BPInsights: December 13, 2019

BPInsights: December 13, 2019

Top of the Agenda

FDIC Proposes Modernizing Changes to Brokered Deposits, Community Reinvestment Act Regulations

On November 12, the FDIC proposed revisions to its brokered deposit regulation. Section 29 of the Federal Deposit Insurance Act prohibits less-than-well-capitalized institutions from accepting assets obtained through deposit brokers.  The revisions would clarify the meaning of “deposit broker” and broaden the application of certain exceptions from the definition.  These changes are intended to modernize the regulation to reflect technological changes and innovations that have occurred since the passage of Section 29 in 1989.

Together with the OCC, the FDIC also proposed a rule to modernize the regulations implementing the 1977 Community Reinvestment Act (CRA), which is intended to ensure that banks meet the credit needs of the communities they serve, including low- and moderate-income neighborhoods.  The proposal would clarify and expand the activities that qualify for credit under CRA and would modify the geographical areas in which banks would be assessed to account for banks that do not rely on traditional branch networks to generate deposits. “Modernizing the 1977 Community Reinvestment Act…is long overdue, and we are encouraged that the agencies have begun the process,” said Greg Baer, President and CEO of BPI, in a statement.  “We are pleased that the agencies have proposed a process by which banks could determine whether a loan or investment qualifies before they make it, which would enable banks to work more closely with their communities to identify and pursue creative ways to better address communities’ funding needs.  The agencies have indicated that they will continue to refine the rule before finalizing it, and we remain optimistic that the additional improvements will result in a joint rulemaking that the Federal Reserve and all stakeholders can support.”


5 Stories Driving the Week

1. After Adjusting for Economic Growth, as Pledged, GSIB Surcharges Should be 50 Basis Points Lower
On December 12, BPI published a blog post that updates the growth adjustment to the systemic indicator scores of the eight U.S. global systemically important banks (GSIBs). BPI had previously addressed the scores in May 2018 using the most recent estimates of trend economic growth reported by the Congressional Budget Office (CBO). On average, the corrected GSIB surcharges would be about 50 basis points lower if the Federal Reserve were to make the growth adjustment, as it committed to doing when it released the final rule on the GSIB Surcharge.

2. U.S. Anti-Money Laundering Chief Calls for Beneficial Ownership Directory
On November 10, Kenneth Blanco, Director of the Financial Crimes Enforcement Network (FinCEN), said anonymous shell companies are creating a “dangerous and widening gap” in the nation’s national security framework, according to a report from the Wall Street Journal. “Criminals thrive when they have somewhere to hide,” Blanco said at an American Bankers Association and American Bar Association conference. “And the secrecy behind shell companies—businesses that exist only on paper—is a clear and present danger.” Blanco said for banks to provide accurate anti-money laundering reports that help identify criminals, they need to know their customers and to do so “the next step is collecting beneficial ownership information when corporations are formed.” A bipartisan group of Senators have offered legislation to end anonymous shell companies and modernize the anti-money laundering framework.


3. BPI Hosts Symposium to Examine Challenges of Implementing CECL Accounting Rule
On December 12, BPI organized a symposium on FASB’s new current expected credit loss (CECL) accounting standard for loan losses that will become effective on January 1, 2020.  The symposium focused on the implications of CECL on banks’ balance sheets from various important perspectives: (i) the day one impact from the perspective of banks, supervisors and market participants; (ii) discussion of whether CECL will be more or less procyclical than the incurred loss methodology; (iii) a discussion of potential adjustments to the capital framework to be considered by the agencies to maintain capital neutrality; and (iv) integration of CECL into the Federal Reserve’s stress tests.  The symposium was attended by staff of BPI’s member banks, market participants, academics and representatives from federal regulatory agencies.

4. BIS Report Examines September Repo Volatility 
On December 8, the Bank for International Settlements (BIS) released its Quarterly Review report, which included substantial analysis of the September volatility in repo markets. BIS attributed the volatility in part to a reduction in reserve balances maintained by the largest U.S. banks, the increased size and volatility of the Treasury’s account at the Federal Reserve, and increased repo borrowing by hedge funds. BIS also attributed the volatility to the degradation of interbank markets that occurred because of the high level of reserve balances in the financial system, as well as a tendency for banks to rely increasingly on reserves when reserves were cheap and abundant.


