Top of the Agenda
HOW WOULD BANKS THAT CONCENTRATE IN MAIN STREET LENDING FARE IN THE FED’S CCAR STRESS TEST?
A new analysis from BPI finds that approximately 800 banks with less than $10 billion in assets – nearly one-fifth of all banks under $10 billion – would have failed the 2018 stress tests. The failed banks have a higher share of loans-to-assets relative to non-failed banks. In addition, failed banks have a higher share of commercial real estate loans and small business loans and a lower share of securities. The results help demonstrate that the CCAR stress test creates incentives for banks to substitute away from small business lending and certain other asset classes whose implicit risk-weights under the test are significantly higher than appears justified.
The blog uses previous work from BPI’s head of research, Francisco Covas, which reverse-engineers the Fed’s CCAR stress tests to estimate the implicit risk weights for different asset classes and uses the same methodology to demonstrate how small banks would have fared if they were subjected to the 2018 stress tests.
SENATORS ENCOURAGE AGENCIES TO IMPLEMENT S. 2155 “EXPEDITIOUSLY”
On Tuesday, the Senate Banking Committee held a hearing entitled, “Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act” with the heads of the prudential regulators as witnesses. Chairman Michael Crapo encouraged the agencies to carry out their responsibilities to implement S. 2155 “expeditiously.” Crapo said the agencies should: significantly tailor regulations for banks with between $100 billion and $250 billion in total consolidated assets; tailor the Liquidity Coverage Ratio for regional banks with more than $250 billion in total consolidated assets; reassess the advanced approaches thresholds; and examine whether the regulations that apply to the standalone U.S. operations of foreign banks should also be tailored at the same time and in a similar manner as U.S. banks. During the hearing, Federal Reserve Vice Chairman for Supervision Randall Quarles offered little new information about the Fed’s plans for tailoring, other than to say the Fed’s tailoring NPR will be out by year-end and was unlikely to provide specific tailoring for FBOs. Republican Senators also used the hearing to press for a meaningful outcome on recent interagency “guidance on guidance.”
- In related news, seven Republican Senate Banking Committee members sent a letter to relevant regulators asking them to review all aspects of the Volcker Rule’s implementation as part of the inter-agency NPR, and specifically urged regulators to revise the “covered funds” definition to curtail its overly-broad application.
FDIC MOVES TO INCREASE TRANSPARENCY AND ACCOUNTABILITY
At a time when many other federal agencies remain opaque, the FDIC under Chairman Jelena McWilliams is taking steps to increase transparency and accountability. In a speech on Wednesday, McWilliams announced the FDIC’s “Trust Through Transparency” initiative, which includes a new section on its website to provide new performance metrics that cross its business lines. The FDIC also issued a request for information on the FDIC’s communication methods and related initiatives.
NEXT WEEK’S FINTECH POLICY SUMMIT EXPLORES CHANGING FINANCIAL TECHNOLOGY AND PUBLIC POLICY
BPI is hosting the second FinTech Policy Summit this upcoming Wednesday in Washington D.C. The FinTech Policy Summit explores the changes in technology and innovation through the lens of public policy. The event includes panels with technologists, innovators, financial services executives, and policymakers. Keynote addresses will be given Craig Phillips, Counselor to the Treasury Secretary; Andrew Morris, Chief Content Officer for Money 20/20; Paul Watkins, Director of the Office of Innovation at the Bureau of Consumer Financial Protection; and BITS President Chris Feeney. The event kicks off at 2pm and will be followed by a rooftop networking reception. Register today!
FED LOOKS TO EXPAND POWER OVER PAYMENTS SYSTEM
In a speech on Tuesday, Federal Reserve Board Governor Lael Brainard floated a proposal for a new 24×365 faster payments system to meet the needs of today’s digital economy. A new faster payments system from the Fed, which would need to be developed for deployment sometime in the future, could potentially increase market fragmentation as it would compete with the already operational RTP system from The Clearing House, which launched in 2017. Further, the Fed acknowledges that another faster payments network could “lower the prospects for ubiquitous faster payments in the United States.” The Fed said it was seeking public input without committing to a specific course of action.
