BPInsights: May 28, 2021

Stories Driving the Week

Bank CEOs Testify on Capitol Hill

The CEOs of JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Citigroup and Morgan Stanley testified before the Senate Banking Committee and House Financial Services Committee at oversight hearings this week. The chief executives described their banks’ support of the U.S. economy and small businesses during the pandemic, their efforts to help business clients transition to a lower-carbon economy and their work to broaden credit access and economic growth in underserved communities.

Here were some themes in lawmakers’ questions:

  • Financial inclusion: Sen. Bob Menendez (D-NJ) asked the bank chiefs about low-fee accounts. Bank of America CEO Brian Moynihan outlined his bank’s low-cost, no-overdraft account that is popular among young consumers and its low-fee emergency-loan product. At the House hearing, Moynihan highlighted Bank of America’s participation in the Bank On program, which supports low-cost financial products to bring unbanked consumers into the banking system. Citi CEO Jane Fraser described the Access Account aimed at underserved consumers. Wells Fargo CEO Charlie Scharf also mentioned the bank’s no-overdraft-fee account offering at the House panel hearing, as did JPMorgan Chase CEO Jamie Dimon. Dimon also highlighted a strong presence in low- and moderate-income communities and the bank’s use of alternative data to help consumers without credit scores access credit. 
  • Diversity: The CEOs outlined their banks’ efforts to create more inclusive workplaces and recruit more employees from diverse backgrounds. Several including Dimon and Fraser said they were working with Historically Black Colleges and Universities (HBCUs) to build a pipeline of diverse talent.
  • Climate: Republicans pressed the CEOs to ensure they are lending to carbon-intensive industries such as oil and gas. The questions came as part of a broader push among GOP lawmakers for “fair access” to banking services for legal businesses that may be controversial. Banking Committee Ranking Member Pat Toomey (R-PA) and his House panel counterpart, Rep. Patrick McHenry (R-NC), criticized the notion of banks incorporating social issues into their business practices. The CEOs emphasized that they are working with clients to transition smoothly to a greener economy. In response to Sen. Tina Smith (D-MN)’s question on climate risk disclosure legislation, the CEOs emphasized that they already provide swaths of information voluntarily, and such a policy would need to apply consistently and be examined to avoid unintended consequences. Goldman Sachs CEO David Solomon said at the House hearing that the green transition will create jobs.
  • Cyber: In the wake of a ransomware cyberattack on Colonial Pipeline that devastated gasoline supply throughout the East Coast, cyber has emerged as a bipartisan priority among lawmakers. Sens. Mark Warner (D-VA) and Bill Hagerty (R-TN) both expressed interest in the issue. Warner said the banks were doing a good job of managing cyber risk but called for continued engagement on the subject. Citi’s Fraser said cybersecurity is the biggest threat to the U.S. financial system. Solomon also named it as one of the greatest risks. “This issue has gone from something that was relatively contained to something that we spend a billion dollars a year [on],” Moynihan said to Rep. William Timmons (R-SC). Dimon said cyber is a huge risk to the system, the banking industry is close to defense companies in its cyber protections, and banks are vigilant about third-party vendor risks.
  • Consumer support: The CEOs emphasized the options they are extending to consumers under stress from the pandemic – for example, JPMorgan’s Dimon said in the Senate hearing that the bank works closely with homeowners behind on their mortgage payments to ensure they avoid foreclosure. “Where appropriate, you can expect us to bend over backwards to keep those folks in their homes,” Dimon said in the House hearing.
  • Global competitiveness: In response to a question from Rep. Roger Williams (R-TX) about competition from China, Dimon said Chinese banks have regulatory advantages compared to banks in the U.S. For example, U.S. banks have to hold much more capital than their Chinese counterparts, he said. In addition, the liquidity coverage ratio precludes American banks from “doing a lot of intermediation in the markets that we could otherwise do,” he said. Dimon also emphasized the inefficiency of public policy, such as infrastructure, as a risk for U.S. leadership in the world. Separately, Fraser said China “is playing an increasing role in the global financial system,” and that it’s strategically important for U.S. multinationals and the U.S. government that foreign-exchange flows, cash management and global investors’ access to the U.S. market take place on American payment rails. Additionally, Dimon and Moynihan said higher taxes hurt American competitiveness. 
  • Supplementary leverage ratio: In response to Rep. Trey Hollingsworth (R-IN)’s question about the supplementary leverage ratio in an environment of growing deposits and slow loan demand, Bank of America’s Moynihan referred to industry suggestions that “completely riskless assets may not have a place” in the ratio, which requires banks to hold capital against assets regardless of risk level. “It’s important to look at it again and make sure it’s calibrated correctly,” he said.
  • Crypto: Dimon said regulators should pay more attention to cryptocurrencies. “My own personal advice to people is stay away from it,” he said of Bitcoin. “That doesn’t mean that clients don’t want it.” He said his views have not changed significantly on Bitcoin since previous comments, but what’s up for debate is whether banks should make it available safely. “Eventually, the regulators who are a day late and a dollar short should be paying a lot more attention to the future, like payment for order flow, high frequency trading, cryptocurrency, and put a legal, regulatory framework around it,” he said. “There is no question that both institutions and individuals are looking for exposure to Bitcoin,” Goldman’s Solomon said. “I’m extremely cautious.” 