5. BPI Submits Comment Letter on Proposed California Privacy Regulations
On December 6, BPI submitted a letter to the California Attorney General on proposed regulations under the California Consumer Privacy Act (CCPA). The letter calls for harmonization of the new rules with the CCPA’s statutory expectations, as well as with the long-standing frameworks banks have built under federal consumer privacy and data security standards. BPI argues that the regulations should take these programs into account to ensure that consumer protections are not unintentionally weakened by companies’ CCPA compliance efforts and proposes amendments to the draft rules that would address these issues. BPI recommended that the effective date of the regulations be set at least six months after the final rules are published and that the Attorney General should not undertake enforcement actions for conduct that occurs before January 1, 2021.


In Case You Missed It

Kraninger Sets April 2020 Goal for Finalizing Payday Rule
The Consumer Financial Protection Bureau (CFPB) Director Kathy Kraninger said on December 10 that the agency aims to finalize in April its amendments to the 2017 payday lending rule, which were initially proposed in February of this year, according to a report from Politico. “Our goal is to finalize the rule in April 2020,” Kraninger told the National Association of Attorneys General at a conference in Washington. “And in the meantime, I can assure you that the Bureau continues to engage in education, supervision and enforcement actions in this space.” Kraninger also said the CFPB will release a supplemental proposed rule “very early in 2020” to complement the debt collection rule it proposed in May.

BPI Joins Joint Trades Letter on Proposed Amendments to Swaps Margin Requirements
On December 9, BPI signed on to a joint trade letter to the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Farm Credit Administration, and the Federal Housing Finance Agency on proposed amendments to the inter-affiliate initial margin requirements for covered swaps.  Under the proposal, the swap margin rule would no longer require bank derivatives dealers to hold initial margin for uncleared swaps with affiliates (inter-affiliate swaps). In the letter, BPI and the trades note their support for this proposed change as it would foster harmonization with international and other U.S. regulators, while also providing necessary changes to minimize future market disruptions and incentivize sound management practices by swap entities. Specifically, the amendments would closely align the bank regulators’ margin requirements for uncleared swaps with those of the CFTC and global regulators.  Outside of the initial margin requirement issue, the comment letter also supports other proposals made by the agencies relating to grandfathering certain “legacy swaps” to facilitate the transition away from LIBOR and to more gradually phase in the implementation of margin requirements for certain bank counterparties.

OCC Highlights Cybersecurity as an Emerging Risk
On December 9, the Office of the Comptroller of the Currency released its “Semiannual Risk Perspective” report that highlighted cybersecurity as a key risk for the financial sector. The report states banks generally have appropriate cybersecurity programs and noted cybersecurity-related matters requiring attention (MRAs) have decreased in recent quarters. The report, however, warns that banks must remain on guard against threats and cited the “need to adapt and evolve current technology systems for ongoing cybersecurity threats.” The report recommends bank boards of directors and senior management be aware of the risks and work to foster a strong cybersecurity risk culture.

BPI’s Paul Calem Participates in Panel on Appraisals in Rural Markets
On November 5, Freddie Mac hosted a Rural Research Symposium on challenges facing rural housing and mortgage markets. The event included a panel discussion on appraisal challenges where BPI economist Paul Calem presented research on how only a part of the information produced by appraisers is used during the mortgage origination process.  He emphasized that the unused information would have value for assessment of lending risk, especially in rural markets where sparse transactions make risk assessment difficult to begin with, and that rural mortgage markets would benefit from policies that encourage the preservation and use of such information.

Bank of England, UK Supervisory Authorities Release New Operational Resilience Requirements
On December 5, the Bank of England, the Prudential Regulation Authority, and the Financial Conduct Authority published a policy summary and set of consultation papers laying out proposed requirements meant to enhance operational resilience in the financial services sector. The proposed policies emphasize the responsibility of firms and financial market infrastructures to improve their operational resilience, requiring them to identify their most important business services and the people, technologies, processes, and facilities that support them. Firms would be required to identify the maximum level of disruption those business services could withstand, test the ability to remain within those tolerances through a range of scenarios of varying severity, and implement mitigation measures where necessary. The Prudential Regulation Authority also published an accompanying consultation paper on “Outsourcing and Third-Party Risk Management” addressing operational resilience with regard to third-party affiliates, which is aimed at facilitating “greater resilience and adoption of the cloud and other new technologies.”

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