BPInsights: May 21, 2022

Stories Driving the Week

Financial Stability Considerations in Bank Merger Analysis

Financial stability concerns of bank mergers are a hot topic. Since enactment of the Dodd-Frank Act in 2010, the federal banking agencies have considered risks to financial stability when evaluating proposed bank mergers and acquisitions, and have found in each case that they did not argue against approval.

However, the Federal Deposit Insurance Corp. is currently seeking comment on a reconsideration of the framework for assessing the financial stability risks that could arise from a merger involving a large bank.  Its request for information bemoans increasing consolidation in the banking industry, consistent with a recent executive order directing federal agencies to consider potential adverse effects of consolidation across all industries.

As regulators set out to update the framework for assessing the financial stability factor when evaluating bank mergers, BPI has conducted a detailed review of past orders and offers recommendations for conducting a systematic analysis of financial stability effects for future reviews.

An accurate analysis of such effects must include both costs and benefits of the merger. BPI analysis found that in most cases, market and regulatory benefits of the merger will offset the systemic costs of creating a larger bank and therefore result in no net increase in financial stability risk, and in many cases a decrease.

To learn more, access this recent BPI research note and a Law360 op-ed.

Key Takeaways: Michael Barr’s Nomination Hearing

Federal Reserve vice chair for supervision nominee Michael Barr faced the Senate Banking Committee on Thursday for a nomination hearing, alongside two SEC nominees. Here are some top takeaways from Barr’s testimony.

  • Tailoring: Sens. Tester (D-MT), Rounds (R-SD) and Daines (R-MT) asked Barr about concerns he had expressed regarding S. 2155, legislation that tailored Dodd-Frank’s prudential requirements to fit banks’ business models and risk profiles. “I did have some concerns that I expressed as the bill was being drafted that some aspects of the bill could weaken capital liquidity rules for larger firms,” he said. “A number of concerns I had with the bill were actually addressed by a manager’s amendment that came in that, for example, clarified that the U.S. operations of foreign firms would still be required to have intermediate holding companies.” Barr said that “a tiered approach, a tailored approach, to regulation makes a lot of sense.”
  • M&A: Barr said he is “not aware of any authority with respect to a blanket moratorium on bank mergers,” in response to a question from Ranking Member Pat Toomey (R-PA). Toomey also expressed concern about Acting Comptroller Michael Hsu’s recent suggestion to impose new regulatory standards such as TLAC on regional bank mergers, asking Barr if regional bank mergers can increase competition in the banking industry in some circumstances. Barr responded that bank mergers “can have positive effects or negative effects on both competition, convenience and needs, financial stability” and that merger reviews should be “conducted based on the evidence.”
  • Climate: Barr said the Fed’s limited authorities are “to assess risk to the financial system from all sources, including climate.” He also said the Fed is “not able to allocate credit” and “should not be in the business of telling financial institutions to lend to a particular sector or not to lend to a particular sector.” The only purpose of the Fed’s scenario analysis or other measures “should be to understand the risks that climate change might pose to the financial system” and to work with banks on managing them.
  • SLR: When asked to commit to issuing a proposal on SLR modifications, Barr said he wants to “take a look at the capital and liquidity in the system, broadly speaking, to look at the SLR, to look at the Basel III so-called ‘endgame’ rules that need to be proposed and to try and take a look at this as a whole, rather than piece by piece.” He said capital and liquidity in the banking system is “quite strong” and said he would move quickly.
  • Crypto: Stablecoins could pose financial stability risks and run risks, Barr said. “It’s quite important that Congress and other regulatory agencies wrap their arms around those financial stability risks and regulate so that we don’t have situations where people are holding an asset that they believe is a cash instrument but it actually is not,” he said. Barr also told Sen. Cynthia Lummis (R-WY) that he would discuss with her the topic of potential requirements for banks to hold crypto assets in custody on their balance sheets (as required by SEC staff accounting bulletin 121).
  • CBDC: Barr said a potential U.S. CBDC “requires a lot more thought and study.” The Fed would need support from Congress and the executive branch if it decides to move forward with one, he said.

CBDC’s Path Forward in the U.S. is Simple: Make Decisions Based on Data

What’s happening: The Bank Policy Institute responded this week to a Federal Reserve discussion paper evaluating the costs and benefits of a central bank digital currency. The response supports the Fed’s position that adequate data and the consent of the legislative and executive branches are prerequisites to any decision to develop a CBDC. Despite the purported benefits cited by some advocates, evidence shows that a CBDC would present severe risks to the financial system and could permanently increase lending costs for businesses and households.

