BPInsights: July 11, 2020

BPInsights: July 11, 2020

Top of the Agenda

Quarles Exchequer Speech Points to FSB Report Concluding Net Benefits of Too-Big-To-Fail Reforms. We’d Argue Costs Are Material.

Federal Reserve Vice Chair for Supervision Randal Quarles reflected on the reforms implemented following the 2008 crisis, whether the question of too-big-to-fail (TBTF) still exists and the challenges that the COVID-19 pandemic has posed to the financial system at a virtual event hosted by the Exchequer Club of Washington D.C. on July 7. His remarks focused heavily on a recent Financial Stability Board (FSB) report that specifically analyzes TBTF, concluding that the reforms have been successful, more progress is needed and the costs of the reforms have been modest and far outweighed by the benefits.

The FSB report is a hefty 133 pages, but the real meat is in the 287-page technical appendix, which provides the analysis behind the conclusions presented in the report itself. We reviewed the report and the analysis conducted by the FSB working group and argue in a new blog post that the conclusion should have been, “Progress has been extraordinary, but costs are significant.”

In addition to the FSB report, Quarles noted in his remarks that the government rescue of banks during the 2008 crisis came at a significant cost to the taxpayers. It is worth noting that while the government stepped up during the financial crisis to provide liquidity and equity, every loan was fully repaid by the recipients and the government netted $22 billion in its equity in banks, according to the Government Accountability Office. Learn More >>

Stories Driving the Week

If It Quacks Like a Duck…ILCs Should Meet Supervisory and Regulatory Safeguards If They Plan to Offer Banking Products

As a result of a statutory loophole, industrial loan companies (ILCs) and ILC parent companies remain free from consolidated and comprehensive supervision and, therefore, pose unique risks to the economy and the Deposit Insurance Fund, BPI argued in a comment letter submitted June 30 to the FDIC in response to a notice of proposed rulemaking issued by the agency in March. The letter urges the FDIC to issue a moratorium on processing new ILC applications — a solution previously proposed in a letter submitted by BPI and consumer and civil rights groups on March 16 — or, at a minimum, should establish robust prudential and regulatory safeguards for ILCs and their parent companies that correspond to the company’s size and business model.

While ILCs offer banking products and services that are functionally indistinguishable from those offered by commercial banks, these companies and their parent companies are not subject to the same consolidated federal supervision and regulation framework as bank holding companies and savings and loan holding companies. ILCs were established in the early 1900s to make small loans to industrial workers, but statutory loopholes created in 1987 through the passage of the Competitive Equality in Banking Act enabled large commercial firms and technology companies to acquire FDIC-insured ILCs. Despite the expanded use of ILCs made possible by this loophole, equitable regulatory treatment has substantial support. According to a Morning Consult survey conducted on behalf of BPI, 78% of respondents agree that if technology companies were to offer financial services to customers, technology companies should be regulated the same as, or more than banks. Learn More >>

Risk.net Reports ‘US Banks Want Urgent Guidance On Capital Plan Updates’

Banks face uncertainty as banking regulators consider the process that will be required of banks to resubmit their 2020 capital plans, according to a report published in Risk on July 7. The report covers key questions around the resubmission of banks’ capital plans in the fall. Importantly, banks need to know if the resubmission includes a set of sensitivity analyses with revised stress scenarios that reflect conditions tied to the COVID event or whether it will be a full-blown stress test.

