TOP OF THE AGENDA
Deposit Growth and Occam’s Razor
The topic of deposit growth has recently come front and center – interestingly, as both a business matter and a political matter. From a business perspective, the focus has been on the demonstrated ability of the nation’s largest banks to generate significant deposit growth, leading to questions about whether greater scale is necessary for other banks to compete – for example, whether deposit gathering challenges will prompt M&A activity. From a political perspective, the focus has been on whether community banks, which remain quite popular politically, are obsolescent.
To understand this better, BPI used U.S. Census Bureau data and FDIC branch data to compare deposit growth across urban and rural areas. This blog demonstrates that large bank deposit growth is not due to unfair competition, too-big-to-fail advantages or favorable regulatory treatment. The blog shows that technology and demographics are assisting universal and regional banks that serve large and mid-sized population centers to gather a significant percentage of deposits. Community banks continue to thrive in the rural areas that they have always considered their sweet spot and have even increased their share there. However, those areas are losing population, and therefore deposits, so community banks are shrinking relative to large banks.
INDUSTRY NEWS
A Modest Change To The LCR That Could Substantially Improve Financial Stability
In a blog post on March 21, Bill Nelson, BPI’s chief economist, proposes a relatively modest adjustment to the Liquidity Coverage Ratio (LCR) that should increase its ability to promote financial stability. The change is designed to increase the likelihood that banks will use in times of stress the liquid assets they set aside to comply with the regulation. Specifically, the change would reduce the projected liquidity needs under the regulation by any recent outflows that have already occurred. The change also could allow the Federal Reserve to maintain a smaller balance sheet because banks may feel less need to hold additional liquid assets over and above the LCR requirement.
BPI Submits SME Financing Evaluation to FSB
On March 21, BPI submitted a comment letter to the Financial Stability Board on the effects of financial regulatory reforms on the provision of financing to small- and medium-sized enterprises (SMEs). The letter presents evidence to show that post-crisis regulatory reforms have significantly curtailed the provisioning of credit to SMEs, with the largest demonstrable impacts in the U.S. appearing to result from the implementation of stress testing and the GSIB capital surcharge framework, the latter of which was developed as an international standard, although it has been implemented more stringently in the U.S. The letter also notes that, while other nonbank institutions may have increased the supply of credit to SMEs in the post-crisis period, research has shown that there is a significant net reduction in the supply of credit to SMEs.
BPI, Trades Submit Comment Letter on Proposed Standardized Approach for Calculating Exposure Amount of Derivatives Contracts
On March 18, BPI, along with several other trade groups, submitted comment letter to the Agencies with several recommendations on the proposal to implement the standardized approach for counterparty credit risk (SA-CCR). Specifically, the letter urges the Agencies to i) recalibrate the supervisory factors for the commodities asset class so as not to exceed the levels set by the Basel Committee standards; ii) provide a more risk-sensitive treatment of initial margin in calculating risk-weighted assets; iii) reconsider the application and calibration of the alpha factor; iv) avoid any disproportionate impact on the cost of business for commercial end-users resulting from reduced hedging; v) allow for netting of all transactions covered by a qualifying master netting agreement; and vi) ensure that SA-CCR does not negatively impact client clearing.
BPI Submits Comment Letter to CFPB on Delay of 2017 Payday Lending Rule
On March 18, BPI submitted a comment letter to the Consumer Financial Protection Bureau (CFPB) on its proposal to delay implementation of the mandatory underwriting provisions under the 2017 final rule on payday lending. The letter asks the CFPB to delay the entirety of the rule, arguing that even with the CFPB’s proposed changes, the payment provisions that would remain in the rule potentially cover a broad range of responsible, safe and sound bank loan products for creditworthy consumers, rather than the vulnerable consumers the rule is intended to protect. The letter further stresses the importance of bank-provided small dollar credit products in furthering access to credit, and of the need for sensible regulation of these products that does not impede banks’ ability to offer low-cost credit to consumers.
Supreme Court Clarifies Definition of “Debt Collector” in Obduskey v. McCarthy & Holthus LLP
On March 20, the US Supreme Court decided in Obduskey v. McCarthy & Holthus LLP that a company, such as a law firm retained by a bank, carrying out residential non-judicial foreclosures is not, for most purposes, a “debt collector” under the Fair Debt Collection Practices Act (FDCPA). The holding, which was by unanimous decision, affirmed a judgment by the U.S. Court of Appeals for the Tenth Circuit and reaffirmed that the procedural requirements of the FDCPA should not extend to enforcing a security interest in a non-judicial foreclosure. BPI, together with the Mortgage Bankers Association, American Bankers Association, U.S. Chamber of Commerce, Securities Industry and Financial Markets Association, and Western Bankers Association, submitted an amicus curae brief to the Supreme Court in November 2018 explaining why non-judicial foreclosures should not be considered debt collection activities under the FDCPA.
