BPInsights: January 04, 2019

BPInsights: January 04, 2019

Top of the Agenda

Flawed Senior Financial Officer Survey

The Federal Open Market Committee (FOMC) is currently allowing its massive portfolio of securities acquired in the crisis to runoff gradually. A question important for both public policy and for financial markets is “When will the runoff end?” Unfortunately, the Federal Reserve Board appears willing to monkey with a critical input to that decision in order to avoid an uncomfortable truth about the impact of liquidity requirements.

The Fed has financed its holdings with the deposits of banks, also known as “reserves.” As a result, when the securities decline, reserves also decline. Reserve balances that exceed the amount banks are required to hold are called “excess reserves” and excess reserves are an important source of liquidity for banks.

As explained in a recent BPI research note (available here) if the Fed wants to keep conducting monetary policy essentially as it has done since the crisis, it will have to stop the runoff when the market for excess reserves gets tight. Read More

BPI Chief Economist Bill Nelson Appeared on CNBC to Discuss the Fed’s Balance Sheet

Bill Nelson, Chief Economist at the Bank Policy Institute, appeared on CNBC’s New Year’s Eve edition of “Squawk Box.” Bill argued that the declining Fed balance sheet was not a cause of stock market volatility. Bill pointed out that asset prices respond to news, but the FOMC has been running down its balance sheet for 1 ½ years and is following exactly the gradual path it announced in advance. At most, the runoff is putting a small amount of upward pressure on longer-term rates. In fact, if there has been news it is that the portfolio rundown might end up being less than expected, not more than expected, because some signs of tightness in the market for excess reserves are already materializing, Bill said. Lastly, Bill pointed out that the recent financial stability reports by the Federal Reserve, Treasury, Office of Financial Research, and International Monetary Fund all described equity price valuations as stretched, and stretched valuations combined with a less certain economic and interest rate outlook was more than sufficient to explain equity market volatility. And for a discussion of how the Fed ended up with such a large balance sheet and where it is headed, go hereRead More

BPI Chief Economist Bill Nelson Proposes One Liquidity Regulation to Rule Them All

On January 3, Bill Nelson, Chief Economist at the Bank Policy Institute, published a blog post titled, “One Liquidity Regulation to Rule Them All,” that describes how the Liquidity Coverage Ratio (LCR) requirement and Net Stable Funding Ratio (NSFR) requirement could be replaced with a single requirement. The Basel III regulatory framework includes two quantitative liquidity requirements. The Liquidity Coverage Ratio (LCR) requires banks to hold sufficient high-quality liquid assets to meet a 30-day episode of systemic and idiosyncratic liquidity stress. The Net Stable Funding Ratio (NSFR) was originally designed to ensure that banks have sufficient liquidity to meet a one-year period of liquidity stress that is less severe than the stress assumed in the LCR. The combined requirement would do a better job avoiding cliff effects, but to implement it, it would be necessary to iron out the current inconsistencies between the two regulations, which would be a good thing. Read More

BPI’s Josh Magri Discusses Cyber Risk and Regulation on CyberWire Podcast

On December 21, Josh Magri, Senior Vice President and Counsel for Regulation & Developing Technology at the Bank Policy Institute, was featured on the CyberWire podcast to discuss how financial institutions conduct cybersecurity in a heavily regulated global financial environment, while protecting their employees and their customers. Josh noted financial institutions have multiple federal and state regulators, with overlapping requirements, creating a complex regulatory environment that diverts institutions’ resources away from cybersecurity towards compliance. Josh touted the recently released Financial Services Sector Cybersecurity Profile. Read More

Banks Should Not Be Compelled to Produce Privileged Information

Following up on an influential memo published by seven leading law firms in May of last year, H. Rodgin Cohen, senior chairman of Sullivan & Cromwell LLP, and Stephen Cutler, a partner of Simpson Thacher & Bartlett LLP, penned an op-ed in Law360 this week reiterating the memos finding that the attorney-client privilege is valid when asserted in the bank examination or enforcement context. In their op-ed Cohen and Cutler argue that, “[b]anks depend on the sound and well-informed counsel of their attorneys to comply with the complexities of the banking laws. We all should want those consultations to take place and to be robust — in furtherance of the long-term safety and soundness of those institutions, the banking system as a whole, and the public. That will be threatened, however, if regulators do not recognize what the law has long recognized — the importance, indeed the necessity, of the attorney-client privilege.” Read More

BPI Events


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. Read More

Industry News and Events

OCC Releases Recovery Planning Requirements for Large Banks

On December 27, the Office of Comptroller of the Currency (OCC) finalized its revised guidelines setting forth large national bank recovery planning requirements. The final guidelines, adopted largely as proposed, establish a bright-line threshold of $250 billion for the guidelines’ application, and confirm that the OCC will not use horizontal reviews for resolution planning purposes. The guidance states that the recovery planning cycle will remain annual. It also grants relief for banks under the $250 billion threshold from completing 2018 recovery plans and preparing 2019 plans, citing the guidelines’ January 28 effective date. Read More

Government Shutdown Continues, New Congress Convenes

The 116th Congress convened its 1st Session, January 3rd, amid a partial government shutdown. On the opening day of the session, the House passed H.R. 21, making appropriations for the fiscal year ending September 30, 2019, and H.J. Res. 1, making further continuing appropriations for the Department of Homeland Security for fiscal year 2019, to reopen the government. In response, the Trump Administration issued a Statement of Administration Policy opposing passage of both bills and noted that, “If either H.R. 21 or H.J. Res 1 were presented to the President, his advisors would recommend that he veto the bill.” The Senate is unlikely to consider a funding bill until an agreement is reached on legislation that the President will support. Congressional Leaders will attend another meeting at the White House on January 4 to discuss a path forward, but neither side has publicly softened on the border wall issue that is at the center of the debate.

