BPInsights: October 23, 2021

Stories Driving the Week

“I Swear the Sun Rose in the West”: Denying the Obvious About Bank Performance in 2020 

In 2020, banks supported the economy, issued debt without the governmental backing provided every other type of corporation, passed stress tests that assumed no governmental support for the economy and saw their capital ratios rise not fall. Could anyone possibly conclude that in fact banks were bailed out and that tighter regulation is necessary? Only in Washington – and, oddly, Minneapolis….

Tester Expresses Concern on Omarova Nomination

Sen. Jon Tester (D-MT) expressed concern this week about OCC nominee Saule Omarova. “I want to give her a fair shake, but I do have concerns,” Tester said in a POLITICO interview. Omarova, a Cornell law professor, has faced criticism for her proposal to nationalize the banking system. Any Democratic opposition to her nomination could signal trouble ahead in the thinly divided Senate, particularly from the Senate Banking Committee which would vote first on the nomination.

BPI Statement on FSOC Climate Report

BPI released a statement by SVP and Associate General Counsel Lauren Anderson this week on the FSOC climate report, which was released Oct. 21. “Climate-related financial risk is a priority issue for the financial sector, and banks are working diligently to better understand, manage and integrate climate-related risk indicators into their overall risk management frameworks,” Anderson said in the statement. “A disclosure standard will help to ensure that financial institutions are working with decision-useful, consistent and comparable data when evaluating companies and their own emissions profiles.  This is especially true for banks who are inherently reliant on client disclosures to evaluate their own carbon footprint.  A disclosure framework that is interoperable with other jurisdictions’ regimes will serve to fill data gaps and ensure a level playing field across countries.”

Quarles Questions Need for CBDC 

Federal Reserve Governor Randal Quarles questioned the need for a central bank digital currency in recent comments at the Milken Institute Global Conference. The global appetite for CBDCs was fueled by Facebook’s stablecoin proposal, which suggested the potential for rapid scale, he said. But the notion that a private entity issuing money threatens central banks’ monetary sovereignty ignores the reality that the current banking system consists of private companies issuing money. “All of our money is in deposits at a bank,” Quarles said.  “Those are claims on a bank.  They aren’t claims on the Federal Reserve.  That is what money is.”

Any financial inclusion benefits from a CBDC would be offset by disintermediating the banking system and politicizing the allocation of credit, he said. Additionally, even a bank-administered CBDC would add little value to the current banking system and still risk dislodging the intermediation of the banking sector, he said. “Every estimate that I’ve read of a kind of co-existing system where the central bank … does issue a central bank digital currency, it takes a very big chunk of the deposits out of the system, even if you’re doing your very best to not disintermediate the banks,” he said.  “And you then run into the same question of, what happens to that?  The Fed’s going to have to put that money back into the private sector system and the political constraints that would come with that funding, even if you haven’t completely, effectively, nationalized the banking system will be severe.”  

See Quarles’ full Q&A with Milken Institute Executive Director Michael Piwowar here and BPI’s press release here.

Treasury Sanctions Review Warns on Digital Currencies

The Treasury Department’s long-awaited sanctions policy review suggested that digital currencies could undermine the effectiveness of U.S. sanctions, according to the New York Times. Digital currencies enable malign actors to evade the safeguards of the formal banking system. Treasury also recommended that sanctions be calibrated to avoid unintended harm to vulnerable groups, such as civilians in sanctioned countries who need humanitarian aid, and enhance cooperation with allies. U.S. sanctions have proliferated in recent years, raising questions of their usefulness as a foreign policy tool. Deputy Treasury Secretary Wally Adeyemo, who led the sanctions review, called in a congressional hearing this week for more funding and staff in Treasury’s financial intelligence and sanctions units to combat emerging threats including ransomware and crypto. He said the department is looking to hire more people with crypto and blockchain expertise.

Fix Bank Leverage Requirements Now, in Advance of Upcoming Treasury Market Stress

The Fed agrees that it needs to fix bank leverage ratio requirements so that they don’t impair the functioning of the Treasury market, so why not fix them before two upcoming Treasury market stress events – the start of QE tapering and a potential debt ceiling debacle? A binding leverage ratio can impair Treasury market liquidity in stressful times, as bank-affiliated dealers are incentivized to reduce low-risk, balance-sheet-intensive activities like Treasury market-making. The Federal Reserve recognized this when it made temporary exclusions from the supplementary leverage ratio in April of 2020 for Treasuries and reserve balances. When the Fed let those exclusions expire a year later, it foreshadowed taking action to ensure that the SLR is a backstop to risk-based capital requirements rather than a binding constraint on banks’ decisions amid growth in central bank reserves and Treasury securities issuance. The Fed and other banking agencies should fix leverage ratio requirements now in order to increase dealers’ capacity to intermediate in the Treasury market before rather than after the upcoming stress periods, a recent BPI blog says.

