BPInsights: February 15, 2019

BPInsights: February 15, 2019

TOP OF THE AGENDA

BB&T and SunTrust Merger Will Not Raise Concentration of the Banking Industry

On February 7, BB&T Corp and SunTrust Bank announced a merger of equals that is expected to be completed at the end of 2019. The combined entity will become the 8th largest U.S. bank holding company, with $442 billion in total assets. This blog post examines the potential impact of the merger from a concentration perspective. In sum, the proposed BB&T and SunTrust merger will help the combined company expand its investment in technology and deliver more and better services to its customers. The proposed merger would have a minimal impact on the degree of concentration of the banking industry.
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ICBA Misstates Which Banks Assisted Furloughed Government Workers

In an op-ed in The Hill, the Independent Community Bankers of America states that community banks assisted government workers during the recent shutdown, while implying that “larger, transaction-based financial firms” did not. There must have been a news blackout at ICBA to miss all the outreach by BPI members to government workers, and by the response rate, it is clear that those workers knew something the ICBA did not. There was also a helpful resource that we provided of our member efforts that can be found by clicking here. Lastly, it leaves one wondering how community banks will compete if they are unwilling to conduct transactions.
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Regulators Warn Banks on Leveraged Loans, But Data Doesn’t Back Them Up

In an American Banker op-ed, BPI’s Francisco Covas and Bill Nelson showed that the share of leveraged loans in the SNC dataset that are troubled has actually declined and encouraged the banking agencies to report the fraction of leveraged loans held by banks and the riskiness of leveraged loans held by banks relative to nonbanks. On January 25, the federal banking agencies released their review of shared national credits — the $4.4 trillion in syndicated loans that are held by three or more regulated financial institutions. This program was created to evaluate large loans held by multiple banks. The report does not provide any statistical evidence that risks associated with leveraged loans held by banks have increased or that banks, as opposed to other holders of such loans, should be cautioned about those risks.
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INDUSTRY NEWS

Quarles Outlines Vision for Financial Stability Board

In a February 10 speech, his first as chair of the Financial Stability Board (FSB), Federal Reserve Vice Chairman Randal Quarles highlighted the need for the FSB to “turn more of its attention and energy toward the future,” calling for a rigorous, “cutting-edge” approach to assessing financial sector vulnerabilities and promising a review of post-crisis policy reforms to “maintain the important reforms in place, ensure they are working as intended, and, where possible, improve them.” Quarles also called for improvements in the FSB’s outreach and transparency to the broad range of stakeholders beyond the FSB’s membership that are affected by its financial stability policy.

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Comptroller Otting Backs CFPB’s Proposed Change to Payday Lending Rule

In a statement released on February 11, Comptroller of the Currency Joseph Otting expressed support for the Consumer Financial Protection Bureau’s February 6 proposal to amend its 2017 payday lending rule by rescinding the rule’s “mandatory underwriting” requirements for certain covered short-term and longer-term balloon payment loans, including payday and vehicle title loans. “By reestablishing a framework of rules that allow responsible lenders to compete, the market can work better for everyone,” Otting said in the statement. “When banks offer products with reasonable pricing and repayment terms, consumers benefit from other services that banks regularly provide, such as financial education and credit reporting.”

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Senate Banking Committee Requests Feedback on Data Privacy Standards

On February 13, Senate Banking, Housing and Urban Affairs Committee Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) issued a request for feedback on data privacy legislation and regulation. The senators asked stakeholders to provide feedback on the “collection, use and protection of sensitive information by financial regulators and private companies.” They focused their inquiry on credit bureaus and efforts to change the Fair Credit Reporting Act. They asked what could be done through legislation, regulation or implementing best practices to ensure customers are notified of a breach and provided adequate disclosures and given control over the use of their private consumer data. Responses will be collected until March 15 and will be made public on the committee’s website.

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BPI Submits Comment Letter to CFPB on No Action Letter/Product Sandbox Proposal

On February 11, BPI submitted a comment letter to the Consumer Financial Protection Bureau (CFPB) in response to the agency’s request for comments on its proposed No Action Letter (NAL) and Product Sandbox policy. The letter recommends four key changes to the proposal that would help improve legal certainty for institutions applying for a determination from the CFPB and would result in banks testing more innovative products and services.

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Calabria Pledges to be Guided by Congressional Statute if Confirmed to FHFA

On February 14, the Senate Banking, Housing and Urban Affairs Committee held a nomination hearing on Mark Calabria to be Federal Housing Finance Agency Director. Calabria said in written testimony that even though he has in the past had “strong opinions” and expressed “frustration” with the current state of the mortgage market, he would be guided by the statute and intent of Congress. “Despite that frustration, I want to very clearly state to this Committee, that if confirmed, my role as Director of FHFA is to carry out the clear intent of Congress, not to impose my own vision,” Calabria said in testimony. Calabria currently serves as chief economist for Vice President Mike Pence. He previously was an economist for the Cato Institute and was a Senate Banking staffer for former Senator Richard Shelby (R-AL).

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Treasury Responds to U.S. Territories’ Inclusion on EU’s AML ‘High-Risk’ List

On February 13, the European Commission (EC) issued a list of countries deemed “high-risk” under its fifth AML Directive-established criteria, which would subject those jurisdictions’ customers and financial institutions to increased due diligence in transactions with banks covered by EU AML rules. Of the 23 jurisdictions listed, 11 do not appear on the Financial Action Task Force’s (FATF, a global AML/CFT standard setting body) high-risk list, and four—American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands—are U.S. jurisdictions. Treasury released a same-day statement criticizing the discrepancies between the EC and FATF lists, rejecting the inclusion of U.S. territories and stating that it does not expect U.S. financial institutions to consider the EC’s designations in their AML programs. The list will be submitted to EU Parliament and, if approved, will take effect in 20 days after its publication in the EU Official Journal.

