BPInsights: March 19, 2022

Stories Driving the Week

Cyber, Tough Legacy Fix: President Signs Omnibus

The President signed the 2022 omnibus spending bill into law this week, which included solutions to address “tough legacy” LIBOR contracts and outlined rules for how private companies report cyber incidents.

BPI supports the passage of this legislation. Greg Baer, BPI President and CEO, responded to the passage:

  • On LIBOR “Tough Legacy” Contracts…

“This law ensures that American consumers and businesses with certain LIBOR-based contracts benefit from legal clarity. It safeguards global financial markets from uncertainty surrounding tough-legacy LIBOR contracts without adequate fallback language. We are grateful to the legislative co-sponsors and to the President for taking crucial action to smooth the path away from LIBOR.”

  • On Cyber Incident Reporting…

“The passage of this law will lead to a more resilient U.S. economy that is better prepared to respond to modern threats. It creates a uniform reporting standard across every major sector of the economy and gives the government the information they need to coordinate and better defend against attacks. BPI appreciates the tremendous effort made by the bill’s sponsors and the President to reach a solution and commends their commitment to prioritizing the nation’s cybersecurity.”

A successful end to a multi-year effort. The passage of these provisions marks a successful end to BPI’s multi-year advocacy effort. These changes will benefit consumers, investors and issuers of securities by warding off years of uncertainty and litigation surrounding the end of LIBOR and will further fortify the U.S. economy against cyberattacks.

Powell, Other Fed Nominees Advanced by Committee

Federal Reserve Chair Jerome Powell’s nomination to a second term was advanced by the Senate Banking Committee this week, along with Board nominees Lael Brainard, Philip Jefferson and Lisa Cook. Brainard will be elevated to the vice chair position and Jefferson and Cook will serve as governors. The next step is a vote by the full Senate. Sarah Bloom Raskin, President Biden’s nominee for vice chair for supervision, withdrew her nomination this week.

Senate Bill Takes Aim at Crypto as Sanctions-Skirting Tool

bill introduced by Senate Democrats this week would enable the Treasury Department to block crypto exchanges from transacting with Russian digital asset addresses, force U.S. crypto holders to disclose offshore transactions over $10,000 and authorize the President to impose secondary sanctions on foreign digital asset platforms that have helped Russians evade sanctions to which they are subject. The bill, whose introduction came as the Senate Banking Committee held a hearing on digital assets in illicit finance, is sponsored by Sens. Elizabeth Warren (D-MA), Mark Warner (D-VA), Jack Reed (D-RI) and Jon Tester (D-MT).  

What’s Happening in Russia Sanctions

  • New sanctions: The Treasury Department this week announced a fresh round of sanctions targeting the president of Belarus and his wife along with several senior Russian officials.
  • International task force: The U.S. Treasury and Justice Departments launched a task force with the governments of Australia, Canada, the European Union, Germany, Italy, France, Japan and the U.K. to target, seize and freeze Russian oligarchs’ assets. The group is known as the Russian Elites, Proxies, and Oligarchs (REPO) multilateral task force.
  • House bills: The House Financial Services Committee this week advanced several bills aimed at expanding the U.S.’s ability to crack down on sanctioned Russians. Most passed with bipartisan support, but one bill that would broaden FinCEN’s ability to scrutinize oligarchs’ assets by eliminating geographic limitations on its investigations garnered Republican opposition.
  • Foreign investor curbs: The Russian government imposed restrictions on trading in Russian assets by foreign investors, according to Reuters. Under the new rules, any transaction between Russians and foreign counterparties will require permission from a Russian government panel. Foreign investors must provide details to the panel in the Russian language.
  • Putin retaliates: Russian President Vladimir Putin sanctioned a slate of U.S. officials, including President Biden and Secretary of State Antony Blinken. White House Press Secretary Jen Psaki, who was also on the list, dismissed the notion that the sanctions would have any meaningful impact.
  • Banks guard against SWIFT cyberattacks: Large global banks are bracing for potential Russian cyberattacks on the SWIFT messaging network after major Russian banks were banned from the system, according to the Financial Times.
  • China: National Security Adviser Jake Sullivan warned that China would “absolutely” face U.S. consequences if it tried to help Russia evade sanctions. The remarks came as U.S. officials said Russia asked China for military assistance in its war in Ukraine.

Russia/Ukraine: Deeper Dive

For a deeper look, here are key aspects of the Russia-Ukraine conflict and its role in the financial system.

  • Shell companies: Freezing assets – like Russian oligarchs’ yachts and apartments – is much easier than actually seizing them, a POLITICO article this week explains. While President Biden and other leaders are warning oligarchs that they are coming after their illicit luxury possessions, the process of asset seizure is complex and lengthy. One big obstacle: shell companies used to buy real estate anonymously.
  • Default risk: Credit ratings agency Fitch Ratings warned of an imminent default in Russian government debt as the country’s foreign-currency bonds come due. Russian officials have said they may pay their dollar-denominated debts in rubles, which have plummeted in value under the pervasive sanctions the country faces. The country appeared to avert default on payments to foreign bondholders that were processed successfully this week, though some risk still looms.