In Case You Missed It

Facebook Launches ‘Novi’ Digital Wallet with Paxos Stablecoin

Facebook this week unveiled its Novi digital wallet pilot, which will use a Paxos stablecoin rather than the Facebook-backed stablecoin Diem while the latter awaits regulatory approval. Paxos, which received conditional approval this year for an OCC national trust bank charter, says its stablecoins are backed by deposits in U.S. bank accounts, U.S. government debt or money-market funds composed of U.S. government debt. The Facebook project garnered opposition from a group of Senate Democrats, including Sens. Brian Schatz (D-HI), Sherrod Brown (D-OH) and Elizabeth Warren (D-MA), who urged the firm to halt its Novi and Diem efforts.

On Oct. 22, BPI published a blog post detailing what we know so far about the Novi project.

CFPB Takes Aim at Big Tech’s Grip on Consumer Financial Data

Apple, Facebook, Google, Amazon, Square and PayPal received demands this week from the CFPB for information on how they harvest and use consumer financial data. The demands, which include 55 questions, signal a more aggressive posture on Big Tech than a routine Request for Information notice. Newly confirmed CFPB Director Rohit Chopra was known as a strong critic of Big Tech during his tenure at the Federal Trade Commission. The move comes as the CFPB considers a policy on consumer financial data sharing. BPI released a statement by SVP and Associate General Counsel Paige Paridon supporting the CFPB’s steps.

Regulators Issue Statement on LIBOR Transition

The federal banking agencies, the CFPB, NCUA and state bank and credit union regulators clarified eleventh-hour LIBOR transition questions in an interagency statement this week. The regulators defined “new contract” as it relates to LIBOR – they had previously urged banks not to enter into new LIBOR-based contracts after the end of 2021 and said such contracts create safety and soundness risks. They also clarified that banks should ensure that alternative rates are appropriate for their institution’s “products, risk profile, risk management capabilities, customer and funding needs, and operational capabilities,” and that banks should understand any potential vulnerabilities of such rates and the markets underpinning them. The statement also advised banks to identify LIBOR contracts that lack adequate fallback language and will mature after the rate ends and urged them to include strong, clear fallback language in new contracts.

Democrats Propose $10,000 Threshold for Bank IRS Reporting

Senate Democrats this week unveiled a revised version of their proposal to require banks to report account inflows and outflows to the IRS. The new proposal would set the reporting threshold to $10,000 instead of $600 and would exclude wage deposits. It has garnered critiques that it would hit independent small-business owners rather than the high-income tax evaders it intends to target.

I Don’t Think the LCR Means What You Think It Means

The Liquidity Coverage Ratio is defined as the ratio of high-quality liquid assets (HQLA) to 30-day projected net cash outflows under stress.  You might think, therefore, that a bank holding company with an LCR of 110 percent could meet a 10 percent increase in projected outflows with HQLA and no more.  You’d be wrong, though.  As explained in a very short blog by our Chief Economist Bill Nelson (one of the architects of the LCR) that uses a real-life example, in some common situations the bank holding company, and its bank affiliate, could easily handle much higher cash outflows.  That is, the LCR may significantly understate the liquidity of many bank holding companies.

PNC Announces Howard University Grant to Support Black-Owned Businesses

Political woes would likely form a bigger obstacle to a U.S. central bank digital currency than mastering the technology, former Boston Fed chief Eric Rosengren said in recent comments at a conference. “The major issue PNC this week announced a five-year, $16.8 million grant to create the Howard University and PNC National Center for Entrepreneurship, which will support Black businesses across the U.S. It will offer educational and leadership resources to help Black and other minority entrepreneurs expand their capacity.

BofA CDFI Portfolio Surpasses $2B

The U.S., European Union and 30 other countries this week released a joint statement pledging to work together Bank of America this week announced that its portfolio of loans, deposits and investments to Community Development Financial Institutions (CDFIs) has exceeded $2 billion. The bank is the largest private investor in CDFIs in the U.S.

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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.