BPInsights: October 17, 2020

BPInsights: October 17, 2020

Top of the Agenda

BPI And Coalition of Financial Trades Submit Letter to Congress Opposing OCC Payments Charter

BPI and a coalition of financial trades, including ABA, CBA, ICBA, CUNA, NAFCU and The Clearing House submitted a letter to members of the House and Senate on October 13 expressing opposition to the proposed payments charter as outlined by Acting Comptroller Brian Brooks of the OCC. As stated in the letter, such a payments charter would not carry the necessary prudential and consumer protections that banks are subject to and, thus, would undermine the stability of the financial system by potentially creating a gateway to the Federal Reserve’s payment system.

The letter also argues that any such proposed charter should be conducted through an open and deliberative notice and comment process, with Congress also having a role in these deliberations. This will help to prevent any regulatory asymmetries that would threaten consumers and the financial system. Learn More >>

Stories Driving the Week

Robinhood Data Breach and Growth of Payment App Fraud Emphasize FinTech Threat to Consumer Safety

Fraud and cybersecurity remains a major risk for frequent users of FinTech services according to two reports this week. Bloomberg reported on a data breach at Robinhood and a recent New York Times report recounts the story of several users who became victims to online scams through popular mobile apps like Cash App and Venmo.

While adoption of many of these financial apps has grown during the pandemic due to easy sign-up processes and the growth of online payments more broadly, many of these apps do not maintain the same safeguards and consumer protections offered through banks. As described in the NYT, these apps bill themselves as easy to use and instantaneous in processing payments, leaving unsuspecting users on the hook when things go wrong. The article references one study conducted by security firm Sixgill, which sought to determine Fraud rates among payment apps by analyzing user activity on the Dark Net. The firm found that Cash App, a payments app owned by Square, was mentioned 10,577 times, a 450% increase from a year earlier. On the opposite end of the spectrum, the article mentions bank-operated Zelle, which offers better user protections due to a “more robust authentication for new users” and protection against losses.

These stories and the consumer safety threats brought about by FinTechs continue to repeat themselves. Consider the data breach that took place at FinTech company Dave in July that impacted 7.5 million users. Or the class-action lawsuit filed against Plaid, accusing the company of harvesting login information for bank accounts and violating user privacy through deceptive practices like matching bank login prompts to solicit user consent for the service. Every few weeks, the story is on repeat.

BPI Calls on DOJ to Align Bank Merger Guidelines with Every Other Industry

The Bank Policy Institute (BPI) responded to the Department of Justice’s (DOJ) request for comments on whether the Antitrust Division should revise the 1995 Bank Merger Competitive Review guidelines in a letter submitted on October 15. In its response, BPI encouraged the Antitrust Division to bring its merger enforcement policy for the banking industry in line with every other industry. This revision is necessary not merely for consistency of approach, but to recognize and incorporate the fundamental changes that have occurred in the banking industry’s competitive landscape since industry guidelines were last issued 25 years ago.

In 2010, the DOJ issued updated Horizontal Merger Guidelines but carved out the banking industry, and only the banking industry, from the Department’s otherwise generally applicable merger-enforcement policy. BPI’s letter proposes to apply uniformly the Herfindahl-Hirschman Index (HHI) threshold under which the Department presumes competitive harm from mergers. Specifically, the 1995 Bank Merger Competitive Review guidelines incorporate an 1,800-point-HHI threshold for presuming competitive harm for the banking industry, far below the 2,500 point threshold the DOJ applies to all other industries.

BPI’s letter also outlines changes to the competitive landscape in banking since 1995. These changes include additional competition from the non-banking sector. All four of the largest categories of household debt —mortgages, student loans, auto loans and credit cards — are offered by both bank and nonbank competitors without local retail bank branches, and competition within banking markets has become more aggressive due to the availability of new financial data sources and analytics. The letter concludes that this increased competition should provide the DOJ comfort that upwardly revising the bank HHI thresholds to the thresholds applicable to all other industries will not give rise to consumer harm. Learn More >>

A Replacement for LIBOR as a Loan Benchmark Would Ideally Be Sensitive to Liquidity Risk as Well as Credit Risk

