BPInsights: December 28, 2018

BPInsights: December 28, 2018


In July, the Bank Policy Institute launched as a nonpartisan public policy, research, and advocacy group representing the nation’s 48 leading banks.

Using data and analysis, BPI promotes greater awareness of how regulations affect not only safety, soundness and financial stability, but also innovation and credit availability. To that end, our staff has been busy producing research and analysis to shape sound policy. Below is a highlight of our “Top 10 Most Read Research and Blog Posts” of 2018. As the year comes to a close, we look forward to continuing to use our research and analysis to show the real-life impact of financial policy.

Happy Holidays and Happy New Year!

Top 10 Most Read Research and Blog Posts

1. Getting To Effectiveness – Report On U.S. Financial Institution Resources Devoted To BSA/AML & Sanctions Compliance

On October 29, BPI Released an empirical study on the effectiveness of the current Bank Secrecy Act, anti-money laundering and sanctions regime. The report measures the resources U.S. financial institutions are devoting to compliance, and whether these resources are efficiently and effectively supporting law enforcement and national security efforts. The data shows that there are very few instances in which banks’ required regulatory compliance efforts yield results, such as law enforcement follow-up. “The data makes it clear that the current U.S. compliance regime is broken and failing at its core mission of catching criminals,” said Angelena Bradfield, BPI’s Vice President of AML/BSA, Sanctions & Privacy.

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2. The Current Expected Loss Accounting Standard Will Make The Next Recession Worse

This blog post, published on July 16, summarized some key results of a working paper from BPI that analyzes the performance of the credit loss accounting standard (CECL) had it been in place during the 2007-2009 financial crisis. The paper finds that CECL would have been highly procyclical, amplifying the contraction in bank lending and the severity of the past crisis.

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3. BPI Files Letter Requesting That the FSOC Work To Evaluate The Systemic And Economic Risks Posed By CECL

On October 18, BPI sent the Financial Stability Oversight Council (FSOC) a letter requesting that the FSOC work to evaluate the systemic and economic risks posed by CECL and engage the Financial Accounting Standards Board (FASB) and regulatory agencies to seek a delay in CECL’s implementation. The letter notes BPI’s concern that the implementation of CECL could undermine financial stability in a future recession or financial crisis, as its requirements establish disincentives for banks to extend credit, especially during stressed economic conditions.

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4. Fed’s Quarles Outlines Needed Adjustments To Stress Testing Framework

In a speech at the Brookings Institution on November 9, Federal Reserve Vice Chairman for Supervision Randal Quarles provided a comprehensive look at the Federal Reserve’s stress testing policy. His remarks included significant news; so also, did remarks during Q&A on a broader set of topics, including the stress test capital buffer, enhanced prudential standards and capital framework.

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5. The Truth About Bank Deposits, Interest Rates, And Benefits To Consumers

In a blog post on August 10, BPI responded to Bloomberg Opinion columnist Stephan Gandel’s column on bank deposits and who benefits the most from higher interest rates. BPI agreed that deposit rates have risen by less than market rates over the past couple years, but also pointed out that all rates were scrunched up against the zero lower bound. “As short-term rates continue to move up, we expect the spread between the fed funds rate and the retail deposit rates to continue to widen and return to its historical long-run value,” according to BPI. Deposit rates have always been below market rates because depositors receive valuable payment services, services that are costly for the bank to provide.

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6. Six Questions About The Net Stable Funding Ratio (NSFR) Requirement

On September 21, in a BPI blog, Bill Nelson offered policymakers a list of six questions that they should be asking their staff about the Net Stable Funding Ratio (NSFR) after the Basel Committee on Banking Supervision (BCBS) “reiterated their expectation of full, timely and consistent” implementation of the Basel III standards for internationally active banks,” yesterday. The NSFR was the last of the major post-crisis regulatory reforms released by the Basel Committee and, because it was developed and completed on a rushed basis, the final version features several significant and serious flaws.

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7. Despite Claims To The Contrary, Fed Staff Paper Does Not Convincingly Show That Economic Costs Of Failure Rise Sharply With Bank Size

A Federal Reserve staff paper looking at the relationship of bank failures on economic activity found that the impact of bank failures in economic activity increases sharply with bank size. In particular, they find that the economic impact of the failure of a single large bank is three times greater than the simultaneous failure of five banks that are each one fifth the size of the large bank. Their extraordinary result suggested that regulation and supervision should become exponentially more stringent as bank size increases. However, BPI found that their result is weak and does not hold up to standard robustness checks.

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8. Responding To Criticism, BPI Stands By Its Finding That CECL Is Procyclical

BPI released a blog post defending previous finding that the new Current Expected Credit Loss (CECL) Accounting Standard for loan losses reserves will be procyclical. BPI reached that conclusion after estimating how reserves for losses would have behaved through the financial crisis under the new standard using real time forecasts rather than an assumption of perfect foresight. The blog post analyzed three studies and finds in two of the studies that CECL is countercyclical only when the models incorporate the assumption of “perfect foresight” and is procyclical when the perfect foresight assumption is relaxed – fully consistent with the finding of our working paper. The third study simply provided no evidence on whether CECL is pro- or countercyclical.

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9. A Transparent Method For Judging The Severity Of Macroeconomic Stress Scenarios

In a blog posted on August 17, BPI Research outlined a simple and transparent approach that the Federal Reserve could use to measure the severity of the annual stress test scenarios it employs under CCAR. The approach requires estimating the impact of a scenario on bank performance in the aggregate and calculating the probability that reality will turn out worse than the scenario. The Fed could use this or a similar approach, in combination with a publicly announced and debated standard for scenario severity, to increase bring greater transparency and accountability to its stress testing process and reduce unnecessary variability in capital requirements.

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10. ICBA Offers No Evidence Supporting Call For Higher Capital

In a blog on August 30, BPI’s Greg Baer pushes back against the American Banker Bank Think column from Independent Community Bankers of America’s Rebeca Romero Rainey that calls for maintaining capital standards for the nation’s largest banks without offering any data-based evidence to support her positions. In her column, Romero Rainey writes that policymakers “should not be tempted … to weaken vital safeguards on our financial system,” without offering any suggestions as to the proper level of safeguards. Instead, Romero Rainey points to the repercussions from the financial crisis and says that large banks “should not be allowed to operate without elevated levels of high-quality capital.”

Baer, who notes that BPI “prides itself on making only evidence-based arguments about regulatory design and calibration,” cites BPI research notes on the GSIB surcharge and the supplementary leverage ratio to support its position. On the GSIB surcharge, a recent BPI note offers “a data-based analysis by which the Fed could adjust its formula to account for economic growth and for the risk-reducing effect of other post-crisis regulations,” Baer says.