BPInsights: February 14, 2020

BPInsights: February 14, 2020

Top of the Agenda

Morning Consult Op-Ed: Consumer Protections and the Digital Evolution in Banking

In an op-ed published February 13 in Morning Consult, BPI SVP for Technology and Risk Strategy Heather Hogsett educated readers about the risk non-banks pose by offering financial products without being required to adhere to the same consumer protections as banks and other financial institutions. The op-ed references a recent speech by Fed Governor Lael Brainard, which noted: “that many things consumers have come to expect — deposit insurance, strong data security and privacy protections, account and transaction fee disclosures, and protections against fraudulent transactions — are lacking in many non-bank providers who face far fewer statutory and regulatory requirements and receive little, if any, oversight of their financial, business, privacy and data security practices.”

Citing serious legal loopholes exploited by BigTech and fintech companies, the op-ed explains how industrial loan company (ILC) charters are used to circumvent requirements under the Bank Holding Company Act, how some fintechs leverage “rent-a-charter” relationships to indirectly access federal deposit insurance, and how aggregators use a risky data acquisition practice known as “screen scraping” to extract and profit from consumers’ financial data. These practices are increasingly putting consumers’ financial and personal data at risk and could pose systemic risks if not addressed. Learn More >>

5 Stories Driving the Week

1. Fed Vice Chair for Supervision Quarles Suggests Supervisory Tweaks in Speech at NYU 

On February 6, the Treasury Department published its 2020 National Strategy for Combating Terrorist and Other Illicit Financing reportThe report details how the U.S. government is addressing In a February 6 speech given at New York University, Federal Reserve Vice Chair for Supervision Randal Quarles suggested possible “technical tweaks” to the Fed’s regulatory and supervisory framework, reported Politico. It was an important and interesting address on a variety of fronts. Its central focus was the role that the Federal Reserve’s supervisory regime has played in the recent repo market upset, but it also had major ramifications for the size of the Fed’s balance sheet and how it views the role of the discount window. On February 11, BPI published a blog post analyzing some of the major takeaways, which can be accessed by clicking on the “Learn More” link below. Learn More >>

2. An Overview of the Global Market Shock Component in the 2020 Stress Tests

On February 11, the Federal Reserve released the global market shock (GMS) component of the 2020 severely adverse scenario after having released the macroeconomic scenarios last week. In this year’s stress tests, 11 of the 34 participating firms must incorporate an instantaneous shock to their trading exposures and losses associated with the default of their largest counterparty. In a BPI blog published on Wednesday, we provide an analysis of the severity of this year’s GMS. Learn More >>

3. Senate Banking Committee Holds Nominations Hearing for Shelton and Waller 

On Thursday, the Senate Banking, Housing, and Urban Affairs Committee held a hearing to consider two nominees for the Federal Reserve Board of Governors, the Honorable Judy Shelton and Dr. Christopher Waller. While Dr. Waller received little attention during Q&A, Republicans and Democrats consistently asked Ms. Shelton about her written record related to her views on monetary policy and the Fed’s independence from political pressure. There were bipartisan concerns about Ms. Shelton’s past support of returning to the gold standard and devaluing the U.S. dollar relative to other currencies in response to interest rate cuts by other central banks. After the hearing, Republican Senators Toomey, Shelby and Kennedy told the press they were undecided as to how they would vote. Learn More >>

4. Federal Reserve Board of Governors Chairman Powell Testifies Before House and Senate

Federal Reserve Board of Governors Chairman Jerome Powell testified before the House and Senate this week to give The Semiannual Monetary Policy Report. In his testimony, Powell remarked on the importance of fiscal policy to support the economy, should it weaken, given the current low-interest-rate environment. During the question and answer period of the hearings, Powell was pressed on several policy items. Notably, Powell was asked about his support for the changes to supervision proposed by Vice Chair Quarles. Powell remarked to Congressman Luetkemeyer (R-MO) that “we do understand that guidance is not a rule.” And during an exchange with Senator Rounds (R-SD) regarding changes to supervision, he noted that “these were ideas. They’re not quite at the stage of being proposals yet, but we’re going to be looking at those.” He then added that “[s]ome of it’ll be rulemaking. Some of it will be guidance. Some of it will be changes to guidance.”

Also of particular importance, he was asked about the Federal Reserve’s involvement in the OCC’s CRA reform efforts. Chairwoman Waters (D-CA) was the first to press Powell on the issue of CRA. Powell’s response to her, and consistently during the hearings, was that the Fed is looking forward to reviewing the comments on the OCC proposal, but has not made a decision about its own proposal.

With regard to real-time payments and the Fed’s proposed FedNow system, Senator Toomey (R-PA) inquired about pricing for FedNow services and whether it would be interoperable with The Clearing House’s RTP system. Powell’s reply was that “full interoperability is the goal” noting however that it would be challenging to achieve. Powell also clarified that the Fed had not made a commitment to flat pricing and questioned whether flat pricing was something “the banks who really wanted us to do this are looking for.” Learn More >>

5. Money Markets Show Relief As Fed Hints At Bank Capital Tweak 

In “Money Markets Show Relief As Fed Hints At Bank Capital Tweak,” Bloomberg News observed that the FRA/OIS spread narrowed in response to Vice Chair Quarles’s speech last week. Vice Chair Quarles indicated that the Fed was considering allowing banks to assume greater access to the discount window in their liquidity contingency plans and that the Fed was considering basing the GSIB surcharge entirely on annual averages rather than on some year-end bank characteristics. The FRA/OIS spread measures market participants’ expectations about the future spread between 3-month Libor and the overnight fed funds rate. Both potential changes could help account for the narrowing. As we noted all the way back in September 2016 (see here (p.3)), term-money market spreads should narrow if it becomes less costly for banks to comply with liquidity requirements. Moreover, the spread Bloomberg News cites spans year-end, so it would narrow if market participants anticipate lower year-end premiums in term rates. Learn More >>

