Top of the Agenda
Federal Reserve Proposes Changes to Stress Test Framework
The Federal Reserve proposed changes on January 8 to its internal stress testing framework. Consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), the proposal would raise the asset threshold for company-run stress tests from $100 billion to $250 billion, remove the “adverse” scenario from stress tests, and would change the frequency of the stress tests from annual to biennial. State member banks that are subsidiaries of U.S. globally systemically important banks (GSIBs) or bank holding companies that have at least $700 billion in total assets or cross-jurisdictional activity of at least $75 billion would still be required to conduct a stress test on an annual basis. Read More
CCAR: What Should the Fed Be Thinking About?
The Fed is likely to release the scenarios that it will use in the 2019 stress tests at the end of this month. Last year we published a blog post (“A Transparent Method for Judging the Severity of Macroeconomic Stress Scenarios,” Covas and Nelson, August 17, 2018) and a research note (“A Proposal to Improve the Transparency of Stress Scenarios,” Covas, November 13, 2018) that describe a simple way the Fed can measure the severity of a stress scenario.
Accurate measurement of the stress-test scenario severity is important because the stress scenario is a key determinant of the overall stringency of a stress test and therefore an important determinant of banks’ capital requirements. We suggested that the Fed calibrate its stress test scenario so that it is roughly as severe as the 2007-2009 financial crisis, which was the most severe recession the U.S. has experienced since World War II. While we still think calibrating to the crisis is a good idea, today we are merely expressing a hope that the Fed is measuring and considering the stressfulness of the scenario that it proposes. Read More
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 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
Powell Warns of Economic Impact of Prolonged Shutdown
Federal Reserve Chairman Jerome Powell said on January 10 that a prolonged government shutdown would hurt the U.S. economy, according to a CNBC report. “Government shutdowns don’t last very long. They typically have not left much of a mark on the economy, which isn’t to say there’s plenty of personal harship that people undergo,” Powell said at an event hosted by the Economic Club of Washington, D.C. According to CNBC, Powell said the central bank would be hampered by a prolonged shutdown due to a lack of data to formulate its economic outlook. “A longer shutdown is something we haven’t had,” he added. “If we have an extended shutdown, I do think that would show up in the data pretty clearly.” Read More
BPI Submits Recommendations to FASB on Proposed Accounting Standards Updates
On January 8, BPI submitted a comment letter to the Financial Accounting Standards Board (FASB) on its proposed changes and clarifications to three current GAAP accounting standards – financial instruments, derivatives and hedging, and current expected credit loss (CECL) standard. Of note, the letter argues that the FASB should either eliminate the suggestion in the proposal that held-to-maturity debt instruments are nonmonetary balance sheet items or else issue a separate proposal on that issue. Additionally, the letter holds that accounting changes made as of the CECL adoption date regarding the allowance for interest receivables and/or relating to nonaccrual policies should be recorded as an adjustment to shareholder’s equity rather than the income statement. Read More
Government Shutdown Continues
The partial government shutdown entered its third week. If it lasts through the weekend it will become the longest government shutdown in U.S. history. President Trump addressed the nation on January 8, calling on Democrats to fund his proposed border wall. House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer responded, calling on President Trump to reopen the government and continue a discussion on border security. President Trump walked out of an afternoon meeting with both Pelosi and Schumer on January 9 following a morning meeting with Senate leadership. Many federal employees will miss a paycheck on January 10 due to the shutdown.
