BPInsights: February 21, 2020 - Bank Policy Institute

Top of the Agenda

New Blog Post: Reserve Requirements Should – and Must – Be Set to Zero

In a blog post published this week, BPI CEO Greg Baer and Chief Economist Bill Nelson note that the Fed concluded more than a decade ago that nonzero reserve requirements serve no monetary policy purpose in the policy implementation framework that the Fed is currently using and therefore the Fed should – and legally must — set reserve requirements to zero. The two explain that by setting reserve requirements to zero, the Fed could come into compliance with two laws, reduce the risk of further money market turmoil, reduce the amount it needs to blow up its balance sheet, increase the supply of credit to Main Street and eliminate the incentive it is creating for banks to engage in inefficient behavior that edges up liquidity risk. All those benefits are attainable at no cost. Learn More >>

5 Stories Driving the Week

1. Fidelity and the Clearing House Spin-off Akoya to Enhance Data Security and Give Consumers Greater Control

On February 20, FMR LLC—the parent company of Fidelity Investments—announced that Akoya would become an independent entity jointly owned by Fidelity Investments, The Clearing House and 11 banks. Akoya is an application programming-interface based (API) network that was developed by Fidelity in 2019 to provide consumers a safe way to transfer their financial data to third parties. Akoya gives consumers the ability to continue taking advantage of their favorite financial applications and products, without being required to sacrifice security by supplying login information to services that rely on unsafe practices such as screen scraping to collect account information. The relationship will enable banks to enhance protections for more sensitive account data, provide consumers greater transparency and control over the sharing of their information and would adhere to best practices established by the Financial Data Exchange. Learn More >>

2. Fed’s Control Framework Could Enable Activist Investors to Circumvent Regulatory Supervision

On February 18, the American Banker published an article highlighting some of the potential effects of the Fed’s recent rule on control and divestiture proceedings. As noted in the article, consistent with the statutory framework, the final rule allows non-bank investors to potentially accumulate a stake of up to 24.99% in a bank, without having to file for bank holding company status. While the rule helps to clarify and provide consistency in the Fed’s control framework, the article suggests that it may also open the door to activist investors, especially in smaller banks. Compared to the current approach, these investors could potentially accumulate more leverage over bank management and their boards following the April 1 effective date of the rule. The article also notes that the framework should provide clearer rules of the road for fintech partnerships with banks. Learn More >>

3. Treasury Provides Readout of Recent EU-US Financial Regulatory Forum

The U.S. – E.U. Financial Regulatory Forum was hosted on February 11-12 and featured the top regulators from each jurisdiction. On February 19, the U.S. Department of Treasury published a readout of the Forum, providing details about the five key themes that were discussed: supervision of cross-border activities, monitoring financial asset classes and reference rates, implementing international banking and insurance standards, fintech and digital finance, and E.U. regulations related to sustainable finance. These forums are held on a biannual rotation, with the goal of continuing to foster strong relationships between U.S. regulators and their E.U. counterparts. The next Forum will be held in Brussels in summer of 2020. To access the readout, click on the “learn more” link below. Learn More >>

4. Research Paper Finds CECL Models are Unable to Raise Reserves Well-in Advance of the Start of an Economic Downturn

On February 19, Risk Magazine reported on a research paper forthcoming in the Journal of Credit Risk that backtested six widely used CECL models for mortgage loans over the 2007-2009 crisis. The paper finds that less sophisticated models were only able to generate accurate levels of allowances for loan losses during the crisis in 2008. Although the more sophisticated models predicted a rise in allowances before 2008, they had to rely on post-crisis data to better estimate the sensitivity of loan losses to changes in economic conditions. These results support BPI’s prior views that CECL will make loan loss allowances very volatile and procyclical at the onset of an economic downturn. Learn More >>

5. FDIC and OCC Issue 30-Day Extension to CRA Comment Period

On February 19, the FDIC and the OCC released a joint statement announcing a 30-day extension to the public comment period for proposed changes to the Community Reinvestment Act. The initial deadline for comment was March 9, 2020; however, the extension will now permit comments submitted by April 8, 2020. Learn More >>

In Case You Missed It

LendingClub to Acquire Radius Bank

On February 18, LendingClub, one of the largest fintech providers of personal loans, announced a $185 million acquisition of Boston-based digital bank Radius Bancorp. Radius Bancorp is a savings and loan holding company regulated by the Federal Reserve; its subsidiary, Radius Bank, is an insured federal thrift regulated by the OCC. In the release announcing the acquisition plan, LendingClub indicated the deal has many benefits, including diversified earnings, enhanced resiliency, additional product offerings and operational efficiency. The deal, if approved, would see LendingClub convert to a regulated savings and loan holding company. This announcement comes just a week after the FDIC approved deposit insurance for Varo Money’s de novo national bank. By seeking federal charters for insured banks, Varo and LendingClub are opting to become fully-regulated banking organizations. This approach stands in contrast to tech and fintech firms like Rakuten and Square that are seeking to enter banking through ILC or industrial bank charters, which allows the parent companies to avoid prudential regulation and supervision mandated by federal law.

Study Shows Economies of Scale Matter for Larger Community Banks

Size matters; that’s according to a 2019 report that compares measures of performance between small and large-size community banks. The research demonstrates four main findings: larger banks achieve better financial performance by taking advantage of valuable investment opportunities more efficiently, average operating costs decrease with size, larger banks have a greater incentive to increase lending to small businesses and larger banks are capable of absorbing higher risks and can lend more efficiently.

Events

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 – CFPB is hosting a symposium on Consumer Access to Financial Records and Section 1033 of the Dodd-Frank Act
03/10/2020 – CFPB hosts “Evolutions in Consumer Debt Relief”
03/11/2020 – Women in Housing & Finance hosts the general counsels of the federal banking agencies
03/18/2020 – Business Roundtable hosts CEO Innovation Summit
06/18/2020 – BPI and SIFMA host 2020 Prudential Regulation Conference

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