In Case You Missed It

Varo Money Sets a Good Example for Fintechs

Varo Money is set to become the first digital-only bank to receive a de novo national bank charter following the FDIC’s approval issued on February 7. The company is still required to obtain approval from the OCC and the Federal Reserve. With a national bank charter, Varo Money will be permitted to access the payment system, accept insured deposits and begin offering loans and financial products in all 50 states and, unlike BigTech’s and fintech’s exploiting the ILC loophole, will be subject to the federal Bank Holding Company Act and related regulations designed to protect the banking system from systemic risks.

House Financial Services Subcommittee Holds Hearing on Diversity and Inclusion at America’s Large Banks

On February 12, the House Financial Services Subcommittee on Diversity and Inclusion held a hearing titled “A Review of Diversity and Inclusion at America’s Large Banks.” The hearing followed the release of a committee report that surveyed the nation’s largest banks and savings and loan companies regarding diversity and inclusion statistics and policies and procedures that they have put in place to promote more diversity and inclusion. Responding to the report, BPI’s Head of Public Affairs Kate Childress stated:

The report on diversity and inclusion published by House Financial Services Committee Chairwoman Waters and Subcommittee Chair Beatty focuses on societal issues that need more attention, not only within the banking industry but across all of corporate America. As the report notes, all of the banks surveyed acknowledge that diversity and inclusion needs to improve, and they are committed to bringing about the necessary changes. The banking industry is well-positioned to take a leading role in addressing diversity and inclusion in a meaningful way.

House Financial Service Committee Task Force Holds Hearing on Artificial Intelligence

On February 12, the House Financial Services Committee’s Task Force on Artificial Intelligence held a hearing titled “Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services.” Members engaged the panel in a technical conversation about methods being employed by machine learning experts to mitigate the impacts of bias in the use and deployment of AI tools. Members on both sides of the aisle acknowledged that there were important tradeoffs between the accuracy of AI models and the fairness of the outcomes they inform. Various tactics to address bias in AI were explored, including auditing and validating models, maintaining human oversight in the development and use of models, maintaining diverse legal and engineering teams and innovating algorithm designs to better isolate biased model components. BPI submitted a letter for the record, which highlighted the promise AI holds for improving fairness for decisions regarding consumer credit. In September, BPI and Covington & Burling LLP published a white paper providing analysis of the relevant legal and policy issues related to the development and deployment of AI and machine learning in the financial services industry.

Wells Fargo Reports 1.5 Billion API Requests as Banks Enhance Data Security 

As the number of fintech providers grows and the availability of product offerings expand, many banks are enhancing their data security protocols and requiring third-party providers to use secure API connections when accessing consumer data. According to a report in the American Banker, Wells Fargo received 1.5 billion requests in 2019 from 15 active partnerships with fintechs, while Citi reported 157 million. APIs offer numerous advantages over screen scraping, but most notably, they permit an institution to better protect the type and amount of data shared with third parties, and API requests do not require the customer to share their login information. The data acquired through these relationships are used to offer consumer-facing products such as personal budgeting apps (e.g., Mint and Personal Capital), tax services, and business uses like treasury or payment services. In addition to the efforts of individual firms through contract agreement, initiatives like the Financial Data Exchange are working to establish best practices and global standards for secure data sharing.

Intelligence Community to Share More With Private Sector 

The Office of the Director of National Intelligence (ODNI) on Monday released its updated National Counterintelligence Strategy. The strategy will take a “whole of society” approach to encourage better public-private collaboration in protecting the nation from cyber threats. It marks a significant expansion in the federal government’s current counterintelligence mission and comes in response to what the intelligence community describes as increasingly sophisticated intelligence capabilities being deployed by threat actors. The strategy’s five pillars are: protect the nation’s critical infrastructure, reduce threats to key U.S. supply chains, counter the exploitation of the U.S. economy, defend American democracy against foreign influence, and counter foreign intelligence cyber and technical operations.

In his announcement of the new strategy, National Counterintelligence and Security Center Director William Evanina stressed the need to provide actionable information to private firms so they can improve their defenses in a rapidly changing threat landscape. The strategy echoes statements from the Cybersecurity and Infrastructure Security Agency and the National Security Agency, both of which have pledged to share more information with private industry. You can read the full National Counterintelligence Strategy by clicking here.


  • 02/11/2020 – The House Committee on Financial Services will convene for a hearing titled “Monetary Policy and the State of the Economy.”
  • 02/18/2020 – FDIC Webinar: “New Standardized Approach for Calculating the Exposure Amount of Derivative Contracts”
  • 02/19/2020 – FOMC minutes released from January 28-29 meeting
  • 02/21/2020 – “Monetary Policy for the Next Recession” featuring Governor Lael Brainard, U.S. Monetary Policy Forum, New York, New York
  • 02/21/2020 – “Financial Markets and Monetary Policy: Is There a Hall of Mirrors Problem?” featuring Vice Chair Richard Clarida, U.S. Monetary Policy Forum, New York, New York
  • 02/26/2020 – The House Committee on Financial Services will hold a hearing titled “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps (Part 2)”
  • 03/10/2020 – “Evolutions in Consumer Debt Relief” hosted by the CFPB
  • 03/11/2020 – Women in Housing & Finance hosts the general counsels of the federal banking agencies

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