TOP OF THE AGENDA
BPI Research Response to FSB Questions on Post-Crisis Reforms
In May of 2019, the Financial Stability Board sent a request for feedback from stakeholders to evaluate of the effects of “too-big-to-fail” (TBTF) reforms. The request for comment included several questions to assess whether post-crisis reforms achieved their intended objectives, its impact on financial system resilience and structure, and material unintended consequences. This blog post addresses these questions by providing an overview of some of the most important academic papers written on this topic.
- Large banks in the United States no longer benefit from a lower cost of funding resulting from a perception that they are too big to fail.
- The post-crisis changes in the regulation and supervision of the largest U.S. banks have significantly increased the resilience of the U.S. and global financial systems.
- Some important unintended consequences include the lower provision of credit to small and medium-sized enterprises, reduced liquidity in corporate bond markets and shift of bank lending to the unregulated sector.
5 Stories Driving the Week
1. Facebook’s Proposed Cryptocurrency Faces Bipartisan Concerns
Lawmakers in the House and Senate raised concerns in a series of hearings over Facebook’s cryptocurrency plans and creation of a digital coin known as Libra. At a Senate Banking Committee hearing on July 16 and a House Financial Services Committee hearing on July 17, lawmakers demanded more regulatory scrutiny and assurances from David Marcus, head of Facebook’s digital currency, Calibra. Lawmakers raised concerns about data privacy, systemic risk, anti-trust, censorship, money laundering protections, consumer protection and encroachment into the financial services industry.
In advance of the hearings, House Financial Services Committee Chairman Maxine Waters released a discussion draft bill that would ban “large platform utilities” from becoming financial institutions. Marcus refused to agree to Waters’ demands to halt work on the project. At the committee hearing, Republicans indicated that more work was needed to understand the technology before deciding to prevent its advance. The G7 group of major economies also issued a warning of Libra, saying in a working group preliminary report that “cryptocurrencies such as Facebook’s Libra will need to be tightly regulated or they could destabilize the global economy,” according a report from the Financial Times. On July 15, Treasury Secretary Steven Mnuchin said at a news conference that Libra is a national security issue and that the United States “will not allow digital asset service providers to operate in the shadows.” The Treasury Department’s Financial Crimes Enforcement Network will hold groups that traffic in any cryptocurrency “to its highest standards,” Mnuchin said.
2. Kraninger Hints at Changes to Examination Process
In a speech on July 17, Consumer Financial Protection Bureau Director Kathy Kraninger said the agency is reevaluating its examination process as part of a broader agency review. “We are taking a fresh look at the entire process of examinations to ensure that we’re risk-prioritizing our resources, utilizing technology to automate certain tasks and taking full advantage of appropriate partnerships with our fellow regulators,” Kraninger told the Exchequer Club in Washington.
3. BPI Comments on Fed’s ‘Controlling Influence’ Proposal
On July 15, BPI submitted a comment letter to the Federal Reserve on its proposal to codify into rule a series of presumptions that the Fed proposes to use to determine whether one company has the ability to exert a “controlling influence” over, and therefore “controls,” another for purposes of the Bank Holding Company Act (BHCA). The letter commends the agency’s efforts to clarify the critical definition of control but also recommends several adjustments to the proposal to align the regulatory framework governing control more closely with Congressional intent. These recommendations include: allowing investors in another company to use contractual terms to assure that the investment complies with applicable legal and regulatory requirements and permitting investors to have larger business relationships with another company than the proposal would allow, each without triggering a presumption of control under the BHCA.
4. House Financial Services Committee Approves Bills on Diversity, Credit Reporting
The House Financial Services Committee approved a series of bills that would set diversity requirements and credit score standards.
By a vote of 53-5, the committee approved H.R. 1018, the Improving Corporate Governance through Diversity Act of 2019, a bill that would require companies to annually disclose the voluntarily self-identified gender, race, ethnicity & veteran status of their board directors, nominees, and senior executive officers.
The panel approved by a 56-2 vote H.R. 281, the Ensuring Diverse Leadership Act of 2019, a bill that would require the Federal Reserve Bank to interview at least one individual reflective of gender diversity and one reflective of racial or ethnic diversity in making the appointment of a regional bank president.
