BPInsights: December 6, 2019

BPInsights: December 6, 2019

Top of the Agenda

BPI’s Bill Nelson Argues for Smaller Fed Balance Sheet Post Repo Disruption

On December 5, BPI’s Chief Economist Bill Nelson presented remarks titled “The Fed’s Balance Sheet Can and Should Get Much Smaller” at a Brookings Institution symposium on “The Repo Market Disruption: What Happened, Why, and Should Something Be Done About It?” In his remarks, Nelson noted that while the repo volatility in mid-September was owed in part to the Fed reducing the supply of reserves balances down close to the minimum levels banks currently require, he presented evidence that that minimum level can be shifted much lower over time. Nelson also argued that the cost of the large-balance sheet implementation framework the Fed has adopted to implement monetary policy increases with the size of the balance sheet necessary to operate it and cited a discussion in the minutes to the November 2019 FOMC indicating that the FOMC agrees. If the Fed can get smaller and it is costly to be bigger, then it follows that the Fed should take steps to shrink its balance sheet further. The remarks concluded by laying out three steps the Fed could take to get smaller: i) controling the volatility in reserve balances; ii) rooting out any bias of bankers and supervisors toward reserves as a liquid asset; and iii) restarting the gradual decline in the System’s portfolio of securities.

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5 Stories Driving the Week

1. FDIC to Release Brokered Deposit Proposal by Year End
On December 3, FDIC Chairman Jelena McWilliams said that she hopes to release a brokered deposit proposal by year end and pledged to provide more details in a speech at a Brookings Institution event titled “Brokered Deposits in the Fintech Age” on December 11. At a Women in Housing and Finance lunch, McWilliams said the current approach as to what is considered a brokered deposit is not very uniform, and there needs to be a regime that is more responsive and transparent. McWilliams also said that it is not worth addressing brokered deposits unless a wholistic approach is taken, including revisiting the primary purpose test. BPI previously submitted a comment letter responding to the FDIC’s Advanced Notice of Proposed Rulemaking. In the letter, BPI recommended that the FDIC clarify and modernize its approach to brokered deposits in a manner that is consistent with Congress’s purpose in the statue. The FDIC will hold a Board meeting on proposed rulemaking on brokered deposits on December 12.

2. Regulators Set to Release Split CRA Proposal Despite Lawmaker Criticism
On December 4 at a House Financial Services Committee hearing, lawmakers criticized FDIC Chairman Jelena McWilliams and Comptroller Joseph Otting (in absentia) for their reported willingness to proceed with a Community Reinvestment Act reform proposal without the Federal Reserve’s involvement and for the approach they may take to modernize the rule. “Instead of working together to make CRA exams more stringent and taking steps to ensure banks fairly serve all communities, we have at least the OCC, if not also the FDIC, in a rush to get a rulemaking out this year in a brazen attempt to weaken the CRA with or without the Federal Reserve,” said Committee Chairwoman Maxine Waters (D-CA). McWilliams has previously said she is “inclined” to sign onto a CRA proposal with the OCC even without the Federal Reserve joining. “I would not sign on to a proposal that basically in any way undermines the original intent of the law, and the proposal that I could sign on, is a proposal that would actually yield more benefit for the communities that it was intended to protect,” McWilliams said at the hearing. Federal Reserve Vice Chair for Supervision Randal Quarles stressed that the Fed continues to cooperate, noting that regulators are only at the point of a notice of proposed rulemaking and the objective will be for all three agencies to join the final rule.


3. Agencies Provide Clarity for Financial Institutions Servicing Hemp-Related Businesses
On December 3, the federal banking agencies, FinCEN and the Conference of State Bank Supervisors released a statement clarifying the legal status of hemp under the Controlled Substances Act and amending Bank Secrecy Act compliance expectations for banks that provide financial services to those businesses.  In the statement, regulators said “banks are not required to file a Suspicious Activity Report (SAR) on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.” Instead, standard AML program expectations, including SARs procedures, apply. The statement also provides banks with additional background information on the legal status of hemp, summarizes the USDA regulations and expectations, and notes that for marijuana-related businesses, banks should continue to follow the Financial Crimes Enforcement Network’s 2014 guidance.


4. Early-Bird Special: CFPB To Reward Firms That Quickly Fix Violations 
The Consumer Financial Protection Bureau is planning to announce a policy soon that will give financial companies a chance to get released from consent orders ahead of schedule once terms of the agreement are met, according to a report from American Banker. The Banker said the move is part of a broader effort by CFPB Director Kathy Kraninger to bring more transparency to the bureau’s processes. Companies accused of violating consumer finance laws enter into consent orders, which can include compliance obligations like “sending reports to the bureau on what progress the company has made to resolve outstanding issues.” However, the Banker reported, “the agency has lacked a standardized process for terminating orders before they are scheduled to end.”


