Top of the Agenda
Banking Agencies and BCFP Issue Interagency Statement on Supervisory Guidance
On Tuesday, the Federal Reserve, FDIC, OCC, NCUA, and BCFP issued an interagency statement explaining the role of supervisory guidance and describing the agencies’ approach to such guidance, a topic of recent Congressional scrutiny and concern.
Notably, the statement clarifies that supervisory guidance does not have the force of law, and the agencies do not take enforcement actions based on supervisory guidance. In addition, the interagency statement explicitly affirms that “[e]xaminers will not criticize a supervised financial institution for a ‘violation’ of supervisory guidance. Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions.” This statement is particularly important in light of the trend in recent years for supervisors to base MRAs, MRIAs, and other supervisory criticisms and citations on purported non-compliance with guidance, as opposed to actual law or regulation. (Notably, the statement notes that examiners may instead “identify” any concerns over practices or deficiencies that do not constitute violations of law or regulation.) The statement further notes that the agencies intend to limit the use of numerical thresholds or other “bright lines” in describing supervisory guidance, and may sometimes issue supervisory guidance for notice and comment.
This interagency statement is a positive step forward in realigning the use of supervisory guidance with the legal framework and addressing the more general problem of “regulation by supervision.” BPI and its predecessors have worked extensively over the past few years to highlight in blogs, comment letters, and articles growing concerns over how these agencies have used guidance in recent years, as well as the broader trend towards “regulation by supervision.”
BPI Perspectives on the 2008 Financial Crisis
BPI RESPONDS TO FT ARTICLE: 5 SURPRISING OUTCOMES OF THE 2008 FINANCIAL CRISIS
Bill Nelson, chief economist at BPI, penned a letter to the editor responding to a Financial Times article. Nelson wrote:
Last week, Gillian Tett cited five “surprises” ( “Five surprising outcomes of the 2008 financial crisis”, September 7) that she says show there have been no material changes to how banks are behaving since the financial crisis. But Ms Tett’s list ignores at least five very material ways in which banks’ safety and soundness and support for the economy have improved greatly: banks now have $1tn more equity; banks have $2tn more highly liquid assets; banks have $1tn in loss-absorbing debt; banks have reduced their reliance on wholesale funding by more than $0.5tn; and banks have $1.5tn more loans to businesses and households.
She concludes that “cynics might say that [her] five surprises show just how powerful the financial elite remains in the west”. We conclude that a decade of hard work by bankers, regulators and international organisations has resulted in a banking system that can serve as a bulwark against financial stability risks while remaining an engine for growth.
Banks Are a Bulwark Against, Not a Source of, Financial Crisis Risk
As the industry looks back at the great financial crisis of 10 years ago, many wonder when the next crisis will come and what will be its cause. In a blog, BPI’s Greg Baer says that the next crisis likely won’t come from inside the banking sector, noting that the Federal Reserve has stated large banks “would be able to lend to households and businesses even during a severe global recession.” Instead, with assessments now indicating that banks are a source of stability not a source of risk, Baer urges regulators to continue to examine existing regulations and determine if they allow for innovation and economic growth, while also allowing the financial system to weather the next crisis.
10 YEARS LATER: EVALUATING THE REGULATORY RESPONSE TO THE GREAT FINANCIAL CRISIS
Last fall, former Federal Reserve Chairman Ben Bernanke and Former Treasury secretaries Hank Paulson and Timothy Geithner convened a group of the policymakers and senior staff who designed the U.S. response to the 2008 financial crisis. The group aimed to document and evaluate the crisis response. The group has written papers on each of the elements of the response — liquidity, guarantees, recapitalization, etc. — including lessons learned and options not taken. These papers, drafts of which were released last week and can be found here, were discussed at a conference at Brookings on September 11 and 12 (video of the conference: day 1 and day 2). A future book is being planned. BPI’s chief economist, Bill Nelson, coauthored the paper on the Fed’s broad-based emergency lending programs.
