BPInsights: June 28, 2019

BPInsights: June 28, 2019

TOP OF THE AGENDA

BPI Analysis of the DFAST Stress Test Results

On June 24, BPI published a blog post that analyzed the Dodd-Frank Act Stress Tests (DFAST) results, released on June 21. The main takeaway of this year’s stress test is that the aggregate stress capital buffer for banks moved back to the levels obtained using results from DFAST 2016 and 2017 after the significant rise observed using DFAST 2018 projections. The improvement in bank performance was in large part driven by projected gains in available-for-sale securities and somewhat lower trading and counterparty losses. Net revenues and loan losses under stress moved back to 2016/2017 levels. However, there was a significant increase in credit card loan losses, in part driven by changes in the Fed’s own models.

On June 27, the Federal Reserve announced that it approved the capital plans of 18 of the large banks as part of the Comprehensive Capital Analysis and Review (CCAR).

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5 Stories Driving the Week

1. BPI and ABA Submit Comment Letter Calling For Better Tailored Regulations for Foreign Banks

The Bank Policy Institute and American Bankers Association on June 21 jointly filed a comment letter with the Federal banking agencies on two proposals to tailor regulations for foreign banking organizations (FBOs). The letter argues that the final rules should rely upon the characteristics of an FBO’s intermediate holding company (IHC) — rather than its combined U.S. operations (CUSO) — to determine requirements that apply at the IHC level, and that the agencies should adopt the general framework of the proposals’ risk-based indicator approach, subject to deploying it so that an IHC’s characteristics determine IHC-level requirements, and to other important changes to the risk-based indicators that would more appropriately reflect the risk profiles of applicable FBOs. The letter further urges the agencies not to impose standardized liquidity requirements on FBOs with respect to their U.S. branch and agency networks.

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2. The Impact of Recent Changes in Capital Requirements on Mortgage Servicing Assets

BPI published a blog post on the effects of a capital requirements proposal for mortgage servicing assets. BPI found that excessive capital requirements for mortgage servicing assets have significantly increased market share by nonbanks. These thinly capitalized nonbanks are more likely to foreclose on borrowers, exacerbating the economic downturn during the next recession.

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3. FSB Seeks International Consensus on Liquidity Rules

On June 25, an official from the Financial Stability Board (FSB) indicated that the FSB intends to build global consensus on liquidity requirements imposed by host countries upon foreign firms, following the release earlier this month of an FSB report on market fragmentation that identified “strengthening the understanding of approaches…towards pre-positioning of capital and liquidity by international banks” as an area for further work. BPI urged against the imposition of more stringent liquidity requirements on foreign banking organizations in its June 21 response to the Federal Reserve’s foreign bank tailoring proposals, citing concerns of increased market fragmentation and reduced financial system resiliency.

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4. Supreme Court Narrows the Use of Regulatory Deference

On June 26, the Supreme Court issued a ruling in Kisor v. Wilkie, focused on long standing court precedent called “Auer deference,” i.e., the deference that U.S. courts have shown to an agency’s interpretation of its own regulations, and which has implications for the weight that U.S. courts will place on banking agency guidance. In a majority opinion by Justice Kagan, the Court substantially narrowed “Auer deference” in holding that while it should be retained as a formal matter under the doctrine of stare decisis (i.e., the legal principle of only overturning longstanding court precedent in very limited circumstances), it was necessary to “clear up” when and how the courts should apply Auer. Most importantly, the Supreme Court articulated a multi-step test for courts to use before applying Auer deference.

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5. Credit Unions Fall Short on Serving to Low-Income Consumers

Credit unions need to do a better job of serving low-income consumers, according to a new research paper from policy analysis firm Federal Financial Analytics. The study, funded by the American Bankers Association, found that credit unions disproportionately lend to higher-income consumers in low-income areas and deny a greater proportion of African-American borrowers than whites of comparable risk profiles.