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Senate Confirms Barr as Attorney General

On February 14, the Senate voted 54-45 to confirm William Barr as attorney general. The vote was near party lines with Democratic Senators Doug Jones of Alabama, Krysten Sinema of Arizona and Joe Manchin of West Virginia breaking with their party and voting in favor of Barr’s nomination.

EVENTS

February 20: Exchequer Speech with FDIC Chairwoman McWilliams
Federal Deposit Insurance Corporation Chairman Jelena McWilliams will deliver a speech to the Exchequer Club on February 20 at 12:30 pm at the Mayflower Hotel in Washington, DC.

February 22: Clarida Speech on Monetary Policy
Federal Reserve Vice Chairman Richard Clarida delivers remarks on February 22 at noon on “The Federal Reserve’s Review of Monetary Policy Strategies, Tools and Communications” at the 2019 U.S. Monetary Policy Forum in New York.
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February 22: Quarles Speech on Federal Reserve Balance Sheet
Federal Reserve Vice Chairman for Supervision Randal Quarles delivers remarks on February 22 at 1:30 pm on “The Future of the Federal Reserve’s Balance Sheet” at the 2019 U.S. Monetary Policy Forum in New York.
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February 26: Senate Federal Reserve Hearing
The Senate Banking, Housing and Urban Affairs Committee will hold the semiannual the semiannual monetary policy report hearing with Federal Reserve Board Chairman Jerome Powell on February 26 at 10 am.
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February 26: Credit Bureaus Hearing
The House Financial Services Committee will hold a hearing on February 26 at 10 am on credit bureaus.
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February 27: House Federal Reserve Hearing
The House Financial Services Committee will convene the semiannual monetary policy report hearing with Federal Reserve Chairman Jerome Powell at 10 am on February 27.
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February 26: Senate Federal Reserve Hearing
The Senate Banking, Housing and Urban Affairs Committee will hold the semi-annual Humphrey-Hawkins hearing with Federal Reserve Board Chairman Jerome Powell on February 26 at 10 am.
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February 26: Credit Bureaus Hearing
The House Financial Services Committee will hold a hearing on February 26 at 10 am on credit bureaus.
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February 27: House Federal Reserve Hearing
The House Financial Services Committee will convene the semiannual Humphrey-Hawkins hearing with Federal Reserve Chairman Jerome Powell at 10 am on February 27.
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February 27: Diversity in Financial Services Hearing
The House Financial Services Diversity and Inclusion Subcommittee will hold a hearing on diversity trends in the financial services industry on February 27 at 2 pm.
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May 1: 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
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June 4: SIFMA and BPI Prudential Regulation Conference
The Securities Industry and Financial Markets Association (SIFMA) and BPI host the 6th Annual Prudential Regulation Conference on June 4 in Washington DC. This year’s conference will assess how the post-crisis prudential regulatory framework is affecting the capital markets, including market liquidity, capital formation and innovation.
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November 19-21: The Clearing House + BPI 2019 Annual Conference
The Annual Conference provides a forum for the industry’s leaders to examine the changing dynamics of the bank regulatory and payments landscapes with two and half days of high-level keynote speakers, in-depth expert panels, and networking. Register today.
The Pierre, New York
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RESEARCH RUNDOWN

Stress Testing Household Debt

This paper estimates a county-level model for the probability of default of households in order to stress test household debt. They find that forecasted delinquency rates using the current debt stocks are lower than based on debt stocks held at the onset of the Great Recession. As a result, household debt represents less of a risk to financial stability now than it was prior to the crisis. These results reflect an improvement in debt-to-income ratios, an increase in the share of debt held by low-credit-risk borrowers, and more reasonable housing valuations relative to the pre-crisis period.

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Banks as Regulated Traders

This paper finds that the introduction of the Volcker Rule in 2014 induced banks to reduce trading book exposures to equity market risk and to a lesser extent interest rate risk and credit risk. In addition, based on a counterfactual exercise the paper argues that the Volcker Rule would have caused a material reduction in trading losses under stress.

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Living at Home Ain’t Such a Drag (on Spending): Young Adults’ Spending In and Out of Their Parents’ Home

Despite income per capita levels and employment rates recovering since the Great Recession, the share of young adults living with their family has remained stubbornly high. This note examines the effect this is having on household consumption. On average, young adults who decide to move out spend $13,000 more annually than those who remain at home. The main drivers are rent, transportation and food. If those young adults were to move out, the impact on aggregate consumption is estimated to be about $40bn. The decision to stay at home could reflect reasons that are holding down spending like potential job instability or high housing costs.

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Are Disappearing Employer Pensions Contributing to Rising Wealth Inequality?

Over the past few decades there has been a significant shift from defined benefit retirement plans, such as pensions, to defined contribution plans, like 401ks. This note investigates the relationship between this change in retirement coverage and the rise in wealth inequality over the same period. The analysis shows that both the traditional defined benefit and defined contribution wealth are highly concentrated near the of the wealth distribution, thus the changes in the composition of retirement wealth cannot explain the rise in wealth inequality.

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