BPInsights: November 22, 2019

BPInsights: November 22, 2019

Top of the Agenda

Regulators, Industry Examine the Changing Financial Landscape at BPI-The Clearing House Annual Conference

BPI and the Clearing House hosted their 2019 Annual Conference, which convened leading voices from the public and private sector for in-depth discussions on the changing financial services, bank regulatory and payments landscape. At the conference on November 21, Treasury Department Deputy Secretary Justin Muzinich said the Treasury Department is committed to working with Congress to find a bipartisan solution to ending anonymous shell companies and reforming the anti-money laundering regime. “Treasury believes we must address the current gap in our system so that the ultimate owners of companies are identified at the time of company formation,” he said in a speech. “Doing so will discourage the use of shell companies to disguise illicit funds, preventing terrorist financing and other serious crimes.” He also addressed digital currencies that he said raise concerns related to money laundering, monetary policy and self-governance.

On November 20, Comptroller of the Currency Joseph Otting reiterated that the OCC would release, by mid-December, a notice of proposed rulemaking (NPR) to reform the Community Reinvestment Act (CRA).  The NPR is expected to provide more transparency on what qualifies for CRA credit, add flexibility to determining assessment areas, and better clarify measurement metrics.

At a later panel, FDIC Chairman Jelena McWilliams said she is inclined to join the OCC in its upcoming CRA proposal. McWilliams also said she expects a brokered deposit rule soon, possibly by the end of the year. On innovation, she said regulators will be releasing interagency guidance on the use of artificial intelligence and alternative data.  Much of the discussion at the conference focused on the changing landscape of finance and technology. “If a tech company wants to be regulated like a bank, they’re welcome to come on board…we have 6,000 employees and we will hire 6,000 more,” McWilliams said in response to tech companies seeking to utilize the ILC charter. The CEOs of U.S. Bancorp, Citigroup, Comerica Bank, Synchrony and Regions Financial Corporation noted that the banking industry is doing a good job of providing innovative services for customers.

On November 21, CFPB Director Kathy Kraninger said her agency will soon provide more clarity on what constitutes an “abusive practice,” as enshrined in the Dodd-Frank Act. She also provided updates on the Bureau’s efforts to encourage greater innovation.


5 Stories Driving the Week

1. FDIC Board Approves Final Rules on Standardized Approach to Counterparty Credit Risk, High-Volatility Commercial Real Estate, Custody Bank Supplementary Leverage Ratio

On November 19, the FDIC, Federal Reserve, and the Office of the Comptroller of the Currency issued final rules on several pending capital proposals. One rule implements the new Standardized Approach to Counterparty Credit Risk (SA-CCR) for calculating the exposure amount of derivative contracts under the regulatory capital rule; SA-CCR will be mandatory for calculating advanced approaches banks’ total risk-weighted assets, while other firms will be permitted to use either SA-CCR or the current exposure methodology. The agencies also finalized a rule that revises the definition of high-volatility commercial real estate (HVCRE) exposures, in line with the requirements of the Economic Growth, Regulatory Relief, and Consumer Protection Act, applying a risk weighting of 150% to such exposures. The agencies provided revisions to the Supplementary Leverage Ratio (SLR) for custody banks that permit the exclusion of qualifying central bank deposits from the denominator of the supplementary leverage ratio. BPI’s comment letters on the HVCRE and SA-CCR proposals can be found here and here.

2. FDIC Proposes Codifying Section 19 Policy as Regulation to Further Address Hiring Barriers 

On November 19, the FDIC issued a proposal to codify, as a regulation, its Statement of Policy on applying the Federal Deposit Insurance Act’s (FDI Act) Section 19 for the hiring of individuals at banks convicted of certain crimes. Under the FDI Act, an individual “convicted of any criminal offense involving dishonesty, breach of trust, or money laundering” is banned from “participating, directly or indirectly, in the conduct of the affairs of any insured depository institution” without first obtaining prior written consent from the FDIC. “We will always strive to protect the integrity of our banking system, but Section 19 should not be a barrier to entry for individuals who have committed minor crimes in the past, paid their debt to society, and reformed their conduct, and are now seeking to gain employment with a financial institution,” FDIC Chairman Jelena McWilliams said. The FDIC indicated that the policy objective of the proposal is to provide additional clarity on the applicability of Section 19 provisions to banks and seek public comment on all aspects of the rule, including additional proposals that could expand the scope of relief available for minor offenses. “The FDIC is taking a significant step in narrowing an overly prescriptive rule that disqualified from banking sector employment people who committed minor crimes, and deserve a second chance,” Greg Baer, President and CEO of the Bank Policy Institute, said in a statement.