OP-ED URGES RECALIBRATION OF PRUDENTIAL STANDARDS FOR FOREIGN BANKS
In advance of Tuesday’s Senate Banking Committee hearing on the Economic Growth, Regulatory Relief, and Consumer Protection Act, Keith Noreika, former Acting Comptroller of the Currency, penned an op-ed on the vital role foreign banks play in the U.S. economy. However, he notes that “poorly calibrated rules” have caused various international banks to reduce their activities in the U.S., “which has hurt American workers and communities.” He urged senators to remember international banks contributions to the economy. “These contributions merit the preservation of the longstanding principle of competitive equality, which requires careful recalibration and tailoring of enhanced prudential standards. Refinements that promote transparency, risk sensitivity, and empirically sound standards will benefit competitive equality,” Noreika adds.
HUD OIG REPORT REVEALS $413M IN UNNECESSARY PREFORECLOSURE CLAIM COSTS, RECOMMENDS CHANGES
A report released Monday reveals that HUD spent $413 million between 2012 and 2017 in unnecessary preforeclosure claim costs and interest stemming from lenders’ failure to comply with established timeframes for completing servicing actions for defaulted loans. The report, conducted by HUD’s Office of Inspector General (OIG), finds that “although the unnecessary amounts were caused by lenders’ inaction, HUD reimbursed lenders for these added costs through FHA insurance claims.” The OIG recommended that HUD amend regulations to require curtailment of these unnecessary servicing delay costs, coordinating with its Office of Finance and Budget to ensure the requirements “can be consistently enforced throughout the claims process.“
BPI RECOMMENDS CHANGES TO THE FDIC’S REQUIREMENT THAT INSURED BANKS SUBMIT RESOLUTION PLANS
BPI filed a comment letter with the FDIC concerning the requirement that all insured banks with $50 billion or more of assets file a plan each year detailing how they would be resolved under the FDI Act (a so-called “IDI plan”). The letter was in response to an admittedly relatively perfunctory notice that the FDIC ran in the Federal Register to renew the information collection elements of the IDI plan requirement. Nonetheless, BPI took the opportunity to make two key recommendations to the FDIC. One, the FDIC staff should provide guidance about its expectations for IDI plans on a public rather than confidential basis to enhance transparency in the process. And two, the informational requirements for IDI plans, on the one hand, and holding company bankruptcy plans required under Section 165(d) of Dodd-Frank, on the other hand, should be harmonized, allowing filers to focus their resolution planning efforts on a single resolution plan filing containing information and analysis that is most applicable to their business model and risk profile while also lowering the burden of review by agency staff. BPI believes that implementing these changes will improve the usefulness of the information collected in the IDI plan and minimize the associated burden on filers.
Underwritings: The BPI Blog
FIVE QUESTIONS FOR THE FEDERAL RESERVE ON THE GSIB SURCHARGE
On Monday, BPI and the Financial Services Forum (FSF) posted a joint blog where BPI and FSF economists highlight five important questions that Fed policymakers should be asking staff about the method that was used to determine a bank’s surcharge. The blog also provides some initial observations that are worth exploring while trying to reach the answer to the five questions. The eight U.S. GSIBs subject to the surcharge make 45 percent of bank loans to businesses and households, support roughly three-quarters of the credit intermediation in capital markets, and provide nearly all the credit needed for international trade. But because capital is an expensive source of funding, the surcharges can also reduce the supply, or increase the cost, of credit to the U.S. economy, so finding the right level is important.
BITS COORDINATES WITH SOCIAL SECURITY ADMINISTRATION ON SYNTHETIC ID FRAUD MITIGATION
BITS has been actively engaged with the Social Security Administration (SSA) in developing electronic access to the SSA database using e-consent, as required by the “Economic Growth, Regulatory Relief, and Consumer Protection Act.” The SSA had requested a series of use cases to help understand how the system will be used and BITS delivered the final drafts this past week. BITS has also been active as part of a broader coalition of financial institutions in developing a requirement surveys, coordinating with other regulatory agencies to validate security requirements and coordinating with the SSA on technical details. Notably, the SSA agreed not to include three pages of IT security questions, preferring to rely on existing regulatory oversight to validate security requirements.
