BPInsights: March 15, 2019

TOP OF THE AGENDA

Survey Finds Banks are Trusted with Personal Data

A recent survey, conducted by Morning Consult on behalf of BPI, found that banks are trusted with consumers’ personal data. Specifically, the poll found that three in four voters are confident in their bank or financial institutions’ ability to securely collect and protect their personal data. Voters are 14 times more supportive of their personal data being used for identity theft protection and fraud prevention than for personal advertisements. The recent research also indicates that over eight in ten voters support a national law that requires banks and financial institutions to notify customers in the event of a data breach.

Machine Learning and Consumer Banking: An Appropriate Role for Regulation

Machine learning has the potential to democratize access to credit. It can expand the pool of people qualified to obtain credit—most notably low- and moderate-income (LMI) borrowers—and decrease the cost of that credit. It also can increase access to credit and reduce systemic risk by allowing different banks to analyze different factors, and thereby generate different results in a way that the existing FICO-based system discourages.

Banking regulators need to use a currently neglected tool, the notice and comment process required of them by Congress, to seek information and advice from experts in machine learning as to how it can benefit access to credit and what the role of regulation should be for this technology. As described in this BPI blog, they will likely hear that their current stance is antiquated and is the greatest current obstacle to a smart and sound way to offer credit to more Americans.

Maloney, Waters Introduce Anti-Money Laundering Reform Bills

This week, Representative Carolyn Maloney (D-NY), released the Corporate Transparency Act of 2019, which requires individuals forming a corporation or LLC to disclose the beneficial owners of these institutions to the Financial Crimes Enforcement Network (FinCEN). The bill would allow both law enforcement and financial institutions to have access to this FinCEN database.

On March 8, House Financial Services Chairwoman Maxine Waters (D-CA) released a bill targeting Bank Secrecy Act/Anti-Money Laundering (BSA/AML) reform. Notably, Chairwoman Waters’ proposal provides for increased information sharing among financial institutions and establishes a Financial Crimes Enforcement Network (FinCEN) Exchange program—a voluntary information-sharing partnership that includes law enforcement, financial institutions, and FinCEN. The bill also encourages innovation in BSA compliance through technology and creates innovation labs within the regulatory agencies.

BPI, Industry Trades Support Congressional AML Reform Efforts

The Bank Policy Institute, along with eight other financial services trade organizations, submitted a letter supporting Congress’s efforts to pass meaningful anti-money laundering reform legislation. The joint trade letter states that “these efforts will help modernize the anti-money laundering and countering the financing of terrorism (AML/CFT) regime in the United States and help prevent the use of corporate structures to hide the identities of their beneficial owners from law enforcement.”

BPI also submitted written testimony for the record to the House Financial Services Committee from Greg Baer, CEO of Bank Policy Institute. “We support the passage of legislation to end the use of U.S. companies as a vehicle for hiding assets from law enforcement and financial institutions legally required to perform due diligence. Doing so will better focus public and private sector resources on deterring and catching criminals, which is the goal of the anti-money laundering (AML) regime,” Baer said in testimony.

Regulators Announce Public Hearings on Proposed BB&T / SunTrust Merger

The Federal Reserve Board and the Federal Deposit Insurance Corporation announced on March 14 that they will jointly hold two public meetings on the proposed merger of BB&T Corporation and SunTrust Banks, Inc. The regulators said the meetings are meant to “collect information relating to the convenience and needs of the communities to be served, including a review of the insured depository institutions’ performance under the Community Reinvestment Act.” The public meetings will be April 25 in Charlotte, NC; and May 3 in Atlanta, GA.

Otting: Banking Agencies Debating How to Issue Proposed New FBO Liquidity Requirements

Bank regulators are discussing drafting a proposal that would require large banks to “defer some compensation for executives and to take back more of their bonuses if losses pile up at a firm,” according to a report by the Wall Street Journal. The Journal reported that the talks are in the early stages from at least three bank regulators: Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Reserve. The compensation rules are required by the 2010 Dodd Frank Act.

Chairman McWilliams Comments on Volcker Rule, Expected Tailoring Proposals

In remarks at the Institute of International Bankers Annual Conference on March 11, Federal Deposit Insurance Corporation (FDIC) Chairwoman Jelena McWilliams expressed the need to right-size the Volcker Rule’s extraterritorial scope while minimizing competitive inequities between U.S. banking entities and their foreign counterparts. She said the rule should not apply to activities not governed by U.S. rules and suggested that the agencies would consider available options for foreign funds in light of the operational burden imposed by existing requirements, which she described as “overly complex.” She also stated that interagency tailoring proposals for resolution planning and foreign bank capital and liquidity requirements are expected “very soon,” and announced a coming FDIC Advance Notice of Public Rulemaking to revise resolution planning requirements for insured depository institutions.