US BANK ANSWERS OCC’S CALL FOR RESPONSIBLE SHORT-TERM, SMALL-DOLLAR INSTALLMENT LOANS
US Bank this week announced the introduction of its “Simple Loans,” marking the first program of its kind to emerge since 2013, when the OCC issued strict federal regulations on small-dollar loans under then-Comptroller Thomas Curry. The change follows a May bulletin, backed by Comptroller Joseph Otting, reversing the OCC’s stance and encouraging banks to issue such loans as an alternative to higher-cost options for customers with reduced access to credit, such as payday loans and credit card advances.
BANKS’ RESILIENCY ROSE IN THE SECOND QUARTER SUPPORTED BY HIGHER CAPITAL LEVELS
BPI’s Bank Conditions Index (BCI) indicates that the resiliency of the banking industry increased in the second quarter of 2018 based on increased capital levels and strong liquidity positions, and a prudent stance on loan originations, according to a blog. The industry is “extremely resilient,” according to the Q2 data, with every category of the index registering improvements. “Overall, the BCI remains well above the level that maximizes the contribution of the index in tracking future GDP growth, suggesting that risk-aversion by banks or banking regulations continue to be holding back economic growth somewhat,” write the blog’s authors, Francisco Covas and Robert Lindgren.
BPI & TCH ANNUAL CONFERENCE 2018
Registration is now open for the 2018 BPI & TCH Annual Conference, the premier gathering for senior financial services executives, regulators, policymakers, and academics focused on the changing regulatory landscape and the future of payments.
November 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
FinCEN Provides Relief from Beneficial Ownership Requirements for Certain Rollovers and Renewals
On September 7, FinCEN released a ruling granting exceptive relief to covered financial institutions from the obligations of the Customer Due Diligence (CDD) rule’s requirement to identify and verify beneficial owner(s) when a legal entity customer opens a new account as a result of (i): a CD rollover; (ii) a renewal, modification, or extension of a loan that does not require underwriting review and approval; (iii) a renewal, modification, or extension of a commercial line of credit or credit card account that does not require underwriting review and approval; and (iv) a renewal of a safe deposit box rental. The exception does not apply to the initial opening of such accounts. As discussed in FinCEN’s notice, the ruling concludes a multi-month review process where temporary relief was provided for rollovers and renewals. It responds to industry concerns raised by FAQ 12 of FinCEN’s April 3 CDD guidance, which states that rollovers and renewals are considered a “new account” and therefore trigger the CDD rule’s beneficial ownership collection requirement.
FDIC Issues ANPR on Limited Exception for a Capped Amount of Reciprocal Deposits from Treatment as Brokered Deposits
On Thursday, the FDIC issued a notice of proposed rulemaking that conforms the agency’s regulations that implement brokered deposits and interest rate restrictions with recent changes to section 29 of the Federal Deposit Insurance Act made by section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The NPR is subject to a 30-day comment period, beginning on the date of publication in the Federal Register. The FDIC noted that this rulemaking is the first of a two-part effort to revisit its brokered deposit rules. The second part wil be issued later this year and will seek comment on the brokered deposit regulations more generally.
FDIC SEEKS COMMENT ON PROPOSED RETIREMENT OF CERTAIN FINANCIAL INSTITUTION LETTERS
On Monday, the FDIC issued for comment a proposal to retire to inactive status 374 risk management supervision-related Financial Institution Letters (FILs) issued between 1995 and 2017. The proposal is subject to a 30-day comment period. The FDIC has noted that 664 risk management supervision-related FILs will remain active and that FILs pertaining to other aspects of supervision are currently under review. The FDIC is taking this action in compliance with section 2222 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which requires the banking agencies and the FFIEC to conduct a review of their rules at least every 10 years to identify outdated or unnecessary regulations.
European Commission Releases Proposals to Strengthen AML Supervision at EU FIs
On September 12, in coordination with President Jean-Claude Juncker’s State of the Union Address, the European Commission released its proposed amendments to the Regulation establishing the European Banking Authority “to reinforce the role of the EBA in anti-money laundering (AML) supervision of the financial sector.” The amendments would allow the EBA to: (i) request national AML supervisors to investigate potential material breaches and impose targeted actions; (ii) address AML decisions directly to financial sector operators “as a last resort” if national authorities do not act; (iii) enhance supervision through common standards, periodic reviews of national supervisory authorities and risk assessments; and (iv) facilitate cooperation with non-EU countries on cross-border cases, among other things. Next, the proposed amendments will be discussed by the European Parliament and Council.
