Top of the Agenda
The GSIB Surcharge, Distorted Incentives, and Reduced Lending Capacity
One of the key determinants of required capital for large banks with a global footprint is the so-called GSIB capital surcharge. This surcharge is an extra capital buffer that the eight U.S. Global Systemically Important Banks (GSIBs) are required to hold and is determined according to a regulatory assessment of each bank’s systemic footprint, or “GSIB score.” On December 19, BPI and the Financial Services Forum published a blog post that calls attention to one component of the GSIB score that has perverse consequences, namely the value of the bank’s common equity. Specifically, it penalizes a bank for growing its stock price and requires a bank that has reduced its risk to nonetheless increase its capital or constrain its lending. Further, the report shows that the increase in the common equity component of the GSIB score is material and distorts incentives to engage in lending that would otherwise support economic growth.
5 Stories Driving the Week
1. Agencies Find No Deficiencies in Resolution Plans from Largest Banks
On December 17, the Federal Reserve and FDIC announced that they did not find any “deficiencies,” or weaknesses that could result in extra prudential requirements in the resolution plans, known as living wills, for the largest and most complex domestic banks. Six out of eight banks, however, did have “shortcomings,” which are possible weaknesses that raise questions about the feasibility of a bank’s plan. The agencies have requested plans to address the identified shortcomings by March 31, 2020. Overall, the agencies noted that significant progress had been made on resolvability and to that end, the agencies said they expect to focus on testing the resolution capacities of banks in their next plans.
2. BoE Makes Capital Requirements More Countercyclical
On December 16, the Bank of England’s Financial Policy Committee announced that it is raising the UK countercyclical capital buffer from 1% to 2%. Moreover, they intend to replace the higher macroprudential buffer with lower minimum requirements leaving the overall level of loss-absorbing capacity of UK banking system about unchanged. They noted this change will improve the responsiveness of capital requirements to changes in economic conditions and help banks better absorb losses while maintaining the level of lending to the real economy through the cycle.
3. Financial Stability Board Focuses on Tech Risks
On December 17, the Financial Stability Board (FSB) said its 2020 program will focus on risks from novel financial technologies such as digital currencies, as reported by Politico. The global regulatory coordinating body said its 2020 work program would “reflect the evolving nature of the global financial system and associated risks to financial stability.” The FSB said it will open a public consultation on regulatory approaches to stablecoins in April before a final report to the G-20 economic powers in July. The group said it will continue to monitor the emergence of financial technology and assess its implications for financial stability. Separately, the FSB pledged to continue to evaluate the effects of regulatory reforms.
4. Fed’s Brainard Warns Adoption of Libra Could Put Consumers At Risk
On December 18, Federal Reserve Governor Lael Brainard warned in a speech about the risks of digital currencies, including Facebook’s proposed Libra. At an event hosted by the European Central Bank, Brainard said Libra could pose risks to consumers and financial stability. “Not only is it not clear whether comparable protections will be in place with Libra, or what recourse consumers will have, but it is not even clear how much price risk consumers will face,” Brainard said.
5. Fintechs Become More Like Banks in Lending Standards, New Tech Rules Loom in 2020
On December 16, Bloomberg reported that financial technology companies have been tightening their credit standards by raising prices on loans to customers with less-than stellar credit and instead lending more to households with higher incomes, above-average credit scores and “less debt relative to their wages.” Bloomberg reported that these “internet-first financial companies that emerged in the aftermath of last decade’s credit crisis promised to upend the industry by lending to risky borrowers” and instead are looking more and more like traditional banking institutions. For a Congressional outlook, Roll Call reported that the fintech industry could expect more data privacy legislation and a “smattering of smaller measures” that are narrowly tailored. “Congress has grown more concerned that Silicon Valley is going too far by tracking users’ every step online and then using that data to manipulate users’ web habits, purchasing decisions and even political stances — giving the companies unfettered access to saving and spending data,” Roll Call reported.