BPI Submits FASB CECL Transition Relief Letter

On March 8, BPI submitted a comment letter to the Financial Accounting Standards Board supporting its proposal to simplify the transition to Current Expected Credit Loss (CECL) accounting standard implementation. BPI supported the use of a one-time irrevocable option to elect the fair value for financial instruments measured at amortized cost but also recommended that FASB permit a one-time transfer of securities out of the held-to-maturity portfolio into the available-for-sale or trading portfolios. BPI also recommended electing for out of the available for sale portfolio into the trading portfolio, which would allow for transition relief consistent with the transition relief afforded upon the adoption of other new accounting standards.

CECL Spells Trouble for Small Banks, Consumers

In an op-ed in American Banker on March 11, Representative Blaine Luetkemeyer (R-MO) warned of the impact of the Current Expected Credit Loss (CECL) accounting standard proposed by the Financial Accounting Standards Board (FASB). Luetkemeyer said CECL “threatens to eliminate some lending services and restrict access to credit, particularly for low-income families. The potentially drastic consequences of CECL are looming over communities across the country and should be a cause for alarm for all consumers.” He said it would be “reckless” for FASB to move forward with the implementation of CECL without “adequate information on possible outcomes.”

BPI Submits Preliminary Rulemaking Comments on California Consumer Privacy Act

On March 8, BPI submitted a response to the California Attorney General’s request for preliminary rulemaking comments on implementing the California Consumer Privacy Act (CCPA). The letter recommends that any rule account for the robust privacy frameworks financial institutions already have in place and focus on protecting information provided to a business by a customer in their personal capacity, consistent with the CCPA’s legislative intent. The letter also calls for a transitional implementation period, with CCPA compliance requirements and enforcement activity beginning no sooner than 12 months after regulatory standards are finalized.

CFPB Releases Latest Edition of Supervisory Highlights

On March 12, the Consumer Financial Protection Bureau (CFPB) released the 18th edition of its Supervisory Highlights report, covering those supervisory activities completed between June and November of 2018. The report includes an overview of its examination findings in remittances, deposits, and mortgage and automobile loan servicing, the public enforcement actions undertaken by the agency, and certain recent modifications to the CFPB’s supervision process.

Fed Governor Lael Brainard Speaks on the Community Reinvestment Act

In a speech at a National Community Reinvestment Coalition conference on March 12, Federal Reserve Board Governor Lael Brainard expressed support for improved approaches to the determination of assessment areas under the Community Reinvestment Act (CRA), while retaining a focus on physical branch locations. Notably, she suggested the creation of separate assessment areas for retail and community development activities for banks “of a certain scale” and a broadening of the current community development test to include evaluation of qualified loans and investments. She also encouraged increased consistency and predictability and a tailoring of CRA evaluations to banks’ size and business model, as well as improved data collection to support expansion of the use of metrics in evaluations.

Lawmakers Launch Artificial Intelligence Caucus

On March 13, Senators Martin Heinrich (D-N.M.) and Rob Portman (R-OH) announced the launch of a bipartisan artificial intelligence caucus. The caucus aims to connect members and staff with artificial intelligence experts in the private sector and academia. It will complement the Trump administration’s work on prioritizing artificial intelligence in federal agency spending. Caucus members will include Senators Brian Schatz (D-HI), Cory Gardner (R-CO), Gary Peters (D-MI) and Joni Ernst (R-IA).

UK Finance Endorses Cybersecurity Profile

UK Finance last week endorsed the Financial Services Sector Cybersecurity Profile (Cybersecurity Profile), stating: “The Profile is a scalable and extensible assessment that financial institutions of all types can use for internal and external (i.e. third-party) cyber risk management, and as a mechanism to demonstrate compliance with various regulatory frameworks, both within the United Kingdom and globally.” The Cybersecurity Profile, which was publicly released at an October 25, 2018 event, was spearheaded by the Bank Policy Institute-BITS and American Bankers Association under the banner of the Financial Services Sector Coordinating Council (FSSCC), with the participation and support of the Futures Industry Association (FIA); Global Financial Markets Association (GFMA) and its member associations, the Association for Financial Markets in Europe (AFME), the Asia Securities Industry & Financial Markets Association (ASIFMA); and the Securities Industry and Financial Markets Association (SIFMA); the Institute of International Bankers (IIB); and the Institute of International Finance (IIF).

Federal Reserve FOMC Meeting

On March 20 Federal Reserve Board Chairman Jerome Powell will hold a news conference following the March 19-20 Federal Open Market Committee Meeting. The briefing will also be webcast live on the Board of Governors’ website.

New York Fed to Host FinTech Conference

On March 22, the Federal Reserve Bank of New York will hold its first research conference on FinTech. The full-day conference will include a panel discussion on FinTech themes and sessions on banks and FinTech lenders, the economics of blockchain, payments and tokens, and expanding regulatory tools.