On January 3, House Members elected the Honorable Nancy Pelosi Speaker of the House, a position she will hold for the second time. The Honorable Kevin McCarthy will be the Republican Leader. One hundred new House Members will be seated this Congress and the House Democrats will hold a 235-199 majority, with one seat in North Carolina currently vacant. In the Senate, eight new members were sworn in and Republicans will expand their majority from 51-49 to 53-47. Leader McConnell will remain Majority Leader and Leader Schumer will remain Democratic Leader.

Congress will solidify outstanding organizational items in the coming weeks, including Committee assignments. For now, we expect Republican Senators Martha McSally (R-AZ) and Kevin Cramer (R-ND) and Democratic Senators Tina Smith (D-MN) and Kyrsten Sinema (D-AZ) to join the Banking, Housing and Urban Affairs Committee. Both the House and Senate are in session next week.

CFPB Issues Mortgage Loan Data Disclosure Policy Guidance

On December 21, the Consumer Financial Protection Bureau (CFPB) issued final policy guidance related to the public disclosure of loan-level data collected under the amended Home Mortgage Disclosure Act (HMDA) requirements. In the final policy guidance, the CFPB acknowledges the privacy risks inherent in the public disclosure of HMDA data and provides for certain modifications directed to protect consumer privacy. These modifications include (i) the omission of certain information—like property address and applicants’ credit scores—from public disclosure, (ii) the disclosure of certain quantitative information, such as applicant age and loan amount, in a range format rather than as precise values, and (iii) the exclusion of free-form text fields, such as for applicant ethnicity, race or reasons for denial. Read More

Global Regulatory Regime Reforms Contributes to Slowdown in Global Trade

Tariffs and global trade wars were frequent topics in 2018, but bank regulation could be doing more to suppress global trade than tariffs. Cross-border bank debt continues to drop post-financial crisis. According to a recent Wall Street Journal article, the total amount of cross-border bank debt has dropped from a peak of $35.453 trillion in the first quarter of 2008 to $29.456 trillion in the second quarter of this year, a fall of nearly 17%. Kristin Forbes, professor of economics at the Massachusetts Institute of Technology and former Bank of England policy maker, told the WSJ that her research indicates that increased regulation, like higher capital requirements, and policy programs designed to encourage domestic loans helped to discourage overseas lending. BPI also has found that global bank post-crisis regulatory regimes are quietly instituting a tariff regime of their own, which should raise concerns. Read More

Checkless Banking Appealing to Wider Audience

On January 4, The Wall Street Journal published an article on the broad appeal of no-frills bank accounts developed for low-income customers. “The accounts, known as checkless bank accounts or safe-transaction accounts, include ATM access, debit cards and mobile banking for small fees and minimum deposit requirements.” The WSJ reported that banks say the accounts have appealed to a “broader base of consumers, particularly young people who don’t use checks and cost-conscious customers who want to avoid incurring overdraft fees.” Read More

House Democrats to Push for More Diversity in Corporate Ranks

“California Democrat Maxine Waters, the first woman and first African-American to chair the House Financial Services Committee, is planning to use her new power to push for more women and minorities in the top ranks of corporate America,” Politico reports. “Waters has proposed creating a subcommittee focused on diversity and inclusion. Senior members of her committee are preparing to introduce bills to force companies to disclose the gender and racial makeup of their boards. That’s just one example of how Democrats taking charge of the House are expected to bring new pressure on companies from Wall Street to Silicon Valley to diversify their leadership.” Read More

The Peril — And Promise — Of Quantum Computing

“Quantum computing may seem like a distant concern for bankers more focused on lending margins and economic conditions, but in the not-too-distant future it could fundamentally transform bank security,” the American Banker reports. “A quantum computer is not an app or a program, but a way of computing information that is fundamentally different than it is for every computer that has ever existed — from the ENIAC to the phone in your pocket.” The Bank Policy Institute recently launched a Quantum Risk Calculator to help organizations better understand if, and when, action needs to be taken to minimize risk to data and prepare for a Post-Quantum Computing (PQC) world. Read More

Research Rundown

How the Largest Bank Holding Companies Grew: Organic Growth or Acquisitions?

This post analyzes the growth of large banks since 1990. The authors decompose the growth of total assets into organic growth and growth attributable to mergers and acquisitions, finding that mergers and acquisitions account for the majority of asset growth at almost all large banks. This growth occurred primarily before 2007-2009 financial crisis, with relatively little mergers and acquisitions activity happening since. Read More

Global Banks and Systemic Debt Crises

This paper analyzes the role of global banks in systemic debt crises. Global banks hold a large portion of the external debt of emerging market economies and this debt constitutes a significant share of global banks’ total assets. Banks highly exposed to emerging market debt amplify the systemic shocks that originate in emerging markets, while banks with a low exposure to emerging market debt transmit shocks from other risky assets in developed economies to debt markets in emerging markets. Read More

Short Takes on Monetary Policy Strategy: An Introduction to Some Basic Concepts

This paper aims to provide a clear discussion of monetary policy strategy. It covers a series of short notes on a set of related issues including the trade-offs the Federal Reserve faces when making their monetary policy decisions and the impact of the economic environment and uncertainty about the state of the economy on optimal monetary policy. Read More

Systemic Risk and the Great Depression

This paper examines systemic risk before and after the Great Depression, using both credit risk of individual banks and each bank’s position in the interbank network. Based on data on linkages between banks from 1929 to 1934, the paper estimates the effect of the failure of 9,000 banks during the Great Depression. Results indicate that systemic risk was evenly distributed in 1929, but the banking crisis of 1930 – 1933 increased systemic risk per bank and increased the riskiness of the largest banks. Read More