Top of the Agenda
A FEW THOUGHTS FROM OUR ANNUAL CONFERENCE
Last week, we co-hosted our annual conference in conjunction with our friends at The Clearing House. Each year, we begin with a panel of outsiders to escape our policy echo chamber. This year’s panel was jarring with all panelists agreeing that U.S. banks are at 70-plus year high for capital, and more liquid than they have ever been but predicting that the next few years would see both a significant number of mergers and organic growth by larger banks. They also agreed that we are on the cusp of a time when competition and the benefits of scale, particularly with respect to technology, will make it increasingly difficult to operate a bank with less than $1 billion in assets, and the regulatory and supervisory environment may allow regional banks to pursue opportunities to merge.
There are good reasons to believe that this trend will be beneficial for bank customers. The analysts noted that banking is a more competitive business than ever before, so one would expect to see technological advances translating into better service and lower prices for retail and commercial customers.
BPI’S NELSON TO TESTIFY ON PROCYCLICALITY OF CECL ACCOUNTING STANDARD
BPI’s Chief Economist Bill Nelson will testify before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit on December 11 at 2 pm on FASB’s Current Expected Credit Loss (CECL) Accounting Proposal. Under CECL, banks will be required to maintain an allowance that equals, for each loan, total losses expected over the life of the loan. CECL was intended to be countercyclical – the goal being for banks to build their allowances in boom years, when lending standards weaken and then draw them down in a recession, when lending standard tighten. In a recent working paper, however, Bill and Franciso Covas, Head of Research, demonstrated that CECL will, in fact, be procyclical in practice and exacerbate an economic downturn. This opinion has been reiterated by the Federal Reserve’s Vice Chairman for Supervision Randal Quarles.
FINCEN, BANKING AGENCIES AND NCUA ENCOURAGE AML INNOVATION IN JOINT STATEMENT
On December 3, the federal banking agencies, Treasury’s Financial Crimes Enforcement Network (FinCEN), and the National Credit Union Administration (NCUA), released a joint statement providing welcome guidance on BSA/AML, designed (and likely) to encourage innovation in an area where it is overdue. In the statement, for which BPI has advocated, regulators noted the importance of bank pilot programs to test and validate the effectiveness of innovative AML approaches. They noted that pilot programs in and of themselves should not subject banks to supervisory criticism even if the pilot program ultimately proves unsuccessful and stated that programs that expose AML compliance program gaps “will not necessarily result in supervisory action with respect to that program.” This statement was helpful in the AML context, and we wonder if it isn’t a prescription that could apply more broadly. While it has become customary to propose regulatory “sandboxes” to allow for innovation, sandboxes shouldn’t really be necessary in an appropriately balanced examination process. Pilots are by definition efforts without material impact on a bank’s financial condition, and pilots therefore should not attract examiner censure in any case; thus, they should not need a regulatory shield. It is good that the agencies have recognized as much in the AML area.
BPI DISCUSSES PAPERS ON IMPACT OF CAPITAL REGULATION ON BANK BEHAVIOR AND ECONOMIC DEVELOPMENT
BPI’s Chief Economist Bill Nelson recently discussed three papers on the economic and financial market impact of bank capital requirements. He prefaced his remarks with some thoughts on the role of research in regulatory policy design, drawing on his experience at the Federal Reserve and now at BPI. All of these papers “are about the impact capital regulations, including stress tests, are having on the economy, an issue that has important implications for the design and calibration of not only those requirements, but also of other requirements,” Nelson noted in his remarks before the Federal Reserve Bank of Cleveland and Office of Financial Research Financial Stability Conference.
BPI HOLIDAY PARTY
A successful BPI holiday party was held on December 4 to kick off the holiday season.
COLUMBIA/BPI 2019 RESEARCH CONFERENCE – BANK REGULATION, LENDING AND GROWTH
The Bank Policy Institute and Columbia University’s School of International and Public Affairs invite submission of papers for a conference on Bank Regulation, Lending and Growth. The purpose of the conference is to bring together academics, market participants, and policymakers to discuss the latest research on how regulation affects credit formation and economic activity.
March 1, 2019, Columbia University, NYC
Industry News and Events
SENATE CONFIRMS KRANINGER TO LEAD BUREAU OF CONSUMER FINANCIAL PROTECTION
The Senate voted 50-49 on December 6 to confirm Kathy Kraninger will serve as director of the Bureau of Consumer Financial Protection, replacing acting chief Mick Mulvaney.
BPI’S NELSON COMMENTS ON FEDERAL RESERVE’S INTEREST RATE OUTLOOK
When discussing the newly released FOMC minutes on CNBC last week, BPI Chief Economist Bill Nelson observed that while a tightening in December was “baked in the cake,” the Fed appeared to be “setting themselves up to [then] pause for a little while and look around.” Bill added that the Fed almost never surprises markets during a tightening cycle. Bill’s research has shown that when the markets are not completely aligned with the Fed’s plans, a speech, testimony, or background interview with the chief economics correspondent at The Wall Street Journal would generally be deployed to set the market straight. On December 6, Nick Timiraos, chief economics correspondent at the WSJ, wrote: “Federal Reserve officials are considering whether to signal a new wait-and-see mentality after a likely interest-rate increase at their meeting in December, which could slow down the pace of rate increases next year.”
