Top of the Agenda

The Fed Is Ignoring the Biggest Lesson of 2008? We Disagree.

BPI and the Financial Services Forum responded to a recent article by the Bloomberg Editorial Board suggesting the Federal Reserve should implement the Countercyclical Capital Buffer (CCyB), despite significant increases in capital in the past decade. Read More

What is the Optimal Level of Bank Capital?

BPI published a research note on the optimal bank capital level. U.S. banks currently hold slightly more capital than optimal. The estimates by the BIS and BoE studies put the optimal range for Tier 1 capital at about 10 to 14 percent of risk-weighted assets. The aggregate Tier 1 capital ratio of U.S. banks is about 13.5 percent; for the largest banks the figure is 13.8 percent, and both are higher than 12 percent (mid-point of the optimal range). The largest banks also have long-term debt outstanding equal to about 10 percent of risk-weighted assets for a total loss-absorbing cushion of 24 percent, above the range the IMF study reports is necessary for banks to comfortably weather a banking crisis. Read More

Chairwoman Waters Touts Financial Services Committee Agenda

House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) laid out her leadership agenda in a speech at the Center for American Progress Fund on January 16. Waters said the Committee will focus on consumer protection issues and the Consumer Financial Protection Bureau. Waters said she would keep a “watchful eye” on the financial regulators to ensure they are “holding bad actors accountable and promoting financial stability.” She said she will pay close attention to fintech firms to encourage innovation while protecting consumers. She also called for reform of the credit reporting agencies and pledged to push housing finance reform. She touted her new Subcommittee on Diversity and Inclusion as an opportunity to review the diversity efforts at financial institutions. Further, she highlighted opportunities for bipartisan work with her Republican counterparts, including long-term reauthorization and reform of the National Flood Insurance Program (NFIP), Terrorism Risk Insurance (TRIA), and the reauthorization of the Export-Import Bank. Read More

BPI EVENTS

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 Read More

BPI Holds Cybersecurity Profile Implementation Workshop

On January 16, Josh Magri of BPI and Denyette DePierro of the American Bankers Association held an implementation workshop for the Financial Services Cybersecurity Sector Profile at Morgan Stanley’s headquarters. The workshop featured use cases from various firms and allowed representatives from financial institutions the opportunity to learn more about implementation of the Profile. Ann Lavis and the HSBC teams’ work were highlighted as an example of a U.S. and international roll-out and use for regulatory examination. Participants also heard from representatives from JPMorgan Chase, Citigroup, Depository Trust and Clearing Corporation and TruSight. For more information about the Profile, please visit the below link. Read More

INDUSTRY NEWS AND EVENTS

BPI Conducts Survey of Liquidity Requirements and Banks’ Demand for Excess Reserves

A recent Federal Reserve FOMC Senior Financial Officer Survey asked banks to rate the importance of different possible determinants of the bank’s minimum desired excess reserve holdings but omitted regulatory obligations. So that the public could have a more complete picture of the factors influencing banks’ demand for excess reserves, we expanded the Fed survey with our own members to allow regulation to be rated as a potential factor in reserve demand. In particular, we asked BPI banks to rate four additional considerations that might determine their minimum desired holdings of excess reserves. The results of the BPI survey indicate that satisfying liquidity requirements is a key determinant of banks’ demand for excess reserves. Over three-quarters of the banks that indicated the Reg YY liquidity buffer requirement is applicable to them rated it as an “important” or “very important” consideration. Similarly, nearly three-quarters indicated the LCR is an “important” or “very important” consideration. Nearly half indicated that examiner expectations about the composition of liquidity buffers is an “important” or “very important” consideration. And over one-third rated resolution liquidity requirements “important” or “very important.” Read More

Supreme Court Passes on CFPB Structure Challenge

The Supreme Court declined to hear a broad challenge on the structure of the Consumer Financial Protection Bureau (CFPB). Justices rejected the appeal brought by a community bank in Texas and advocacy groups which argued that the agency structure violated constitutional separation of powers. They also argued that the CFPB’s funding system through the Federal Reserve is unconstitutional. Three pending appeals court cases remain on the CFPB. The bureau was created as part of the 2010 Dodd Frank Act. Read More

