BPInsights: November 2, 2018

BPInsights: November 2, 2018

Top of the Agenda

Federal Reserve Tailoring Proposal Does Not go Far Enough to Resolve Significant Problems

The Federal Reserve issued a proposal on Wednesday to establish a revised framework for the application of prudential standards for large U.S. banking organizations and amend standards relating to liquidity, risk management, stress testing, and single-counterparty credit limits. This proposal implements the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), which provided the Federal Reserve with discretion to apply its prudential standards to institutions with total consolidated assets between $100 billion and $250 billion. In addition, the Federal Reserve, OCC, and FDIC issued a joint proposal that would tailor the application of regulatory capital rules, the liquidity coverage ratio rule, and proposed net stable funding ratio rule for large U.S. banking organizations. The proposals include four categories of regulatory standards based on the following indicators of a firm’s risk: total assets, cross-jurisdictional activity, nonbank assets, reliance on weighted short-term wholesale funding, and off-balance sheet exposure.

“The proposal considers important factors beyond a bank’s asset size; however, it does not do enough to tailor regulations based on banks’ risk profiles,” said Greg Baer, President and CEO of the Bank Policy Institute. “It is disappointing that the proposal defers reforms for CCAR stress testing and delays any consideration of reform for foreign banking organizations. Moreover, it is worth noting that this proposal does not resolve significant problems with the underlying rules it seeks to tailor.” The Federal Reserve has noted that it will, along with the FDIC, propose changes to the tailoring of resolution planning requirements at a later date.

BPI Releases Report Providing Statistical Rationale for Policymakers to Reform AML Regime

The BPI released on Monday an empirical study on the effectiveness of the current Bank Secrecy Act, anti-money laundering and sanctions regime. The report measures the resources U.S. financial institutions are devoting to compliance, and whether these resources are efficiently and effectively supporting law enforcement and national security efforts. The data shows that there are very few instances in which banks’ required regulatory compliance efforts yield results, such as law enforcement follow-up. “The data makes it clear that the current U.S. compliance regime is broken and failing at its core mission of catching criminals,” said Angelena Bradfield, BPI’s Vice President of AML/BSA, Sanctions & Privacy.

The findings included:

  • Survey participants are employing over 14,000 individuals, investing approximately $2.4 billion and utilizing as many as over 20 different I.T. systems per institution to assist them with BSA/AML compliance.
  • In 2017, survey participants reviewed approximately 16 million alerts and filed over 640,000 SARs and more than 5.2 million CTRs, and institutions reported that a median of 4% of SARs and an average of 0.44% of CTRs warranted follow-up inquiries from law enforcement.
  • Further, the survey found participants are employing over 915 individuals, investing roughly $173 million, and utilizing 3 to 6 I.T. systems at each institution to assist them with U.S.-based sanctions compliance, yet when screening wires and customer and related party accounts for potential OFAC matches, institutions reported true matches with an overall median of 0.00004%, with some institutions reporting no true customer matches at all.

Regulators Propose New Standardized Approach for Calculating Exposure of Derivatives Contracts

The Federal Reserve, OCC and FDIC issued a Notice of Proposed Rulemaking amending the capital rule to implement a new approach for calculating the exposure amount for derivative contracts, known as the standardized approach for counterparty credit risk (SA-CCR). The long-expected proposal incorporates SA-CCR into the determination of total leverage exposure under the supplementary leverage ratio, the cleared transaction framework under the capital rule, and the Fed’s single counterparty credit limit framework. The proposal would require advanced approaches banking organizations to use SA-CCR and would allow non-advanced approaches banking organizations to use the current exposure methodology (CEM) or SA-CCR in calculating risk-weighted assets.

BPI News

BITS Unveils Quantum Risk Calculator

On October 31, BITS released the BITS Quantum Risk Calculator (QRC) to help banks and other firms understand and manage future cyber risk to cryptography-based security controls. Quantum Computing is rapidly emerging, and while this will be an overall boon for innovation, an anticipated side effect of a post-Quantum Computing world (Y2Q) is that modern encryption, integral to protecting sensitive and regulated data in transit and at rest, may instantly become obsolete. BITS QRC encourages firms to understand which systems will be at risk and start preparations so applications and data can be migrated in an orderly fashion to quantum-safe architectures.

BPI Weekend Wedding

BPI’s Hilary Arden, Vice President and Director of Events, will marry Brad Scher, an Associate at Klerer Financial Services, in New York this weekend. Her BPI team congratulates her and wishes her a happy celebration.



Join us this November 26-28 for the 2018 BPI & Clearing House Annual Conference. Registration is now open for the premier gathering for senior financial services executives, regulators, policymakers, and academics focused on the changing regulatory landscape and the future of payments. Register today!
November 26-28, 2018, The Pierre, NYC

NYU Stern-BPI Gallatin Lecture Series on Banking

The New York University Stern Business School and BPI host a lecture entitled, “A Crisis of Beliefs: Investor Psychology and Financial Fragility,” with Andrei Shleifer, John L. Loeb Professor of Economics, Harvard University, on Dec. 4 at 5 pm.
Henry Kaufman Management Center
44 West Fourth Street (corner of Greene Street), NYC


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

Industry News and Events

State Regulators Renew Suit Against the OCC to block National Charter for Fintechs

On October 25, the Conference of State Bank Supervisors filed a lawsuit against the Office of Comptroller of the Currency challenging the federal regulator’s national bank charter for fintech firms. The OCC previously released plans for a limited charter for fintech companies, allowing them to operate across state lines. CSBS filed a similar suit against the OCC when the charter was in its proposed form.