What BPI is saying: Greg Baer, BPI President and CEO, issued the following statement:

“The technical questions surrounding a CBDC are complex, but the determination over whether a CBDC should exist in the U.S. remains straightforward: does the data support the decision and is it legally permissible? Current research overwhelmingly undermines the purported benefits of a CBDC and instead indicates that a CBDC would seriously disrupt the financial system, significantly harming consumers and businesses. Ultimately, any decision with such extraordinary implications must — and can only — follow the express permission of the legislative and executive branches of government.”

The Crypto Ledger

The tumble of stablecoin TerraUSD rattled the crypto markets last week, and its fallout continues to shake confidence in the crypto ecosystem. The collapse demonstrated the run risk posed by unregulated stablecoins. Do Kwon, the creator of TerraUSD’s sister token Luna, outlined a rescue plan for the crypto asset this week. But the whole episode has spurred calls for stablecoin rules and questions of whether stablecoins should touch the federally insured banking system.

  • Speaking of deposit insurance: The FDIC this week adopted a rule targeting firms, including crypto and FinTech companies, that falsely suggest they have deposit insurance. The CFPB echoed the move by issuing an enforcement memorandum.
  • Tether backing: A newly released attestation of Tether’s asset holdings reveals that more than 20 percent of its “reserves” are still held in commercial paper and CDs. For a redline comparison of Tether’s new “reserves” declaration and its previous one, click here.
  • ‘Not ready’: Stablecoin proponents want to use the digital assets as a payment tool, but the recent stablecoin crash shows they are “not ready yet” for that purpose, CFPB Director Rohit Chopra said in a Bloomberg interview this week.
  • Sanctions: The Department of Justice has launched its first criminal prosecution involving the alleged use of crypto to evade U.S. sanctions, according to the Washington Post. A federal judge in D.C. approved a DOJ criminal complaint against a U.S. citizen accused of transmitting more than $10 million in bitcoin to a digital currency exchange in an unidentified U.S.-sanctioned country. The judge rejected the notion that cryptocurrencies are not subject to U.S. sanctions laws.
  • No bankruptcy protection: Coinbase customers may lose their crypto assets if the exchange goes bankrupt, according to a regulatory filing cited by the Wall Street Journal. This treatment differs from how assets held for customers at a regular brokerage firm are protected in bankruptcy proceedings.
  • Europe divided: European lawmakers were split in their initial response to the crypto fallout. EU legislators have been working on a bill called “MiCA” (Markets in Crypto-assets) aimed at crypto sector oversight.

How Banks Navigate Sanctions Complexity: BPI’s Greg Baer on Bankshot Podcast

BPI President and CEO Greg Baer joined a recent episode of the Bankshot podcast with American Banker’s John Heltman. They discussed how globally active banks navigate the complexities of U.S. and international sanctions. Sanctions implementation entails increasingly complex investigative work, Baer said. “Over time, it becomes more complicated because once someone is sanctioned, they stop doing business in their own name. And they begin using shell companies and surrogates,” he said. “So a lot of sanctions compliance actually consists not of just sort of robotically running someone’s name through your system, but actually doing the investigative work to try to determine what else that person or company might own, which can become quite involved.” Another challenge is minimizing collateral damage to innocent parties while severing ties with sanctioned people and companies, Baer said.

The investigative efforts of the U.S. intelligence community and the responsiveness of Treasury’s OFAC have made a complicated process easier, he said.

In Case You Missed It

BPI Urges Flexibility, Consistency in FDIC Climate Risk Principles

The FDIC should enable banks to support the green transition by maintaining a flexible, risk-based approach to climate risk, BPI wrote in a comment letter on the agency’s draft climate-related financial risk management principles for large institutions. Excessively prescriptive rules relating to credit allocation or cost of financing could impose unintended consequences for the economy or shift financing outside the regulated banking sector. The FDIC principles are similar to their OCC counterpart, which BPI commented on in February.

M&T Bank Launches ‘Amplify Fund’ for Community Investment

M&T Bank this week unveiled a $25 million “Amplify Fund” to support low- and moderate-income communities in Connecticut, the larger New England market and New York. The philanthropic initiative follows the bank’s completion of its merger with People’s United.

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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.