5. Congressman Luetkemeyer Releases Regulatory Guidance Legislation
On November 26, Congressman Blaine Luetkemeyer (R-MO) reintroduced the Guidance Clarity Act, which would require federal agencies to include in guidance a statement that the document is not legally binding. “I am introducing the Guidance Clarity Act to force regulators to provide a plain language statement on the front page of guidance documents stating that it is not law nor will it be enforced as a law,” Luetkemeyer said in the release. BPI and the American Bankers Association previously took the rare step of petitioning the agencies to propose a formal rulemaking process that codifies guidance is nonbinding.

In Case You Missed It

Federal Regulators Address the Use of Alternative Data in Credit Underwriting
On December 3, the five federal financial regulatory agencies issued a statement discussing the use of alternative data in credit underwriting and noting the benefits that using such data could provide consumers in expanding access to credit. “The agencies recognize that use of alternative data may improve the speed and accuracy of credit decisions and may help firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system,” the agencies said in the statement. “Using alternative data may enable consumers to obtain additional products and/or more favorable pricing/terms based on enhanced assessments of repayment capacity.” The agencies also noted the need for a well-designed compliance management program that follows relevant consumer protection laws and regulations in any use of alternative data. BPI has previously released a discussion draft paper on modernizing regulatory approaches with the responsible use of artificial intelligence in credit underwriting.

FSOC Releases Annual Report, Highlighting Areas of Potential Emerging Threats
On December 4, the Financial Stability Oversight Council released its annual report where it highlighted significant financial regulatory developments and potential emerging threats.  The council, which consists of the top financial regulators, discussed cybersecurity, the transition to a new alternative reference rate and away from LIBOR, and risks from nonbank mortgage origination and servicing companies as potential threats. The council also called on the agencies to “closely monitor the repo markets, including an assessment of the increased concentration risk in the tri-party repo market.” Given the turmoil in the repo market in September, the council recommended that the relevant agencies “undertake a focused review of the September events in the wholesale funding markets and assess the broader implication for financial stability.”

House Republicans Press Federal Reserve for Update on Post Crisis Regulatory Framework
On November 19, House Financial Services Committee Republicans, including Ranking Member Patrick McHenry (R-NC) sent a letter to Federal Reserve leaders asking for an update of the comprehensive review of the post-crisis regulatory regime, as reported by Politico. The lawmakers publicized the letter, which was sent to Federal Reserve Chairman Jerome Powell and Federal Reserve Vice Chairman for Supervision Randal Quarles, ahead of regulators’ testimony before the committee on December 4. Specifically, the lawmakers asked the ways the review has informed the development of the Stress Capital Buffer (SCB) and greater overall transparency of the stress tests and the macroeconomic scenarios included in the Comprehensive Capital Analysis Review (CCAR) program.

RTP Payments Network Adds Corporate America Credit Union as Funding Agent
On December 3, the Clearing House announced that the Corporate America Credit Union, which serves nearly 500 credit unions nationally, is now a funding agent of the real-time payments network. “As a Funding Agent, CACU will allow member credit unions to efficiently manage their liquidity on the network at a lower cost and will fund and manage positions in the RTP network’s joint Federal Reserve bank account on behalf of its members. What this means for credit unions is that CACU will be able to facilitate the settlement and 24/7 liquidity management of members’ RTP network participation, which could be costly for credit unions to administer independently,” The Clearing House said in a release.

BPI Submits Letter to Financial Action Task Force on Draft Guidance on Digital Identity
On November 29, BPI submitted a response to the Financial Action Task Force’s (FATF) public consultation on its Draft Guidance on Digital Identity, which is aimed at clarifying “how digital ID systems can be used to conduct certain elements of customer due diligence” (CDD) at regulated entities under the FATF’s anti-money laundering/countering the financing of terrorism (AML/CFT) recommendations. BPI affirmed banks’ commitment to preventing illicit financial activity and expressed support for the FATF’s view that digital ID has the potential to strengthen AML/CFT and CDD controls, increase financial inclusion, improve customer experience and reduce costs for regulated entities. BPI stated that fundamental components will need to be addressed by both the public and private sectors before adoption for AML/CFT and sanctions compliance, including information collection expectations necessary to confirm identity, verification mechanisms, procedures for updating and retaining information, consumer privacy and data security protections, audit processes, expectations for using digital IDs in ongoing monitoring and, as necessary, the ability to rely on third-party or other providers.

The GSIB Surcharge and Repo Markets
On November 26, BPI published a blog post that argues that despite the Fed’s actions to expand the level of reserves in the wake of the volatility in September, repo rates will likely move higher at year end as a result of the global systemically important bank (GSIB) capital surcharge. The analysis shows that the year end adjustments have in the past been most pronounced for the complexity, interconnectedness, and cross-jurisdictional activity categories of the GSIB score. Moreover, based on just-released third-quarter data, banks will have to make higher adjustments to their 2019 year end scores than they did in the two prior year ends to avoid an increase in capital requirements.