Fed’s Stiroh Says Banking Becoming Homogenous Leads to Increased Systemic Risk

In a keynote address to the Finanical Times U.S. Banking Forum, Kevin Stiroh, head of supervision at the New York Fed, presented evidence that supervision and regulation, low interest rates, and emerging fintech innovation were driving large banks to become more similar. In particular, rather than specializing in capital markets or lending, banks were increasingly gravitating toward a universal-bank model. Stiroh notes that a move away from specialization could reduce economic efficiency and, while each individual bank might be better diversified, increase the systemic risk in the banking system as a whole. Stiroh notes, for example, that a binding leverage ratio provides an incentive for banks to shift toward riskier assets. Stiroh concludes that supervisors need to keep up with the changing environment. However, he did not discuss ways that regulation and supervision should be changed to reduce the incentives they create for homogenization.

Midterm Races to Watch and Key Policy Issues

The 2018 midterm elections are shaping up to be one of the most influential and important elections of our lifetime. Here’s a roundup of key races in House, Senate and gubernatorial elections and what policy areas you can expect each candidate to focus on if they are elected.

Important Senate Races to Decide 2019 Control

Several states will also determine who controls the Senate in 2019. Democrats will still need to win most of West Virginia, North Dakota, Missouri, Montana, Indiana, and Florida — and then win the Republican-held seats in Nevada, Arizona, and maybe even Tennessee or Texas — in order to win the 51 seats they need.


  • Federal Reserve: The House Financial Services Committee is expected to hold a hearing with Federal Reserve Vice Chairman of Supervision Randal Quarles on November 14. Vice Chairman Quarles will also testify in a hearing on November 15 at 10 am before the Senate Banking Committee.
  • GSE Pilots: The Senate Banking Committe on Housing, and Urban Affairs will hold will hold a hearing on November 14 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.
  • 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 A. Blanco is among the witnesses.

Fed Vice Chairman Quarles Delivers Remarks on the State of Financial Regulation at Brookings

On November 9, Federal Reserve Vice Chairman for Supervision Randal Quarles will deliver remarks at the Brookings Institution on the state of financial regulation. After delivering his prepared remarks, Vice Chairman Quarles will participate in a fireside chat with Brookings Senior Fellow Martin Baily. To conclude the event, Brookings Fellow Aaron Klein will moderate a panel discussion with Randall Guynn, head of the Financial Institutions Group at Davis Polk, and Rodgin Cohin, senior chairman of Sullivan & Cromwell, among other panelists on their perspective on the state of financial regulation.

Conference on Fintech and the New Financial Landscape

Fintech has been playing an increasing role in shaping financial and banking landscapes. The Federal Reserve Bank of Philadelphia hosts a conference 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

Research Rundown

What are the Consequences of Global Banking for the International Transmission of Shocks? A Quantitative Analysis

This paper proposes a structural model of global banking that could be used for counterfactual evaluations of regulatory policies. In particular, the model highlights a bank’s choice to either form a branch or subsidiary when entering a foreign market. The authors use the model to perform a study the European sovereign debt crisis , finding that the effects of the crisis on US lending could have been attenuated by greater subsidiarization.

Going the Extra Mile: Distant Lending and Credit Cycles

This paper proposes a novel method of measuring risk-taking by lenders; the average distance from the borrower to the bank. Average distances are greater during times of easy credit and shorter when credit is tight. The usefulness of the lending distance as a measure of risk-taking lies in the ease with which it is calculated. The authors use this measure to assess the interaction of lending competition with the credit cycle, finding that finding that greater competition pushes banks to take greater risks, lending to borrowers farther from bank locations.

Effects of Basel III Higher Capital and Liquidity Requirements on Banking Sectors across the Main South East Asian Nations

This paper analyzes the effect of higher capital and liquidity requirements under Basel III on bank capital, lending spreads, and steady state output of members of the Association of Southeast Asian Nations (ASEAN-5). The author finds that, under normal market conditions, banks in these countries already hold enough capital to meet the Basel III requirements, which will be fully enforced starting in 2019. The author also finds that banks will have to increase average lending spreads by 68% to meet those requirements. In the long run, the projected economic benefits of the Basel III for ASEAN-5 countries outweigh costs.

Are CoCo Bonds a Good Substitute for Equity? Evidence from European Banks

This paper examines whether the issuance of contingent convertible (CoCo) bonds reduces bank default risk to the same extent as the issuance of common equity. The authors estimate a model that captures the relationship between bank capital structure, bank asset risk, and credit default swap default spreads, then compare the announcement effect of new CoCo bond issuances to the effect of common equity issuances. They find that CoCo bonds converted to full and permanent debt relief reduce bank default risk as much as common equity, but that other CoCo bond types do not.