The committee passed, by a vote of 52-6, H.R. 3279, the Diversity in Corporate Leadership Act of 2019, a bill that would require companies to disclose the gender, racial and ethnic composition of their corporate boards and nominees for the board of directors.
The committee approved by a 32-26 vote H.R. 3618, the Free Credit Scores for Consumers Act of 2019, a bill that would require consumer reporting agencies to give consumers free copies of their credit scores that are used by creditors.
The committee cleared by a 32-26 vote H.R. 3642, the Improving Credit Reporting for All Consumers Act, a bill to improve the process for consumers to resolve inaccuracies on their credit reports, including by creating a new right to appeal credit reporting decisions, and directing the Consumer Financial Protection Bureau (CFPB) to develop minimum standards for the credit reporting agencies.
The panel also passed by a 33-25 vote H.R. 3629, the Clarity in Credit Score Formation Act of 2019, a bill that would establish clear federal oversight of the development of credit scoring models by directing the Consumer Financial Protection Bureau (CFPB) to set standards.
5. BB&T / Suntrust Hearing Prep
The House Financial Services Committee will hold a hearing on July 24 at 10 am on the proposed merger of SunTrust and BB&T. BPI previously published a blog showing that banking industry is unconcentrated and will remain so after the BB&T/SunTrust merger.
In Case You Missed It
Federal Banking Agencies Announce Two-Year Extension of Relief from Volcker Rule Restrictions for Qualifying Foreign Funds
The federal banking agencies on July 17 extended Volcker Rule relief to so-called “qualifying foreign excluded funds” for another two years (until July 21, 2021), as the agencies consider whether to permanently amend the Volcker Rule regulation to ensure it doesn’t unintentionally restrict a foreign bank’s fund-related activities conducted entirely outside of the United States.
FDIC Approves Final Rules on Large Bank Deposit Account Recordkeeping and Joint Accounts
On July 16, the FDIC approved amendments to its rules (1) requiring large banks to maintain detailed deposit account records on daily basis and (2) governing joint ownership deposit accounts. On account record keeping, the amendments grant large banks an optional one-year extension and require executive certification of compliance only to the executive’s “knowledge and belief under due inquiry,” changes that had been recommended in a comment letter that BPI submitted with the ABA. The rule also provides grace periods for deficiencies resulting from mergers or changes in law. For joint accounts, the rule helpfully provides banks more flexibility in demonstrating that accounts qualify as “joint” for insurance purposes.
BPI, Joint Trades Respond to HUD’s Proposed Annual and Loan-Level Certifications, Defect Taxonomy
On June 28, in conjunction with the Housing Policy Council, Mortgage Bankers Association, and American Bankers Association, BPI responded to HUD’s request for comment on its proposed changes to the lender certification requirements for FHA-insured mortgages and the FHA’s Defect Taxonomy, used to identify defects in the underwriting and servicing of those loans. The letter encourages the replacement of the current certification requirements with a lender acknowledgement based on loan eligibility and a reliance on the existing oversight and enforcement regime. In an earlier response to HUD’s proposal, submitted June 7, the trades separately proposed recommendations for the FHA’s annual certification process and statements.
Agencies Issue Proposal on Capital Treatment of Land Development Loans
July 12, the federal banking agencies released a proposal to clarify the treatment of land development loans under their capital rules for high-volatility commercial real estate (HVCRE). Expanding upon their proposal last September to revise the definition of HVCRE exposure (BPI’s response can be found here), the new proposal would clarify that the definition’s exception for loans financing the development of one- to four-family residential properties would not extend to credit facilities that only finance land development activities (rather than construction of the residential structures). For a loan to qualify for the exclusion, the credit facility would be required to include financing for construction of one- to four-family residential structures.
Lawmakers Unveil Competing Flood Insurance Bill
Lawmakers from states threatened by storms unveiled a bill to reform the National Flood Insurance Program and differing from the recent legislation passed by the House Financial Services Committee. The new bill by Senators Bob Menendez (D-NJ), John Kennedy (R-LA) and Bill Cassidy (R-LA) “would take further steps to ensure that flood insurance is kept affordable while improving technology to combat flood risks,” according to a report from American Banker.
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