The report also indicates that banks are urging the Fed to allow the use of second-quarter balance sheets for the resubmission of capital plans so that results could become available to the Fed by mid-October. They warn that delaying the release of the scenarios would extend the uncertainty in capital requirements for a longer period of time, which could lead to a contraction in credit availability and counter the Fed’s goals of encouraging banks to finance the economy during the crisis. Learn More >>


BPI and Coalition of More Than 130 Trade Groups Representing Small Businesses Borrowers and Lenders Call for Streamlined PPP Forgiveness

BPI joined 130 trade groups representing small business borrowers and lenders in a letter submitted to congressional leaders supporting legislation that would streamline forgiveness of Paycheck Protection Program (PPP) loans valued at less than $150,000. The legislation, introduced by Sens. Kevin Cramer (R-ND), Bob Menendez (D-NJ), Thom Tillis (R-NC) and Kyrsten Sinema (D-AZ), would require the borrower to answer just one simple question affirming that the funds were used in accordance with PPP guidelines.

This is the second letter BPI has submitted in support of this change to reduce the time and complexity of the current forgiveness process; the previous letter was jointly submitted with the Consumer Bankers Association (CBA) on June 2. In response to the introduction of the legislation on June 30, BPI President and CEO Greg Baer and CBA President and CEO Richard Hunt released the following statement:

The existing forgiveness guidance will require the smallest business owners to invest a significant amount of time and resources into completing complex forms. Business owners stated upfront they would use these funds to rehire workers. Rather than requiring small business owners to now hire accountants or play one themselves, the government should forgive PPP loans for the smallest businesses so these entrepreneurs can focus on helping the local economy.


In Case You Missed It

CFPB Finalizes Amendments to Small-Dollar Lending Rule

On July 7, the Consumer Financial Protection Bureau (CFPB) finalized amendments to a rule originally established in 2017 that would affect payday, vehicle title, and certain high-cost installment loans. The amendments rescind the underwriting provisions established under the 2017 rule, which the agency stated would help improve access to credit while also retaining key protections such as safeguarding consumers against unfair, deceptive or abusive practices. The final rule also ratifies new payment provisions that create a two-attempt limit on the number of attempts a lender can make to withdraw from a consumer’s account if previous attempts have failed.

American Banker Podcast: How COVID-19 Could Alter the Regulatory Landscape

American Banker reporter John Heltman released a new podcast on July 1 focused on the financial regulations instituted following the 2008 crisis and how these regulations have held up during the COVID-19 pandemic. The podcast features a collection of interviews and commentary from financial industry experts, including BPI President and CEO Greg Baer, academics and analysts. The podcast analyzes the sufficiency of capital and liquidity requirements and raises an important question: Does the non-banking sector pose a threat to the economy and, if yes, should non-banks be required to adhere to capital and liquidity requirements? To listen to the podcast, please click here.

Borrower Interest in U.S. Main Street Facility Is Low, Testifies Powell

In his remarks before the House Financial Services Committee on June 30, Chair of the Board of Governors of the Federal Reserve System Jerome Powell stated that lender registration for the Main Street Lending Program was underway and that 300 lenders had begun the process of registering, but interest from borrowers has been low. As reported by the Financial Times and the Wall Street Journal, the lackluster reception from potential borrowers may be a byproduct of the program’s complexity. BPI Senior Vice President and Associate General Counsel Lauren Anderson is quoted in the Financial Times stating: “What banks are telling us is that once borrowers have a better sense of the details and the complexity of the programme — the legal documentation, the fact that it is a participation structure, the requirement that the borrower has to do quarterly reporting — they may lose interest.” Some reports indicate that interest from the program could increase should there be a second wave of COVID-19 infections, but in the interim, Powell pledged to continue soliciting feedback from lenders and borrowers to improve the program.

Upcoming Events

  • 07/14/2020 – Business Entity Beneficial Ownership: United States Legislative and Policy Briefing Beneficial Ownership Event Hosted by ACFCS
  • 07/14/2020 – CCAR 2020 and COVID-19: What We Know & Future Implications Hosted by SIFMA
  • 07/16/2020 – Rethinking Public-Private Intelligence Sharing Hosted by the Intelligence and National Security Alliance (INSA) and BPI
  • 07/29/2020 – FOMC Meeting
  • 10/16/2020 – 10th Annual FDIC Consumer Research Symposium

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