BPInsights: January 31, 2020

BPInsights: January 31, 2020

Top of the Agenda

Agencies Release Proposal to Revise Volcker Rule’s ‘Covered Funds’ Restrictions

On Thursday, the federal financial regulatory agencies invited public comment on a joint agency proposal to clarify and streamline the “covered fund”-related provisions of the regulation implementing the Volcker Rule, a Dodd-Frank rule that restricts a banking group’s ability to engage in proprietary trading as well as invest in or sponsor private equity funds and hedge funds. In November 2019, the agencies simplified requirements for the proprietary trading restrictions of the Volcker Rule. The NPR released on Thursday offers proposals to simplify the requirements for the funds-related restrictions including modifying certain aspects of the existing rule that have prevented banks from engaging in traditional commercial banking and asset management activities clearly outside the intended scope of the Volcker Rule. The joint agency proposal would permit banking institutions to broaden their financial services offerings to customers by authorizing previously prohibited investments in investment vehicles such as credit funds and venture capital funds and simplifying restrictions on providing asset management services to customers including to family wealth management vehicles and fund custodial clients. “Today’s proposal will allow banks to get back to some important traditional commercial banking and asset management activities that the current rule prohibits, helping businesses grow and consumers build savings,” said BPI President and CEO Greg Baer in a statement. “These are client-focused, non-proprietary activities that the Dodd-Frank Act didn’t intend to prohibit.”




5 Stories Driving the Week

1. Federal Reserve Votes to Finalize New Control Framework 

The Federal Reserve voted on Thursday to approve a final rule to codify into regulation a series of presumptions that the Fed will use to help determine when one company has the ability to exert a “controlling influence” over, and therefore “controls,” another for purposes of the Bank Holding Company Act. The final rule is intended to increase the transparency and consistency of the Fed’s control framework for investments below 25% (i.e., the threshold for automatic control under the BHCA). The rule should, in many cases, help facilitate permissible investments in banking organizations and by banking organizations. The final rule closely resembles the proposal released in April with certain targeted adjustments made to the final rule taking into account public comments including recommendations included in BPI’s comment letter.
As in the proposal, the final rule implements a tiered framework for determining presumptions of controlling influence based on a company’s level of voting ownership of another institution, in combination with other relationships between the two companies.


The rule is slated to take effect April 1.


Learn More >> 

2. Comptroller of the Currency Otting Urges Consensus on the Hill for CRA Proposal 

This week, the House Financial Services Committee held a hearing titled “The Community Reinvestment Act: Is the OCC Undermining the Law’s Purpose and Intent?” Comptroller of the Currency Joseph Otting was the sole witness and defended the recently proposed revisions to the Community Reinvestment Act (CRA) regulatory framework, while encouraging critics to submit concerns and suggest improvements through the comment process. The proposal, published by the FDIC and the OCC, would change several aspects of the regulation in hopes of modernizing the framework, which has not been updated since the 1990s. Democratic and Republican Committee members agreed that modernization of the framework was important given changes in the banking industry and consumer preferences but disagreed about whether the proposed revisions were an appropriate approach. Most Republicans expressed the view that the proposal would be beneficial to communities, including rural communities; many Democrats expressed strong concerns about potential negative unintended consequences and continued to press the Comptroller to extend the comment deadline so that community stakeholders would have additional time for review. The Comptroller rejected calls for an extended comment deadline, citing the delayed publication of the proposal in the Federal Register, which effectively extended the comment period to 88 days, as well as the extensive dialogue over the past decade regarding needed reforms. He also challenged what he referred to as “misperceptions” about the proposal, specifically that it would reduce overall CRA activity. The hearing echoed discussions in the subcommittee hearing on this topic on January 14, 2020. The comment deadline is March 9, 2020.

Learn More >>

3. BPI Offers Recommendations to NY Financial Services Regulator on Proposed Regulation on Disclosure of Confidential Supervisory Information

On January 27, BPI submitted comments to the New York Department of Financial Services (NYDFS) on its proposal to amend restrictions on the use and disclosure of confidential supervisory information (CSI) under Section 36.10 of the New York Banking Law. BPI’s letter generally supported the proposed revision to the NYDFS CSI framework to allow NYDFS-supervised institutions to disclose NYDFS CSI, such as examination reports, to outside legal counsel and auditors without the need to first obtain the NYDFS’ written approval noting that the current approach inhibits the flow of CSI between financial institutions and their trusted external advisors. In addition, BPI offered the NYDFS several recommended revisions to the NYDFS’ CSI framework designed to facilitate effective and efficient compliance by regulated entities (e.g., by removing unnecessary barriers to sharing CSI with affiliates), further clarify the scope and definition of CSI (e.g., business records in the possession of a regulated entity should not normally be considered CSI), and promote safety and soundness (e.g., through greater ability to share CSI between parties to merger and acquisition transactions).

