BPInsights: October 2, 2021

Stories Driving the Week

Congress Should Close the ILC Loophole

Lawmakers should eliminate shortcuts that enable multinational e-commerce conglomerates and tech behemoths to pick and choose their own rules and cut costs at the expense of consumers and the financial system, BPI, the Center for Responsible Lending and ICBA said in a joint statement on a House Financial Services subcommittee hearing this week. The hearing examined the “future of banking,” including whether to prevent companies that are not banks from using an industrial loan company (ILC) charter to expand their business into financial services without meeting the full slate of safeguards and oversight that applies to bank holding companies.

The statement applauded the Subcommittee’s scrutiny of the ILC loophole and urged the introduction and prompt passage of a legislative solution to address this problem. There should not be two separate rulebooks applied to businesses offering indistinguishable products; if your business operates as a bank, you must follow the same supervision and regulation requirements applied to traditional banks.

BPI also submitted a statement for the record for the hearing that included a recent BPI research note offering a view on the bank merger application process in order to counter the false narrative that bank M&A is “rubber-stamped” by regulators. In fact, the note shows that time and again, the process includes what amounts to minimum eligibility standards to even file an application and often results in the applicants being encouraged to withdraw the application or, particularly when large banks merge, required to divest acquired assets.

WSJ Editorial: Comptroller of the Economy

OCC chief nominee Saule Omarova “wants to eliminate the banks she’s being appointed to regulate,” The Wall Street Journal Editorial Board wrote in a piece this week. “The Cornell University law school professor’s radical ideas might make even Bernie Sanders blush,” the WSJ wrote. “She graduated from Moscow State University in 1989 on the Lenin Personal Academic Scholarship. Thirty years later, she still believes the Soviet economic system was superior, and that U.S. banking should be remade in the Gosbank’s image.” Omarova is “the wrong nominee for the wrong industry in the wrong country in the wrong century,” the board wrote.

Cyber, CBDC, Leverage Ratio: Top Takeaways from Powell and Yellen’s Hill Testimony

Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell testified together on Capitol Hill this week in separate hearings before the Senate Banking Committee and House Financial Services Committee. Here are some key takeaways from their testimony.

  • Climate scenario analysis: Powell told the House Financial Services Committee that scenario analysis will play a key role in how the Fed supervises banks’ climate risk management. He mentioned that such a tool is very different from stress tests. “Scenario analysis at this point is about institutions really understanding what these risks will be, how they will develop over time, what are the channels through which they will develop.”
  • Supplementary leverage ratio: Powell said the exclusions from the SLR denominator worked during the crisis, but he thinks the SLR is less binding now because all excess liquidity in the system is going into the Fed’s overnight reverse repurchase agreement facility. Notably, take-up at the ON RRP facility hit a record high of over $1.6 trillion at the end of the third quarter. He reiterated that the Fed is examining potential changes to the SLR. The ratio adds particular balance-sheet pressure in an environment like the current one where fiscal stimulus and easy monetary policy continue to flood the banking system with excess liquidity. “Overall, though, with all the liquidity in the system it could again become the binding constraint and that would not be good from a safety and soundness standpoint,” he said.
  • CBDC and stablecoins: In response to Senate Banking Committee Ranking Member Pat Toomey’s question about congressional authority to issue a CBDC, Powell responded that “the relevant parts of our law were written long before digital finance was a thing and, while a central bank digital currency could take many forms, it is possible that, under some forms, that you’d be able to make an argument that it would be authorized under current law.” However, he said, it is “such a fundamental issue” that it would be ideal if Congress authorized any CBDC with new legislation. Separately in House testimony, Powell commented that “stablecoins are like money market funds, they’re like bank deposits, but they’re, to some extent, outside the regulatory perimeter and it’s appropriate that they be regulated—same activity, same regulation.”     
  • Cyber: Powell highlighted cybersecurity risk as a significant threat to the financial system. “When I think about systemic risks to the financial system, I always think about cyber risks really more than anything else,” he said. 
  • Other big-picture risks: Yellen, who as Treasury Secretary leads the Financial Stability Oversight Council, said the growth of activity in the shadow banking sector, such as open-end bond funds, poses a financial stability risk. FSOC is examining that topic, as well as leverage among hedge funds that can trigger financial runs. She also emphasized climate risk as a potential threat to the financial sector.
  • Diversity: In response to a question from Senate Banking Committee Chairman Sherrod Brown (D-Ohio) on whether including more Black women on the Fed board should be prioritized, Yellen and Powell both agreed that more diversity on the board would be welcome.

Making Stablecoins Stable: Is the Cure Worse than the Disease?