3. OCC and FDIC Clarify State Rules for Online Lenders 

The OCC and the FDIC issued a proposal to clarify the federal law that governs the interest rates that state-chartered banks and national banks, respectively, may charge on a loan. In addition, the proposal would confirm that — consistent with federal banking law as well as fundamental principles of contract law and the common law — the interest rate terms of a bank loan remain valid following the sale, assignment, or other transfer of the loan to any third party. The proposal, which will have a 60-day comment period, is intended to address the uncertainty created by a 2015 U.S. Court of Appeals for the Second Circuit decision, Madden v. Midland Funding, which called into question the enforceability of interest rate provisions of bank credit agreements following assignment of the loan to a non-bank.


4. BPI Submits Letters to Banking Agencies on Supervision Tailoring 

On November 18, BPI submitted comment letters to the Federal Reserve, FDIC and OCC, urging them to align their supervision and examination processes with recent final rules tailoring prudential standards for large financial institutions. BPI asked that the agencies revise their frameworks for supervision, horizontal reviews, and supervisory expectations and guidance to align with the interagency tailoring rules, as well as confirm through notice and comment that the standard and scope of their supervisory review for purposes of evaluating a bank’s capital adequacy, asset quality, management capability, earnings, liquidity adequacy and sensitivity to market risk, collectively referred to as CAMELS rating, aligns with the rule.


5. Federal Reserve, FDIC Approve BB&T, SunTrust Merger

On November 19, the Federal Reserve and FDIC approved the merger of BB&T Corporation with SunTrust Banks, Inc. The regulators evaluated the merger based on statutory requirements – factors including financial and managerial resources, convenience and needs of the communities of the combined entity and financial stability of the proposal. The merged bank will be named Truist. The Justice Department also signed off on the proposed merger earlier this month. The regulatory approval process also included approvals from the Georgia Department of Banking and Finance and the North Carolina Commissioner of Banks. The approvals largely pave the way for the institutions to complete the merger by year-end with their targeted closing date of December 6.


In Case You Missed It

Federal Reserve Mulls Creating Digital Currency
On November 19, Federal Reserve Chairman Jerome Powell said the central bank is considering creating a digital currency, according to a report from Politico. The remarks were noted in a letter responding to an inquiry from Congressmen French Hill (R-AR) and Bill Foster (D-IL).  Powell said that the Fed is weighing the costs and benefits of a new U.S. dollar central bank digital currency (CBDC) but is not currently developing one.  He also noted that it is monitoring Facebook’s proposed Libra digital currency and further stated that a CBDC would raise important policy, operational and legal questions.

Innovation Inside and Outside of the Regulatory Sandbox
On November 19, Naeha Prakash, BPI Associate General Counsel and Senior Vice President for Consumer Regulatory Affairs, published a blog post that evaluates whether sandboxes allow for further innovation or function as a narrow window by which participants must operate in order to innovate. This post encourages innovation inside and outside of the regulatory sandbox. A regulatory sandbox, although intended to support innovation, raises considerations regarding its practical ability to increase financial inclusion for consumers, while also fostering responsible innovation by financial institutions.

Basel Committee Takes Aim at Libra In Describing Crypto Risks
On November 19, the chairman of the Basel Committee on Banking Supervision said that cryptocurrencies are “unsafe to rely on as a medium of exchange or store of value,” according to a report from Politico. During a keynote speech at Euro Finance Week in Frankfurt, Pablo Hernández de Cos specifically highlighted Facebook’s digital currency initiative Libra during remarks describing how continued growth of cryptocurrencies could increase risks for banks.  He stated that Libra could require banks to play “different and non-mutually exclusive roles,” and that there are “broader questions about banks’ business models” to consider with the emergence of stablecoins as a source of instant payments.” He also noted Basel is undergoing a research initiative on digital currencies.

