BPInsights: July 26, 2019 - Bank Policy Institute

Top of the Agenda

Lawmakers Press the Federal Reserve to Provide Answers on Real-Time Payments

The debate over real-time payments intensified on Capitol Hill this week. In 2015 the Federal Reserve called on the private sector to build a real-time payments system, and The Clearing House responded by building the most advanced payments system in the world. The Fed is nonetheless rumored to soon announce a proposal to build its own system. The issue has caught the attention of Members of Congress, and a bipartisan group of Senators, including Senators Mark Warner (D-VA), Thom Tillis (R-NC), David Perdue (R-GA), Tom Carper (D-DE), and Jon Tester (D-MT) who sent a letter on July 22 to Federal Reserve Chairman Jerome Powell asking questions about the Fed’s potential decision. The letter requests answers to their questions by the Board before taking any further action related to the Fed’s October request for comments. Specifically, the letter seeks answers on the following:

how a government-run system would support innovation;
whether (and on what empirical grounds) the Fed has made a finding that the private sector cannot provide services with reasonable “effectiveness, scope, and equity”;
how long it would take the Fed to stand up a potential system and at what cost; and
how a Fed system would achieve interoperability with private sector systems.

Also, this week, Senate and House Democrats, including Senators Chris Van Hollen (D-MD) and Elizabeth Warren (D-MA), introduced legislation that that would require the Federal Reserve to begin development of a real-time payments system. Such a move would delay ubiquitous adoption of real-time payments across the country, a goal of the Fed’s Faster Payments Task Force. On the other side of the issue, Congressman Ted Budd (R-NC) introduced legislation that would require the Fed to undertake a quantitative impact study prior to developing a real-time payment system. Congressman Denver Riggleman (R-VA) introduced legislation that would prevent the Fed from offering any new payment service prior to satisfying certain requirements, including determining that any associated costs will be recovered, that such a service will yield a clear public benefit, and that no other parties can be expected to provide such a service with reasonable effectiveness.

5 Stories Driving the Week

1. House Financial Services Committee Reviews Proposed Merger of BB&T and SunTrust

On July 23, the House Financial Services Committee convened for a hearing to analyze the proposed BB&T and SunTrust merger to form Truist Financial. BB&T CEO Kelly King and SunTrust CEO William Rogers assured lawmakers that their combined bank would continue to serve consumers, communities – including low- and moderate- income communities and employees and would not create a systemic risk. “The combined BB&T/SunTrust entity will actually increase competition by creating a stronger regional bank that reduces concentration of systemic risk at the top of the market,” Rogers said in testimony. “The combined company will have an even more balanced profile due to greater diversification across customers, business lines and geographies, and it will bring new strengths to areas less served by major institutions.” Lawmakers agreed; ranking Republican Patrick McHenry (R-NC) said the two institutions are “in essence large Main Street banks doing standard, non-capital markets-oriented business.” Democrats praised the institutions for their community reinvestment plan. King, who will be the CEO of Truist, said the merger and community benefits plan exemplifies “how it will support local communities in the years to come.”

2. Federal Bank Agencies and FinCEN Release Risk-Based Approach for AML Supervision

On July 21, the federal banking agencies, the Financial Crimes Enforcement Network (FinCEN), and the National Credit Union Administration released a joint statement on Risk-Focused Bank Secrecy Act/Anti-Money Laundering Supervision. The statement notes that it is intended to improve transparency in the risk-focused approach used for planning and performing BSA/AML examinations and does not establish new requirements. In particular, it notes that regulators recognize that each bank has a unique risk profile and scope examinations accordingly. It goes on to state that the risk-focused approached reflected in the statement forms the foundation for the information communicated to examiners in the FFIEC’s AML exam manual.

3. BPI Files Comment Letter with FSB on Post-Crisis Reforms

Following on a blog post published last week, on July 24 BPI submitted a letter to the Financial Stability Board (FSB) evaluating the effectiveness of the post-crisis “Too Big to Fail” reforms intended to reduce systemic and moral hazard risks for global systemically important banks (G-SIBs). The letter argues that the reforms have largely achieved their objectives of making banks more resilient against failure while continuing lending and critical operations in times of stress, as well as making it possible for banks to fail without disrupting the financial system or requiring taxpayer-funded capital injections. The letter also encourages a shift toward implementation and avoiding unintended consequences of the reforms. Further, the letter urges the FSB to address the tendency toward geographic ring-fencing and to re-evaluate the calibration of its current capital and liquidity standards.

4. CFPB, FTC Announce $700 Million Equifax Settlement

On July 22, the Consumer Financial Protection Bureau and the Federal Trade Commission, along with 50 state attorneys general, announced a settlement with Equifax requiring the credit-reporting firm to pay up to $700 million in monetary relief and penalties associated with a 2017 data breach that exposed the personal information of nearly 150 million consumers. The agreement, if approved by the court, would provide up to $450 million in relief to consumers and a $100 million civil penalty, in addition to other monetary relief.

5. Lawmakers Examine Alternative Data in Underwriting and Credit Scoring

On July 25, the House Financial Services Committee Task Force on Financial Technology held a hearing to look at the use of alternative data for credit decision purposes. Members on both sides of the aisle acknowledged the potential benefits for lenders’ analyzing non-FICO based credit scoring to expand access to credit but also explored the potential risks. Democrats expressed concerns about fair lending implications and consumer privacy. Republicans explored the need for regulatory clarity and asked witnesses whether no-action letter relief was an appropriate response to financial innovation. Witnesses urged Congress and regulators to work together to modernize and quickly communicate rules governing fair lending, privacy and credit reporting.

In Case You Missed It

Pat Parkinson to Join Bank Policy Institute as Special Advisor
On July 11, the Bank Policy Institute announced that Patrick Parkinson has been hired as a special advisor and will start on August 11. He will join BPI’s research team where he will contribute to in-house production of empirical, academic-quality research and provide strategic advice to BPI’s regulatory affairs team. Parkinson most recently was a managing director at Promontory Financial Group, where he advised clients on regulatory and risk management issues. His career of public service includes a 31-year tenure at the Federal Reserve, where he was director of the Division of Banking Supervision and Regulation, a member of the Basel Committee on Banking Supervision, and a senior member of the Federal Reserve’s Division of Research and Statistics.

Senate Banking Holds Hearing on Cannabis Banking
On July 23, the Senate Banking Committee held a hearing on the challenges of banking the cannabis industry. Chairman Mike Crapo (R-ID) said without access to the banking system, the legal cannabis businesses are forced to “operate in the shadow.” He further noted following the hearing that there is a “strong case to be made [that] we need to deal with the banking side of this issue.” Senator Robert Menendez (D-NJ) pushed his legislation to allow insurance companies to serve state-authorized cannabis businesses. In addition, House Judiciary Committee Chairman Jerry Nadler (D-NY) released legislation to legalize cannabis, expunge criminal convictions for profession and impose a 5 percent federal excise tax.

Global Standard Setters Announce Extension on Implementation of New Derivative Margin Requirements
On July 23, the Basel Committee and International Organization of Securities Commissions (IOSCO) announced a one-year extension on the final implementation phase of the internationally agreed-upon framework for initial margin requirements for non-centrally cleared swaps. With this extension, the final implementation phase will take place on September 1, 2021 at which point firms handling an aggregate average amount of non-cleared derivatives greater than 8 billion euros will become subject to the framework.

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