Lawmakers Request Details on Assistance to Furloughed Federal Workers, BPI Members Stand Ready to Help Employees Affected by Government Shutdown

Members of Congress including Representative Katie Porter (D-Calif.) and Senator Elizabeth Warren (D-Mass.) sent letters to financial institutions requesting information about how they are assisting furloughed federal workers during the government shutdown. BPI members understand the hardship that the shutdown is having on furloughed employees and stand ready to help. Many of our members are offering assistance through various initiatives. Read More

Congressman McHenry Asks U.S. Regulators for Brexit Impact Update

On January 15, Congressman Patrick McHenry (R-NC), Republican leader on the House Financial Services Committee, sent letters to the federal banking agencies requesting an update following this week’s vote on the Brexit withdrawal agreement. “While the potential for a prolonged or uncertain Brexit could prove challenging, a no-deal Brexit could be disruptive,” McHenry wrote. On January 15, Prime Minister Theresa May’s received a stinging defeat in Parliament over her Brexit deal to leave the European Union. Read More

House Financial Services Committee Names New Members

The House Financial Services Committee announced the addition of 16 new Democrats and five Republicans. The newly appointed Democratic members include Representatives Alma Adams of North Carolina, Cindy Axne of Iowa, Sean Casten of Illinois, Madeleine Dean of Pennsylvania, Tulsi Gabbard of Hawaii, Jesús García of Illinois, Sylvia Garcia of Texas, Al Lawson of Florida, Ben McAdams of Utah, Alexandria Ocasio-Cortez of New York, Dean Phillips of Minnesota, Katie Porter of California, Ayanna Pressley of Massachusetts, Michael San Nicolas of Guam, Rashida Tlaib of Michigan and Jennifer Wexton of Virginia. The five new GOP members assigned to the committee are Anthony Gonzalez of Ohio, John Rose of Tennessee, Bryan Steil of Wisconsin, Lance Gooden of Texas and Denver Riggleman of Virginia.

Government Shutdown Continues

The government shutdown became the longest in U.S. history on January 12, and a clear end is still not in sight. Senator Lindsey Graham (R-SC) suggested to reopen the government temporarily for three weeks to facilitate a deal with Congressional Democrats on the U.S.-Mexico border wall. In his rejection of Graham’s consideration, President Trump continued to blame Democrats and promised to build the U.S.-Mexico border wall.

Meanwhile, the effects of the partial government shutdown are rising. In a media call to discuss fourth-quarter results, JPMorgan CEO Jamie Dimon said, “Someone estimated that if it goes on for the whole quarter, it can reduce growth to zero. We just have to deal with that. It’s more of a political issue than anything else.” He continued, “eventually there will be offsets recession, we don’t know when that’s going to be.” Read More

Ways and Means Committee Requests Treasury Update on Government Shutdown

On January 16, Ways and Means Committee Chairman Richard Neal (D-MA) sent a letter to Treasury Secretary Steven Mnuchin inviting him to appear at a hearing on January 24 on the government shutdown’s impact on the Treasury Department and American taxpayers. Read More

BPI Submits Letter to OCC on Board of Directors Meeting Minutes Requirement

On January 13, BPI submitted a written response to the Office of Comptroller of the Currency’s request for feedback on the information collections mandated by the regulations that national banks must follow when conducting fiduciary activities. The letter calls for the elimination of a Part 9 requirement that any audit of fiduciary activities be included in the minutes of a board of directors meeting. The letter notes that (i) board minutes are intended to reflect board discussions rather than effectively serve as a list of mandated information (in this case audit results), and that (ii) information presented to the board – and, especially information required to be presented to the board via a legally enforceable regulation – should meet a materiality threshold. Read More

116th Congress Legislative Activity

On January 15, the House failed to pass a continuing resolution to open closed departments and agencies through February 1. The measure did not include the $5.7 billion in border wall funding sought by President Trump. Though the House and the Senate were originally scheduled to be in recess January 21-25, 2019, that will be canceled if the shutdown continues.

