BPInsights: September 25, 2021

Stories Driving the Week

Biden to Tap Omarova for OCC Chief

President Biden intends to nominate Saule Omarova, a Cornell University law professor, to head the Office of the Comptroller of the Currency. The agency is currently led by Acting Comptroller Michael Hsu. Omarova, a Kazakhstan native educated in Russia, has expressed views on the financial system that set her up for a rocky confirmation process in the closely divided Senate, Bloomberg reported this week, including wanting to nationalize the retail banking system. Omarova received the “Lenin Personal Academic Scholarship” to Moscow State University in 1988-89, according to her CV.

Reuters Breakingviews article by Gina Chon described Omarova as a “radical choice” for the OCC. “She advocates scrapping private bank deposits and giving Americans accounts at the Federal Reserve,” Chon wrote, adding that such thinking is “ill-suited” for the regulatory agency.

Ransomware in the Crosshairs: Treasury Strikes a Balance

The Treasury Department’s Office of Foreign Assets Control’s updated advisory on ransomware payments and steps to mitigate sanctions risks wisely managed the fine line between discouraging ransomware payments and penalizing the victims, such as America’s schools, hospitals and critical infrastructure, BPI’s Angelena Bradfield said in a statement this week. To avoid penalties, firms will need to establish good practices and also work promptly and effectively with law enforcement. We commend these efforts to encourage strong cybersecurity practices, and as the Administration moves forward with additional policy solutions to deter ransomware actors, BPI members remain committed partners and have proposed recommendations to assist efforts to mitigate this nefarious activity.
 
Treasury this week sanctioned virtual currency exchange SUEX, which allegedly facilitated ransomware transactions. The action marks the first direct attempt by Treasury to block the financial pipelines through which illicit ransomware payments flow.

Cyber Amendment in NDAA Signals House Commitment to Strengthening Cybersecurity

BPI’s EVP and President of BITS Chris Feeney this week released a statement commending the House for including a cyber amendment sponsored by Reps. Yvette Clarke (D-NY), Bennie Thompson (D-MS), John Katko (R-NY) and Andrew Garbarino (R-NY) in the National Defense Authorization Act for fiscal 2022. The amendment will facilitate better cybersecurity threat and information sharing between the public and the private sectors and will help critical infrastructure more efficiently and effectively respond to cyber events that threaten the resiliency of the U.S. financial system.

Preserve Consumers’ Right to Data Access Security and Privacy

Consumers should have the ability to access their personal financial data, according to a statement for the record submitted this week by BPI in advance of a U.S. House Committee on Financial Services Task Force on Financial Technology hearing. The statement emphasizes that while consumers should be able to use their preferred applications to manage spending and other financial matters, consumers should not have to forfeit the expectation of data security and privacy. The statement presents three key recommendations: consumer financial data should be safe and secure regardless of who holds it; informed consumer consent should be obtained; and consumers should have control over the type and amount of information shared.

Liquidity Transformation Always Finds the Path of Least Regulation

The basic business model of banking is inherently unstable – banks take deposits and use them to make loans. Deposit insurance and liquidity regulations ensure that such a business model remains safe and banks don’t suffer runs on their deposits. The emergence of stablecoins – several of which claim to be backed completely by “reserves” – brings this balance to the forefront of regulatory discussions, according to a new BPI blog by Chief Economist Bill Nelson. As U.S. regulators consider how to oversee this new asset class, the saga brings to mind other examples of liquidity transformation outside the regulated banking system, such as money market funds in the global financial crisis. With at least one major stablecoin issuer, Tether, reportedly investing the money it receives for its coins in Chinese commercial paper, the current turmoil in the Chinese financial system makes greater transparency all the more important.

In Case You Missed It

Treasury Sets Sights on Stablecoin Risks

The Treasury Department and financial regulators are eyeing stablecoins as a threat to financial stability, with a group of federal regulators preparing to issue a report this fall on the crypto assets. The potential allure of fast payments comes with risks, a recent POLITICO article reports. “The ‘stablecoins’ we see in the marketplace today are anything but stable, and in their current form, lack transparency about what backs them, present heightened financial crime risk, and purport to be far safer than they actually are,” BPI SVP and Associate General Counsel Paige Paridon said in the article.

