BPInsights: May 7, 2022

Stories Driving the Week

Joint CRA Update Begins to Take Shape

The FDIC, Federal Reserve and the OCC this week proposed a new joint rule to update the regulations implementing the Community Reinvestment Act.

Here’s What BPI is Saying: Katie Collard, BPI senior vice president and associate general counsel, issued the following statement in response to the release of the proposal Thursday:

“We look forward to reviewing the proposal in detail and submitting comments during the rulemaking process. At first glance we are encouraged by the agencies’ efforts to make CRA evaluation more objective, transparent and predictable and to clarify and expand the types of activities that qualify for CRA credit. BPI supports a coordinated interagency approach to CRA reform and appreciates the agencies’ effort to achieve a framework that better serves low- to moderate-income and underserved minority communities. It is incumbent upon the banking agencies to arrive at a final rule that applies CRA standards consistently to all banks. The final rule should also further incentivize the adoption of financial inclusion programs, such as Bank On certified accounts, by giving banks clarity on how these programs will be treated under the CRA framework.”

The proposal would aim to expand access to credit and financial services in low- and moderate-income communities, provide consistency in the benchmarks regulators use to evaluate retail lending and community development financing, and tailor CRA evaluations and data collection to bank size and business models. It would also update CRA assessment areas to address increasing use of mobile and digital banking.

Like any 700-page proposal, the devil could lurk in the details and so industry’s support remains uncertain, and even elected officials have posited that legislative reforms to the CRA could be more effective than a wholesale regulatory revamp.

Go Deeper: To learn more about BPI’s Community Reinvestment Act engagement, click here.

Smartphones and Household Financial Fragility Matter More for Financial Inclusion than Bank Branches, Size

Smartphone access and household financial fragility are meaningful factors in financial inclusion for U.S. households, rather than a change in the number of bank branches or a change in the mix of large or small banks in an area, a new BPI analysis finds.

The analysis delves into financial inclusion data at the metropolitan area and state levels and explores several factors that could influence different outcomes in financial inclusion. It concludes that neither a reduction in bank branches nor an increase in the proportion of branches owned by large banks have a meaningful effect on financial inclusion. Instead, smartphone use, demographic composition and household financial fragility are key financial inclusion drivers.

Why it matters: Policymakers and the banking industry are trying to bring more households into the banking system, especially low-income and minority households. To address the challenge of unbanked households, it’s important to discern what factors improve financial inclusion. The view that bank mergers harm financial inclusion has gained traction among some advocates, but this view is not supported by evidence.

What could help: Expanding digital inclusion to enable more mobile banking, improving the economic status of households with low education levels and income and strengthening outreach to minority communities could reduce the percentage of people who are unbanked, the findings suggest.

One Change to Consider in Basel’s New Operational Risk Capital Charge

The latest changes to the Basel bank capital framework include a new capital charge for operational risk. The U.S. banking agencies will soon implement the latest version of the Basel framework, including this capital charge – the standardized approach for operational risk, or “OPE.” If the U.S. includes that charge in its updated Basel proposal, it would mark the first instance of U.S. banking regulators explicitly imposing a charge for operational risk in the risk-weighted capital regime under the standardized approach.

Bottom line: The OPE offers a simplified approach that resolves some problems with variability in capital charges under the previous Basel methodologies. It’s a significant improvement in some ways. But it has a key limitation: It distorts operational risk capital requirements for banks with business models heavy on noninterest revenues (capital markets activity, custody services, etc.). These banks will face capital requirements much higher than their actual risk of losses and much higher than operational risk losses in the Fed’s stress tests.

The solution: This misalignment could be largely corrected by imposing a cap on the OPE’s services component like the cap that already applies to the interest component. Deducting reserves, Treasuries and agency MBS from the definition of those caps would also make the operational risk requirement less procyclical.

Learn more here.

CBDC, Stablecoins, Politics of Central Banking: Quarles Q&A

Former Federal Reserve Vice Chair for Supervision Randal Quarles participated in a Q&A with Rob Blackwell in a recent Banking With Interest podcast episode. Here are some takeaways from the interview.

  • CBDC: Quarles, a notable CBDC skeptic, reemphasized that stance in the interview, saying the U.S. would probably not issue a CBDC. “No, I don’t think that it’s inevitable,” he said. “I don’t think it would be wise. I think it’s more likely than I wish that it were. But at the end of the day, I don’t think it will happen.” A U.S. CBDC would require Congress to change the law, he said.

