TOP OF THE AGENDA
Federal Reserve Conference Highlights Need for Stress Test Regime Changes
On July 9 at a Federal Reserve Bank of Boston conference to review of the stress test regime, Federal Reserve officials said the Federal Reserve’s stress test regime should continue to “evolve” to be effective. “Stress testing has evolved, and must continue to evolve, to take on what we as supervisors learn from our work and what we can learn from others,” Federal Reserve Vice Chair for Supervision Randal Quarles said. Specifically, Quarles said he expects the central bank to issue a revised stress capital buffer proposal “in the near future” and he has high hopes to include it in next year’s stress testing cycle. In the April 2018 proposal, the stress capital buffer requirement was calculated as the difference between the firm’s starting and lowest projected capital ratio under the severely adverse scenario plus four quarters of planned common stock dividends. Quarles also said if the dividend prefunding assumption were going to be changed in the revised proposal the Fed would explain very clearly how they would restrict a bank from paying dividends as it dips into the buffer requirement.
Panelists also focused on greater CCAR transparency. Quarles also reiterated his commitment to increased transparency around the stress tests. “Like a teacher, we don’t want banks to fail, we want them to learn,” Quarles said. BPI supports greater transparency and published a proposal offering a solution. Quarles also said he already views the countercyclical capital buffer as “already on” and the challenge instead is to figure out how to turn it off in the next downturn.
Lastly, Quarles also mentioned that the Fed is willing to revisit the calibration of the GSIB surcharge in the context of the “overall capital requirements as they exist and as they are going to evolve over time.”
5 Stories Driving the Week
1. Regulators, Lawmakers Raise Concerns on Risk of Facebook’s Libra Plan
Federal Reserve Chairman Jerome Powell said at a House Financial Services hearing on July 10 that Facebook’s planned Libra digital currency raises “many serious concerns,” including potential risks to the stability of the financial system, privacy and money laundering. “I just think it cannot go forward without there being broad satisfaction with the way the company has addressed money laundering — all of those things — data protection, consumer privacy,” Powell said. At a Senate Banking Committee hearing on July 11, he said the U.S. would discuss Facebook’s Libra plans at the next G-7 meetings in France.
When asked about Facebook’s cryptocurrency plans at a Bipartisan Policy Center event on July 11, Quarles said the Financial Stability Board would be looking at the issue and he “would not be surprised” if the Financial Stability Oversight Council also undertakes a review.
Also, Senate Banking Committee ranking member Sherrod Brown (D-OH) sent a letter to the Federal Reserve on July 10, raising concerns of Facebook’s Libra plans and urging the Federal Reserve to “take seriously the potential ramifications” of Facebook’s plan and to explain how it plans to regulate the Libra network. In a letter to the committee on July 8, Facebook said it would rely on third-party developers to build its payment system.
2. Agencies Finalize Rule Simplifying Capital Requirements for Standardized-Approaches Banks
On July 9, the federal banking agencies finalized a rule simplifying capital requirements for banking organizations that use the “standardized approaches” capital framework. The rule, which would, subject to the agencies’ pending tailoring proposals, apply to all but those largest institutions required to retain the advanced approaches framework, simplifies the capital treatment of mortgage servicing assets, minority interests, deferred tax assets, and investments in unconsolidated financial institutions. The final rule (which, notably, does not address revisions to the definition of high-volatility commercial real estate exposure contained in the proposal as it is now being covered in a separate rulemaking) will also allow common stock repurchases without the prior approval from the Federal Reserve previously required.
3. Proven Bank Privacy Laws Should Apply to Tech Firms, Too
In an op-ed in American Banker, BPI President and CEO Greg Baer noted that the Gramm-Leach-Bliley Act provides a comprehensive federal framework to govern how banks manage their customers’ data and allows consumers to control sharing of that information. A similar effort seems warranted for the tech industry, with existing law as a useful guide.
4. FDIC Chairman McWilliams Highlights Resolvability Concerns for Central Counterparty Clearing Houses
In July 1 remarks at a colloquium on cross-border resolution hosted jointly by BPI and the Institute of International Finance, FDIC Chairman Jelena McWilliams highlighted concerns surrounding the resolvability of central counterparty clearing houses (CCPs), suggesting the agency’s concern over its limited ability to identify and remedy deficiencies in the nonbank entities. Because CCPs do not file resolution plans with the FDIC, McWilliams warned that the agency lacks a process for addressing potential deficiencies in CCPs equivalent to that available to banks. McWiliams further noted that CCPs use “margin, limited skin-in-the-game, guarantee funds, and assessment waterfalls from clearing members” to absorb extreme losses, rather than “the pre-funded, gone-concern, loss-absorbing resources” that can be used to recapitalize critical operations.
5. Financial Stability Board Recommends No Changes to Total Loss-Absorbing Capacity Standard
On July 2, the Financial Stability Board published a report assessing the ongoing implementation of its total loss-absorbing capacity standard (TLAC), aimed at allowing orderly resolution for global systemically important banks (G-SIBs). Importantly, the report, which finds “steady and significant” progress both in G-SIBs’ issuance of TLAC and in individual jurisdictions’ setting of TLAC requirements, does not recommend any changes to the standard.
In Case You Missed It
BPI Comments on OCC’s Anticipated Rulemakings on Fiduciary Capacity and Non-Fiduciary Custody Activities
One June 28, BPI submitted a comment letter on the OCC’s advanced notice of proposed rulemaking (ANPR) exploring an update to the definition of “fiduciary capacity” to include directed trust-related activities and the issuance of a new regulatory framework establishing basic requirements for non-fiduciary custody activities of national banks. The letter urges against the OCC’s adoption of either contemplated rulemaking, arguing that they are unnecessary and could be counterproductive, without meaningful improvements in the OCC’s supervision of the services or benefits that bank customers receive from them.
The House Judiciary Committee’s top Republican, Doug Collins (R-GA), is preparing draft data privacy legislation to “give consumers control over the commercial use of their online data.” The measure would “establish a federally recognized class of online data that consumers create online” and give consumers control over the data’s commercial use, including prohibiting it.
On June 28, BPI submitted a comment letter to the federal banking agencies on information collection requirements in the reporting forms through which banks are required to provide information on their exposures in foreign countries. Objecting to the agencies’ proposed three-year extension of the forms without changes, the letter identifies a number of areas that would benefit from additional agency guidance and recommends several technical revisions to correct inconsistencies with other reporting forms.
The Utah Department of Commerce announced on July 2 that it would join Arizona in offering a fintech sandbox to companies seeking to test new financial products or services. Under the Utah program, companies may test products for up to two years without a license. Following the two-year period, companies would need to either stop offering the product or obtain any applicable licenses. While the sandbox would not likely benefit large financial firms, companies with a Utah presence wishing to test smaller-scale products may see some benefit. The program adds to a growing list of jurisdictions contemplating sandboxes or other tools to encourage financial innovation.
In an op-ed on Fox News, Senate Banking Committee Chairman Mike Crapo (R-ID) said consumers should be granted greater control of their data privacy rights, such as through informed consent. We need to establish obligations for data collectors, brokers and users, and implement an enforcement system to ensure the collection process is not abused, and that data is appropriately protected,” Crapo wrote. Through the committee, Crapo is examining approaches to data privacy.
Federal bank regulators have formed an interagency working group to increase coordination in assessing cybersecurity at large banks, according to a report by Politico. The discussions, which are still in their early stages, are meant “to increase efficiency around how exams are conducted and could give the agencies a clearer line of sight into cyber risk management throughout an entire firm.” Chris Feeney, an executive vice president at BPI, said industry welcomes “any efforts to streamline examinations.”