Top of the Agenda
Editor’s Note: BPInsights will not publish next week due to the Thanksgiving holiday. We will resume publicaction the week of November 26.
BPI STANDS BY RESEARCH SHOWING THAT CECL ACCOUNTING STANDARD IS PROCYCLICAL
BPI released a blog post defending previous finding that the new Current Expected Credit Loss (CECL) Accounting Standard for loan losses reserves will be procyclical. BPI reached that conclusion after estimating how reserves for losses would have behaved through the financial crisis under the new standard using real time forecasts rather than an assumption of perfect foresight. This blog post analyzes three studies and finds in two of the studies that CECL is countercyclical only when the models incorporate the assumption of “perfect foresight” and is procyclical when the perfect foresight assumption is relaxed – fully consistent with the finding of our working paper. The third study simply provides no evidence on whether CECL is pro- or countercyclical.
BPI RESEARCH PROPOSES MEANS TO INCREASE STRESS TEST TRANSPARENCY
BPI published a research note titled, A Proposal to Improve the Transparency of Stress Tests, which describes a straightforward and transparent way that the Fed could measure and establish guidelines for stress test severity. Specifically, the Fed could estimate the relationship between aggregate bank performance measures, such as loan loss provisions and pre-provision net revenue, and the macro variables in the stress test, and indicate that it intends to calibrate future scenarios so that they are roughly as stringent as the conditions that prevailed in the financial crisis.
BPI SUBMITS COMMENT LETTER ON CUSTOMER IDENTIFICATION PROGRAM REQUIREMENTS FOR AML
On Tuesday, BPI submitted a letter to FinCEN responding to its proposal to renew without change its requirements for banks’ anti-money laundering Customer Identification Programs (“CIPs”). The letter stresses FinCEN’s review as an opportunity to modernize key aspects of the rule that would remain unchanged under FinCEN’s current proposal. The response emphasizes the importance of allowing banks greater flexibility to adapt their CIP to a rapidly changing technological landscape, including to innovations that would allow firms to collect customer information from a broader range of secure and reliable sources. Finding that FinCEN’s proposal also underestimates the collection burden and compliance costs, the letter urges a more risk-based and less prescriptive approach to CIP requirements.
BPI FILES AMICUS BRIEF TO PROVIDE CLARITY IN THE FORECLOSURE PROCESS
BPI, along 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 curiae brief to the U.S. Supreme Court in Obduskey v. McCarthy & Holthus LLP. The brief, filed on Wednesday, argues that the procedural requirements of the Fair Debt Collection Practices Act (FDCPA) should not extend to enforcing a security interest in a non-judicial foreclosure. According to the brief, the FDCPA’s procedural requirements were enacted to address third-party collection of unsecured consumer debts rather than the process of mortgage foreclosure. Applying the FDCPA in the non-judicial foreclosure context would not provide meaningful protection for borrowers beyond the already-robust procedural protections of state and federal foreclosure law and would introduce unnecessary complexity in the foreclosure process, resulting in higher costs and burdens for both mortgage lenders and mortgage borrowers.
BPI, TRADES REQUEST EXTENSION ON AGENCY PROPOSAL FOR CALCULATING EXPOSURE OF DERIVATIVES CONTRACTS
BPI submitted a joint trades comment letter requesting an extension of 30 days to comment on banking agencies’ proposed rulemaking on the Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (SA-CCR). The trades urged that the extension be granted since the proposed approach has broad applications and represents a new methodology for calculating total risk-weighted assets for derivatives under the capital rule. Additional time is necessary also for industry participants to source complete and accurate data in their response to the proposed rulemaking, as requested by the proposal.
BPI Events
BPI & TCH ANNUAL CONFERENCE 2018
BPI & Clearing House host the 2018 Annual Conference on November 26-28. The event is 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
BPI HOLIDAY PARTY
Join BPI for our Holiday Party as we celebrate 2018 and usher in the holiday season. The party will be December 4 from 5 pm to 7 pm at the BPI Headquarters.
