BPInsights: November 20, 2020

Stories Driving the Week

OCC’s Brooks Lays Out Payment Charter Options as He Eyes Formal Nomination to Post

Acting Comptroller of the Currency Brian Brooks said one of the banking agency’s payment charter frameworks is ready to receive applications, according to a Nov. 17 Forbes interview.

President Donald Trump indicated this week he will formally nominate Brooks to lead the agency. The acting OCC chief advocates “unbundling” the longstanding trio of banking functions – taking deposits, making loans and processing payments – in favor of leaner FinTech business models that offer only a sliver of those services, but strive to be treated like banks. The payments charter could destabilize the financial system if it gives FinTechs access to internal features of the banking system without the safety standards and oversight of full-fledged banks, BPI has argued.

Brooks laid out a roadmap in the interview for how FinTech companies can vie for access to the national banking system. They can seek a special-purpose national bank charter for companies that do payments or lending, or both, but that don’t take deposits; buy an existing national bank; or seek a national limited-purpose trust bank charter. So far, no companies have applied for the first kind of charter, Brooks said, although this claim seems at odds with a pending application by an entity calling itself Figure Bank, a lender that won’t take deposits. Brooks maintains that OCC is ready to take these kinds of applications, notwithstanding that New York’s state financial regulator has successfully sued the OCC over this charter in District Court, though an appeal is pending in the Second Circuit. Some FinTechs, like Jiko, have successfully bought existing national banks. As for national trust charters, Brooks signaled there are a number of “crypto bank” charter applications currently in the OCC’s pipeline.

A fourth option is also available, according to Brooks – namely, companies that conduct payments only (no lending or deposit-taking) can also apply for an unbundled yet still “full service” national bank license. He signaled that a business like PayPal, which recently announced that its customers can buy and sell cryptocurrency on its platform, could fit into the payments charter proposal. “The magic non-depository payments charter, we don’t have that yet, but are ready to do it,” Brooks said in the Forbes interview. Read more >>

Banks Were a Source of Strength in March Market Turmoil, Major Financial Stability Reports Show. Nonbanks, Not So Much.

Banks bolstered the financial markets during the March market turmoil with well-capitalized balance sheets that weathered shocks rather than amplifying them, two notable financial stability reports find.

Nonbank financial firms, in contrast, were vulnerable to a lopsided ledger with too many sellers and not enough buyers, the Financial Stability Board said in a report published Nov. 17. That category includes money market funds, hedge funds and life insurers. Also, hedge funds in particular are highly leveraged and exacerbate the effects of market volatility.

But banks served as a source of stability amid the pandemic-related turmoil – a shock that originated outside the financial system rather than within it, in contrast to the 2008 financial crisis, the FSB said. The Office of Financial Research reached a similar conclusion in its annual Financial Stability Report.

Several factors enable banks to be the global markets’ best shock absorbers, according to the FSB. Banks have become much stronger since the financial crisis, and it helped them weather the shock of March’s market volatility, which made it costly for companies and governments to raise funds in the debt markets as even “safe haven” assets like Treasuries suffered drastic price drops. Banks hold assets that exceed their liabilities by even more than the margin regulators require, and they hold plenty of assets that are easily sold without high costs to unload them, the OFR said in its report. They also have less leverage than nonbanks such as hedge funds. They’re prepared for emergencies.

“Some parts of the system, particularly banks and financial market infrastructures, were able to absorb rather than amplify the macroeconomic shock, supported by the post-crisis reforms,” the FSB said in its report. “However, key funding markets experienced acute stress and public authorities needed to take a wide range of measures to support the supply of credit to the real economy.”

While banks are meeting or exceeding the capital and liquidity requirements set by regulators, they also face regulatory limits on how much they can help stabilize market stress. The nonbank sector has increasingly acted as an intermediary in trading as banks’ market-making abilities have been constrained. “While regulatory requirements proved effective in containing excessive bank leverage, those requirements may have become temporarily binding for some banks given the magnitude of the shock,” the FSB said. “For example, some banks may have seen a temporal increase in the denominator of the leverage ratio as a result of intermediation in secured funding markets. These constraints might have reduced dealers’ incentives to expand their balance sheets by absorbing mismatches between supply and demand in these markets in stress.” Learn More >>

BPI Urges Congress to Enable Swift, Smooth Forgiveness Process for PPP Loans

BPI joined more than 100 financial and business trades in a joint letter Nov. 19 urging Congress to simplify and expedite the Paycheck Protection Program loan forgiveness process for small businesses hit by the coronavirus pandemic.  Lawmakers should pass legislation — such as bipartisan bills S. 4117 and H.R. 7777 — that would forgive PPP loans of less than $150,000 after the borrower fills out a simple, one-page forgiveness document, the letter said.

