TOP OF THE AGENDA
Editor’s Note: BPI will update Insights later in the day with any CCAR stress test announcement analysis.
FASB Hosts Roundtable Discussion on CECL Accounting Standard Implementation
On January 28, the Financial Accounting Standards Board (FASB) held a public roundtable meeting discussing the implementation of its current expected credit loss (CECL) accounting standard. Last year, BPI published a paper that found CECL would have been highly procyclical, as it resulted in banks adding to their loan allowances (and constricting lending) when their support for the economy was most needed.
Senator Tillis Cautions of Unintended Consequences from GSIB Capital Surcharge
Senator Tom Tillis (R-NC), who sits on the Senate Banking Committee, argued in the American Banker that the GSIB surcharge may be having unintended consequences on financial markets. Tillis noted that as a member of the Banking Committee he views it as “imperative that we find out” to what extent regulations are driving recent market volatility. He also stated that issues related to the surcharge and the ability of banks to provide liquidity are areas he hopes to see greater focus moving forward.
Regulators Prepare Proposal for Custody Bank Capital Requirements
Federal bank regulators are aiming to release a proposal in the first quarter to implement a section of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, that would ease backup capital requirements specifically for three custody banks (Bank of New York Mellon, State Street and Northern Trust) but not other banks that provide custodial services, according to a report from Politico. The proposal would exclude Federal Reserve deposits from the calculation of the supplementary leverage ratio (a backup minimum capital requirement) for these banks so that they can continue to accept customer deposits during times of stress. The proposal would not address another previously issued proposal by the Fed and OCC (but not the FDIC) to change the calculation of the supplementary leverage ratio that applies to the eight globally systemic important banks.
INDUSTRY NEWS AND EVENTS
Powell Suggests the Fed Needs More Time to Act on Real Time Payments
Federal Reserve Chairman Jerome Powell signaled that the agency is not close to making a decision on whether to build a real-time payments system, reported Politico. Powell said the Fed is “very actively” working on creating a real-time payments system.
“We have some proposals out, and we’re considering them,” Powell said at a press conference on January 30. “The thing is, it’s very important in that space to consult with the full range of market participants and … consumer groups, and we’ve done that … for a period of years.”
“We don’t have plenary authority to just do things, for the most part, in the payments space,” he said.
Senate Banking Chairman Crapo Calls for Data Security Legislation
Senate Banking Committee Chairman Mike Crapo (R-ID) said in a column on January 28 that he plans to make data privacy legislation a priority in the new Congress. Crapo said in the column that he intends to explore legislation that would “give consumers more control over and enhance the protection of consumer financial data and ensure consumers are notified of breaches in a timely and consistent manner.”
New State of the Union Date is Set
President Donald Trump formally accepted House Speaker Nancy Pelosi’s invitation to deliver the State of the Union on February 5. The president’s speech was originally scheduled for January 29 but postponed due to the government shutdown. Stacey Abrams, who ran as a Democratic candidate for Georgia governor in 2018, will give the Democratic response.
Federal Reserve Schedule
On February 6, Federal Reserve Vice Chairman for Supervision Randal Quarles will give a speech at the Federal Reserve Stress Testing Conference in New York City.
On February 6, Federal Reserve Board Chairman Jerome Powell will appear at the Eccles Federal Reserve Board Building in Washington to deliver opening remarks for an event entitled, “Conversation with the Chairman: A Teacher Town Hall Meeting.”
On February 7, Federal Reserve Vice Chairman Richard Clarida will present a paper from the National Bureau of Economic Research titled, “The Global Factor in Neutral Policy Rates.”
The longest government shutdown in U.S. history ended with Congress and the president approving legislation funds the federal government until February 15, 2019.
House Passes Resolution Encouraging Financial Assistance to Furloughed Workers
On January 29, the House passed a resolution, H. Res. 77, expressing that it was the sense of Congress that financial institutions and other companies “take steps to mitigate the financial hardships faced by customers as a result of the federal government shutdown.” The nonbinding resolution said institutions should consider waiving or reducing penalty, late payments and similar fees, cease evictions and foreclosures. BPI members stand ready to help employees affected by the government shutdown.
Senate Banking Committee Chairman Outlines Committee Agenda
Senate Banking Committee Chairman Mike Crapo (R-ID) outlined his committee agenda for the 116th Congress. The areas he plans to focus include housing finance reform, data security, credit bureau reforms, innovation, regulatory oversight and access to credit.
BPI Hires Kenice Middleton as Senior V.P. of Cybersecurity Risk Management
BPI announced the hire of Kenice Middleton as Senior Vice President of Cybersecurity Risk Management. Middleton will oversee the organization’s cybersecurity portfolio and policy work, including BITS’ industry efforts in risk management and critical infrastructure resilience. Since 2014, she served as Director of Cybersecurity Risk Management for the IRS, where she led compliance, risk, and cybersecurity initiatives and provided oversight of over 140 major applications and general support systems with a team of over 200 federal employees and contractors. Middleton will start on February 25.
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 conference brings 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
Over-the-counter frictions systematically drive yield spread changes
This post investigates the power of over-the-counter frictions to explain changes in yield spreads. Intermediation in over-the-counter markets is faces three primary frictions: dealers committing capital to inventory management, investors searching for counterparties, and bargaining between counterparties. search, and bargaining. The authors use data from the corporate bond market to proxy inventory, search, and bargaining frictions, then model the relationships between these proxies and the latent common factor of yield spread changes. They find that OTC frictions explain 23% of variation in the common component, with most of that 23% explained by search and bargaining frictions.
What Caused the Post-crisis Decline in Bank Lending?
This brief explores why bank lending has failed to respond to expansionary monetary policy in the wake of the Great Recession. The authors find that not only has lending failed to recover to the level expected, but banks seem to have permanently decreased lending relative to total assets. They compare lending growth during the recovery to other economic activity and find that lending has lagged behind GDP and job growth, loan demand as surveyed by the Fed Board of Governors, and a measure of banks’ uncertainty about the future. The authors find that increasing regulation of banks in the response to Dodd-Frank and higher excess reserve holdings better explain the pace of bank lending.
Should the Central Bank Issue E-Money?
This working paper analyzes several e-money proposals and their implications for payments systems efficiency and competition among financial intermediaries. The authors find that distributed ledger technology and mobile computing have not changed the tradeoffs involved in central banks providing accounts directly to the public: central banks would still be liable for the identification of account-holders, a task they are not especially well-equipped to handle and one that would demand significant resources. However, these new technologies may have changed the tradeoffs involved in central bank provision of token-based systems, possibly allowing regulators to increase competition in the payment services market.
How Have Banks Responded to Changes in the Yield Curve?
This article examines the effects of a flattening yield curve on the banking sector. The authors focus on three flattening episodes: 1994 – 1995, 2004 – 2006, and 2015 – 2018. They find that in the earliest episode, the industry as a whole looked more like a “retail” bank than a “wholesale” bank. The industry depended heavily on core deposits and Net Interest Margins went largely unchanged. In the middle episode, the industry had become more dependent on volatile wholesale funding. Net Interest Margins decreased, incentivizing banks to shift their portfolios to riskier assets. During the most recent episode, the industry had gone back to the “retail” model. Post-crisis regulations pushed banks to reduce wholesale funding and funding from core deposits went up. Net interest margins actually increased during this episode, mitigating the incentive for banks to reallocate to riskier assets.