CFPB Releases Reports on Effectiveness on Mortgage Rules

On January 10, the Consumer Financial Protection Bureau (CFPB) published two reports assessing the effectiveness of the Mortgage Servicing Rule issued under the Real Estate Settlement Procedures Act (RESPA), as well as the Ability to Pay and Qualified Mortgage Rule (ATR/QM Rule), which amended the Truth in Lending Act (TILA). As mandated by the Dodd-Frank Act, the CFPB is required to conduct an efficacy assessment of its major rules, such as the Mortgage Servicing Rule and ATR/QM Rule. On this basis, the reports comprehensively examine the Mortgage Servicing Rule and the ATR/QM Rule, including assessing, among other items, whether the rules impacted access to credit and the cost of credit and servicing, as well as the impact on foreclosures and modifications resulting from delinquencies. Read More

BPI Joins the ABA and SIFMA in Submitting Comment Letter to NIST on Privacy Framework

On January 14, BPI, through its technology policy division known as “BITS,” along with the American Bankers Association (ABA) and the Securities Industry and Financial Markets Association (SIFMA) submitted a comment letter to the National Institute of Standards and Technology (NIST) on it request for information on the NIST Privacy Framework: An Enterprise Risk Management Tool. The letter expressed support for NIST’s effort and made recommendations that the Framework replicate the structure of the current Cybersecurity Framework, while also defining terminology and offering a series of standards that can guide the broader economy in managing privacy risk.

The letter also urged consideration of the complexities of the multiple legal and regulatory regimes that currently dictate how the financial services sector manages privacy risk and encouraged NIST to partner with other U.S. government agencies to more effectively harmonize the global regulatory environment. Read More

RESEARCH RUNDOWN

Creditor Recovery in Lehman’s Bankruptcy

This is the first in a series of four New York Federal Reserve Board (NYFRB) blog posts intended to quantify how much value was destroyed by the Lehman bankruptcy. The authors find that the long resolution process had both costs and benefits, losing creditors time and liquidity while also allowing the prices of Lehman’s assets to rise as the economy recovered. Overall, the recovery rates of Lehman’s creditors are lower than comparable historical averages. Customers of Lehman’s broker-dealer, however, fared better. The broker-dealer was resolved under the Securities Investor Protection Act rather than Chapter 11, resulting in customers recovering 100 percent of their claims. Read More

Customer and Employee Losses in Lehman’s Bankruptcy

This is the second in a series of four NYFRB blog posts on the value lost in the Lehman bankruptcy, this one focusing on losses to Lehman customers and employees. The authors find that customers of Lehman’s broker-dealer suffered only minimal losses. The legally required separation of Lehman and customer assets offered protection and most customer accounts were quickly transferred to other broker dealers. Institutional customers faced delays in resolution, however. Customers of Lehman’s UK broker-dealer fared far worse, but the effect on the hedge fund industry was limited because only 1 percent of industry assets were held by firms that relied on Lehman. Those who traded centrally cleared securities through Lehman were well-protected by their central counterparties, encouraging greater use of central clearing after the crisis. Former Lehman employees were hired by other brokers, but a substantial portion either left or were laid off by their new firms. Read More

Lehman’s Bankruptcy Expenses

This New York Federal Reserve post is the third in a series on the costs of Lehman’s resolution. It discusses the direct expenses of Lehman’s bankruptcy and SIPA proceedings, i.e. services provided by lawyers, accountants, and other professionals. The absolute cost is far larger than previous resolutions, and the relative cost is still higher than expected given the observed negative relationship between firm size and expenses. The high relative cost was driven by the length of proceedings and the complexity of claims. Read More

The ECB’s performance during the crisis: Lessons learned

This paper studies the response of financial markets to European Central Bank (ECB) policy interventions during the euro crisis. Using a value at risk (VAR) model, the authors examine the effect of a “surprise” monetary policy shock on distressed euro area government bond spreads and equity market returns. Their findings differ by intervention type. In terms of passive measures, the provision of dollar liquidity helped stabilize financial markets, as dollar shortage was a key vulnerability for euro area banks. The provision of euro liquidity, however, had limited effect. The authors conclude from the evidence that central bank interventions are most effective if they clearly signal a commitment to reinvigorating the economy and if they address the source rather than the symptom of financial stress. Read More