In a separate letter, BPI, as a part of a joint coalition of borrower and lender trades, asked Congress to work with the Treasury Department and Small Business Administration to refine the Loan Necessity Questionnaires currently required for loan amounts above $2 million, which could result a potential impact to businesses that managed to stay afloat during this time period and could prove burdensome for lenders to facilitate this process. The coalition also encouraged SBA and the Treasury Department in a related letter to suspend the use of the questionnaires until they reach a better solution that reduces the burden on borrowers.

PNC Announces $11.6 Billion BBVA Acquisition

PNC Financial Services Group Inc. announced an agreement to acquire BBVA USA Bancshares Inc. for $11.6 billion on Nov. 16. According to the Pittsburgh-based PNC’s press release, the purchase price will be funded with cash, including proceeds from its recent sale of its stake in BlackRock Inc., and the acquisition is expected to close in mid-2021. The deal would extend the combined bank’s presence from coast to coast in the U.S., with a presence in 29 of the 30 largest U.S. markets. Houston-based BBVA USA Bancshares, the U.S. operations of Spanish bank Banco Bilbao Vizcaya Argentaria SA, has $104 billion in assets. Learn More >>

Senate Vote Fails on Judy Shelton Fed Board Nomination

On Tuesday, the Senate voted to end debate on the nomination of Judy Shelton for the Federal Reserve Board of Governors, with the vote ultimately failing due to a few Republican objections as well as absences from other senators quarantining from COVID exposure. Following Tuesday’s vote, the Senate adjourned on Wednesday until after Thanksgiving, making the likelihood that Shelton will receive another vote and be confirmed before Democrat Mark Kelly is seated on Nov. 30 very slim. It is still expected that Christopher Waller’s nomination to the Federal Reserve Board of Governors will receive a vote after Thanksgiving and Waller will likely be confirmed.

In Case You Missed It

ECB’s Lagarde Warns on Payment Moratoria ‘Cliff Effect’ Risk

The European Central Bank expressed concern that payment moratoria may be disguising the extent of eventual losses, with ECB President Christine Lagarde warning European lawmakers on Nov. 19 that there is a risk of a cliff effect when borrowers have to restart payments. ECB officials have been urging European banks to assess potential damage to their balance sheets and identify borrowers who may have fallen behind. For similar sentiments, see BPI’s earlier caution here.

Banks Unveil Global Accounting Standard to Track Greenhouse Gas Portfolio Impact

The Partnership for Carbon Accounting Financials (PCAF) launched the Global GHG Accounting and Reporting Standard for the Financial Industry on Nov. 18. Sixteen financial institutions, including Bank of America and Morgan Stanley, helped create the PCAF Standard, a method of measuring greenhouse gas emission impacts on financial assets, such as stocks, corporate bonds and commercial real estate. Additionally, 86 financial institutions have pledged to measure and report greenhouse gas emissions associated with loans and investments.  

Fed to Join Network of Central Banks Focused on Climate. What Happens Next?

The Federal Reserve will join the Network for Greening the Financial System (NGFS), a group of central banks and supervisors aimed at combating climate risks, Federal Reserve Vice Chairman Randal Quarles said last week. Membership in the group would allow the U.S. to shape global efforts to manage climate risks to the financial system, according to a Climate Risk Review article on Nov. 16.

The Network has been active in developing reference climate scenarios, guides for supervising climate-related risk and integrating climate-risk management into central bank functions.  The Fed could play an influential role in the organization’s macroprudential workstream, which is headed by the Bank of England, said Lauren Anderson, BPI’s senior vice president and associate general counsel, in the article. “They’re close counterparts, so that’s a possibility down the line,” she said.