NOTEWORTHY UPCOMING HEARINGS
SEC Oversight: The Senate Banking, Housing, and Urban Affairs will hold a hearing on December 11 at 10 am on Securities and Exchange Commission oversight with SEC Chairman Jay Clayton.
CECL: The House Financial Services Subcommittee on Financial Institutions and Consumer Credit holds a hearing on December 11 at 2 pm on FASB’s Current Expected Credit Loss (CECL) Accounting Proposal. BPI’s Chief Economist Bill Nelson will testify.
International Institutions: The House Financial Services Subcommittee on Monetary Policy and Trade will hold a hearing on international financial institutions on December 12 at 10 am with David Malpass, Treasury Under Secretary for International Affairs, testifying.
Note: Due to the funeral of former President George H.W. Bush, several hearings were postponed or rescheduled. The Senate Banking, Housing, and Urban Affairs Committee’s hearing on pilot programs for Fannie Mae and Freddie Mac and the House Financial Services Committee’s hearing on the Federal Housing Administration have been postponed and will be rescheduled for a later date. The House Financial Services Committee hearing titled, “A Legislative Proposal to Provide for a Sustainable Housing Finance System: The Bipartisan Housing Finance Reform Act of 2018” has also been rescheduled to a date to be determined.
BPI FILES AMICUS BRIEF IN BLAKE V. JPMORGAN CHASE
BPI, together with the American Bankers Association, Housing Policy Council, U.S. Mortgage Insurers, and the Mortgage Bankers Association, submitted an amicus curiae brief to the Third Circuit Court of Appeals in Blake v. JPMorgan Chase, encouraging the Court to reject the plaintiff’s attempt to dramatically expand the statute of limitations for private actions under the Real Estate Settlement Procedures Act (RESPA). The brief, filed December 1, holds that alleged violations of RESPA’s prohibition on kickbacks accrue at settlement, giving borrowers one year from their loans’ closing to bring a claim. The plaintiff’s so-called “continuing violations doctrine,” by contrast, argues that each time a portion of an insurance premium is ceded to the captive reinsurer there is new kickback that gives rise to a new RESPA violation and restarts the statute of limitations.
BPI TO FILE BRIEF IN SIEGEL ATA SECONDARY LIABILITY CASE
BPI, together with the Institute of International Bankers, the Chamber of Commerce, and the American Bankers Association, submitted a motion for leave to file its amicus curiae brief with the Second Circuit Court of Appeals in Siegel v. HSBC Bank USA. The brief encourages the Court to reaffirm the appropriate statutory limits of secondary liability under the Anti-Terrorism Act, noting that under the plaintiffs’ theory, any bank providing clearing services in the U.S. could potentially be subject to substantial damage awards and reputational injury based upon terrorist acts committed without its knowledge or involvement. The brief addresses the potential chilling effect on international finance and trade associated with broadening secondary liability in ATA cases beyond that contemplated by the statute.
CAN THE U.S. INTERBANK MARKET BE REVIVED? (KIM, MARTIN, AND NOSAL)
This paper examines whether reducing the supply of excess reserves could revive the interbank lending market. Due to the Federal Reserve’s large-scale asset purchases and a set of new regulations that imposed new balance sheet costs on banks, the interbank market shrank 95 percent between the 2007-2008 financial crisis and 2018. The authors find that the new regulations increase the cost of interbank trading and incentivize non-banks to lend reserves to banks, both of which decrease interbank trading.
JUST RELEASED: A CLOSER LOOK AT RECENT TIGHTENING IN CONSUMER CREDIT (ARMANTIER ET AL)
This post reviews the results of the Federal Reserve Bank of New York’s October 2018 Survey of Consumer Expectations (SCE) Credit Access Survey. This survey shows a decline in credit application rates and an increase in rejection rates from 2017 to 2018. The increasing rejection rates are for credit cards, credit card limit extensions, and mortgage refinances. Borrower-initiated account closings did not change significantly, but lender-initiated account closings rose markedly.
MACROPRUDENTIAL FX REGULATIONS: SHIFTING THE SNOWBANKS OF FX VULNERABILITY? (AHNERT ET AL)
This paper evaluates the effectiveness and unintended consequences of macroprudential foreign exchange regulations. Borrowing in foreign currency is often cheaper, though it introduces the risk of local currency depreciating against the foreign currency. This makes debt-servicing more expensive and has the potential to lead to default. The authors find that while foreign exchange regulations may successfully discourage banks from borrowing in foreign currency, they cause firms to increase their foreign exchange borrowing from non-banks.
STATE-DEPENDENT EFFECTS OF MONETARY POLICY: THE REFINANCING CHANNEL (EICHENBAUM, REBELO, AND WONG)
This post investigates the relationship between monetary policy efficacy and mortgage refinancing in an economy where the large majority of mortgage loans have a fixed interest rate. The authors find that monetary policy is more effective when there is a large pool of potential savings from refinancing. When borrowers stand to save less by refinancing, the monetary transmission mechanism is less effective.