OCC’s Hsu Questions Crypto’s Inclusion Promise in Speech

Acting Comptroller Michael Hsu called into question cryptocurrency innovations’ promise of bringing more underserved consumers into the financial system in a recent speech to the Blockchain Association. “How is crypto/DeFi making it less expensive to be poor?” he said. “How is it helping to expand access to banking services and credit? How is it making housing more affordable and building long-term wealth?” Hsu compared the opacity of the crypto space to problems with credit-default swaps leading up to the global financial crisis and called for more transparency and clarity in cryptocurrency and decentralized finance. Hsu also focused on crypto exchanges (Coinbase, BlockFi, etc.) that offer “stablecoin savings accounts” with annual percentage yields between 4 and 14.5 percent, and similar products on DeFi networks (staking, yield farming, or liquidity mining).  These products are often marketed to consumers as good alternatives to FDIC-insured bank savings accounts, equally safe with better returns.  “How are the returns generated? It is hard to get straight answers that don’t quickly devolve into cryptospeak. If one follows the money, what lies at the end?” Hsu said, before observing “I find it both concerning and ironic that the crypto/DeFi space is replete with scams” and that “those who are going to be hurt most are going to be those least able to bear it.”  The last comment seems to suggest a more active role for the CFPB, which BPI has urged the agency to take on.

Central Bankers Want to Know Whether They Can Issue Digital Currency. The Real Question Is, Should They?

As global central banks study whether they can issue a central bank digital currency (CBDC), the question of whether they should do so has received relatively less attention, BPI CEO Greg Baer wrote in a Business Reporter piece published this week. CBDC threatens to dislodge commercial banks’ crucial intermediation from the economy and therefore slow economic growth, the piece says.

Fed Meeting Previews Taper Coming Soon

The Federal Reserve will likely soon pare its massive bond-buying activities, Chair Jerome Powell said at the press conference following this week’s central bank meeting. The Fed may start tapering its asset purchases as early as November while the U.S. economy emerges from the pandemic. Powell indicated that the decision to taper will depend not only on the employment and inflation situation, but also whether “the overall situation is appropriate” and that they will “look at the broader environment at that time,” phrases that suggest the FOMC may not taper if there is a debt-ceiling debacle. Powell appears to be trying to warn markets as soon as possible of future tapering plans after a “taper tantrum” roiled bond markets in recent years in reaction to the central bank pulling back from bond-buying support. The taper timeline was the main focus of Powell’s press conference, but here are other takeaways.

  • CBDC: Powell reiterated that the Fed has not decided whether to issue a central bank digital currency, that such a decision would require backing from Congress and the Administration and that a paper exploring the topic is forthcoming. He also repeated his view that the U.S. isn’t losing a CBDC race with international rivals.
  • Racial equity: In response to questions about racial disparities in unemployment rates and the Fed’s goal of more broad-based labor market success, Powell clarified the central bank isn’t targeting a particular unemployment rate for any particular demographic group and instead considers a broad range of metrics. He also said the Fed is limited to “famously broad and blunt tools” for addressing inequality and pointed to fiscal and education policy as more directly helpful in that pursuit.  
  • Dot plot: The FOMC also released its quarterly forecast.  The median participant now judges that liftoff next year will be appropriate, with the funds rate rising about ¾ of a percentage point in 2023 and 2024.

Gensler Likens Stablecoins to ‘Poker Chips’ in Washington Post Interview

Securities and Exchange Commission Chair Gary Gensler compared stablecoins to “poker chips” in a casino in a Washington Post interview with David Ignatius this week. The agency has signaled an aggressive policing approach to cryptocurrencies, with Gensler recently describing the crypto landscape as the “Wild West” devoid of sufficient regulation. Gensler reiterated in the interview that the SEC has “robust authorities” to oversee crypto products, but gaps exist in the regulatory framework. The SEC recently took aim at a new account proposed by crypto exchange Coinbase where users could lend out their crypto assets in exchange for yield – Coinbase consequently abandoned its plans to launch the product.

SEC Requests Climate Disclosures from Firms

The SEC has requested information from multiple public companies on how climate risk could affect their business. The SEC staff requests came in the form of comments on companies’ regular filings with the agency, and were made to firms in industries including agriculture, banking, oil and gas, real estate and trucking. The SEC is currently considering proposing climate disclosure rules, which Chairman Gary Gensler suggested this week may get pushed to early next year.

CISA Chief Backs 24-Hour Cyber Incident Reporting

CISA Director Jen Easterly expressed support for a 24-hour reporting requirement for cyber incidents in her testimony before the Senate on incident reporting legislation currently in draft form. Easterly said that companies would report cyberattacks “ideally” within 24 hours. BPI has recommended a 72-hour reporting window, as proposed by Sens. Gary Peters (D-MI) and Rob Portman (R-OH) and in a bipartisan House bill. BPI believes 72 hours is more appropriate as it would strike the right balance to allow sufficient time for investigation and implementation of remediation and response measures while reporting timely and useful information to CISA. Cyber incident reporting legislation is expected to be included in the must-pass National Defense Authorization Act.

U.S. Bank to Buy MUFG’s Union Bank

U.S. Bancorp, the parent company of U.S. Bank N.A., has agreed to purchase MUFG’s Union Bank for about $8 billion, according to a press release this week. The planned acquisition would expand U.S. Bank’s presence on the West Coast. MUFG will hold a minority stake of approximately 2.9% in U.S. Bancorp as part of the acquisition.

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Disclaimer:

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.