeable future.

Consequently, the Fed must recalibrate the eSLR so that it is more of a backstop for risk-based capital requirements and less of the binding capital constraint, Francisco Covas and Anna Harrington write in a new BPI blog. If the eSLR is not recalibrated, there’s an increased risk of a repeat of the recent Treasury market disruption and an additional incentive for banks to reduce low-risk, balance-sheet-intensive activities.

Brainard Calls for Money-Market Fund Reforms, Closer Scrutiny of Treasury Markets

Federal Reserve Gov. Lael Brainard said in a speech on March 1 that money market funds and other mutual funds need overhauls after their mass selloffs exacerbated pandemic market stress last year. Capital buffers could help absorb losses, and reforms such as swing pricing could prevent investors from running for the exits when other investors redeem their shares early, she said. She called for careful analysis of potential vulnerabilities in the Treasury markets.

Banks weathered the market turmoil well, Brainard said, attributing their resilience to strong capital and liquidity buffers. She called for banks to remain well-capitalized and continue to lend to households and businesses as the economy rebounds from the pandemic.

She also pointed to risks of asset bubble pops, stemming from bond fund outflows or pessimism on coronavirus variants. She said low interest rates are likely to persist, which could lead to bubbles, and suggested that the countercyclical capital buffer should therefore be raised.

Chopra, Gensler Face Senate Queries at Confirmation Hearings

Rohit Chopra and Gary Gensler, President Biden’s nominees to lead the Consumer Financial Protection Bureau and the Securities and Exchange Commission, respectively, signaled at a confirmation hearing March 2 that they would take a more aggressive enforcement stance than their predecessors. The two nominees answered questions on a range of topics.

Chopra, an FTC commissioner, affirmed that supervisory guidance is not the same as law and is meant to help companies understand what the rules are. The CFPB, FDIC and OCC each finalized rules in January codifying the 2018 Interagency Statement Clarifying the Role of Supervisory Guidance, which says supervisory guidance does not create binding legal obligations. The final rule marked the culmination of BPI’s 2018 petition for rulemaking under the Administrative Procedure Act, which asked regulators to clarify the role of guidance. Banks were concerned that nonbinding guidance was being used as the basis for disciplinary actions that can prevent banks from expanding or making acquisitions.
He also said that large tech platforms entering the financial services industry deserve close scrutiny. Chopra said he will follow the law when it comes to deposit insurance applications for Industrial Loan Companies, a structure that allows nonbanks like retailers or tech firms to operate bank-like entities while avoiding the comprehensive supervision to which bank holding companies are subject. He said he would rely heavily on FDIC staff to evaluate those applications, but left his own stance on the issue unclear. The FDIC began granting deposit insurance to ILCs again after a long hiatus and last year formalized its framework for supervising such firms and their parent companies. BPI has argued that Congress should close the ILC loophole that could allow a Big Tech firm or another large nonbank to access crucial banking system features without being subject to the the comprehensive consolidated supervision that bank holding companies face. That access would erode the wall between banking and commerce required by banking law.

Gensler said he wanted to look at the role of tech in stock market trading after recent volatility surrounding Robinhood brokerage users. He said the agency will also examine climate change risk disclosure and equity market structure issues.

Treasury No. 2 Pick Adeyemo Advances to Full Senate Vote

Adewale “Wally” Adeyemo, President Biden’s nominee for Deputy Treasury Secretary, was cleared by the Senate Finance Committee on March 3 by voice vote, indicating broad support, according to the panel. Adeyemo’s nomination now faces a vote by the full Senate. He is widely expected to be confirmed.

American Banker: Interagency CRA Breakthrough Appears Likely

As the new Administration fills banking oversight roles, analysts and industry attorneys predict that a joint Community Reinvestment Act rule is on the horizon, according to an American Banker article this week. BPI has urged the Federal Reserve in a recent comment letter to jumpstart the process of crafting a common set of CRA rules with the FDIC and OCC. Fed Chair Jay Powell also expressed support in a recent congressional hearing for a joint CRA rulemaking and said the central bank has started discussing it with the other regulators. “We are engaged, have been engaged, and continue to be engaged with the FDIC and the OCC, and we’re working on that very thing,” he said.

Treasury Announces $9B in CDFI, MDI Investments

The Treasury Department will invest $9 billion in Community Development Financial Institutions and Minority Depository Institutions as part of an initiative to support underserved communities hit hard by the pandemic, the department announced March 4. Treasury opened the application process for the Emergency Capital Investment Program, a new program designed to expand access to capital in minority communities. The newly announced initiative complements $3 billion in additional funding aimed at addressing the pandemic impact in underserved communities.

In Case You Missed It

JPMorgan Pledges $350M to Grow Black-, Latino-, Women-Owned Businesses

JPMorgan Chase & Co. committed $350 million in low-cost loans, equity investments and philanthropy to help Black-, Latino- and women-owned businesses grow, the bank announced late last week. The effort is part of JPMorgan’s $30 billion commitment to provide economic opportunities to underserved communities. Several other BPI member banks, including Truist, PNC, U.S. Bank, Bank of America, Wells Fargo, Citigroup and others, launched similar community investment efforts. Citigroup announced this week that its Citi Foundation launched a $25 million request for proposals aimed at nonprofits providing technical assistance to small businesses owned by people of color. Nonprofits can receive up to $500,000 in unrestricted funding allowing them to expand and serve more businesses in need.

