BPInsights: November 13, 2021

Stories Driving the Week

How Basel Will Shape Business Lending

U.S. banking regulators will make significant changes to U.S. bank capital requirements over the next year. The impact of those changes, which will ripple out to the entire economy by affecting the availability and cost of credit to U.S. businesses of all sizes, hinges on how the U.S. implements the Basel Accord. A new staff working paper focused on business lending provides an introduction to the agreement and explores how Europe will likely implement it. A key factor is how U.S. regulators determine the capital requirements for various types of business loans, including to small businesses. An inflexible interpretation of Basel could make credit much more expensive, and less reflective of actual default risk, for U.S. businesses than for their European counterparts.

To read the report, please click here. You can also find a video explainer here.

OCC: Banks Should Have Climate Answers by Next Year

Acting Comptroller Michael Hsu signaled in a speech this week that the OCC is watching climate risk closely in bank supervision. Hsu laid out five questions bank boards of directors should ask to gauge climate risk at their institutions, and said bank leaders should be able to answer these questions by “this time next year” with greater confidence and accuracy than they have today. The questions cover exposure to a carbon tax and vulnerability of critical services like data centers to extreme weather, among other topics. The exercise is designed to bolster banks’ climate risk management abilities, he said.

U.S., Europe Crack Down on Ransomware; FinCEN Updates Ransomware Advisory

The U.S. Department of Justice, the U.S. Treasury Department and European law enforcement authorities announced actions against alleged ransomware perpetrators and enablers, according to The Wall Street Journal this week. Treasury sanctioned Yaroslav Vasinskyi, a Ukrainian national, and Russian national Yevgeniy Polyanin in connection with the REvil ransomware attacks, and also sanctioned a Russian-linked crypto exchange accused of facilitating ransomware payments. DoJ arrested Vasinskyi and indicted Polyanin on charges related to the attacks. The E.U.’s law enforcement arm said authorities in Romania arrested two people in connection with the REvil group, whose victims include meatpacker JBS and IT provider Kaseya.

The actions come as FinCEN released an updated ransomware advisory, which states that the Treasury bureau will not hesitate to take action against entities that engage in money transmission activities if they fail to register with FinCEN or comply with AML obligations. The advisory also provides more details on the role that cyber insurance firms and digital forensic and incident response firms play in addressing ransomware attacks. Deputy Treasury Secretary Wally Adeyemo also emphasized in a recent speech that Treasury expects cryptocurrency firms to comply with AML requirements. “We hope that the SUEX action demonstrated that OFAC requirements apply to the virtual currency industry the same way they do to traditional banks, and we will enforce them – although we’d much prefer not to have to,” he said, referring to recent Treasury sanctions against a crypto exchange. “We’d prefer the industry did it itself.”

Washington Post Editorial: Stablecoins May Not Be Stable. That’s a Problem

Stablecoins may not actually be stable, The Washington Post said in an editorial this week. Uncertainty over the assets backing the digital coins underscores the need for regulation, the editorial said. “New laws, however, should not be permission to evade old ones that apply to banking and other traditional financial operations,” the editorial board wrote. “Meanwhile, federal regulators already can guide the industry by letting it know they’re prepared to enforce the laws that currently exist.”

Axios: Senate Dem Concerns Growing with Omarova

More Senate Democrats have expressed concern about OCC nominee Saule Omarova, whose nomination hearing has been slated for Nov. 18. Democratic Sens. Joe Manchin (D-WV), Kyrsten Sinema (D-AZ) and Jon Tester (D-MT) have raised concerns with the White House over the nomination, according to Axios.  

The PPP Was FinTech’s ‘Moment to Shine.’ That Spotlight Also Revealed the Problems With Those Loans

The Paycheck Protection Program gave FinTechs a spotlight as they touted their ability to reach underserved minority business owners, but such firms were responsible for a disproportionate share of suspicious PPP loans, according to a Morning Consult article this week. This disconnect between the promise of fast cash for underserved businesses and the evidence of fraud and consumer complaints was also highlighted in recent remarks by Acting Comptroller Michael Hsu: “Fintech advocates proudly point to the role of fintechs in facilitating expanded access to PPP loans as evidence of their promise and value to society compared to traditional banks. More recent evidence, however, shows higher rates of customer dissatisfaction and of fraud with PPP loans facilitated by fintechs versus those facilitated by traditional banks.”

In Case You Missed It

Quarles Resigns from Federal Reserve

BPI released a statement this week on the resignation of Federal Reserve Governor Randal Quarles, whose term as Vice Chair for Supervision recently expired. “Informed by a deep and broad knowledge of finance and financial history, his tenure featured not only a nuanced and studied understanding of regulatory topics of extraordinary complexity but also a rare wit and sense of humor and history, and hearty laugh, that made any interaction with him a rare pleasure,” CEO Greg Baer said in the statement. “Randy Quarles defines the term public servant, and his return to private life is a loss for anyone who cares about banking policy.”

CBDC Global Roundup

Here what’s new in central bank digital currency plans around the global economy.

  • China: The Chinese central bank will strive to increase the digital yuan’s interoperability with existing payment apps, People’s Bank of China Governor Yi Gang said this week. China’s CBDC project is widely viewed as a response to the perceived threat that private-sector payment apps such as Alipay and WeChat Pay pose to the Communist Party – and an attempt to grasp the troves of consumer payment data they control.
  • Russia: Russian central banker Elvira Nabiullina agreed with the notion that any potential CBDC would likely be recognized as legal tender, saying “seamless conversion between forms of money” is crucial for public confidence in CBDC.
  • U.K.: The Bank of England and the U.K.’s finance ministry said they would hold a formal consultation next year on whether to launch a CBDC.
  • E.U.: Any potential CBDC would likely be recognized as legal tender in the E.U., ECB official Fabio Panetta said this week.
  • Singapore: The Asian city-state’s central bank is launching a project exploring the tech aspects of a CBDC, in partnership with the private sector, Managing Director Ravi Menon of the Monetary Authority of Singapore said this week.
  • BIS: The BIS released a working paper entitled “Central bank digital currencies: motives, economic implications and the research frontier.”  Among other things, the paper concludes that: “CBDCs are an idea whose time has come. If properly designed, they present an opportunity to improve payments with a technologically advanced representation of central bank money, one which preserves the core features of finality, liquidity and integrity that only the central bank can provide,” but also recognizes that “further exploration on CBDC design choices and their macro-financial implications is essential…” It also concludes that “With CBDCs, central banks’ main goal is to provide a universal means of exchange for the digital economy . . . and [not] . . . to disintermediate the financial sector…”

What’s in the Fed’s Latest Financial Stability Report 

The Federal Reserve’s most recent Financial Stability Report highlighted what the central bank sees as the most pressing risks to the financial system. A COVID-induced economic downturn and a steep rise in interest rates topped the list of worries. The report also flagged Chinese real estate market distress as a potential risk. While the survey of market participants found inflation to be the #1 financial stability concern, the report is silent about why there would be a steep rise in interest rates that slowed the economy.

The Fed also mentioned stablecoin funding risk, or the risk that stablecoins suffer a run. Stablecoins and crypto are also featured in a section reflecting surveys of market participants about immediate threats. Notably, cryptocurrencies and stablecoins rose from #9 among prominent near-term threats to #5 from spring 2021 to fall 2021.

U.S. Bank Sets Net Zero by 2050 Goal

The CU.S. Bank announced this week it had set a target for net zero greenhouse gas emissions by 2050. The bank also aims to source 100 percent renewable electricity within its operations by 2025.

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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.