BPInsights: January 25, 2019

BPInsights: January 25, 2019

Top of the Agenda

CECL and Stress Tests: A Dangerous Mix

Last year, BPI published a paper that analyzed the impact of the “current expected credit loss” (CECL) methodology for accounting for loan losses on banks’ regulatory capital ratios during the 2007-09 financial crisis, had it been in place during that time. The paper found that CECL would have been highly procyclical, as it resulted in banks adding to their loan allowances (and constricting lending) when their support for the economy was the most needed. In short, CECL is procyclical when incorporated into non-stressed capital requirements because of the rapid shift in expectations about the deteriorating state of the economy at the onset of an economic downturn. A similar mechanism is at play in the stress tests because of the sudden change from banks’ own baseline scenarios at the beginning of the planning horizon to the Federal Reserve’s severely adverse scenario. As shown in this blog post, banks’ stressed capital requirements would have increased by a significant amount had the Federal Reserve incorporated CECL in the 2018 Comprehensive Capital Analysis and Review (CCAR) and assumed perfect foresight. Read More

Bank Policy Institute Files Comment Letter on Proposed Tailoring of Capital, Stress Testing and Liquidity Requirements

In a January 22 comment letter to the federal banking regulators, BPI responded to the agencies’ proposal to tailor stress-testing and liquidity requirements, as well as to a related Federal Reserve proposal that would change enhanced prudential standards for large bank holding companies and savings and loan holding companies. BPI recommended that similar tailoring reforms be applied to foreign banking organizations based on the characteristics of their intermediate holding companies. With the recognition that large banks are safer and more resilient than they have been in decades, the letter also recommends regulators significantly increase the dollar threshold for the risk-based indicator of cross-jurisdictional activity, citing results from a quantitative study released January 22 by BPI that found the proposed threshold was significantly too low. Read More

Big U.S. Banks Are Letting Stress Tests Make Decisions for Them

According to a recent Deloitte survey, global banks are even more reliant on regulatory stress tests. Bloomberg reported that 78 percent of global banks now use the tests to “assess concentrations and set limits internally,” up from 67 percent in 2012. Deloitte also found that 87 percent of respondents said they uses the capital tests for “strategy and business planning, up from 68 percent seven years ago.” Read More

BPI Responds to the FDIC’s Request for Information on Small Dollar Lending

On January 22, the Bank Policy Institute submitted a comment letter to the Federal Deposit Insurance Corporation (FDIC) on its request for information seeking input regarding small-dollar credit products. To encourage and enable more banks to provide small-dollar credit products, BPI’s letter suggests that any proposed guidance by the FDIC should consider streamlining its supervisory expectations for banks offering such products and engaging in regulatory coordination with other agencies to ensure a consistent regulatory framework for banks that operate in the market. “Given the importance of these loans and banks’ extensive experience in offering and underwriting them, it is important that the FDIC continue to work with the banking industry to encourage these types of products and services,” said Naeha Prakash Senior Vice President and Associate General Counsel for Consumer Regulatory Affairs at BPI. Read More


Lawmakers Call for Assistance for Furloughed Workers

With the government shutdown continuing without an end in sight, on January 24 Senator Elizabeth Warren (D-Mass.) sent letters to the heads of the Federal Reserve, Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) asking for details on how the shutdown is impacting the agencies. Representative Gregory Meeks (D-N.Y.) and Senator Tina Smith (D-Minn.) introduced legislation to encourage financial institutions to offer assistance to furloughed government workers and contractors. Read More

Congressman McHenry Outlines Republican Committee Priorities

House Financial Services Committee Ranking Member Patrick McHenry (R-N.C.) sent a letter to Chairwoman Maxine Waters (D-Calif.) on January 22 outlining his list of the committee’s hearing priorities for the first months of Congress. His priorities including the impact of Britain’s Brexit withdrawal from the European Union, cybersecurity, modernization of the Bank Secrecy Act and Anti-Money Laundering (BSA/AML) regime, housing finance reform, and regulation of fintech. Read More

Financial Committees Announce Subcommittee Assignments

The Senate Banking, Housing and Urban Affairs Committee Chairman Mike Crapo (R-Id.) announced Subcommittee assignments for the 116th Congress. House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) also announced House subcommittee leadership. Read More



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’s BITS Delivers Presentation on Cybersecurity

On January 22, BITS President Chris Feeney delivered a presentation as part of PNC’s Security Speaker Series titled, “The Enterprise, The Industry, The Customer: Protecting and Enabling Financial Services.” The presentation covered cybersecurity, regulatory harmonization and the rise of fintech, and the challenges and opportunities presented by each. Read More


Dynamism Diminished: The Role of Housing Markets and Credit Conditions

This paper assesses the effects of housing prices and credit supply on the activity of young firms. The authors find that local house price changes have a large effect on employment growth and the share of employment accounted by young firms; bank lending supply has a smaller effect. They determine that house prices affect new firm formation and young-firm expansion through the wealth, liquidity, and collateral channels. At the national level, the decline in house prices drove the collapse in the activity of young-firms during the Great Recession. The contraction in bank loan supply reinforced this collapse. Read More

Bank Profitability and Financial Stability

This paper analyzes the relationship between bank profitability and financial stability. First, empirical results indicate that bank profitability and price-to-book ratios are negatively related to systemic and idiosyncratic risks. Second, an elevated share of noninterest income is found to be associated with higher systemic and idiosyncratic risks as well as higher leverage and over-reliance in short-term wholesale funding. Third, lower competition is associated with lower idiosyncratic risk but higher systemic risk. Finally, asset quality and funding costs are important determinants of bank profitability. Read More

The Information in Interest Coverage Ratios of the US Nonfinancial Corporate Sector

The post develops an index of corporate vulnerability using interest coverage ratios (defined as the ratio of earnings before interest and taxes to interest expenses) of all U.S. publicly traded firms. The analysis estimates a firm-specific interest coverage ratio threshold to classify firms into “vulnerable” and “non-vulnerable” buckets to construct the vulnerability index. It then shows the vulnerability index is highly countercyclical and has significant power to predict measures of aggregate economic activity up to 2 years-ahead. Read More

Post-Crisis Financial Regulation: Experiences from Both Sides of the Atlantic

This post presents findings and discussions from the workshop on post-crisis financial regulation hosted by the Federal Reserve Bank of New York and the Banca d’Italia. The workshop covered the impact of regulatory reforms on market liquidity, bank funding and included a panel on current challenges faced by regulators. Although there is a general agreement that post-crisis reforms made the banking system healthier, regulators still face important challenges with respect to the rules for bank resolution during a financial crisis, on the role of macroprudential policy tools and its linkages to fiscal and monetary policy and on the increased role of nonbanks in providing financial intermediation services. Read More

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