BITS PRESENTS CYBERSECURITY SECTOR PROFILE IN CHICAGO AND NEW YORK CITY
Josh Magri, BITS’s Senior Vice President and Counsel for Regulation & Developing Technology, presented the Financial Services Sector Cybersecurity Profile at the FS-ISAC Fall Summit in Chicago this week alongside Denyette DePierro of the American Bankers Association. Magri was also a panelist discussing changes in InfoSec oversight requirements. The appearances were a part of BITS’s ongoing efforts to promote the Profile to the financial services and regulatory communities and expand industry adoption.
NYU STERN-BPI GALLATIN LECTURE SERIES ON BANKING
BPI and New York University Stern School of Business present “A Crisis of Beliefs: Investor Psychology and Financial Fragility,” with Andrei Shleifer, John L. Loeb Professor of Economics, Harvard University on Dec. 4, 2018, 5 PM (Cocktail Hour Following Lecture).
Henry Kaufman Management Center
44 West Fourth Street (corner of Greene Street), NYC
COLUMBIA/BPI 2019 RESEARCH CONFERENCE – BANK REGULATION, LENDING AND GROWTH
The Bank Policy Institute and Columbia University’s School of International and Public Affairs will hold a conference, titled “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.
March 1, 2019, Columbia University, NYC
Industry News and Events
FEDERAL RESERVE’S QUARLES TESTIFIES IN HOUSE, SENATE ON INDUSTRY SUPERVISION
On Wednesday, the House Financial Services Committee held a hearing on the Federal Reserve’s supervision and regulation of the financial system with Vice Chairman of Supervision for the Federal Reserve Randal Quarles. Following the passage of S. 2155, Chairman Quarles explained how the Federal Reserve already implemented parts of the law and how the agency will continue to integrate it. Chairman Quarles focused on creating a transparent and simpler post-crisis regulatory and supervisory framework.
On Thursday, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing also on the Federal Reserve’s supervision and regulation with Vice Chairman Quarles. Chairman Quarles again highlighted how the Federal Reserve will continue to enact provisions of S. 2155. He noted that a joint proposal between the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation regarding a community bank leverage ratio will be released soon.
FEDERAL RESERVE REPORTS CONDITION OF U.S. BANKING SYSTEM AS ‘GENERALLY STRONG’
In conjunction with Vice Chairman Quarles’s testimony before Congress this week, the Federal Reserve issued its first Supervision and Regulation Report summarizing current banking conditions and regulatory and supervisory developments within the Federal Reserve. The report finds that the U.S. banking system is “generally strong,” with the safety and soundness of LFIs (defined to include banks overseen by the Fed’s Large Institution Supervision Coordinating Committee, and large and foreign banking organizations more broadly) continuing its post-crisis upward trend. The report similarly finds a majority of regional and community banks to be in satisfactory condition but notes the persistence of some compliance and risk-management issues across reviewed firms.
HOUSE, SENATE SET LEADERSHIP ROLES FOLLOWING ELECTION
In the Senate, Republican leader Mitch McConnell will remain in his role next Congress, though six-year term limits caused a shuffling among other party leadership. Majority Whip John Cornyn won’t keep the position, causing a chain reaction that’s pushed other leaders up one rung. John Thune, currently chairman of the GOP conference, will take Cornyn’s spot.
Senator John Barrasso will assume the conference chairmanship, while Roy Blunt will move from vice chairman of the conference into Barrasso’s prior job as chairman of the Senate Republican Policy Committee. Senator Joni Ernst will become the conference vice chairmanship. Ernst is the first woman on the Senate Republican leadership team in eight years.
Minority Leader Chuck Schumer (N.Y.) will stay at that post, with senior roles below him also remaining the same, including Minority Whip Dick Durbin (Ill.). Senator Patty Murray (Wash.) was re-elected assistant Democratic leader. Senator Debbie Stabenow (Mich.) will remain as the chairwoman of the Democratic Policy and Communications Committee.
In the House, Republican leader Kevin McCarthy won an election to be Minority Leader in the next Congress. McCarthy will succeed retiring House Speaker Paul Ryan as the top House Republican. Steve Scalise the current party whip, was elected to be minority whip in the next Congress. While Congresswoman Liz Cheney will be the new House GOP conference chairwoman.
House Democratic Leadership elections are scheduled for November 28th.