House Subcommittee Holds Hurricane Relief Hearing

On March 26 at 10 am, the House Financial Services Subcommittee on Oversight and Investigations will convene a hearing entitled, “The Administration of Disaster Recovery Funds in the Wake of Hurricanes Harvey, Irma, and Maria.”

House Subcommittee Hearing on Corporate Governance Disclosures

On March 26, the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets will hold a hearing at 2 pm on proposals to “improve environmental, social and governance disclosures.”

Comptroller Otting Remarks at Policymaker Forum

Comptroller of the Currency Joseph Otting will deliver remarks at a policymaker forum hosted by Antonin Scalia Law School’s Financial Services Regulation Law Concentration and the Law & Economics Center’s Program on Financial Regulation & Technology on March 27 at the Law School’s Hazel Hall at 5 pm.

Fed’s Quarles Delivers Remarks

The Antonin Scalia Law School’s Financial Services Regulation Law Concentration and the Law & Economics Center’s Program on Financial Regulation & Technology are hosting a forum with Federal Reserve Board Vice Chair for Supervision Randal Quarles on April 9 at 5 pm at the Law School.

Financial Regulation Conference with Policymakers

The Antonin Scalia Law School’s Financial Services Regulation Law Concentration will host its first full day public policy conference on the Future of Financial Regulation on May 16. Craig Phillips, Counselor to the Secretary of the Treasury, will be the opening keynote speaker and SEC Commissioner Hester Peirce will be the luncheon speaker. Full agenda to come.

SIFMA and BPI Host Prudential Regulation Conference

The Securities Industry and Financial Markets Association (SIFMA) and BPI will host the 6th Annual Prudential Regulation Conference on June 4 in Washington DC. This year’s conference will assess how the post-crisis prudential regulatory framework is affecting the capital markets, including market liquidity, capital formation and innovation.

November 19-21: The Clearing House + BPI 2019 Annual Conference

The Clearing House and BPI will host the 2019 Annual Conference from November 19 to 21. The event provides a forum for the industry’s leaders to examine the changing dynamics of the bank regulatory and payments landscapes with two and half days of high-level keynote speakers, in-depth expert panels, and networking. Register today.
The Pierre, New York

Affordability, Financial Innovation, and the Start of the Housing Boom

This paper analyzes the relationship between rising house prices and non-traditional features of mortgage contracts. When purchase mortgage loan originations peaked in 2005, approximately 60 percent of these loans had at least one non-traditional feature. Non-traditional features of mortgages such as extended payment terms or interest-only amortization periods allow borrowers easier access to credit. Examining county-level data, the authors find that a rise in non-traditional mortgages preceded local housing booms in the mid-2000s. This was accompanied by declining denial rates and a shift from FHA to subprime mortgage loans, lending support to the view that rising house prices in the last decade were fueled by changing mortgage contract availability and a shift towards subprime borrowers.

When Quantitative Tightening Is Not Quantitative Tightening

In response to the Great Recession, the Federal Reserve lowered the federal funds target rate and greatly expanded its balance sheet with large-scale asset purchases. Since 2015, the Fed has been normalizing monetary policy, raising the target rate by 2.25 percentage points and beginning the process of reducing the size of the balance sheet. This post makes the argument that, while the expansion of the Federal Reserve’s balance sheet may have had large macroeconomic effects, the reduction of its balance sheet has relatively small macro effects. This argument is grounded in a theory that indicates growing the Fed’s balance sheet only has macro effects when the target rate is near zero.

Impact of Financial Regulations: Insights from an Online Repository of Studies

The Bank of International Settlements is launching a public repository of studies on the effects of financial regulation. This paper provides an overview of the new repository, gives a selection of insights on the effects of capital and liquidity regulations, and uses a meta-analysis of the studies within the repository to explain the heterogeneity of results. The authors find that the net stable funding ratio has a much stronger countercyclical effect on bank lending than capital or other liquidity requirements. They also find a wide range of estimates of the impact of capital regulation on loan growth.

Bank Networks and Systemic Risk in the Great Depression

This column uses data on U.S. bank relationships during the Great Depression to analyze changes in the structure of the banking network, develop a measure of systemic risk, and test that measure. The systemic risk measure developed by the authors incorporates both a bank’s internal credit risk and external risk from network connections. They find that systemic risk was widely dispersed at the outset of the depression but concentrated at the top of the system after the banking crisis of the 1930s. They also find that the banking system as it was in 1929 was made more fragile by the fact it concentrated banking interactions around particular banks in the network. This reinforces a point made elsewhere in the literature, that macroeconomic shocks will have different effects the financial system, depending on the structure of its bank relationships.