BPI’s Pat Parkinson Joins Mercatus Center Podcast

BPI Senior Fellow Pat Parkinson discussed last year’s Treasury market meltdown – and potential fixes to prevent it from happening again – on the Mercatus Center’s Macro Musings podcast this week. Potential solutions include the implementation of a standing repo facility, changes to the supplementary leverage ratio, expanded central clearing of Treasuries and increased data collection. Parkinson recently co-authored a Brookings Institution paper outlining those issues.

Powell Reaffirms Easy Monetary Policy Path

Federal Reserve Chair Jay Powell reiterated on March 4 his intentions to keep buying bonds and maintaining low interest rates until the central bank’s goals of full employment and average 2 percent inflation are met. The recent rise in government bond yields “was something that was notable and caught my attention,” Powell said at a Wall Street Journal event. In language that was extraordinarily similar to that used by Gov. Brainard the day before, Powell said he “would be concerned by disorderly conditions in markets or a persistent tightening in financial conditions that threatens the achievement of our goals.”

POLITICO: Fed Weighing Tighter Restrictions on Foreign Bank Branches

The Federal Reserve’s top lawyer said the central bank is still considering putting standardized liquidity requirements on U.S. branches of foreign banks, according to POLITICO. General Counsel Mark van der Weide said at an Institute of International Bankers conference this week that the Fed will turn back to the issue in 2021 after the central bank agenda was disrupted by the COVID-19 pandemic. U.S. branches of foreign banks are direct extensions of the foreign parent and don’t face the same rules as the intermediate holding companies that include their U.S. operations.

UK Regulators Kick Off Final Chapter for LIBOR

The UK Financial Conduct Authority confirmed March 5 that the London Interbank Offered Rate, a global reference rate underpinning hundreds of trillions of dollars in financial contracts, will no longer be published as of Dec. 31, 2021, for most versions of the rate. Some tenors of U.S. dollar LIBOR will be phased out more gradually, ending on June 30, 2023, but U.S. regulators have urged banks not to start any new LIBOR-based contracts after the end of this year. The British announcement marks the beginning of the end for LIBOR’s status as the reference rate of the world. It comes as Federal Reserve Chair Jay Powell last week endorsed the idea of federal legislation to smooth the process of “legacy” LIBOR-based contracts transitioning away from the rate.

Fed Finalizes Guidance to Recalibrate Supervisory Expectations for Boards of Large Financial Institutions

The Federal Reserve on Feb. 26 finalized its Board of Directors’ Effectiveness Guidance that applies to large U.S. Federal Reserve-supervised financial institutions with at least $100 billion in assets. The measure was originally proposed in 2017. The Guidance identifies the attributes of “effective” boards of directors, such as approving, reviewing and monitoring the firm’s strategy and risk appetite, supporting independent risk management and audit, and holding the management of the institution accountable. The Fed expects to take these attributes into account in evaluating and rating an institution’s so-called “Governance and Controls” performance under the Large Financial Institution (LFI) Rating System framework.  In a key change from the proposed version of the Guidance and consistent with BPI’s recommendations, the Fed eliminated any expectation or requirement that the results of board self-assessments would be shared with examiners to assist them in evaluating board effectiveness.

In connection with the release of the Guidance, the Fed updated or removed supervisory expectations for boards of directors in 21 Fed Supervision and Regulation (SR) Letters due to their being inconsistent with the Guidance (i.e., they placed unnecessary compliance expectations on the board of directors).

The new Guidance, together with the removal of a number of unnecessary supervisory expectations for financial institution boards, help to address longstanding concerns that boards are overburdened with regulatory responsibilities as well as the blurring of the lines between the role of the board and that of senior management. These were concerns highlighted in our 2016 report, The Role of the Board of Directors in Promoting Effective Governance and Safety and Soundness for Large U.S. Banking Organizations (2016 Report) as well as our recently released Guiding Principles for Enhancing U.S. Banking Organization Corporate Governance (2021 Exposure draft open for public comment).

ABA’s Nichols: The Fed Needs to Close Backdoor to its Payment Rails

Federal and state proposals that enable tech firms to get bank-like charters could give FinTechs access to the Fed’s payment system without proper oversight, putting consumers at risk, American Bankers Association chief Rob Nichols wrote in an American Banker op-ed this week. FinTechs could expand their banking footprint through federal loopholes or state charters such as the Wyoming Special Purpose Depository Institution model. BPI has highlighted in blog posts that some Wyoming SPDIs claiming to invest their deposits only in risk-free “reserves” are actually currently permitted to invest them in assets that can rise and fall in value and carry risks, including corporate debt and mortgage-backed securities.

Solarium Commission Leaders Detail Role of Cyber Director

Two top officials on the Cyberspace Solarium Commission have offered details on the role and responsibilities of the newly created National Cyber Director position, according to an Inside Cybersecurity article this week. The role, which was created by the National Defense Authorization Act for this fiscal year, has not yet been filled. Mark Montgomery and John Costello explained how the new position will work and provided context on the related Deputy National Security Adviser for Cyber and Emerging Technologies role. NSA veteran Anne Neuberger was recently named to that position, where she is currently coordinating the federal response to the SolarWinds hack. BPI has supported the creation of a National Cyber Director position to enhance the federal government’s cybersecurity policy coordination.

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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.