    A CBDC would siphon money out of the private sector banking system into the government, and it could then have political “strings” attached as it flows back into the economy. He also questioned the financial inclusion benefits.
  • Stablecoins: Regulators should be moving faster to create a framework for stablecoins, Quarles said. He said stablecoin issuance should not be limited solely to banks, and that there are ways to ensure that nonbank stablecoin issuers are stable, suggesting that the framework could resemble that of a government money market fund, but with better regulation to mitigate the risks.
  • ‘Big tasks’: Incoming, and current acting, financial regulators have a full agenda ahead and will likely not seek to reverse regulatory recalibrations that Quarles and counterparts made, he predicted, largely because doing so would take agency resources and time and so wouldn’t be viewed as worthwhile, on balance. “Looking at the bank merger framework is a high priority” for officials at the FDIC and other agencies, he noted. He also previewed Basel III endgame implementation and the CRA as important policy priorities on the horizon.
  • Politics: When asked if the Fed has become politicized, Quarles said not particularly, but he is “worried that could be changing,” largely because politicians might seek to leverage the Fed’s powers to achieve social and economic policy outcomes that can’t be achieved through lawmaking due to lack of consensus. He predicted future Board governor appointments could become as politically controversial as today’s Supreme Court appointments. He also described the Reserve Banks’ role as “seigniorage-funded research institutions” that risk independence when conducting research in policy areas outside the Fed’s mandate.
  • In the spotlight: Quarles gave his personal perspective on the scrutiny he experienced testifying on Capitol Hill. “When you are making a modest proposed change to the precise calibration of the enhanced [supplementary] leverage ratio, to be portrayed in public hearings as if your hands are dripping with the blood of the young of the nation is annoying,” he said. “But part of the job is that that’s the job and it will be over, and no one really watches those clips on YouTube.”

The Crypto Ledger

Here’s the latest in cryptocurrency this week.

  • Bored apes: A recent New York Times opinion piece by Farhad Manjoo, “What is Happening to the People Falling for Crypto and NFTs,” questions the trustworthiness and the hype of the crash-riddled crypto universe. “Cryptocurrencies, blockchains, NFTs and the constellation of hyped-up technologies known as “web3” have been celebrated as a way to liberate the internet from the tech giants who control it now,” Manjoo wrote. “Instead what’s happening with Bored Apes suggests they’re doing the opposite: polluting the digital world in a thick haze of errors, swindles and expensive, largely unregulated financial speculation that ruins whatever scrap of trust still remains online.”
  • ‘Mixer’ sanctioned: The U.S. this week imposed its first-ever sanctions on a crypto “mixer” — a platform that facilitates illicit transactions by obfuscating their origin, destination and counterparties. The sanctioned mixer, Blender.io, is used by North Korea to support malicious cyber activities and money laundering, the Treasury Department said. 
  • SEC staffs up: The SEC is beefing up its crypto investigative unit with 20 new staffers, according to the Wall Street Journal this week. The Crypto Assets and Cyber Unit was created in September 2017 as digital asset sales were surging.
  • Crypto SARs doubling: The number of suspicious activity reports involving crypto more than doubled from 2020 to 2021, from 42,782 to about 92,000, American Banker reported. Much of the uptick comes from the San Francisco area, a hub of large crypto firms’ U.S. headquarters, and part of the increase may stem from crypto exchanges registered as Money Services Businesses flagging unlicensed entities, according to the article. Treasury’s FinCEN is seeking to hire more crypto analysts as it oversees such reports.
  • EU-U.S. teamwork: Senior European Union official Mairead McGuinness called for a joint EU-U.S. approach to crypto regulation in a recent op-ed. McGuinness highlighted potential risks of crypto, such as sanctions evasion, consumer harm, financial stability risk and environmental damage.

On Climate Data, FSB Eyes ‘Macroprudential’ Tools, Third-Party Verification

The Financial Stability Board recently published its consultation on Supervisory and Regulatory Approaches to Climate-related Risks, which recommends, among other things, that global banking regulators may need to use “potential macroprudential tools” alongside more targeted microprudential approaches to address climate risk. The group of global financial regulators and central bankers also recommended that further regulatory reporting on climate-related risk metrics may be needed along with third party verification.

In Case You Missed It

Trades: Expanding Durbin Amendment Would Harm Consumers

Extending the Durbin amendment to credit cards in addition to debit cards would curtail consumer choice and access to credit, a group of trades including BPI wrote in a letter this week to leaders of the Senate Judiciary Committee. The panel held a hearing this week on the dual routing system. The retail industry’s proposal to expand the amendment ignores the differences between debit and credit cards and would raise costs for consumers just as the economy recovers from the pandemic, the letter said.

EU Plans to Block Three Russian Banks from SWIFT

The European Union plans to block access to the SWIFT financial messaging system for three Russian banks, including Sberbank, its largest. The other two banks are Credit Bank of Moscow and the Russian Agricultural Bank, according to POLITICO. The move aims to cut off banks that are “systemically critical to the Russian financial system and Putin’s ability to wage destruction,” European Commission President Ursula von der Leyen said, according to the POLITICO article.

Fifth Third Surprises Families of Babies on 5/3 With Gifts

Fifth Third Bank marked its “namesake day” of May 3 (5/3) by surprising Central Indiana families of babies born on that day with $1,053 to open a college savings account. The gifts also included a gift card and essential baby items.

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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.