Rep. Maxine Waters (CA-43), chairwoman of the House Financial Services Committee, stated in a press release that “the Trump shutdown is jeopardizing the integrity of our financial markets and the hard-earned savings of millions of Americans.” The shutdown leaves the financial services agencies unable to do their job and the American people to suffer, according to Waters. The Securities and Exchange Commission is among the agencies affected by the shutdown. Read More
Preparing for a Cyber Crisis: Critical Steps to Protect Your Firm
The cyber threat landscape is rapidly evolving, and increasingly rising to the top of the agenda for those responsible for leading America’s financial institutions and for regulators tasked with overseeing the industry. New regulatory requirements at the federal, state and global levels have made cybersecurity risk management even more challenging. Preparing ahead of time for such an incident can make all the difference in customer experience and public confidence. BITS, the technology policy division of the Bank Policy Institute, recently hosted a cybersecurity discussion with CEOs and directors. Chris Feeney, president of BITS, recently sat down with Hannah Stott-Bumsted, a partner at the leading advisory firm Brunswick Group and featured panelist at the event, to discuss best practices and opportunities for financial firms to better prepare for a cyber crisis. Read More
116th Congress Legislative Votes
The House considered four funding bills this week. On January 9, the House voted 240-188 to pass FY19 Financial Services and General Government funding. The legislation would fund the Treasury Department, IRS, White House, and federal judiciary, among other agencies and grants a 1.9 percent pay raise for federal civilian employees. On July 10, the House voted 244-180 on a standalone spending measure to provide funding for the Departments of Transportation, Housing and Urban Development, and other agencies. The Senate will not vote on any measure unless they are confident President Trump will sign it into law, according to Majority Leader Mitch McConnell. The White House confirmed President Trump will veto the bills unless there is an agreement on border security.
Upcoming Congressional Schedule
On January 15, the Senate Judiciary Committee will hold a hearing on the nomination of the Honorable William Pelham Barr to be Attorney General.
The House is scheduled to remain in session through January 17 and the Senate remains in session through January 18. There is a break in both chambers from January 21 through 25 but this may change depending on budget funding. We will monitor to for any changes given the partial shutdown.
White House Nominates Calabria as FHFA Director
On January 3, President Trump officially nominated Mark Calabria as the next director of the Federal Housing Finance Agency. Calabria currently serves as chief economist for Vice President Pence. He’s a former Republican aide on the Senate Banking Committee. Calabria has previously advocated for shrinking the footprint of the government-sponsored enterprises. Until the Senate confirms Calabria, Comptroller of the Currency Joseph Otting will serve as acting director of the agency. Read More
Coming to Terms with Operational Risk
This post discusses the increasing recognition of operational risk, which includes among other things fraud, natural disasters, and cyberattacks. A series of rogue trading incidents in the 1990s brought operational risk to the attention of regulators. By the early 2000s, it was assessed to be larger than market risk and, as of December 2017, accounts for 28 percent of regulatory capital at institutions subject to the Advanced Capital Adequacy Framework. Recent literature has shown that operational risk increases with the size and complexity of a bank. Read More
Did Negative Interest Rates Improve Bank Lending?
Since 2012, several central banks have implemented negative interest rate policies (NIPR). One of the goals of NIPR has been to support economic growth by increasing both the supply and demand for bank loans. This paper investigates whether NIPRs have succeeded in this goal. The authors find that, contrary to what policymakers intended, bank lending was weaker in countries that introduced negative interest rates. The adverse effect was stronger for small banks, as well as banks that depended more on retail deposits, were less well-capitalized, were more reliant on interest income, and faced more competitive markets. Read More
Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates
A decline in the natural interest rate has been observed over the last few decades, implying that central banks will now be constrained by the lower bound on nominal interest rates. This will make it more difficult to mitigate negative shocks and anchor inflation expectations too low. This paper analyzes the effects of alternative monetary policy approaches under the conditions of a low natural interest rate and a lower bound on the nominal rate. The authors find that the alternative policies studied work by raising the inflation rate above the target rate when policy is unconstrained, countering the economic effects of the lower bound. Read More
Proceeding with Caution – A Survey on Central Bank Digital Currency
This paper draws on a recent survey of central banks to summarize their current work on central bank digital currencies (CBDC), the motivation for that work, and the likelihood of an issuance of CBDC. The authors find that 70 percent of central banks are researching CBDCs, but that their research is largely conceptual. Some central banks are running pilot projects, though most of these are strictly investigative. A small number of central banks with idiosyncratic circumstances intend to issue CBDC in the short or medium term. Read More