BPInsights: September 18, 2021

Stories Driving the Week

How to Expand Mortgage Lending to Low-, Moderate-Income Households 

The current securitization capital rules overstate a bank’s risk of holding a pool of mortgages for which there has been a bona fide transfer of credit risk through a CSRTs transaction, a new BPI post says. The result is inconsistent with international capital standards and a drag on multilateral efforts to increase credit availability to low- and moderate-income households and reduce the concentration of credit risk in taxpayer-backed GSEs. The U.S. banking agencies could expand mortgage credit availability for low- and moderate-income households by amending the regulatory capital rules to encourage transfer of credit risk to the private market, subject to rigorous rules. The approach would allow a more efficient shift of mortgage credit risk from banks to the private sector, revitalizing the private securitization market without easing bank capital requirements or eroding underwriting standards. Because the transferred mortgages remain on the originating bank’s consolidated U.S. GAAP balance sheet, leverage ratios would deteriorate slightly due to cash received from the sale of securities. While the post argues that the banking agencies should amend the capital rules to encourage the transfer of credit risk to the private market by banks, the FHFA is proposing to go much further by easing the leverage requirements of the GSEs and expand their capacity to do even more credit risk transfers to help support LMI communities.

Stablecoins May Get FSOC Review

The Financial Stability Oversight Council, chaired by Treasury Secretary Janet Yellen, is considering whether to launch a review of the potential financial stability threat posed by stablecoins, according to Bloomberg. Such scrutiny could lead to designation by the FSOC of stablecoin issuers or their activities as systemically important, which would subject them to more stringent regulation and oversight. The President’s Working Group on Financial Markets, a separate group led by Secretary Yellen, is expected to issue recommendations on stablecoin in December. Another Bloomberg article this week highlighted major stablecoin concerns among Treasury officials: ensuring investors can reliably move money in and out of tokens; the ability of certain stablecoins to rapidly scale up; widespread fire-sale runs on crypto assets; and how to manage the growth of stablecoins backed by Big Tech firms.

Credit Losses from Declining Industries: Lessons for Climate-Risk Modeling

Banking regulators’ growing focus on climate risk stems partly from the assumption that banks risk large losses on loans to businesses threatened by climate-related factors. But business sectors’ shifting fortunes amid societal and technological change are nothing new, a new blog post by BPI Chief Economist Bill Nelson says. Economists should look to prior instances of this phenomenon to gauge the risk of loan losses related to climate-driven business failures. Declining firms in these situations tend to end with a whimper, not a bang: as large-scale societal shifts make some firms unprofitable, they will likely adapt and operate at a smaller scale, dwindle or perhaps be acquired rather than fail in their current forms. Kodak offers a case study of a firm failure owing to technological change that resulted in no bank losses. Kmart, Sears and JCPenney are firms that fell to changing societal preferences that warrant additional investigation. Coverage of the blog post can be found in MarketWatch.

Hsu Highlights Climate Risk, Crypto, Inclusion

Acting Comptroller of the Currency Michael Hsu said in a recent speech that his agency is working with other banking agencies to craft climate risk management guidance for large banks. “Climate change poses an existential risk to society and the associated financial risks pose safety and soundness risk to banks,” he said. Guidance does not have the force of law but can serve as an indication of regulators’ priorities and affect the way banks manage risk. Hsu also offered updates on other OCC priorities, such as financial inclusion and reining in risks of new financial technologies.

Hsu applauded Bank On accounts as tools to “help reduce inequality and build trust.” He said the OCC is aiming to boost financial inclusion by strengthening the Community Reinvestment Act and bringing “credit invisibles” (people without a credit score) into the formal banking system. On FinTech, Hsu warned against the dangers of splintered regulatory efforts and FinTech activities that bypass banks as safe intermediaries, but said he was encouraged by joint federal efforts to oversee crypto and stablecoins.

