BPInsights: October 10, 2020

BPInsights: October 10, 2020

Top of the Agenda

Bloomberg Analysis of DOJ Investigations Determines FinTechs Issued 75% of all Fraudulent PPP Loans

A Bloomberg analysis of over 100 cases currently being investigated by the Department of Justice (DOJ) uncovered that approximately 75% of all fraudulent loans processed through the Paycheck Protection Program (PPP) were handled by Fintech companies. This comes even though FinTech providers issued only 15% of all loans for the program. The report determined that many of these cases could have been prevented by a simple Google search, which would have determined that a business did not actually exist. Kabbage, a FinTech provider that held a large volume of these loans, reportedly issued loans in an average of four hours “without human intervention or manual review” despite claiming “rigorous verification checks.” These lax practices could lead to substantial taxpayer losses as these PPP loans were fully guaranteed by the Small Business Administration. Learn More >>

Stories Driving the Week

American Banker: “Banks Urge Fed to Revise Liquidity Rule After Pandemic Shock”

The federal banking agencies are working to finalize rules to implement the Net Stable Funding Ratio (NSFR), one of two liquidity requirements included in a set of international bank regulatory standards established by the Basel Committee on Banking Supervision. However, as argued in a recent BPI blog post and reported on this week by the American Banker, implementation of the NSFR may have worsened market turmoil earlier this year. Bill Nelson, chief economist at BPI, is quoted in the article stating, “It does make it ironic that they are adopting this in the wake of events for which it was demonstrably not needed, and it would have made it worse,” That’s because, despite being a liquidity requirement, the NSFR punishes banks for holding two of the most liquid investments available to banks: lending overnight with Treasury securities as collateral (aka “Treasury reverse repo”) and outright holdings of Treasury securities. Nelson raised examples from the E.U. where the NSFR has been adopted, highlighting that the E.U’s version at least fixes the aspects of the regulation that would have worsened the recent episodes of financial market turmoil. Learn More >>

Necessary Dimensions of a Holistic Review of the Meltdown of U.S. Bond Markets in March

In the wake of the meltdown of U.S. bond markets in March, the Financial Stability Board committed to conducting a “holistic review” of the March market turmoil; however, in a recent blog post, BPI cautions that a review focused on the nonbank financial institutions (NBFIs) would not be a holistic review.

For one thing, selling pressures in March were widespread, not limited to NBFIs. More importantly, a holistic review must also seek to understand why securities dealers were not able to absorb those selling pressures. BPI’s post argues that the March disruptions stemmed from a fundamental structural problem in the U.S. financial system. In recent years the rapid growth of the U.S. Treasury and corporate bond markets has far outstripped dealers’ capacity to supply liquidity to those markets. The post identifies measures that would encourage both bank-affiliated dealers and independent dealers to allocate more capital to bond market intermediation. Absent such measures, bond market liquidity under stress will likely continue to be dependent on the kinds of massive market interventions that the Federal Reserve was forced to make in March. Learn More >>

JPMorgan Chase & Co. Commits $30 billion to Improve Economic Opportunity in Black and Latinx Communities

JPMorgan Chase & Co. committed $30 billion to address wealth inequality and improving economic opportunity among Black and Latinx communities in a major announcement made on October 8. This massive commitment adds to existing efforts underway by JPMorgan and other BPI member companies seeking to address inequality and invest in underserved communities. The money will be disbursed over the next four years and will dedicate $14 billion to affordable rental units, $12 billion in new mortgage commitments and $4 billion in loan refinancing. Learn More >>

BPI and Ideologically Diverse Coalition of Non-Profits and Associations Call on Senate to Include Corporate Transparency Act in NDAA

BPI and a coalition of 29 other non-profits and trade associations submitted a letter to the leadership of the House and Senate Armed Services Committees on October 7 urging them to include the Corporate Transparency Act in the National Defense Authorization Act (NDAA) for the Fiscal Year 2021. The coalition, made up of national security and law enforcement organizations, faith-based organizations, human rights groups, small businesses and other organizations, vividly portrays the devastation caused by the abuse of anonymous companies. The House of Representatives voted in July to included language to modernize the anti-money laundering framework and end anonymous shell companies in the House version of the NDAA. The Senate and House versions of the NDAA will be reconciled in a conference committee later this year. Learn More >>

Fed Reserve Banks Host First in Series of Events titled “Racism and the Economy”

The Federal Reserve Banks of Atlanta, Boston and Minneapolis hosted the first of a series of events earlier this week titled “Racism and the Economy.” The event brought together panelists from diverse backgrounds and community roles to discuss new ideas on how to improve economic opportunity. In remarks reported by POLITICO, the Reserve Bank presidents Raphael Bostic, Neel Kashkari and Eric Rosengren emphasized the need to listen and to step forward to play a more active role, as well as “signal with its actions that it represents all Americans.”

One proposal that the Fed could consider as part of its broader goals is to implement a new discount window credit program for CDFIs proposed by BPI in a recent blog post. This program would allow the Fed to support the community investment goals of CDFIs by using its existing, non-emergency lending authority, and would provide a reliable and ongoing source of funding to support community development objectives. Learn More >>

In Case You Missed It

SBA Announces Changes to Loan Forgiveness Program Following Initial Roll-Out Earlier This Week

Earlier this week, it was reported that Small Business Administration (SBA) has begun working through the more than 96,000 forgiveness requests that the agency has received since the application process opened on August 10. Shortly following those reports, the SBA issued a release on Thursday evening announcing that it would be implementing additional changes to the process for loans valued at less than $50,000.

EU Bank Earnings Could Impede ECB Monetary Policy

POLITICO EU reported this week that Isabel Schnabel of the Executive Board of the European Central Bank (ECB) warned that Eurozone banks declining profits could impede the Bank’s monetary policy. “The biggest banks’ aggregate return on equity slumped to 0.01 percent at the end of the second quarter from 6 percent a year earlier, driven by impairments and provisions, she said during the Single Resolution Board conference on Thursday,” according to the POLITICO EU report. The ECB is carefully monitoring declining profits Ms. Schnabel said. She suggested it could lead to “tighter credit standards and lower lending which could then also impair [the ECB’s] policy transmission,” the article stated.

Toomey Announces Retirement from Senate at End of 2022

On October 5, Senator Pat Toomey (R-PA) announced that he would not seek re-election for the U.S. Senate, and does not plan to run for Governor of Pennsylvania. Instead, the Senator, who has served for the last 10 years and whose term is set to expire in 2022, plans to retire from public service and return to the private sector.

Upcoming Events

  • 10/14/2020 – Fed Vice Chair for Supervision Randal Quarles financial regulation speech at the Hoover Institute Monetary Policy Virtual Series
  • 10/16/2020 – 10th Annual FDIC Consumer Research Symposium
  • 12/11/2020 – Fed Research Conference on Bank Supervision

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