Quarles Speaks on Capital, Crypto, Supervision

Federal Reserve Vice Chair for Supervision Randal Quarles spoke at a Senate Banking Committee oversight hearing and a Brookings Institution event this week. Here are notable remarks.

  • Leverage ratios: At the Brookings event, Quarles reiterated that the Fed is considering different ways to retool the supplementary leverage ratio, a measure that can make it more costly for banks to hold safe assets as deposits at Federal Reserve Banks (reserve balances) and Treasuries flood the system as a result of the Federal Reserve’s monetary policy. “There were clearly some pressures on dealers as a result of our regulatory framework that didn’t exist before,” Quarles said though he questioned whether the temporary change to the SLR made by regulators last year had much of an effect on Treasury market functioning. He also said the Fed did not envision the trillions of dollars of reserves currently in the system when it calibrated the appropriate level of the SLR in 2014, a point BPI has made in a recent blog.
  • Quarles outlined several different options for recalibrating leverage ratios, which treat all assets on banks’ balance sheets the same regardless of risk level.  His options included numerator adjustments and excluding reserves from the SLR denominator, which he noted could cause a potential significant decrease in the aggregate level of capital unless risk-based capital levels are increased or the SLR is increased. 
  • He concluded by noting there are pros and cons to all the approaches and the Federal Reserve is working through all of those options but would prefer a solution where there is not a need to increase the minimum SLR requirement to avoid calibrating the system in a way that makes financing the government more attractive to the financial sector than financing the private sector. He also noted that they may have to “do something somewhere else with regard to risk-based capital” to avoid a “potential significant decrease in the aggregate level of capital in the system.”
  • Balancing shock absorption, efficiency: The Treasury market turmoil of March 2020 shouldn’t lead to overcorrections that impede the efficient flow of capital markets, Quarles indicated at the Brookings event. “We shouldn’t solve for March of 2020,” he said. “If you create a system that actually can shrug that off, you don’t have an efficient system for the other hundred years of the century.” He also said that stabilizing measures for the banking system don’t necessarily apply to the fragmented nature of nonbank finance.
  • Basel endgame rules will ‘tailor themselves’: Two key pieces of the Basel III “endgame” rules – the capital charge for operational risk and the capital charge for trading risk – will “in many cases, tailor themselves, they’re addressed principally to larger firms,” Quarles said in response to Sen. Jerry Moran’s (R-KS) question about how the tailoring framework will be maintained as the rules are implemented.
  • ‘Sprint’ toward common posture on crypto: In both appearances, Quarles highlighted banking regulators’ new “sprint” initiative meant to align the agencies on cryptocurrency, a topic that is increasingly attracting policymaker attention. “A common regulatory framework and capital treatment, an operational treatment and, in the course of that, if there are gaps in the regulatory framework, we’ll also make those known,” Quarles said at the congressional hearing.
  • CBDC: Quarles said at the Senate hearing that the Fed’s comprehensive study on central bank digital currencies will ultimately lead to “a conclusion of whether a CBDC is appropriate for the United States. I think that’s very much an open question, currently.” He added that most types of CBDC would require legislative authority.
  • Supervision black-box: Sen. Thom Tillis (R-NC) pressed Quarles on the opacity of Fed supervisory actions such as MRAs and MRIAs, whose confidentiality enables the Fed to play a “judge, jury and executioner role,” Tillis said. Quarles said the central bank is “trying to increase transparency around that.”