BPI & TCH ANNUAL CONFERENCE 2018
Join us this November 26-28 in New York for the commercial banking industry’s leading conference! This gathering, jointly-hosted by BPI and The Clearing House, brings together over 600 bank executives, regulators, policymakers, and academics for an in-depth discussion focused on the key issues for the country’s commercial banks. This year’s program features over 20 panel discussions and keynote remarks for a thoughtful look at the changing regulatory landscape and the future of payments.
Conference attendees will glean insights from panel sessions including:
• Supervision 2.0: Adapting Bank Supervision to the Digital Age
• Banks, Fintechs, Neo-Banks: The Drive for Constant Innovation
• The Federal Reserve Presidents Panel
• Considering Correlations Between Bank Regulation and Inequality
• CEO Roundtable on the Business of Banking
Early Bird Registration ends soon — Register today!
Nov. 26-28, 2018, The Pierre, NYC
CALL FOR PAPERS: COLUMBIA/BPI 2019 RESEARCH CONFERENCE – BANK REGULATION, LENDING AND GROWTH
The Bank Policy Institute and Columbia University’s School of International and Public Affairs invite the submission of papers for a conference on Bank Regulation, Lending and Growth. The purpose of the conference is to bring together academics, market participants, and policymakers to discuss the latest research on how regulation affects credit formation and economic activity. Paper submission deadline is November 1, 2018.
March 1, 2019, Columbia University, NYC
REGULATORS FAIL TO ADDRESS BSA PROBLEMS FOR LARGER BANKS
On Wednesday, the federal banking agencies, NCUA, and FinCEN released an “Interagency Statement on Sharing Bank Secrecy Act Resources.” The statement details how community-focused banks and credit unions, with less-complex operations and lower risk profiles, may share resources to improve BSA/AML compliance. Notably, it says that (i) financial institutions should approach collaboration “like other business decisions, with due diligence and thorough consideration of the risks and benefits;” (ii) collaboration should be contractually supported and performance periodically reviewed and evaluated by management; (iii) where banks share employees or other resources to manage BSA/AML compliance, existing regulatory guidance applies; and (iv) collaborative arrangements/consortia formed under Section 314(b) of the USA PATRIOT Act are not covered by this notice.
While the statement does not specifically address the size of banks covered by the guidance, the language used (less-complex, lower risk profile) suggests that large banks are not covered. According to initial BPI survey results, in 2017, 18 large institutions filed 640,000 suspicious activity reports (SARs), which is 31.6 percent of the over 2 million SARs filed with FinCEN that year. Previous BPI research found that of the roughly one million SARs filed annually by depository institutions (banks and credit unions), approximately 50 percent are filed by only four large banks. Whereas a small to mid-sized bank might file a handful of SARs per year, the largest banks file roughly one SAR per minute. Yet, institutions reported that in 2017 a median of 4 percent of SARs received follow-up inquiries from law enforcement. While financial institutions of all sizes devote substantial resources to AML/CFT compliance, this guidance appears to do very little to make the AML/CFT regime more efficient and effective for those institutions that provide the vast majority of leads to law enforcement.
IS THERE A ROLE FOR LEGISLATION WHEN IT COMES TO ADDRESSING DATA BREACHES?
On September 28, the House Financial Services Committee held a hearing entitled, “Examining Opportunities for Financial Markets in the Digital Era.” The hearing signaled that existing standards and regulation do not reflect technological innovation in the financial sector. Fintech provides numerous benefits, but also risks, such as third-party data aggregation and selling. Policymakers increasingly believe there is a role for legislation, including Federal legislation to address recent breaches, such as Equifax and Facebook.
Next Week in Washington
SENATE HEARING: CONSUMER DATA PRIVACY: EXAMINING LESSONS FROM THE EUROPEAN UNION’S GENERAL DATA PROTECTION REGULATION AND THE CALIFORNIA CONSUMER PRIVACY ACT
On Wednesday, the Senate committee on Commerce, Science, and Transportation will hold a hearing entitled, “Consumer Data Privacy: Examining Lessons From the European Union’s General Data Protection Regulation and the California Consumer Privacy Act.”
SENATE HEARING: EXPLORING THE CRYPTOCURRENCY AND BLOCKCHAIN ECOSYSTEM
On Thursday, the Senate Committee on Banking, Housing and Urban Affairs will hold a hearing on “Exploring the Cryptocurrency and Blockchain Ecosystem.”