CFPB Announces Enhancements to Advisory Committees, Opening of Member Applications
On March 21, the Consumer Financial Protection Bureau (CFPB) announced enhancements to its advisory committee program, which includes the Consumer Advisory Board (CAB), Academic Research Council (ARC), Community Bank Advisory Council (CBAC), and Credit Union Advisory Council (CUAC). Beginning in fiscal year 2020, the committees will expand their focus to broad policy matters and increase the frequency of in-person meetings from two to three times annually, while the ARC, which will be elevated to a Director-level advisory committee, will continue its separate biennial meetings. Additionally, general committee membership will be extended from one-year to two-year staggered terms; the agency will begin accepting applications for membership for 45 days following the publication of a notice in the Federal Register.
BPI Announces CNBC as Exclusive Broadcast Partner for Fintech Ideas Festival
The Bank Policy Institute announced CNBC as the exclusive broadcast partner for the upcoming Fintech Ideas Festival, March 27-28 in San Francisco, CA. The Fintech Ideas Festival is an exclusive world-class event that brings together financial services and technology CEOs, futurists, investors and other leading thinkers to discuss and envision the future of technology and financial services. CNBC will provide live coverage from the Fintech Ideas Festival, as well as one-on-one interviews with top executives attending the conference. The current event lineup includes over 30 CEO influencers who will weigh in on a broad range of topics, including artificial intelligence cybersecurity, blockchain and data privacy.
BPI Files Amicus Brief on Applicability of HOLA Preemption to Successor Banks in McShannock v. JP Morgan Chase
On March 15, BPI submitted an amicus brief to the Ninth Circuit in McShannock v. JP Morgan Chase, supporting the view that Home Owners’ Loan Act (HOLA) preemption of conflicting state laws applies to a successor bank to the extent preemption applied at initiation of a loan originated by a federal savings association (FSA). Specifically, the brief offers several policy reasons why the U.S. Court of Appeals should hear an interlocutory appeal of the District Court’s opinion that HOLA preemption no longer applies to a loan upon its sale or transfer to a non-FSA successor bank.
Trump Administration Announces Changes to Flood Insurance Program
The Trump Administration said on March 18 that it would overhaul the government-sponsored flood insurance program. The Federal Emergency Management Agency, which runs the National Flood Insurance Program, said it will begin assessing properties individually according to several factors, including “rainfall, coastal surges and the distance to a body of water—rather than applying one formula across an entire flood zone when assessing flood risk and contract cost,” according to the Wall Street Journal. The government will also factor in the cost of replacing a home, which “push up premiums for homeowners with higher-valued properties and decrease those with lower-cost homes.” FEMA will release the new flood insurance rates for single-family homes on April 1, 2020 and they will go into effect October 1.
The Next Crisis: Banking Perspectives Q1 Issue is Now Available
The Q1 edition of Banking Perspectives, the quarterly journal of BPI and The Clearing House, focuses on “The Next Crisis” and looks at the steps taken to improve the safety and soundness of the banking industry since the last financial crisis and how some of the steps, mandated by bank regulations, could potentially contribute to the next crisis.
EVENTS
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.
Quarles Remarks on Financial Stability Board Agenda
On March 28, Federal Reserve Vice Chairman of Supervision Randal Quarles will deliver remarks on the Financial Stability Board agenda at 7:15 am EDT (12:15 pm local time) to the Joint Conference of the European Central Bank and the Journal of Money, Credit and Banking: Financial Intermediation, Regulation and Economic Policy:The 50th Anniversary of the Journal of Money, Credit and Banking.
Fed’s Bowman Delivers Remarks on Agriculture and Banking
On March 28 at 10 am EDT (8 am local time), Federal Reserve Governor Michelle Bowman delivers remarks on “Agriculture and Community Banking” at the Independent Community Bankers Association of New Mexico (ICBA/NM) 2019 Ag Lenders Conference in Deming, N.M.
Fed’s Clarida Remarks on Global Shocks
Federal Reserve Vice Chairman Richard Clarida delivers a speech on March 28 at 9:30 am EDT (2:30 pm local) on “Global Shocks and the U.S. Economy” at the Banque de France and European Money and Finance Forum Colloquium in Paris, France.
Fed’s Quarles Remarks on Macroprudential Policy
Federal Reserve Vice Chairman for Supervision Randal Quarles delivers remarks on March 29 at 12:05 pm on macroprudential policy at the Manhattan Institute’s Shadow Open Market Committee’s Spring 2019 Meeting.
Fed’s Quarles Delivers Remarks at Financial Regulation Forum
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 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
RESEARCH RUNDOWN
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 on the financial system, depending on the structure of its bank relationships.
