BPInsights: May 8, 2021

Stories Driving the Week

Big Tech, FinTech Payment System Access Hinges on Fed’s Path Forward

“The issue of who can access the Federal Reserve’s payment system is an important one, and it is good that the Fed has sought comment on the complex questions surrounding it,” BPI President and CEO Greg Baer said in a statement this week following the Fed’s proposed guidelines on account access. “Historically, only regulated and supervised banks have been permitted access, and if Big Tech and FinTech firms seek that right, the question is whether they ought to shoulder the traditionally associated responsibilities, and whether further protections are warranted given that they are uninsured and lightly regulated, and therefore inherently riskier to the system.”

BPI Supports FinCEN AML Rollout, Makes Recommendations

BPI expressed support for FinCEN’s effort to implement the Corporate Transparency Act, a new anti-money laundering measure that targets anonymous shell companies, in a comment letter to the bureau submitted this week. BPI proposed recommendations meant to make the AML changes effective and useful, both for banks detecting money laundering and for law enforcement officials fighting human trafficking, terrorism financing and other crimes.

“A sensible rollout of the new AML and beneficial ownership rules will make it significantly easier to unravel criminal networks and throttle core financial conduits used by criminals,” remarked Angelena Bradfield, Senior Vice President of AML/BSA, Sanctions and Privacy at BPI. “The recommendations we propose in our comment letter are imperative to ensure that law enforcement, intelligence, national security agencies, financial institutions and federal functional regulators have the data and information they need to effectively do their jobs.”

BPI, which has long supported AML reforms that maximize effectiveness, made three key recommendations:

  • FinCEN should ensure that its new beneficial ownership directory – which stores information about the ultimate owners of businesses – is a reliable, centralized information resource.
  • New CTA requirements should be harmonized with existing regulatory requirements to, among other things, make sure banks and the government don’t duplicate efforts when addressing illicit finance risk.
  • FinCEN should broadly interpret what it means to be a “reporting company.” Illicit actors do not limit their nefarious activities to corporations or LLCs and, therefore, a narrow definition of who should and should not report may leave the door open to exploitation.

BPI Blog: Goldilocks and the Fourth Way 

One of the toughest challenges in financial regulation is how to regulate capital – in particular, at how granular a level to assess the risk of each asset. A leverage ratio requirement, in which all risk weights are set to 1, has the benefit of simplicity but ignores risk and therefore both misstates financial condition and incentivizes riskier conduct. More risk-sensitive approaches, however, must either rely on banks’ own assessments of risk or empower government regulators to allocate capital by making the decision themselves. Three approaches will be debated as the federal banking agencies implement the latest Basel framework, but there may be a fourth, according to a recent BPI blog by CEO Greg Baer.

This fourth approach could offer a way to do what was previously unavailable: leverage private sector innovation and resources; allow for prompt adjustments to adapt to new risks or new data; prevent any possibility of cheating; and expand the universe of companies that can be fairly evaluated. It would offer a notable improvement relative to the one-size-fits-all model used in Basel’s Standardized Approach, and at the very least seem worthy of further analysis, and public notice and comment.

BPI, Joint Trades Call for Joint CRA Rulemaking

BPI and a coalition of financial trades urged the OCC in a comment letter this week to scrap its Community Reinvestment Act rule and restart a joint rulemaking effort with the Federal Reserve and FDIC.  A common set of CRA rules among banking agencies would give consistency to banks as they serve their communities. “With this request, we reaffirm our commitment to engaging in a constructive dialogue and to engaging with the banking agencies to develop an updated CRA framework that benefits communities, banks, and regulators alike”, the trades wrote in the letter. Coverage of the letter can be found in POLITICO Pro and Bloomberg Law.

Current Expected Credit Loss Methodology and Loan Growth: Evidence from the COVID-19 Event

The adoption of the current expected credit loss standard (CECL) and the COVID event’s economic shock provided an ideal natural experiment to observe how a major change in bank accounting rules affected loan growth. Only banks that file SEC reports were required to adopt the new standard at the start of 2020, while smaller banks were not required to do so. The contrast provides a useful comparison between CECL adopters and those still using the previous standard, the incurred loss methodology. The comparison effectively controls for loan demand and other factors that could explain differences in loan growth across the two groups of banks. The baseline analysis excludes the largest banks, which are subject to tighter capital and liquidity standards that could confound the conclusions of the analysis.

New BPI research shows that the adoption of CECL at the start of an economic downturn negatively affected consumer lending, particularly personal loans, student loans and credit cards. The lack of impact on other household and business loan types, such as mortgages and commercial real estate loans, hinged on banking regulators’ decision to delay the effect of CECL on regulatory capital after the standard was adopted. Results indicate regulators should make the CECL add-back to capital permanent to prevent an increase in capital requirements and dampen the procyclicality of CECL during economic downturns.

American Banker: Congress’ Inaction on ILCs, FinTech Charters Worries Bankers

The lack of legislative action on ILC charters raises concern among the banking industry, American Banker reported this week. BPI has called on Congress to close a loophole that allows newly chartered ILCs to access banking privileges without consolidated supervision, the multilayered oversight that governs banks’ parent companies under a cornerstone banking law, by the Federal Reserve. The loophole allows Big Tech companies to exploit the banking system while taking on more risk than a fully regulated bank, putting customer deposits in danger. Recent attempts by Rakuten, the “Amazon of Japan,” and other firms to become ILCs give Congress a timely springboard to take action. “We all know that Congress kind of reacts to events,” BPI Head of Government Affairs Ed Hill said in the article. “So these recent applications, and the like, I do think give Congress something sort of tangible to react to. … We would have preferred that Congress passed this years ago, obviously. But I don’t think that’s practical. I really think that the time is right now.”

