Stories Driving the Week
Regulators Ask Banks to Assess Climate-Related Risks from Largest Counterparties, but Data Gaps Persist
With regulators seeking to determine how climate change will affect the banking industry, new demands for data are spreading worldwide. Currently, with no common standards in place, corporates are fielding different questions from different banks, and banks are fielding different demands from different regulators. Without some agreement on common standards, we risk a climate change Tower of Babel, with assessments based on what language is being spoken rather than real risk, and with no ability to translate the results for one firm to another, a new BPI blog says.
BPI Blog: The Dollar, the Yuan and CBDCs: What Talks, What Walks
The question of whether a Chinese central bank digital currency threatens the U.S. dollar’s global hegemony has reached the highest echelon of economic policy, with Federal Reserve Chairman Powell indicating at this week’s FOMC press conference that the U.S. doesn’t need to rush to match its strategic rival’s move. He pointed out that the dollar derives its global clout from many factors, such as the stability of the U.S. government and its rule of law. The surveillance implications of a Chinese CBDC – with every transaction shaping a social credit score — would likely deter major world powers from adopting a yuan reserve currency. Powell correctly noted that a system with full government visibility into every payment would not work in the U.S.
Major democratic countries like Japan or Australia would likely have good reasons to favor the dollar over the yuan as a reserve currency, even in the event of a digital yuan, a new BPI blog by CEO Greg Baer says. The prospect of a digital yuan’s speed would probably have minimal appeal over current payment systems. A more plausible reason for concern about a Chinese CBDC is the reach of U.S. sanctions on its allies worldwide.
Powell: Archegos Collapse Not a Systemic Risk to Large Banks
Federal Reserve Chair Jay Powell this week put the breakdown of trading firm Archegos into perspective from a bank regulatory point of view. While noting that the Fed would be examining risk management lapses at some firms, he said: “In the grand scheme of these large institutions, the Archegos risks were not systemically important or were not of the size that they would have really created trouble for any of those institutions.”
Prudential Regulators, GameStop Oversight on Deck at House Financial Services Committee
The House Financial Services Committee will hold the expected final hearing on the GameStop stock frenzy on May 6 with SEC Chairman Gary Gensler as well as representatives from FINRA and the DTCC. The Committee will also hold a prudential regulator oversight hearing on May 19 as well, Chairwoman Maxine Waters (D-CA) announced this week. The hearing lineup also includes a May 27 hearing with several bank CEOs.
Morning Consult: FinTech Complaints to CFPB Surged Amid Pandemic
Complaints about FinTech products and services ballooned in the early months of 2021 compared to the same period a year earlier, according to a Morning Consult analysis this week of Consumer Financial Protection Bureau data. Complaints appeared to proliferate as customers turned to FinTech apps for digital services during the pandemic, the report said. CFPB complaints about a swath of FinTechs including digital wallets and virtual currencies nearly tripled in the first quarter of 2021 compared to that period last year. “Practically, one of the reasons why these products are getting more complaints is that digitally native products are advertising that they function like a bank and that they have all the same consumer protections,” Melissa Baal Guidorizzi, an attorney at O’Melveny & Myers LLP and former CFPB official, said in the article. “If they aren’t living up to this promise, that’s where the complaints are coming from.”
BPI Blog: The Overnight Reverse Repurchase Agreement Facility
As explained in a new blog post by BPI’s Chief Economist, the Fed’s overnight reverse repurchase (ON RRP) agreement facility could expand to over $1 trillion in coming months. The ON RRP facility accepts overnight cash investments from banks, GSEs and money market mutual funds and provides Treasuries as collateral. The facility essentially expanded the central bank’s authority to pay interest on reserve balances to a broader set of counterparties such as money market funds. As reserve balances continue to balloon — and after the exclusion of Treasuries and reserves from banks’ supplementary leverage ratios expired, making it more expensive for banks to hold reserves – the use of the facility will likely rise sharply going forward. What was meant to be a temporary measure to ensure the Fed could raise rates when it wanted to do so appears poised to become a massive and permanent government vehicle for private-sector savings.