Learn More >>


4. CFPB Announces Policy Statement Clarifying Approach to ‘Abusiveness’ Standard
As predicted in BPInsights last Friday, the CFPB announced a Statement of Policy Regarding Prohibition on Abusive Acts or Practices, providing a “common-sense framework” for how it will use its supervisory and enforcement authority with respect to the “abusiveness” prong of the Dodd-Frank Act prohibition on “unfair, deceptive, or abusive acts or practices.” In the policy, the CFPB clarifies that it will focus on practices where the harm outweighs the benefits to consumers, avoid citing conduct as abusive where the facts or circumstances overlap or align with being “unfair” or “deceptive,” and plead standalone “abusiveness” violations in a way that shows the nexus between the cited facts and the CFPB’s legal analysis of the claim. The policy also states that where a company has demonstrated a good-faith effort to comply with the law, the CFPB will not seek certain forms of monetary relief. The CFPB notes that it may still engage in a future rulemaking to further define the standard.

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5. Banks Assess Climate-Related Risks, But Don’t Hold All the Answers

Activists are increasingly turning to banks and other financial institutions in their efforts to prevent climate change by calling on banks to discontinue or restrict investments to “brown assets,” or investments in industries believed to exacerbate environmental uncertainty, such as the fossil fuel industry. Banks invest in social responsibility initiatives to demonstrate a commitment to sustainable green finance, but “the hard reality is that as long as demand for oil, gas and coal keep growing, supply will find a way to meet it,” reported Greg Ip in a Wall Street Journal article published January 29. “To slow climate change, the world must address fossil-fuel demand, not supply.” In his column, Ip indicates that capital and fossil fuel are fungible products; producers can obtain funding elsewhere in the event of divestment by one institution. Furthermore, countries that are “less susceptible to public pressure…can finance operations without foreign money.”


In a response at his post-FOMC press conference on January 29, Federal Reserve Chair Jerome Powell acknowledged the possibility that climate change could pose a “systemwide financial stability risk” and said the Fed will take steps to ensure that financial system is resilient, but called on elected officials to address the broader policy challenges. Banks may not hold the answer to solving climate change, but efforts are already underway to mitigate risks posed by climate change. On January 28, the Institute of International Finance and European Banking Federation published a survey of 70 financial institutions, finding that 60% of respondents currently follow recommendations established by the Task Force on Climate-related Financial Disclosures, and 45% have an independent framework in place to assess climate-related risk.


Learn More >>

In Case You Missed It

Magistrate Judge Issues Report Recommending Dismissal of Madden Challenge 

On January 22, a magistrate judge issued a report to the U.S. District Court in the Western District of New York recommending that the Court dismiss the Madden challenge brought against JPMorgan Chase’s credit card securitization program. The magistrate’s report stated that Madden did not directly apply to the program, and so followed earlier precedent from the U.S. Supreme Court and the Second Circuit for the proposition that the bank’s sale of receivables to the securitization trust did not end the applicable federal preemption of state usury laws. In his report, the magistrate cited BPI’s and SFA’s (Structured Finance Association) amici brief filed with the Court. The District Court will now review the magistrate’s report.

Government Turns to Private Industry for Help Defending National Security

Government agencies and policymakers are relying more on private industry to protect vital infrastructure and national security, according to an Inside Cybersecurity report covering statements made by National Security Agency General Counsel Glenn Gerstell at an American Bar Association luncheon. This comes as attacks by foreign nation-states become more complex and frequent, and U.S. intelligence communities grapple with identifying proportionate responses while protecting against evolving risks posed by lone-wolf criminals, who “are now capable of causing as much harm as a nation-state.” Gerstell highlighted the forthcoming report from the congressionally established Cyberspace Solarium Commission as an important milestone in reshaping national security responsibilities. The report will be released by April and will be considered as part of the National Defense Authorization Act later this year. The financial services industry has historically collaborated with law enforcement and intelligence services to preserve the integrity of the financial system through stakeholder convenings, information-sharing initiatives, and the establishment of industry-wide best practices through FS-ISACSheltered Harbor and the Financial Services Cybersecurity Profile.