Treasury Nominee Liang Seeks Bond Market Review; Batchelder Eyes IRS Boost

Nellie Liang, the nominee for Treasury Undersecretary of Domestic Finance, called for scrutiny of Treasury market performance under stress at her nomination hearing this week before the Senate Finance Committee. The position oversees the $21 trillion Treasury securities market. Liang, while at Brookings Institution, coauthored a paper with BPI Senior Fellow Pat Parkinson suggesting policy changes that could enhance the market’s liquidity, such as more widespread central clearing of Treasuries and exempting bank reserves from the supplementary leverage ratio. Lily Batchelder, President Biden’s nominee for Assistant Secretary for Tax Policy, also testified at the nomination hearing, where she expressed support for strengthening the Internal Revenue Service and exempting family farms from proposed taxes on asset transfers at death, according to Bloomberg. She also called for more frequently updating estimates of the gap between taxes owed and taxes paid.

Financial Trades Call on Federal Reserve to Clear Up Ambiguities in Liquidity Reporting Proposal and Provide Adequate Time to Implement Changes

BPI, SIFMA, ABA, FSF and IIB this week urged the Federal Reserve to clarify several areas of the proposed liquidity reporting changes that would be used to help monitor the liquidity positions of large, globally interconnected banks. The Fed’s proposed revisions to the Complex Institution Liquidity Monitoring Report are meant to capture details of banks’ funding flows that impact a long-term liquidity risk measure, the recently finalized Net Stable Funding Ratio (NSFR). Banks must comply with the NSFR, a regulatory liquidity measure requiring banks to hold adequate stable funding to support their assets, commitments and derivatives exposures over a one-year time horizon, beginning on July 1, 2021. However, the proposed changes far exceed the scope of those required by the NSFR, the trades wrote in a comment letter filed May 27. Also, the Fed’s data-reporting changes will likely be finalized close to the NSFR effective date, leaving banks insufficient time to make the necessary and significant changes to their reporting systems.

Yellen: Biden Budget Will Bolster Funding for FinCEN Database, CDFIs

The presidential budget will propose more funding for the FinCEN beneficial ownership database, Treasury Secretary Janet Yellen said in congressional testimony this week ahead of the budget release on May 28, according to an American Banker article. The directory, which will contain information on covered businesses’ beneficial owners, was created by a new law aimed at preventing anonymous shell companies. The budget will also request more funding for Community Development Financial Institutions, she said.

Michael Hsu on Priorities in Bloomberg, POLITICO

New Acting Comptroller Michael Hsu discussed the top items on his agenda in media interviews this week. Hsu said in a POLITICO Pro Q&A that he’s seeking a safe way to handle FinTech services such as cryptocurrency trading, which are vying for a bigger role in the banking system. He also wants the banking system to avoid “complacency”; said banks need certainty on CRA, but that all options are on the table, from fully scrapping the 2020 OCC rule to maintaining the status quo; and said he wants to understand the full picture of FinTech charters. “My big concern is making sure that the individual decisions from charters fit with a broader strategy about the regulatory perimeter,” he said. In a Bloomberg interview, he said he has no plans to “open it up and do a bunch of surgery” on capital and liquidity rules. So far, he has indicated a calculated, deliberative approach to reviewing – and reshaping — OCC policies.