HOUSE FINANCIAL SERVICES COMMITTEE PASSES 12 BILLS, INCUDING DEPOSIT BROKER BILL AND DATA BREACH CONSUMER NOTIFICATION BILL
On Thursday, the House Financial Services Committee considered and reported favorably 12 bills. BPI focused its efforts on two bills and summitted a support letter on H.R. 6158, the Brokered Deposit Affiliate-Subsidiary Modernization Act, which would clarify that the definition of “deposit broker” does not extend to bank affiliates and subsidiaries that assist customers who wish to place their deposits at affiliated banks; and a letter on H.R. 6743, the Consumer Information Notification Requirement Act, which would put in place uniform consumer notification standards across all Gramm-Leach-Bliley Act (GLBA) regulatory agencies and would preempt state and local data protection and consumer notification standards for financial institutions subject to the GLBA.
SENATE BANKING COMMITTEE HEARING: FINTECH – EXAMINING DIGITIZATION, DATA, AND TECHNOLOGY
On Tuesday, September 18, the Senate Banking Committee will convene a hearing entitled, “Fintech: Examining Digitization, Data, and Technology.” The witnesses will be: Mr. Steven Boms, President, Allon Advocacy, on behalf of Consumer Financial Data Rights (CFDR); Mr. Brian Knight, Director of the Program on Financial Regulation, Mercatus Center at George Mason University; and Ms. Saule T. Omarova, Professor of Law and Director, Jack Clarke Program on the Law and Regulation of Financial Institutions and Markets, Cornell University.
RESCHEDULED: SENATE BANKING COMMITTEE HEARING ON IMPLEMENTATION OF THE ECONOMIC GROWTH, REGULATORY RELIEF, AND CONSUMER PROTECTION ACT
The Senate Banking Committee hearing on the Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act hearing, previously scheduled for Thursday, September 13, was postponed because of Hurricane Florence. The hearing is rescheduled for Tuesday, October 2. The witnesses will be: The Honorable Joseph M. Otting, Comptroller, Office of the Comptroller of the Currency; The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System; The Honorable Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation; and The Honorable J. Mark McWatters, Chairman, National Credit Union Administration. The hearing is the first such hearing following the passage of S. 2155.
The House will be in recess next week, while the Senate will be in session. Also of note, it is likely that the Senate will remain in session during much of October.
Bank of England working paper: Repo Market Functioning
This working paper uses a change in the Bank of England’s leverage ratio reporting requirements to study the effect of capital regulation on repo markets. The authors find that dealers subject to a more binding leverage ratio accepted less repo from their clients. In addition, the frequency of transactions are reduced and repo pricing worsens.
The Real Effects of the Financial Crisis
Former Federal Reserve Chairman Ben Bernanke reviews the post-crisis literature on the role of credit in economic behavior, arguing for the inclusion of credit factors in mainstream macroeconomic analysis. He also applies factor analysis to daily financial data, then compares the ability of factors to forecast macroeconomic indicators from 2006 to 2012. The analysis finds that factors associated with financial panic better predict adverse economic changes than those associated with household leverage.
Treasury Market Practices Group working paper: Do You Know How Your Treasury Trades Are Cleared and Settled?
This working paper describes the clearing and settlement structure of the secondary market for U.S. Treasury securities and identifies potential risk and resiliency issues. The paper is intended to rectify the lack of understanding of recent structural changes to the market on the part of market participants and facilitate public discussion of clearing and settlement practices.
NBER working paper: Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance?
This working paper uses a data set that covers all advanced economies that have experienced negative nominal interest rates to explore what effects negative rates have had on banks. The authors find that losses in interest income are offset by non-interest income and savings on deposit expenses, showing that banks have been relatively unaffected by negative rates.