Top of the Agenda

New Blog: Have Banking Regulations Reduced Market Liquidity?

In March of this year, market liquidity evaporated under stress, not only in markets for corporate debt but also in the U.S. Treasury markets, which are ordinarily the most liquid of all markets. Market participants and the Federal Reserve attributed the evaporation of market liquidity to the exhaustion of the capacity of banks to provide liquidity to markets. In BPI’s most recent blog post, Have Banking Regulations Reduced Market Liquidity?, Bill Nelson and Pat Parkinson recommend a broad review of how banking regulations affect market liquidity, with a view to identifying specific elements of the regulatory framework that are unnecessary for bank safety and soundness and that, by impairing market liquidity, are making the financial system as a whole more vulnerable to shocks. Learn More >>

Stories Driving the Week

BPI Blog: A Few Observations on Professor Stein’s Remarks Last Week at the Brookings Institution

Last week, in a presentation on a Brookings Webinar (available here), Harvard Professor Jeremy Stein called for a ban on dividend payments by all banks, irrespective of their current and projected capitalization.  In BPI’s most recent blog post, “A Few Observations on Professor Stein’s Remarks Last Week at the Brookings Institution,” Bill Nelson and Francisco Covas argue that a blanket ban on dividends for all banks, irrespective of their capital levels, would throw out the post-crisis international regulatory framework in precisely the situation for which it was designed and when it appears to be working as intended. Moreover, they argue that the “more adverse” scenario in the paper has an extremely low probability of occurring, but the results of the “less adverse” scenario are broadly consistent with BPI’s own work on a similar issue. Learn More >>

Hearing Recap: Treasury Secretary Mnuchin and SBA Administrator Carranza Testify on Implementation of CARES Act

On June 10, the Senate Small Business and Entrepreneurship Committee held an oversight hearing at which Treasury Secretary Mnuchin and SBA Administrator Carranza testified on their agencies’ implementation of Title I of the CARES Act, with a focus on the operations of the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program.

Although he acknowledged “bumps along the road,” Chairman Marco Rubio (R-FL) stressed that the PPP has been a success. Ranking Member Ben Cardin (D-MD) generally agreed, but raised concerns about a recent SBA Inspector General “flash report” which found that the agency’s implementation of the PPP “did not fully align” with the Congressional intent of the CARES Act, as SBA “did not provide guidance on prioritizing underserved and rural markets” and “failed to collect demographic information for small businesses seeking PPP loans.”

During Q&A, Chairman Rubio (R-FL) and Senators John Kennedy (R-LA), Mitt Romney (R-UT), and Joni Ernst (R-IA) asked Secretary Mnuchin about loan forgiveness in the PPP program. Each remarked that forgiveness should be the focus in lieu of penalties and that the loan forgiveness application should be simplified for small businesses. Secretary Mnuchin confirmed that borrowers failing to meet the 60% requirement will still receive loan forgiveness equal to payroll costs and proportional amount of non-payroll costs, reiterating commitments made in a joint statement with the SBA Administrator released earlier this week. He said Treasury’s “intent is to get [forgiveness applications] processed quickly” and highlighted a “third-party calculator,” which borrowers can use to input all the required information and “get the forgiveness forms done in 15 minutes.”

Throughout questioning by Republicans and Democrats, Secretary Mnuchin predicted that the economy is “going to need another bipartisan [piece of] legislation to put more money into the economy” and emphasized that the Administration “absolutely believe[s] [that] small business[es] and…many big businesses in certain industries are absolutely going to need more help.” Learn More >>

Acting Comptroller of the Currency Previews “True Lender” Proposal and Commits to Vigorously Defend National Banks Against Madden Challenges

At a virtual event hosted by the Online Lending Policy Institute, OCC Acting Comptroller of the Currency Brian Brooks remarked that the agency is nearing a proposal on clarifying the “true lender” doctrine in response to “rent-a-charter” schemes, reported Bloomberg. A rent-a-charter scheme is a practice used by some fintechs and other non-bank lenders where the non-bank lender will enter into an arrangement with a bank for the bank to serve as the named originator of the credit. This enables the non-bank lender (i.e., the true lender) to take advantage of federal preemption afforded to banks and make loans at interest rates that would otherwise be usurious under state law. Brooks indicated that the proposed rule would seek to restore enforcement authority over these arrangements to federal banking authorities.

In his remarks, Brooks also committed to vigorously defend national banks against Madden challenges brought against banks in the courts. In Madden (2d. Cir. 2015), the Second Circuit rejected the longstanding “valid-when-made” doctrine, a common law doctrine providing that an assignee of a bank loan “steps into the shoes” of the bank that originated the credit and, therefore, bank loans carrying interest rates that are valid when made under applicable federal law remain valid with respect to that rate, regardless of whether the loan is subsequently sold or assigned to a non-bank. On June 9, a Colorado state court issued an opinion in Fulford v. Marlette Funding, LLC concurring with Madden and discounting the “valid-when-made” doctrine. The court acknowledged that the FDIC and OCC have issued proposals attempting to settle uncertainty created by Madden but discounted their significance claiming that the rule changes have not yet gone into effect. BPI participated in an amici brief in the case supporting the “valid-when-made” doctrine on both precedential and policy grounds arguing that it supports the smooth functioning of credit markets. Learn More >>

BPI Submits Comment Letter in Response to Brokered Deposits NPR

Last week, BPI submitted to the FDIC a comment letter in response to the agency’s notice of proposed rulemaking on brokered deposits. In its letter, BPI recommended revisions to the definition of “deposit broker” to make it more effective over the long term; the exception for agents or nominees whose primary purpose is not the placement of deposits; and the exception for insured depository institutions. The letter also requested several clarifications to the brokered deposit framework. Learn More >>

Rapid Adoption of Digital Banking Spurs Interest From Fraudsters, Warns FBI

The Federal Bureau of Investigation (FBI) released a public service announcement on June 10 warning that the agency expects cybercriminals to increase targeting of mobile banking apps as the adoption of these platforms grows. The announcement indicates that since the beginning of 2020 mobile banking has increased by 50%, and that 20% of Americans plan to visit physical bank branch locations less often. Fraudsters are targeting these users through the development of malicious trojans designed to live on smartphones and tablets, malicious promotion of fake banking applications and phishing attacks designed to mimic legitimate banking institution correspondence to solicit login credentials from unsuspecting victims.

Banks invest billions of dollar each year developing military-grade solutions to protect their customers and thwart cybercriminals, but educating consumers on how to avoid common threats is critical. As indicated in the FBI announcement, users should only obtain applications from trusted app stores and sources, implement and use two-factor authentication, use strong passwords and reach out to the bank directly if a correspondence or application appears suspicious. Learn More >>