Would a safer, more stable stablecoin pose a bigger threat to the financial system than the current, unstable iteration? This question is the centerpiece of prepared remarks by BPI CEO Greg Baer at a Women in Housing and Finance policy lunch on Sept. 27. Stable stablecoins could dislodge deposit funding from the banking system and thereby deprive businesses and consumers of a stable, low cost-source of loans, he said.

BPI Calls for Expanding Employment Opportunities for Rehabilitated Individuals with Criminal Records

In anticipation of the House Financial Services Committee Subcommittee on Diversity and Inclusion’s hearing entitled “Access Denied: Eliminating Barriers and Increasing Economic Opportunity for Justice-Involved Individuals,” BPI released a statement for the record urging clarity on Section 19 of the Federal Deposit Insurance Act in order to foster employment opportunities for rehabilitated job seekers with criminal records. The statement for the record recommends that Congress consider amending the law to clarify ambiguous terms, narrow the banking jobs to which the restrictions apply or limit the statute to felonies or crimes that resulted in more than minimal loss to banks. These calibrations would not increase risk to the banking system and would enhance the prospects of economic success for people with criminal records by allowing them access to job opportunities in the banking sector.

In Case You Missed It

Google Drops Checking Account Plans 

Google is scrapping its plan to offer bank accounts to its users, according to The Wall Street Journal this week. The feature, known as Plex, was meant to debut in 2020, but the project has been abandoned after several missed deadlines. It would have linked Google Pay users to checking account and debit card offerings at several institutions including Citigroup and Stanford Federal Credit Union.

Coinbase Offers Checking Account Feature, Bringing it Closer to Banking

Coinbase this week unveiled a new feature it will soon offer, allowing U.S. customers to deposit paychecks into the crypto platform. The direct-deposit service, which edges Coinbase further into the day-to-day business of banking, will use an unnamed FDIC-insured bank partner. The announcement comes as crypto firms are increasingly drawing scrutiny from regulators over a variety of concerns about their products and services.  These firms currently operate outside of the banking and securities regulatory framework despite offering products identical to those offered by banks and other firms that are subject to robust oversight under the banking and securities laws.

Synthetic LIBOR for Sterling and Yen to Be Published Until 2022, UK Regulator Says 

The UK Financial Conduct Authority (FCA) announced this week that a “synthetic” version of the London Interbank Offered Rate will continue to be published throughout 2022 for six sterling and yen LIBOR settings. Synthetic LIBOR is a rate that is not based on bank trading data. The FCA issued a related consultation that would limit the use of synthetic LIBOR to certain legacy contracts in order to ensure an orderly LIBOR transition for investors in those markets as the world prepares to wean off the rate. The consultation would also prohibit most new use of U.S. dollar LIBOR after year-end 2021, even though several tenors of U.S. dollar LIBOR will continue to be published until mid-2023, consistent with U.S. interagency guidance and FCA supervisory expectations.

Kraken Hit with $1.25M Penalty by CFTC

The Commodity Futures Trading Commission imposed a $1.25 million penalty on cryptocurrency exchange Kraken for illegally offering margined retail commodity transactions in digital assets including Bitcoin and for failing to register as a futures commission merchant, the agency said this week. BPI published a blog post last year about Kraken’s Wyoming banking charter and the potential run risks of its banking business model.

On Postal Banking, Japan Says ‘Return to Sender’

The Japanese government plans to sell shares in Japan Post Holdings Co. as early as next month, according to Bloomberg. The move marks the latest chapter of the country’s privatization of the postal and financial services company. The share sale price target is 1 trillion yen (about $8.9 billion).

Fifth Third Chief Investment Strategist Testifies on ‘Second Chance Hiring’

Fifth Third Chief Investment Strategist Jeff Korzenik testified this week on his own behalf at a House Financial Services Committee subcommittee hearing on breaking barriers to employment opportunities for individuals with criminal records. “Second chance hiring, done right, is business, not charity,” Korzenik said in his testimony. “Good policy can reduce barriers to these practices without compromising public safety or institutional soundness.” Korzenik wrote a book and multiple articles recommending “second chance hiring” as a way to resolve labor market challenges, fill racial equity gaps and “build a society of stronger workers and consumers.” JPMorgan Chase CEO Jamie Dimon has also written an op-ed recently on the need to embrace second chances for job seekers with criminal records. 

JPMC Adds $60M to Investment in Minority-Led Banks

JPMorgan Chase is continuing its initiative to invest in minority-led banks and community development financial institutions, adding $60 million to its equity investments. The bank invested $40 million in February in four Black-owned banks.

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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.