In Case You Missed It

BPI, Joint Trades Issue Statement on Fed’s Decision to Revisit Reg II

BPI, ABA, CBA, CUNA and NAFCU issued the following statement on the Federal Reserve’s decision to revisit Reg II: “The Durbin Amendment has been flawed from the beginning, making it harder for banks and credit unions to serve consumers, causing unintended consequences for financial institutions and failing to deliver on its promise to lower retail prices. The Fed’s decision to revisit Reg II risks causing even further consumer harm. The Fed’s own study of debit card transactions, both in person and online, shows that merchants and consumers are increasingly benefitting from significant investments in innovation and fraud detection embedded in the nation’s payment rails today. By reopening the rules surrounding debit card transactions, the Fed could put the convenience, safety, and security that Americans have come to expect when they use their debit card at risk. We will vigorously oppose any attempt to undermine the payments system at the expense of consumers.”

Yellen Taps Michael Hsu as OCC Acting Chief

On May 7, Treasury Secretary Janet Yellen announced her intent to appoint Michael Hsu, Associate Director of the Federal Reserve’s Bank Supervision and Regulation Division, as First Deputy Comptroller at the OCC, where he would then become Acting Comptroller. Hsu would replace Blake Paulson, the current acting OCC head, in that role. There is still no nominee to lead the agency permanently, but former Deputy Treasury Secretary Sarah Bloom Raskin turned down the job, according to The Wall Street Journal.

Powell: CRA Rules Should Apply to All Consumer Lenders

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.  

Bloomberg: Banks Seek Biden’s Aid After Trump’s 1,000-Sanctions-A-Year Pace

Financial industry groups, including BPI, are seeking clarity from the government as banks navigate a complex and growing thicket of sanctions requirements, according to a Bloomberg article this week. “Sanctions have definitely gotten more complex,” Angelena Bradfield, BPI SVP, AML/BSA, Sanctions and Privacy, said in the article. “Banks are having to create bespoke compliance apparatus to cope with an increasingly complex landscape and complex sanctions.” The Treasury Department is currently undertaking a review of U.S. sanctions policy, led by Deputy Secretary Wally Adeyemo.

BoE’s Bailey Sounds Grim Warning on Crypto

When asked about the rising value of cryptocurrencies, Bank of England Governor Andrew Bailey said: “They have no intrinsic value,” according to CNBC. “I’m going to say this very bluntly again,” he added. “Buy them only if you’re prepared to lose all your money.”

Bloomberg: BofA Tech Chief Says Cyber Attacks Have Surged ‘Dramatically’

Bank of America Chief Operations and Technology Officer Cathy Bessant warned of surging cyberattacks amid the pandemic and said the bank is devoting more resources to fighting cyber threats, according to a recent Bloomberg article. “Criminals are by definition very crafty, very entrepreneurial — and times of stress produce opportunities,” Bessant said. “There’s no question that the rate and pace of attacks, and the nature of attacks, has grown dramatically.”

BPI, Joint Trades File Brief in Citi/Revlon Appeal

BPI filed a joint brief with several other financial trades in the Citi/Revlon appeal. The brief argues that the Second Circuit should reverse Judge Furman’s decision at the District Court level on both legal and policy grounds and require that the lenders return the erroneous payment to Citi.  It explains that the Judge misapplied the key precedent (a 1991 New York state court case – Banque Worms) because that precedent had materially different facts from those in this case.  In Banque Worms, the loan at issue was currently due at the time of the mistaken payment to the lender (and, thus, the erroneous payment was not a windfall but rather was applied to discharge amounts owed to the lender consistent with New York’s “discharge for value” principle) unlike here where no principal was currently due on the Revlon loan (and, thus, the payment was a clear mistake and a windfall to the defendant/recipients). The District Court decision places an unjustifiable level of risk on banks that act as agent for a group of lenders, the brief explains, and the case has major implications for banks executing wire transfers. 

Bloomberg: Biden To Tap Crebo-Rediker, Nelson As Treasury Undersecretaries

President Joe Biden will nominate Heidi Crebo-Rediker as the Treasury Department’s top diplomat and Brian Nelson as its top sanctions official, according to a Bloomberg article. Nelson, a former staffer of Vice President Kamala Harris when she was California Attorney General, will be nominated for Undersecretary of Terrorism and Financial Intelligence, or TFI. Crebo-Rediker, who will be tapped as Undersecretary of International Affairs, served as Chief Economist at the State Department in the Obama Administration. Other expected nominees include Josh Berman to lead Treasury’s work on CFIUS and Elizabeth Rosenberg as Assistant Secretary of Terrorist Financing.

California Regulator: FinTech Firm Chime Can’t Call Itself ‘Bank’

FinTech company Chime can’t market itself as a “bank,” a California regulator said. The firm allegedly violated state law by using “chimebank” in its web address and using the terms “bank” and “banking” in other aspects of its business. Chime agreed to revise language on its website and app to clarify that it is not a bank and that banking services are provided by its bank partners. The case comes as many FinTech and Big Tech firms seek to be treated more like banks, without being subject to the same supervisory framework as a bank.

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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.