In Case You Missed It
Bloomberg: Biden Plan Would Expand Bank Reporting Duties to IRS
A provision of President Biden’s family and childcare plan would target tax evasion by requiring banks to report more transaction data to the IRS, according to Bloomberg. The American Families Plan would prompt banks to add data on aggregate account outflows and inflows to their annual reports to the IRS, according to the Treasury Department. The move is meant to make IRS audits more targeted, Treasury said. Paul Merski, EVP of Congressional Relations at the Independent Community Bankers of America, said in the Bloomberg piece that additional IRS reporting information would increase compliance costs and add to the glut of information banks already provide to the government. That existing obligation includes millions of currency transaction reports sent to FinCEN, along with suspicious activity reports. The proposal as written is like “sending your bank statement to the IRS every month,” Merski said. “The federal government can’t track all of that – any more requirements would be adding more hay to that haystack.”
Fed Releases Supervision and Regulation Report
The Federal Reserve on April 30 released its semiannual Supervision and Regulation Report, which outlines the central bank’s supervisory and regulatory priorities and describes the banking system’s conditions. The report highlights banks’ strong capital and liquidity positions and robust operational resilience, as well as banks’ vital role in supporting small businesses through PPP and market indicators that demonstrate investor confidence in bank health. It also summarizes recent Fed regulatory and supervisory actions. Supervisory priorities for large banks include LIBOR transition, board effectiveness, credit risk management, liquidity risk management and cybersecurity.
PNC Launches $88B Community Investment Plan
PNC this week announced an initiative to provide $88 billion in support to low- and moderate-income communities, communities of color and other underserved groups over four years, starting in January 2022. The plan is connected with PNC’s pending acquisition of BBVA’s U.S. operations. As part of the project, PNC will expand its Bank On-certified products to BBVA’s markets. The plan includes offering mortgage and home equity loans to more underserved borrowers; expanding lending to small businesses in underserved communities; providing community development loans, including to CDFIs; and increasing philanthropy efforts. Coverage of the initiative can be found in American Banker.
BofA Pledges $1.5M to Racial Equity Efforts in Massachusetts
Bank of America this week committed $1.5 million to advance racial equality and economic opportunity in Massachusetts. The pledge will support King Boston, an organization driven by the legacy of Martin Luther King Jr. and Coretta Scott King, and the Massachusetts League of Community Health Centers. It is part of the bank’s $1.25 billion, five-year commitment to address racial inequality and support similar efforts across the private sector.
NYT: Still Getting Your Head Around Digital Currency? So Are Central Bankers
A New York Times piece this week summarizing the state of play on central bank digital currency cited BPI President and CEO Greg Baer’s recent working paper on the topic. The article refers to his argument that banks would not be able to use central bank digital currency holdings to make loans, a lack of essential funding that would push the cost of basic banking services up. It also cites the notion that CBDCs make the financial system more vulnerable to runs when stressed investors flock to safe assets.
FT Op-Ed: End of LIBOR Stirs Anger on Wall Street
As LIBOR, former linchpin of financial contracts around the world, heads for the exits, the finance industry and regulators are debating the merits of various replacement rates, according to a Financial Times op-ed on April 24. Some banks worry that SOFR, the successor backed by the Fed-sponsored Alternative Reference Rates Committee, is not sensitive enough to credit risk. An OCC official raised that point, citing concerns at some regional banks and small banks, at a recent congressional hearing on LIBOR transition. The FT piece points out that there is not currently a SOFR rate for different time periods that pegs borrowing benchmarks for three- or six-month terms, for example. There is also no SOFR rate with collateral based on private-sector loans. The article refers to BPI’s argument that during stress, SOFR-based rates could fall as U.S. Treasuries, a haven asset, rally – meanwhile, banks’ funding costs would rise as short-term credit rates climb. BPI recently called for Congress to pass legislation to ease the transition for tough-legacy LIBOR contracts.
American Banker: Banco Santander Leaning More on U.S. Operation for Growth
Banco Santander’s U.S. business is driving more of its bottom line than ever before, according to an American Banker article this week that includes an interview with CEO Ana Botín. The Spanish lender is planning to expand digital and retail operations in the U.S. to sustain that momentum, the article says. About 29 percent of Santander’s global profits came from its North America business in the first quarter of the year, compared to 21 percent a year earlier.
Public-Private Ransomware Task Force Calls for Bitcoin Regulation
A new report from a public-private panel aimed at fighting ransomware, a form of digital extortion where hackers demand payouts from critical-infrastructure entities, recommended more collaboration between governments and the private sector; more cohesion among different government agencies; a coordinated international approach; the creation of emergency funds to support ransomware response; and more regulation of cryptocurrencies, which are often used in ransomware attacks. The report from the Ransomware Task Force called for cryptocurrency exchanges, kiosks and over-the-counter trading platforms to comply with KYC, AML and CFT laws and receive closer government scrutiny.