Both the House and Senate will adjourn for Thanksgiving recess today. The Senate returns on Monday, November 26 and the House on Tuesday, November 27. Targeted adjournment for Christmas recess is scheduled for Friday, December 14.
SENATE BANKING COMMITTEE TO HOLD UPCOMING HEARINGS
AML: The Senate Committee on Banking, Housing, and Urban Affairs will hold a hearing on November 29 at 10 am on “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform.” Financial Crimes Enforcement Network Director Kenneth Blanco is among the witnesses.
GSE Pilots: The Senate Banking, Housing, and Urban Affairs will hold a hearing on December 5 at 10 am on pilot programs at Fannie Mae and Freddie Mac. Witnesses include Sandra Thompson, deputy director of the Federal Housing Finance Agency, Fannie Mae Interim Chief Executive Officer Hugh Frater and Freddie Mac Chief Executive Officer Donald Layton. This hearing was rescheduled from November 14.
SENATE CONFIRMS BOWMAN TO FEDERAL RESERVE COMMUNITY BANK SEAT
The Senate in a 64-34 vote on Thursday confirmed Kansas State Banking Commissioner Michelle Bowman as a member of the Federal Reserve Board. Bowman, nominated in April, is the first person confirmed to the Fed seat reserved for a community banker, a position created in 2015. The seven-member Fed board now has five members, after dwindling to as low as three over the past year.
HOUSE PASSES BILL TO CEMENT CYBERSECURITY AGENCY AT DHS, AWAITS PRESIDENT’S SIGNATURE
The House on Tuesday passed HR 3359, the Cybersecurity and Infrastructure Security Act of 2018 that would rename the current National Protections and Programs Directorate (NPPD) as the Cybersecurity and Infrastructure Security Agency (CISA) and reorganize it into an operational agency of the DHS. The bill is expected to be signed into law by the President in the coming weeks. DHS officials have stated this legislation is more aligned with their responsibilities and expect the change will better communicate their cybersecurity mission to the private sector.
OCC’S OTTING ENCOURAGES FOREIGN BANKS TO CHOOSE NATIONAL SUPERVISION
In remarks in Tokyo on Wednesday, Comptroller of the Currency Joseph Otting encouraged foreign banking organizations to opt for OCC supervision over state charters, stressing the agency’s large-bank experience and the relative efficiency of a single national charter. The OCC has been “working to promote growth and service to bank customers [in the area of] supervision of international banks operating in the United States,” Otting said. “Operating under federal supervision is not right for every bank, but it can make sense depending on your business model.”
FED’S BRAINARD, FDIC’S MCWILLIAMS, HIGHLIGHT LESSONS ON FINTECH’S ROLE IN ARTIFICIAL INTELLIGENCE, BPI WEIGHS IN
In a Tuesday speech at the Philadelphia Fed’s Fintech event, Federal Reserve Board Governor Lael Brainard addressed the ever-growing role of AI in financial services, highlighting both the potential benefits and concerns for a supervisory and regulatory approach emphasizing risk mitigation. Brainard indicated that the Fed is open to suggestions on adapting current regulations or supervisory expectations to accommodate AI and other technological developments, while appropriately managing correspondent risks. At the same event, FDIC Chairman Jelena McWilliams also laid out a set of questions—focused on balancing innovation with safety and soundness, as well as expanding fintech activity among community banks—that would guide the thinking of the agency’s new Office of Innovation, announced last month.
BITS President Chris Feeney moderated a panel titled, “The Roles of Alternative Data in Expanding Credit Access and Bank/FinTech Partnership,” at the conference. The panel explored alternative data’s role in credit decisions, innovation and alternative lending processes as well as regulatory and policy implications of alternative data use.
EUROPEAN BANKING AUTHORITY CALLS FOR IMPROVEMENTS TO EUROPEAN STRESS TESTS
In a speech, European Banking Authority Chairperson Andrea Enria summarized some of the lessons learned as the EBA concluded its fourth round of stress tests. The speech highlighted the benefits and downsides of EBA’s use of banks’ own models in stress tests. On the upside, Enria said the use of banks’ own models provides incentives for banks to invest in risk management and provides market participants large amounts of data thereby improving market discipline. However, Enria noted the use of banks’ own models has its own set of challenges and regulators must impose unrealistic constraints on banks’ own models to “limit over-optimism of banks’ estimates.” He also criticized the U.S. approach as being opaque and imprecise, and leading to uncertainty regarding the amount of required capital banks need to hold. Of note, the speech cites a blogpost published by BPI on the EBA’s stress tests.