SENATE HEARING: OVERSIGHT OF PILOT PROGRAMS AT FANNIE MAE AND FREDDIE MAC
The Senate Committee on Banking, Housing and Urban Affairs will hold a hearing on Thursday, October 18 entitled “Oversight of Pilot Programs at Fannie Mae and Freddie Mac.”
SENATE HEARING (POSTPONED, DATE TBD): COMBATING MONEY LAUNDERING AND OTHER FORMS OF ILLICIT FINANCE – REGULATOR AND LAW ENFORCEMENT PERSPECTIVES ON REFORM
The Senate Banking, Housing and Urban Affairs Committee postponed a hearing entitled “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform.” The hearing was originally scheduled for October 4 and a new date has not been set.
- The Senate remains in session through most of October with the possibility they will adjourn prior to the midterm elections. The House is in recess currently and is expected to return November 13th.
CONFERENCE ON FINTECH AND THE NEW FINANCIAL LANDSCAPE
Fintech has been playing an increasing role in shaping financial and banking landscapes. The conference, hosted by the Federal Reserve Bank of Philadelphia, intends to provide a platform for industry practitioners, regulators, policymakers, business leaders, and researchers to share their thoughts on the new financial landscape.
November 13-14, Renaissance Philadelphia Downtown, Philadelphia
RESOLVING “TOO BIG TO FAIL”
A post on the New York Fed’s Liberty Street Economics blog examines how the cost of capital is affected by the requirement that big banks file “living wills.” Authors Nicola Cetorelli and James Traina find that living wills increase the cost of capital, indicating a reduction in implicit “too big to fail” subsidies. The effect is greater for banks that were more systemically important prior to the announcement of living wills.
BANK PERFORMANCE UNDER NEGATIVE INTEREST RATES
A post on the Centre for Economic Policy Research’s policy portal, VOX, analyzes balance sheet data from 5,000 banks in the EU and Japan to determine how banks respond to negative interest rate policies. Authors Jose Lopez, Andrew Rose, and Mark Spiegel find that overall net income appears to be unaffected by negative interest rates as compared to low positive rates. However, this seems to result from banks mitigating losses in net interest income by increasing net non-interest income, a strategy that the authors believe may be unsustainable.
THE IMPLICATIONS OF REMOVING REPO ASSETS FROM THE LEVERAGE RATIO
This article from the European Central Bank uses counterfactual exercises to assess the effects of removing repo assets from the leverage ratio. The authors find that when repo assets are removed, the probability of bank default increases and the power of the leverage ratio to predict bank default decreases, suggesting that exempting repo assets from the leverage ratio may adversely affect the stability of the financial system.
THE DIFFERENTIAL IMPACT OF BANK SIZE ON SYSTEMIC RISK
A working paper from the Federal Reserve Board uses historical data on bank failures to determine whether the failure of larger banks has a different effect on the real economy than the failure of smaller banks. The authors, Amy Lorenc and Jeffery Zhang, find that banks in the 99th percentile by size have a statistically significant, adverse effect on GDP growth and the unemployment rate. This impact increases with size: banks in the top 0.15 percent of the distribution an impact more than twice that of banks in the top 0.75 percent of the distribution.
CROSS-BORDER BANKING AND THE CIRCUMVENTION OF MACROPRUDENTIAL AND CAPITAL CONTROL MEASURES
This working paper from the International Monetary Fund analyzes the joint effect of macroprudential policy and capital control measures on cross-border banking flows. The authors, Eugenio Cerutti and Haonan Zhou, find that both types of measures have international spillover effects and that many of the spillover effects are possibly associated with circumvention or arbitrage motives. They find no evidence that additional capital controls could mitigate spillovers.
DOES THE G-SIB FRAMEWORK INCENTIVISE WINDOW-DRESSING BEHAVIOUR? EVIDENCE OF G-SIBS AND REPORTING BANKS
This article from the European Central Bank evaluates whether the framework for regulating global systemically important banks incentivizes window-dressing behavior and whether capital market activities are an important component. G-SIBs are assigned a capital surcharge on the basis of year-end measurements of risk indicators; “window-dressing” is when banks reduce their indicators in the fourth quarter in order to reduce their surcharge. The authors find that banks have reduced their risk score and some risk indicators at year-end and that capital market activities are a main driver of this behavior.