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In Case You Missed It

Banking Industry Barely Mentioned in Democratic Debate

Over a series of two nights – July 26 and 27th – 20 Democratic presidential candidates sparred for their first debates. The candidates focused on issues ranging from immigration, health care and climate change but did not draw a spotlight on the financial services industry

House Financial Services Committee Announces Hearing on Facebook

The House Financial Services Committee announced that it will hold a hearing on Facebook’s plans for a digital currency at a July 17 hearing. Committee Chairman Maxine Waters said: “Facebook has data on billions of people and has repeatedly shown a disregard for the protection and careful use of this data.” She also asked the company to agree to a “moratorium on any movement forward on developing its cryptocurrency until Congress and regulators are able to examine the issues and take action.”  The Senate Banking Committee previously announced that it would hold a hearing on July 16 on Fabebook’s planned “Libra” project with David Marcus, the head of the Facebook subsidiary overseeing Libra, set to testify.

BPI Comments on FDIC IDI Plan Proposed Changes

On June 21, BPI (along with SIFMA and the ABA) submitted a comment letter in response to the FDIC’s advance notice of proposed rulemaking to tailor and improve its rule requiring large insured depository institutions (IDIs) to submit resolution plans. The letter recommends the rule be tailored, generally consistent with how the 165(d) resolution plan requirements are tailored, and recommends regular submission cycles and predictable and transparent resolution planning requirements.

An Even Better Way to Combine Stress Test Results

On June 19, BPI published a blog post presenting a new, simpler proposal for combining stress test results and one that draws some intuition from engineering and from portfolio theory in finance. We also show that the current approach will not only lead to the government allocating credit but also could result in an increase in bank risk through reduced diversification. By contrast, the approach we propose would lower bank risk by reducing leverage and would also leave credit allocation decisions by banks unchanged.

CFPB Hosts Symposium to Define UDAAP’s ‘Abusiveness’ Standard

On June 25, the Consumer Financial Protection Bureau (CFPB) hosted a symposium, the first in a series, examining the “abusiveness” standard articulated as part of the Dodd-Frank Act prohibition on “unfair, deceptive, or abusive acts or practices” (UDAAP). The symposium, which included remarks by CFPB Director Kathleen Kraninger, featured two panels, each of which weighed the benefits and other considerations regarding any potential action by the CFPB to provide additional clarity on the standard.

IOSCO: Liquidity in Corporate Bond Markets Under Stressed Condition

On June 21, the International Organization of Securities Commissions (IOSCO) published a report on “Liquidity in Corporate Bond Markets under Stressed Conditions.” IOSCO reported that post-crisis reforms reduced the capacity of intermediaries to provide liquidity to traders and caused a move away from principal-based toward and agency-based-trading. This will result in less liquidity under stressful conditions and more pronounced price dislocations in bond markets, which may spill over into other markets and also damage the real economy.

BPI Submits Comment Letter to Fed, FDIC on Resolution Planning Requirements

On June 21, BPI (joined by SIFMA and the ABA) submitted a comment letter to the Federal Reserve and FDIC on their proposed revisions to regulations governing resolution planning requirements for banks as mandated by section 165(d) of the Dodd-Frank Act. The letter identifies several areas for refinement and clarification within the proposal’s risk-based framework for filing frequency and content requirements, recommending revisions to the proposed timing of requests, notifications and other deadlines, as well as to elements of the proposal’s requirements for the plans’ informational content.

BPI Submits Letter on Fed, FFIEC Call Report and Supplemental Reporting Instructions for Operating Lease Liabilities

On June 26, BPI submitted a letter to the three banking agencies for the Supplemental Reporting Instructions issued by the Fed and Federal Financial Institutions Examination Council (FFIEC) in March regarding reporting of operating lease liabilities under the new accounting standard effective January 1. Arguing that operating lease liabilities should not be reported as secured borrowings under existing regulatory reporting definitions of those terms and that the FFIEC’s interpretation would result in higher FDIC assessments for banks of all sizes, the letter urges the agencies to withdraw the instructions and reissue them for public notice and comment with the clarification that operating lease liabilities should be reported as unsecured borrowings.

Events

7/10/2019 — House Financial Services Committee Holds Monetary Policy Hearing

7/10/2019 — House Subcommittee Hearing on ESG Governance

7/11/2019 — House Financial Services Committee Convenes Markup

7/16/2019 — Senate Banking Holds Facebook Digital Currency Hearing

7/17/2019 — House Committee Holds Facebook Cryptocurrency Hearing

7/24/2019 — House Financial Services Convenes Hearing on SunTrust, BB&T Merger

7/25/2019 — House Fintech Task Force Convenes AI Hearing

11/19/2019 – 11/21/2019 — The Clearing House + BPI 2019 Annual Conference

 

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