UK REACHES DEAL DETAILING BREXIT PLANS, IMPACTING U.S. BANKING INSTITUTIONS’ EUROPEAN FOOTPRINT
Developments in Brexit intensified this week with British Prime Minister Theresa May announcing a deal governing the UK’s withdrawal from the European Union. The agreement which would keep the U.K. bound to the EU for many years after the country leaves the bloc in March, allows the U.K. to maintain close ties to the EU, its biggest trading partner, while also reclaiming control over its borders. The U.K. approved the Brexit referendum in 2016 and May’s announcement details what leaving the EU would entail. If May gets the agreement past parliament (which is not at all guaranteed), the accompanying transition period to 2020 will give banks and other financial firms more time to shift jobs and assets to the EU. The announcement follows reports of plans by U.S. financial institutions, including Bank of America, Citigroup and Wells Fargo, to move sizeable portions of their European operations from London to Paris.
FTC HOLDS HEARINGS ON COMPETITION AND CONSUMER PROTECTION
The FTC held the sixth session of its series of “Hearings on Competition and Consumer Protection in the 21st Century.” Major themes in the discussion included the dampening effect of GDPR on technology venture investment, the disproportionate compliance costs borne by young or small firms after data privacy regulations are enforced, and how this reduces incentives for entrepreneurship. Further sessions focusing on artificial intelligence, data security and privacy will be held November 13-14, December 11-12 and February 12-13. Public comment can be made online until January 7, 2019.
Research Rundown
THE FUTURE OF FINANCIAL STABILITY AND CYBER RISK
This article examines the intersection of cyber and financial risk, highlighting several areas of special concern: increasingly sophisticated adversaries, a lack of understanding of the interactions of cyber risk and financial contagion, fragmented response efforts, and the continuing evolution of the financial system. The authors recommend harmonizing international regulations, developing quantitative measures of cyber risk, mapping critical market structures, and conducting both domestic and international exercises involving executives from the worlds of finance and cybersecurity.
TEN YEARS AFTER THE CRISIS, IS THE BANKING SYSTEM SAFER?
This post evaluates the safety of the banking system today relative to the pre-crisis and crisis periods using four measures of vulnerability: aggregate capital needed to maintain a minimum acceptable capital ratio under stress, fire sale-induced systemic spillover losses under stress, liquidity mismatch under stress, and run vulnerability. All four measures of vulnerability increased significantly in the period leading up to the crisis, dropped sharply in the period since, and have stabilized at much lower levels, with the liquidity stress ratio peaking a year earlier than the others.
LOCAL BANKS, CREDIT SUPPLY, AND HOUSE PRICES
This paper studies the effect of an increase in the supply of mortgage credit on house prices and employment. The author builds a natural experiment around the 2008 exodus of Swiss retail customers from UBS, a large, universal bank, to smaller, local banks that specialize in mortgage lending. Exploiting the fact that mortgage lenders near UBS branches received a larger influx of deposits, the author finds that banks invest strictly in their area of specialization in response to the exogenous positive funding shock. Further, increases in house prices around the affected banks were more than 50 percent greater than other neighborhoods. Employment at small firms reliant on real estate collateral located in the affected neighborhoods also increased.
THE COSTS AND BENEFITS OF LIQUIDITY REGULATIONS: LESSONS FROM AN IDLE MONETARY POLICY TOOL
This paper investigates the response of banks to regulation-mandated changes in liquid assets. Liquidity regulations have only been adopted since the global financial crisis, but the reserve requirement that has been in place since the pre-crisis era serves as a simple, de facto liquidity rule. The authors find that regulation-imposed increases in high quality liquid assets reduce lending, with the least liquid loans decreasing the most, and bank profits. However, increased HQLA also decreases the likelihood of failure.