Powell: Fed ‘Making Do’ Without Full Slate of Reg Officials

At the Federal Open Market Committee press conference Wednesday, Chair Jerome Powell said the central bank is still getting its regulatory work done despite several senior vacancies. He referred to the stress tests and several proposals for mergers that have been evaluated. “We’re making do with the situation we have,” he said. “A good number of things have come to the Board for approval.” This week’s FOMC meeting was notable as the first instance of a rate hike in several years.

GAO Finds Durbin Interchange Price Fixing Law Raises Costs for Low-Income Consumers

Limits on debit interchange fees raise the cost of financial services for low- and moderate-income consumers, a recent Government Accountability Office report found. The effects of the Durbin Amendment and Regulation II limit banks’ ability to offer free checking accounts, the report says. Banks use revenue generated from interchange fees to cover the cost of accounts. The GAO report also said banks face regulatory uncertainty on small-dollar loans that limits their availability to offer them.

In Case You Missed It

Ukraine is a Big Moment for Crypto, But Not for the Reasons its Promoters Think

Nearly $100 million in cryptocurrency has filled digital wallets in Ukraine in recent weeks, but this surge in crypto use has only highlighted its uselessness, Molly Roberts wrote in a recent Washington Post op-ed. Digital tokens are only useful when they’re converted into fiat currency, adding another layer of friction to paying for goods and services, she wrote. Despite crypto proponents’ emphasis on Ukraine as an exemplar use case, the crypto crowdfunding there looks more like a marketing gimmick.

  • Crypto political donations: Another instance of crypto’s impracticality: political donations – even from the crypto industry itself. A vast majority of the millions of dollars in crypto industry political giving last year was in U.S. dollars, Bloomberg reported.

Amazon-MGM Deal Puts Merger-Review Shot Clock in Spotlight

Amazon’s $8.45 billion acquisition of MGM closed this week, and the reason for the closure highlights an important part of bank merger review: the clock. The deal closed because the Federal Trade Commission’s statutory review period expired and the application was therefore deemed approved. This case closely parallels last week’s federal court ruling that the FDIC had improperly claimed that its requests for further information from an applicant had stopped the statutory clock for its merger review.  It also echoes a recent American Banker op-ed from BPI explaining the 91-day rule in bank M&A review–whereby merger applications are deemed approved if the Fed hasn’t ruled on them within 90 days–and why it matters for a healthy banking sector. 

EU Rules Out Bank Shareholder Payout Ban Over Ukraine

European bank regulators have ruled out a blanket ban on bank shareholder distributions amid the Ukraine crisis, according to the Financial Times this week. “I’m not concerned by the overall ballpark of dividends and buybacks,” Andrea Enria, chair of the ECB’s supervisory board, said in the article. BPI has published research about how bank capital distribution bans hurt the economy by raising banks’ cost of capital.

What the Nickel Market Disaster Says About Moral Hazard

This week, an overextended Chinese nickel producer failed to meet its margin calls on the London Metal Exchange. Rather than letting that indebted firm lose money, the exchange intervened to save the firm from the consequences of its bad bets by canceling the trades. This episode illustrates the problem of moral hazard, the Wall Street Journal’s James Mackintosh wrote recently in an op-ed. “Taking away legitimate profits from traders in order to finance the rescue undermines the very notion that markets can themselves punish the highly leveraged,” Mackintosh said. “It means yet more intervention and regulation will be required in future to limit the extra leverage that such rescues encourage.”

Ethereum’s Creator Has Doubts About Crypto’s Future 

This week, an overextended Chinese nickel producer failed to meet its margin calls on the LEthereum creator Vitalik Buterin, a key crypto player, has watched the evolution of the world he helped create with concern, according to a Time magazine profile of Buterin. Crypto has “a lot of dystopian potential if implemented wrong,” he said in the article. Among his concerns: danger to investors, high transaction costs, crypto holders’ lurid displays of wealth and the prospect of crypto being used by authoritarian regimes.

EU Crypto Proposal Fails, But Crypto’s Future on Continent Still Uncertain

A European proposal that would have effectively banned Bitcoin mining and trading in the EU failed to advance through the EU’s Economic and Monetary Affairs Committee this week. The proposal, which would subject cryptoassets to minimum environmental standards and therefore hinder energy-intensive Bitcoin mining, was part of the Markets in Crypto-assets (MiCA) legislation. However, the committee passed a separate measure to add crypto mining to the EU’s taxonomy for sustainable finance, a classification system that defines which economic activities can be considered environmentally sustainable. The MiCA legislation now needs approval from the EU’s executive arm, EU member states and the European Parliament before it can become law.

Discover Issues Diversity, Equity and Inclusion Report

Discover recently released a report on diversity, equity and inclusion titled “Working Toward a Brighter Future.” The report includes key DE&I goals for the company and metrics measuring representation of women and employees of diverse backgrounds.

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Disclaimer:

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.