With LIBOR scheduled to go off-line at the end of 2021, attention increasingly focuses on what will replace it.  Regulators have encouraged use of the Secured Overnight Financing Rate or “SOFR” (a measure of overnight Treasury repo rates) and have professed themselves satisfied with its development as an alternative rate for derivative markets.  Many banks, though, continue to advocate for an additional, benchmark that would better track banks’ cost of funds, such as Ameribor, the ICE Bank Yield Index, or an index created by Stanford Professor Darrell Duffie.  Advocates for an additional benchmark or benchmarks have emphasized the need for the benchmark to reflect the credit-risk-premiums paid by banks.  This note suggests that it is at least equally important that the benchmark reflects liquidity-risk premiums. Learn More >>

Congressional Coalition Calls for Delay of GSIB Surcharge in Letter to Fed

A Congressional coalition led by Representative Trey Hollingsworth (R-IN) submitted a letter to Federal Reserve Chairman Jerome Powell and Vice Chairman for Supervision Randal Quarles on October 9 urging the Fed to extend “the exclusion of [U.S. Treasuries] and [Federal Reserve Bank] balances and the impact of banks’ participation in the MMLF to the GSIB surcharge.” The letter argues that these changes are necessary to further support banks’ ability to facilitate economic recovery, and warns that if changes are not implemented by the fourth quarter, “banks subject to the surcharge may see an increase in required capital, impacting the availability of credit at a time when consumers are facing unprecedented challenges.” Learn More >>

Global Regulators Turn Attention to Nonbanks and Stablecoins Ahead of G20 Summit

Ahead of the G20 Summit scheduled to take place in November, global financial regulations are slated to address a multitude of important topics, including the regulation of nonbanks and stablecoins. Speaking at a Hoover Institution virtual event on October 14, Fed Vice Chair for Supervision Randal Quarles remarked, “[w]hile banks so far have been resilient to the shock from the COVID event, the same cannot be said for important parts of the system of nonbank financial intermediation.” Quarles emphasized that NFBIs are “top of mind of international regulators” and confirmed that nonbank regulation was on the agenda for next month’s G20 Summit.

The Financial Stability Board released a report on October 13, as mandated by the G20 in June 2019, titled “Regulation, Supervision and Oversight of ‘Global Stablecoin’ Arrangements.” While the report does not address considerations related to AML/CFT, data privacy, cyber security, consumer and investor protection and competition, it establishes recommendations for a “holistic approach to regulation, supervision and oversight,” emphasizing the importance of “international cooperation and information sharing.”

In Case You Missed It

Morning Consult: “A Liquidity Rule Dormant Since 2016 Is Getting a Second Life, and Banks Say the Treasury Market Can’t Handle It”

The FDIC is scheduled to meet next week to vote on the implementation of the Net Stable Funding Ratio (NSFR), a liquidity requirement designed by the Basel Committee following the 2008 crisis. As detailed in a Morning Consult article published on October 15, BPI has argued against the implementation of the NSFR in its current form because “U.S. regulators’ version would have assigned unfair values to Treasury securities. So, when Treasury markets seized up in March, broker-dealers would have had even less incentive to purchase Treasurys because it would have lowered their NSFR and strained balance sheets further.” To read the full article, please click here.

Business Roundtable Releases Recommendations to Reduce Racial Wealth Divide in America

The Business Roundtable announced a new report on October 15, which establishes meaningful goals to reduce the racial wealth divide in America.

Some of the recommendations from the report include:

  • Increasing new loans to Black & Latinx homeowners
  • Making new investments in CDFIs & MDIs
  • Providing technical & mentorship to minority small business owners

To learn more, please click here.

New York Department of Financial Services Calls for FSOC-Like Organization to Regulate Social Media Platforms

The New York Department of Financial Services wants to see social media outlets like Twitter regulated as systemically important institutions, according to findings from an investigation conducted by the agency released on October 14. The report refers to an incident that took place on the platform in July, where a 17-year old hacked into the accounts of prominent celebrities, business leaders and politicians, including current Democratic presidential nominee Joe Biden, to conduct a financial scam that resulted in $118,000 in stolen bitcoin. The findings from the report describe the potential for individual actors to “weaponize” social media companies and determines that an oversight agency could help to identify susceptibility to key threats.

Upcoming Events

  • 10/19/2020 – Fed hosts discussion on “Cross-Border Payments and Digital Currencies”
  • 10/20/2020 – FDIC Board Meeting
  • 10/21/2020 – Fed Governor Lael Brainard scheduled to give a speech at a virtual conference hosted by the Society of Professional Economists
  • 12/11/2020 – Fed Research Conference on Bank Supervision

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