CFPB Issues Proposal to Expand Safe Harbor of Remittance Transfer Rule
On December 3, the CFPB issued a notice of proposed rulemaking to expand a safe harbor in its remittance rule to more institutions. The 2013 remittance rule was mandated by the Dodd-Frank Act to provide protections for consumers sending international money transfers by requiring certain disclosures from entities that provide the transfers “in the normal course of business.” Under the current rule, a company that makes 100 or fewer transfers annually is exempt. The proposal would raise that threshold to 500 transfers per year. The proposal would continue to allow banks and credit unions to continue to provide estimates rather than exact fees, prices, and exchange rates under certain conditions where it could be “economically infeasible for these institutions to provide exact disclosures,” an exception that is currently slated to expire in July 2020.

House Panel May Vote on Bills That Could Derail Libra
Politico reported on November 25 that the House Financial Services Committee may vote in December on legislation designed to rein in Facebook’s Libra digital currency and other similar digital currencies. The legislation is on a tentative agenda of bills the committee will consider at a December 10-11 markup, according to a list circulated by the panel and obtained by Politico. The tentative list includes a bill by Representative Chuy García (D-IL) that would block Facebook and other large tech companies from developing digital currencies and another by Representative Sylvia Garcia (D-TX) that would subject Libra and other so-called stablecoins to securities regulation.

BPI and SIFMA Submit Comment Letter to SEC on Proposed Update to Disclosure Requirements
On December 2, BPI and SIFMA submitted a comment letter to the SEC responding to proposed updates and revisions to the SEC’s Industry Guide 3 governing disclosure requirements by bank and savings and loan holding companies. The letter supports proposed updates, including the elimination of duplicative disclosure requirements, reduction in required reporting periods, and codification of disclosures within Regulation S-K. The letter recommends that the SEC eliminate disclosure requirements of uninsured time deposits and requirements to disclose more broadly in XBRL format. In addition to other recommendations, the letter further encourages the SEC to retain its guidance allowing registrants to exclude or aggregate certain loan categories for the loan maturity table, allowance for credit losses, and credit ratio disclosures.

BPI Submits Comment Letter to Agencies on Proposed Call Report Revisions
On December 3, BPI submitted a comment letter to the Fed, OCC, and FDIC responding to proposed reporting revisions to the Call Reports and the FFIEC 101 (reporting of risk-weighted assets under the advanced approaches). The letter does not support adoption as proposed of the expansion in the scope of the Call Report for insured depository institution subsidiaries or the proposed change in reporting of home equity lines of credit that convert from revolving to non-revolving status in view of the potential significant operational challenges associated with these proposed changes. The letter encourages the agencies to eliminate supplementary leverage ratio data reporting tables from the FFIEC 101 and to provide an eighteen-month implementation period for the proposed reporting changes to the Call Reports related to the Total Loss Absorbing Capacity Holdings rule.

Basel Committee Encourages Tailored Implementation of Its Basel III Framework
On November 26, the Basel Committee released a statement encouraging a tailored approach to implementing its Basel III framework in its European Union member jurisdictions, emphasizing support for “supervisory practices commensurate with the risk profile and systemic importance of the banks being supervised.” The statement noted that the use of internal models is not required, even for “internationally active” banks, and suggests implementing similar standards in non-member jurisdictions. “A proportionate regulatory framework should not reduce the resilience of banks or dilute the prudential framework, but rather reflect differences in risk and complexity across banks…,” the statement said, noting that individual jurisdictions are free to implement more restrictive requirements than those comprising the framework.

Basel Committee Issues Guiding Principles for Operationalization of a Sectoral Countercyclical Capital Buffer
On November 27, the Basel Committee released a set of guiding principles for the operationalization of a sectoral countercyclical capital buffer (SCCyB), which would allow national authorities to temporarily impose additional capital requirements to directly address a buildup of risks in a specific sector, rather than the broader approach taken by the traditional CCyB. The guiding principles note that national authorities should target a small number of segments that are systemically important to financial stability and prone to cyclical imbalances. The principles also clarify that the SCCyB may be used as a complement or a substitute for the CCyB, and multiple SCCyBs could be appropriate simultaneously. Importantly, the SCCyB is not being incorporated into the Basel standards and is therefore voluntary and not needed for Basel compliance.

Basel Committee Publishes Details on List of Global Systemically Important Bank
On November 22, the Basel Committee published further information on the methodology used in conjunction with the Financial Stability Board in determining its 2019 list of global systemically important banks (GSIBs), which was also released November 22. Global banks are scored using a variety of indicators of their systemic importance, and each bank designated as a GSIB is mapped into corresponding “buckets” to determine the level of its heightened capital requirement.


Upcoming Events

  • 12/10/2019 — Federal Reserve FOMC Meeting
  • 12/10/2019 — Senate Banking Committee Convenes SEC Oversight Hearing
  • 12/10/2019 — House Financial Services Committee Markup
  • 12/11/2019 — Brookings Event on Brokered Deposits with FDIC Chairman Jelena McWilliams
  • 12/12/2019 — FDIC Board Meeting on CRA and Brokered Deposits Proposals

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