House Cyber Incident Reporting Bill Proposed for Inclusion in Defense Bill

House Homeland Security Committee leaders submitted bipartisan cyber incident reporting legislation as an amendment to be included in the must-pass fiscal 2022 defense authorization bill, according to Inside Cybersecurity. BPI recently testified in support of the legislation, which includes key provisions to help harmonize any new requirements with existing financial sector regulations, and recognizes the need to allow firms time to investigate and implement response measures prior to reporting to the government. Lawmakers also proposed other cyber provisions for the NDAA, such as one that would create a five-year term for the Director of the Cybersecurity and Infrastructure Security Agency. The bill will likely head to the House floor next week.

In Case You Missed It

BPI Adds Anthony Bush to Government Affairs Team

This week, BPI announced Anthony Bush has been hired as Assistant Vice President of Government Affairs. Bush’s portfolio will focus on consumer and small business issues and economic inclusion. He previously served as a legislative assistant on the majority staff of the House Committee on Oversight and Reform. Bush will start Sept. 20 and report to Head of Government Affairs Ed Hill. 

BPI, Joint Trades Urge Action on Debt Limit

BPI and several other financial trades urged congressional leaders in a recent letter to raise the federal debt ceiling without delay. Failure to take action would hurt the creditworthiness of the U.S. and disrupt the U.S. Treasury market, a linchpin of global capital markets and the U.S. economy, the trades said.

Do PPP Exclusions Strip Certain Businesses of Their Constitutional Rights?

A recent court decision casts a spotlight on the range of businesses hurt by the pandemic – including strip clubs – and decides whether the government can refuse to support businesses it disfavors on moral/political grounds.  Overturning a District Court decision in favor of the strip clubs, the Seventh Circuit ruled that “[t]he problem with plaintiffs’ First Amendment claim and the preliminary injunction here is that Congress is not trying to regulate or suppress plaintiffs’ adult entertainment.  It has simply chosen not to subsidize it. Such selective, categorical exclusions from a government subsidy do not offend the First Amendment.”  Given the precedent set here, further proceedings (an appeal to the en bancSeventh Circuit or the Supreme Court) will bear watching.

German Central Banker Backs Slow Rollout for Digital Euro

Bundesbank chief Jens Weidmann said a digital euro should be launched at a deliberate pace, given its disruptive potential. “A gradual approach might make sense given the risks involved,” Weidmann said in a speech at a FinTech conference. A rush to swap bank deposits for CBDC in times of stress could destabilize the banking system, Weidmann said. The ECB began the “investigative phase” of its digital euro efforts this summer.

Q&A: Truist’s Kelly King Reflects on a Half-Century in Banking

Former Truist CEO Kelly King, who retired on his 73rd birthday on Sept. 11, offered reflections and lessons learned from his decades-long career in banking in an American Banker Q&A. King was succeeded by former SunTrust CEO Bill Rogers. “I passed along to him the same thing he would pass along to me: Continue to focus on culture and lead the organization from a purpose point of view,” King said of his advice to Rogers. “You want people to feel like they have a purpose and a passion.”

Citi, BNY Mellon Join Verizon to Launch Request-for-Payment Messages

BNY Mellon and Citi collaborated with Verizon to launch a “request-for-payment” messaging service for Verizon customers with Citi accounts, the companies announced this week. The tool, which uses The Clearing House’s RTP network, marks the first at-scale use of real-time payments technology in production with retail customers. It enables Verizon customers who bank with Citi to pay their bills immediately, 365 days a year, at any time of day.

BNP Paribas Receives 3 Euromoney Awards

BNP Paribas was named World’s Best Bank for Sustainable Finance, World’s Best Bank for ESG Data and Technology and World’s Best Bank for Public Sector by financial publication Euromoney, the bank announced this week. “The Group’s contribution to responsible and sustainable growth through financing the economy and advising customers in their transformation is recognized here,” CEO Jean-Laurent Bonnafé said.

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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.