Cooperation Between Home and Host Central Banks Rather Than Fragmentation of International Banks
On November 19, BPI Chief Economist Bill Nelson published a new working paper exploring the benefits of cooperation between home and host central banks. To some extent, BPI finds that the increased prepositioning is a consequence of strains that developed during and after the financial crisis in the informal understanding between central banks over the provision of lender of last resort support to an international banking organization.  Stronger cooperation among authorities could allow for reduced prepositioning.

Federal Reserve Issued Third Financial Stability Report, Noting Strong Capital of Largest Banks
On November 15, the Federal Reserve Board issued its third twice-yearly Financial Stability Report. The report noted that the nation’s largest banks are strongly capitalized, despite several large banks having announced plans to reduce their voluntary capital buffers. The Fed concluded that investor appetite returned to a level consistent with historical norms but remained elevated for some important asset classes, such as riskier corporate debt, commercial real estate and farmland markets. Moreover, borrowing by businesses remained elevated while household leverage remained modest relative to income. The Fed also reported that banks’ holdings of high-quality liquid assets remained elevated at large banks and the amount of runnable liabilities in the financial system was low. The Fed identified three near-term risks to the financial system: stresses in Europe, such as those related to Brexit; stresses in emerging markets; and an unexpected and market slowdown in U.S. economic growth.

Quantifying Just How High U.S. Capital Requirements Are
On November 20, Head of Research Francisco Covas published a blog post that shows differences in the implementation of the capital rules across jurisdictions can lead to highly material variation in bank regulatory capital ratios. Specifically, the results reported here indicate that the aggregate Tier 1 capital ratio of U.S. GSIBs would be about 8 percentage points higher if their capital ratios were calculated with the capital framework being used in the United Kingdom. Consequently, the aggregate Tier 1 capital ratio of domestic GSIBs would be close to 22 percent. Based on this estimate, the capital ratio of domestic GSIBs is close to the upper end of the estimate in a paper by Federal Reserve economists, and well above the estimated optimal range of between 10 and 14 percent from a paper by Bank of England economists.

House, Senate Panel Pass Bills Reauthorizing Terrorism Risk Insurance Program
Measures to reauthorize the Terrorism Risk Insurance Act (TRIA) advanced in the House and Senate this week. On November 18, the House passed by a vote of 385-22 legislation that would extend the TRIA Program for seven years. On November 20, the Senate Banking Committee followed by approving by voice vote a similar reauthorization of the TRIA program. The Terrorism Risk Insurance Program, established following the September 11 attacks, provides a catastrophic insurance backstop in the event of a major terrorist attack.

Top Senate Democrats Release Principles for Federal Privacy Legislation
On November 18, a group of top-ranking Senate Democrats unveiled data privacy policy principles, calling for sweeping protections of consumers’ personal information. Top Democrats on the Senate’s Commerce, Judiciary, Banking and HELP committees released the principles that “call for a comprehensive framework to include checks on the collection, use and sharing of consumers’ data; enhanced protections for kids and teens; greater safeguards for consumers against abusive data collection and algorithmic discrimination; and the ability of users to access, delete and correct their information.” Politico reported that the announcement comes “as bipartisan efforts to introduce a consensus federal privacy bill have remained publicly stalled for months, despite the ongoing uproar over privacy mishaps in the tech sector and other major industries.”


Upcoming Events

  • 12/05/2019 — Brookings Institution Event on “Repo Market Disruption” with BPI’s Bill Nelson Among the Speakers
  • 12/05/2019 — Senate Banking Committee Holds Financial Regulators Oversight Hearing
  • 12/10/2019 — Federal Reserve FOMC Meeting
  • 12/10/2019 — Senate Banking Committee Convenes SEC Oversight Hearing

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