BPInsights: May 30, 2020

BPInsights: May 30, 2020

Top of the Agenda

Good Things Come in Threes: BPI Publishes New Posts on Bank Capital Regulation and the Fed’s Upcoming Sensitivity Analysis

The Bank Policy Institute released three new blog posts this week focused on bank capital regulation and the Federal Reserve’s upcoming sensitivity analysis as part of the 2020 CCAR stress test.

The first note analyzes what the effect would be on bank capital levels if there were a second wave of virus and prolonged economic downturn; using the most severe stress scenario published by Moody’s Analytics. The results show that even in this scenario, banks retain sufficient capital to remain well above minimum capital requirements and maintain most of their capital buffers; as a result, none of the major banks would face dividend restrictions. That said, the resulting increase in the stress capital buffer would decrease banks’ lending capacity.

The second examines possible approaches the Federal Reserve could take in conducting its announced sensitivity analysis. While the above note shows that even a severe continuing stress would leave banks in strong condition, the case for the Fed imposing such a stress as a binding capital requirement is not strong. It would be procyclical, and would run expressly counter to other actions that it and the other banking agencies have taken to expand lending capacity. For a guide on how it should proceed, the Fed should look to its earlier SCAP test, which was a favorable turning point in the 2007-09 crisis.

The last notes that if the Fed truly wishes to update its stress test assumptions to account for current economic and banking conditions, its operational risk assumptions are long overdue and a good place to start. In essence, CCAR 2020 presumes bank litigation losses stemming from a bank-caused crisis with litigation losses akin to those stemming from the 2007-09 financial crisis; the current crisis, however, was caused by a virus. Thus, operational risk losses are likely to be dramatically lower than presumed.

Stories Driving the Week

Nearly Unanimous House Vote Seeks to Ease PPP Guidelines, Legislation Moves to Senate

Paycheck Protection Program recipients worried about overly restrictive rules governing the loans may soon see relief following a 417 to 1 vote on H.R. 710 in the House that would ease some of the provisions governing the legislation. Most notably, the legislation expands the deadline to use the money from eight weeks to 24 weeks and addresses the issue of loan forgiveness by reducing the required percentage that business owners must allocate to payroll from 75 percent — established by the Small Business Administration and Treasury — down to 60 percent. Some of the other major provisions of the legislation include postponing the deadline to rehire workers past June 30, the addition of payroll tax deferments, the addition of SBA reporting requirements for loans valued at more than $2 million, and $10 billion in funding set aside for Community Development Financial Institutions.

The legislation now heads to the Senate for consideration. Senator Marco Rubio (R-FL) — Chair of the Senate Small Business Committee— stated that the bill has “inadvertent technical errors” according to POLITICO, and plans to push for separate bipartisan legislation he introduced last week. Learn More >>

FT: A Ban on U.S. Banks Issuing Dividends Would be Bad Policy

A ban on a banks’ ability to issue dividends would produce few to no benefits and would have substantial costs, argues BPI President and CEO Greg Baer in an op-ed published this week in the Financial Times. Baer references similar measures currently being implemented in the E.U. and the U.K. that were designed with the intent of enhancing lending capacity in response to the COVID-19 pandemic. However, the U.K.’s announced dividend plan resulted in a reduction in the investment value of banks to an average of just 0.4 times their tangible book value, ultimately serving contrary to the goal of expanding an institution’s ability to lend in response to customer needs.