The move to join the NGFS comes as the Bank of England and other international regulators prepare to launch climate stress tests to weigh how banks handle scenarios like a sudden swing in the price of carbon or physical risks such as rising sea levels. Stress testing is a narrow way of testing a bank’s strength that wouldn’t easily translate to far-ranging climate change effects, BPI Senior Vice President and Head of Research Francisco Covas said in the article. “The way the Fed does stress testing is as a narrow exercise: looking at bank performance under stress, calculating minimum CET1 [Common Equity Tier 1] ratios and assessing banks’ capital plans,” he said. “I don’t think the Fed is going to go in that direction with climate. I think it’s going to be a slow process.”

BPI Encourages Flexibility on AML Programs

On Nov. 16, BPI submitted a comment letter to the Financial Crimes Enforcement Network (FinCEN) on its proposed definition of AML program effectiveness. The letter recommends that FinCEN, in coordination with other regulatory agencies, provide institutions the flexibility to design AML programs that align with their business models. This flexibility, coupled with regulatory reforms, would empower banks to devote additional resources to working with law enforcement to address more serious crimes and would improve the utility of the information available to the law enforcement and intelligence communities. “Modifying the existing AML program requirements to allow for greater flexibility, clarity and coordination among agencies will dramatically improve effectiveness and benefit both the U.S. financial system and national security,” Angelena Bradfield, SVP of AML/BSA, Sanctions & Privacy at the Bank Policy Institute, said in a BPI statement Nov. 17. BPI and a coalition of financial trades also submitted an accompanying letter to FinCEN emphasizing many of these recommendations.

Business Insider: Akoya, a Data Aggregator Backed by Major Banks, Just Nabbed Its First Client. Here’s How It’s Looking to Take on Plaid and Yodlee and Upend How Bank Data is Shared.

According to a Nov. 16 Business Insider article, US Bank has signed up with Akoya, a data-sharing platform that competes with Plaid and Yodlee to provide the “pipes” that enable fast, streamlined mobile payments. Akoya, which is backed by several major U.S. banks, is launching an API-based data sharing system, which experts say is more secure than the “screen scraping,” typically used by data aggregators, because it doesn’t store sensitive customer data – it simply grabs the data when needed. 

Financial Times: Santander Plans to Buy Wirecard’s Core European Business For €100m

Spanish bank Banco Santander will buy German FinTech company Wirecard’s core business in Europe for about 100 million euros, the Financial Times reported Nov. 16. About 500 Wirecard employees will join the Spanish lender, which will buy Wirecard’s European tech platform that processes electronic payments for merchants and its remaining credit card issuing businesses on the continent. The deal marks a milestone in dismantling the payment provider, which was at the center of a massive global fraud scandal. 

BPI Blog: Farmer and the Seed Corn

The Federal Reserve’s countercyclical capital buffer (CCyB) requirement ensures that banks save more – reinvest earnings in their own capital or raise capital from others – in good times and allows them to save less – paying out more earnings to owners — in bad times. But dividend bans, such as the one imposed on European banks amid the coronavirus pandemic, would contradict such a policy by forcing banks to raise capital when it is more expensive to do so, according to a Nov. 18 blog post by BPI Chief Economist Bill Nelson. Investors in bank stocks also expect dividends as part of investing in a mature industry with steady streams of income – bank dividend bans would steer them toward other kinds of stocks. 

Carnegie Endowment, World Economic Forum Report: Financial Industry, International Community Must Cooperate on Cyber Risks

The financial industry should work closely with the diplomatic community to protect global financial infrastructure from cybersecurity threats, according to a report released Nov. 18 by the Carnegie Endowment for International Peace and the World Economic Forum. The report, which was the subject of a Nov. 18 panel discussion by Bank of England Gov. Andrew Bailey, Rep. Jim Langevin (D-R.I.) and WEF Director Jeremy Jurgens, is intended to serve as a blueprint for action to inform future U.S. approaches and the work of the G7, G20 and relevant standard-setting bodies.   

NYT: Christine Lagarde on Her Plans for the European Central Bank  

European Central Bank President Christine Lagarde emphasized climate change and global cooperation as top priorities in a New York Times interview published Nov. 17. The former French finance minister and International Monetary Fund head’s tenure atop the central bank has brought a “sense of urgency” to the issue of climate change, Lagarde said. The ECB joins the Bank of England, which is launching its climate stress tests next year, in examining how climate change could alter and transform the financial system. The Federal Reserve also mentioned climate change in its recent Financial Stability Report, but said that it is in the early stages of analyzing it as a source of potential financial risk. BPI expressed concern in a recent blog post about the data challenges and limited predictive power of climate change stress tests.

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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.