In Case You Missed It

Financial Trades Report Shows Markets, Large Banks Gave Vital Boost to Global Economy During COVID

Large global banks and financial markets bolstered the world economy amid the pandemic, providing crucial credit and liquidity and helping to restore confidence, says a report released this week by the Financial Services Forum, Institute of International Finance and the International Swaps and Derivatives Association. Strong, resilient banks also helped businesses raise capital, provided liquidity through market-making, facilitated government pandemic relief programs and exhibited remarkable resilience in the crisis, the report says.

BPI, Joint Trades File Brief Supporting FDIC ‘Valid-When-Made’ Rule  

BPI and several other trades filed an amici curiae brief on May 27 in California v. FDIC urgingthe court to uphold the FDIC’s 2020 rulemaking to clarify that the “valid-when-made” doctrine applies to loans originated by FDIC-insured state banks.  The “valid-when-made” doctrine assumes that, when a bank validly originates a loan to a customer and later sells that loan to a nonbank buyer, terms and interest rate on that loan remain valid from when the loan was originated.  The brief points out that the valid-when-made doctrine has significant judicial precedent including U.S. Supreme Court cases from the 1800s which confirm the doctrine.  The doctrine was universally accepted until 2015, when a Second Circuit Court of Appeals’ decision (Madden v. Midland Funding LLC) held that a nonbank lender who buys a bank loan on the secondary market no longer enjoys the protections of federal law in continuing to charge the original interest rate on the loan, regardless of whether such a rate is permissible in the borrower’s home state.  The FDIC’s rulemaking — along with a similar rulemaking by the OCC — was intended to reaffirm the doctrine.  The brief points to evidence that uncertainty caused by Madden restricted credit access for low-income Americans and small businesses impacted by the decision.

City of London Pivots Toward U.S. on Green Finance

The City of London is backing the U.S. over the EU as a global standards-setter in green finance, according to a recent POLITICO Pro article that cites a City report. The U.K. finance industry organization is angling for a partnership with the U.S. on climate change and financial regulation that avoids the EU’s prescriptive approach on what activities are considered “green.” The report argues for a common reporting standard for carbon intensity and a uniform framework for data collection. U.S. and U.K. financial officials discussed bilateral cooperation on several issues, including sustainable finance, recently at a U.S.-U.K. Financial Regulatory Working Group meeting.

Huntington-TCF Merger Gains Regulatory Approval

The Federal Reserve, OCC and Department of Justice have approved Huntington Bancshares Inc.’s proposed merger with TCF Financial Corp., the banks announced this week. TCF will sell several branches in Michigan as a condition of the approval.

BNY Mellon Launches Instant Bill-Pay Service Using RTP Network

BNY Mellon will be the first bank to provide corporate clients with instant digital bill-pay service using The Clearing House’s RTP network, the bank announced May 26. Those businesses can use the product to receive real-time bill payments from their customers. The product will likely appeal to businesses like internet and telecom providers and credit card companies that bill customers regularly and would particularly benefit from instant payments, the bank said.

Wells Fargo Fulfills $50M Pledge With Investments in 13 Black-Owned Banks

Wells Fargo has fulfilled its 2020 commitment of $50 million to Black-owned banks, the bank announced this week. The milestone came as Wells Fargo finalized investments in two more MDIs: The Harbor Bank of Maryland and Industrial Bank of Washington, D.C.

American Banker: PNC Reports Brisk B2B Enrollment For Real-Time Payments

The pandemic’s shift toward the “immediate economy” has driven quick enrollment in PNC’s link to The Clearing House’s Real Time Payments network, Chris Ward, executive vice president and head of product for treasury management at the bank, said in an American Banker article this week. Pervasive digital shopping and selling has intensified the need for businesses to access funds immediately, he said. More than 250 of PNC wholesale clients currently use the service, compared to a handful a year ago. 

HSBC Chief Says No Thanks to Bitcoin

HSBC CEO Noel Quinn said the British bank does not intend to offer cryptocurrency as an investment option or launch a crypto trading desk because the digital coins are too volatile and lack transparency, according to Reuters.

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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.