In Case You Missed It
BPI Symposium on the Current Expected Credit Loss Accounting Standard
On December 12, BPI organized a symposium on the regulatory capital implications of the Financial Accounting Standards Board’s new current expected credit loss (CECL) accounting standard for loan losses, which becomes effective on January 1, 2020. The symposium covered four topics related to the regulatory capital impact of CECL on bank balance sheets: (i) the likely day-one impact; (ii) whether CECL will be more or less procyclical than the incurred loss methodology; (iii) potential adjustments to the regulatory capital framework to offset unintended consequences of CECL; and (iv) integration of CECL into the Federal Reserve’s stress tests. The symposium, which was held under the Chatham House rule, was attended by representatives from federal bank regulatory agencies, staff of BPI’s member banks, market participants, and academics.
CFTC and SEC Proposes New Cross-Border Swaps Rules
The Commodities Future Trading Commission (CFTC) and Securities Exchange Commission (SEC) approved rules on December 18 for a new swaps framework. The CFTC approved a proposal to amend cross-border application of certain swaps rules and amendments to certain regulations for registered derivatives clearing organizations (DCOs), including addressing risk management and reporting obligations. The SEC also adopted a series of rule amendments to improve the framework for regulating cross-border security-based swaps, including single-name credit default swaps.
Bank of England Publishes Proposals for Stress Testing Financial Stability Implications of Climate Change
On December 18, the Bank of England published a discussion paper setting out its proposed framework for the 2021 Biennial Exploratory Scenario (BES) exercise, which sits as part of the Bank’s stress-testing framework. The objective of the 2021 BES will be to test the resilience of the largest UK banks and insurers to the physical and transition risks associated with different climate scenarios as well as looking more broadly at the financial system’s exposure to climate-related risk. The Bank of England is the first central bank to publish an approach to climate stress-testing. The proposal is open for comment until March 18, 2020.
ABA and BPI Comment on Proposed Interagency Policy Statement on Allowances for Credit Losses
On December 16, the ABA and BPI submitted a comment letter to the OCC, Fed, and FDIC responding to the proposed interagency policy statement on allowances for credit losses. The letter requests that the agencies provide clarification within the final policy statement on how expectations related to CECL practices may differ from current incurred loss accounting practices and how such practices and analyses may change. The response also emphasizes that the policy statement should reduce conflicting messages from other organizations (such as the Financial Accounting Standards Board and the American Institute of Certified Public Accountants) to supporting documentation and recommends that the agencies issue additional guidance on the use of external data and integration of such data into bank processes related to CECL. The letter further encourages the agencies to clarify capital management expectations under CECL.
Basel Committee Launches New Consolidated Framework to Organize Global Standards
On December 16, the Basel Committee launched its consolidated Basel Framework that brings together its global standards for the regulation and supervision and presents them on a new section of its website. The new format focuses on reorganizing the existing standards previously agreed to by the Basel Committee in December 2017. The Basel Committee noted that the preparation for the new format revealed “some inconsistencies between Basel requirements as well as ambiguities that needed to be addressed through minor policy changes.” Following an earlier consultation, Basel published a set of changes that the Committee agreed to make relative to the draft version of the framework and provided a list of frequently asked questions.
BPI Encourages Coordination of Small Business Lending Requirements in Joint Trades Letter
On December 13, BPI joined the American Bankers Association, the Consumer Bankers Association, and the Independent Community Bankers of America in responding to the federal banking agencies’ request for comment on ways to modify the Call Report data reporting requirements to adequately reflect banks’ small business lending activities, based on the GAO’s findings that “lending is based on outdated definitions that do not adequately capture lending to these segments of the economy, thereby limiting the ability of policymakers to monitor credit conditions…and adjust monetary policy as needed.” The associations urged the agencies to delay proposing any changes to the reporting requirements until completion of the Community Reinvestment Act and Section 1071 of the Dodd-Frank Act rulemakings to allow the revised definitions and Call Report reporting requirements for small business loans to be coordinated with those contained in the final rules.
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