Baer indicates that U.S. banks have dramatically expanded lending by $800 billion. The largest banks with more than $100 billion in assets are holding on to $245 billion in capital above requirements and continue to maintain regulatory buffers with an overall lending capacity of more than $2 trillion. He concludes the op-ed stating that those advocating for government-mandated dividend halts for banks (and only banks) appear to have adopted an “if it ain’t broke, let’s break it” approach to bank regulation. While perhaps politically appealing, such an approach is bad policy and a repudiation of the good work that both regulators and banks have done since the last financial crisis. Learn More >>


Release: Cyber Risk Institute Launches to Mitigate Cyber Risk and Support Compliance for Financial Services

The Bank Policy Institute led a coalition of trade associations and financial institutions to create the Cyber Risk Institute (CRI), which was formally announced on May 27. CRI is a coalition of more than 31 firms and growing, representing the entire spectrum of the financial services industry. The organization was established to develop cyber security and resiliency strategies and standards to help institutions respond to evolving threats. By implementing a common language for cybersecurity risk assessment, CRI will continue to maintain and develop the Financial Services Cybersecurity Profile (the “Profile”; also known outside of the United States as the Financial Services Profile, or “FSP”).

To learn more about the organization and its role, please click here.

NGFS Publishes Five Recommendations for Managing Climate-Related and Environmental Risks

The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) — a multinational coordinating body of central banks and supervisors established in 2017 following the Paris One Planet Summit — released a set of five recommendations in a “Guide for Supervisors” on May 27. The guide establishes a set of best practices for managing climate-related and environmental risks and presents the following five recommendations:

Recommendation 1 – Supervisors are recommended to determine how climate-related and environmental risks transmit to the economies and financial sectors in their jurisdictions and identify how these risks are likely to be material for the supervised entities.

Recommendation 2 – Develop a clear strategy, establish an internal organisation and allocate adequate resources to address climate-related and environmental risks.

Recommendation 3 – Identify the exposures of supervised entities that are vulnerable to climate-related and environmental risks and assess the potential losses should these risks materialise.

Recommendation 4 – Set supervisory expectations to create transparency for financial institutions in relation to the supervisors’ understanding of a prudent approach to climate-related and environmental risks.

Recommendation 5 – Ensure adequate management of climate-related and environmental risks by financial institutions and take mitigating action where appropriate.

This report was preceded by a consultation guide published by the European Central Bank (ECB) on May 20, setting expectations for how banks should manage climate-related and environmental risks when implementing business strategies, governance, risk management and public disclosures. Further reports are expected from the NGFS in the coming months relating to scenario analysis and stress testing. Learn More >>


In Case You Missed It

Southern District of New York Holds Syndicated Loans Are Not ‘Securities’ in Kirshner Decision

On May 22, a judge for the Southern District of New York granted a motion to dismiss in Kirschner v. JPMorgan, rejecting claims that syndicated term loans should be treated as “securities” under securities laws. In the case, the plaintiff, who represented investors in a syndicated term loan to Millennium Laboratories LLC, asserted state securities and common law claims against several banks that arranged and distributed portions of a loan (a term loan B) to approximately 400 mutual funds, hedge funds and other institutional investors (you can read BPI’s amici brief, submitted with LSTA, supporting the defendants’ motion to dismiss, here). In granting the defendants’ motion to dismiss, the court applied the so-called “family resemblance” test set forth in Reves v. Ernst & Young (a 1990 Supreme Court decision and seminal case on the issue of whether or not an instrument is a security) and found that the “[p]laintiff has cited no case in which a court has held that a syndicated term loan is a “security,” and this Court has found no such case in its review [of relevant case law].” As BPI and LSTA noted in the amici brief arguing in favor of the position adopted by the court because the term loan B is structurally no different from any other term loan B in the institutional syndicated loan market, a ruling that a syndicated loan is a “security” could have significant adverse implications for the entire loan market, which is vital to the economy.

Federal Banking Agencies Issue FAQs on CRA Consideration For COVID-Related Activities

The federal banking agencies issued a set of FAQs on the Community Reinvestment Act (CRA) consideration for activities in response to the COVID-19 pandemic on May 27. The FAQs clarify information included in the Joint Statement on CRA Consideration for Activities in Response to COVID-19, which was issued on March 19, and:

  • Explain how both retail and community development activities will be considered in examinations;
  • Include guidance on the treatment of COVID-19 designated disaster areas; and
  • Outline CRA eligibility and reporting standards for the Paycheck Protection Program and the Main Street Lending Program.


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