Don’t Forget: Small Banks Can Pose Systemic Risk

On January 28, Jeremy Kress, an assistant professor in business law at the Ross School of Business of the University of Michigan and Matthew Turk, an assistant professor in business law at Indiana University’s Kelley School of Business wrote a column in the American Banker outlining systemic risks posed by community banks. The authors reminded readers that every banking crisis in U.S. history has included the failure of numerous community banks. “Community banks insist that recent deregulation is warranted because the Dodd-Frank Act and Basel III imposed onerous compliance burdens and made it difficult for them to compete. But these claims are misleading,” they wrote.  “…[T]he latest reforms have now eased capital requirements, loosened liquidity rules and relaxed supervisory oversight of community banks. These unwarranted rollbacks are likely to increase systemic risks.”

European Regulator Calls for Bank Mergers
In remarks this week, Andrea Enria, Chair of the European Central Bank’s Supervisory Board, echoed recent calls by other ECB officials for more mergers in the EU banking system, the Wall Street Journal reported.  The ECB has said it will not stand in the way of EU bank mergers by requiring higher capital requirements upon merger. It has been suggested in the past that the ECB has been too stringent in its requirements when banks have sought merger approvals.  The tone has changed; however, as many in the EU see consolidation as one of the means by which the European banking system can compete with other global competitors.

ECB Releases 2019 Supervisory Review and Evaluation Process, Overall CET1 Requirements Remained Stable at 10.6%
On January 28, the ECB published outcomes from its 2019 Supervisory Review and Evaluation Process (SREP), an annual evaluation that helps to establish capital requirements and guidance for European banks based on the risk assessment of an individual institution. The SREP assesses four criteria: the viability and sustainability of business models, the adequacy of internal governance and risk management, the risks to capital and the risks to liquidity and funding. Notably, for the first time, the ECB also published banks’ Pillar 2 requirements in an effort to provide greater transparency. The overall Common Equity Tier 1 (CET1) requirements of the 109 banks evaluated remained stable at 10.6% compared to the 2018 cycle; however, six banks fell below the additional CET1 levels required under Pillar 2 guidanceAccording to the ECB, “[f]or those banks which have not taken satisfactory measures in the last quarter of 2019, remedial actions have been requested within a precise timeline.”

BPI Files Comment Letter Responding to FDIC RFI on Cost-Benefit Analysis

On January 28, BPI filed a comment letter responding to the FDIC’s request for information on how to improve its regulatory rulemaking process. The comment focuses on how the FDIC can better account for, and conduct, cost-benefit analysis.  Specifically, BPI recommends that the FDIC adopt through notice-and-comment a policy statement governing how it will subject its regulatory actions to cost-benefit analysis. The policy statement should (1) commit the FDIC to voluntarily comply with a Clinton-era Executive Order (and related OMB guidance) setting forth a well-regarded framework for cost-benefit analysis, as if the FDIC were an executive agency; and (2) establish a dedicated unit within the FDIC with sufficient expertise, experience, stature and resources to conduct cost-benefit analysis properly, as well as voluntarily seek input from or review by the OMB’s specialists on cost-benefit analysis. BPI asserts that these steps will enhance the efficiency, transparency and public accountability of the FDIC’s regulatory actions, while also reinforcing the FDIC’s reputation for independence. The letter makes the same recommendations for the Federal Reserve and OCC.


  • 01/31/2020 – The House Committee on Financial Services will hold a hearing entitled “Is Cash Still King? Reviewing the Rise of Mobile Payments”
  • 02/04/2020 – The Bipartisan Policy Center will hold an event titled “A Conversation with Janet Yellen and David Malpass”
  • 02/05/2020 – The House Committee on Financial Services will hold a hearing titled “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps.”
  • 02/06/2020 – The House Committee on Financial Services will hold a hearing titled “Protecting Consumers or Allowing Consumer Abuse? A Semi-Annual Review of the Consumer Financial Protection Bureau.”
  • 02/11/2020 – The House Committee on Financial Services will hold a hearing titled “Monetary Policy and the State of the Economy.”
  • 02/12/2020 – The House Financial Services Subcommittee on Diversity and Inclusion will hold a hearing titled “A Review of Diversity and Inclusion at America’s Large Banks.” 
  • 02/12/2020 – The House Financial Services Task Force on Artificial Intelligence will hold a hearing titled “Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services.”
  • 02/14/2020 – Columbia University/Bank Policy Institute 2020 Bank Regulation Research Conference
  • 02/26/2020 – The House Committee on Financial Services will hold a hearing titled “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps (Part 2).”

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