Top of the Agenda
Hudson Institute Panel Discusses Need to Strengthen National Security by Ending Anonymous Shell Companies
On November 5, the Hudson Institute hosted a discussion on preventing illicit financial activity, which focused on congressional legislation to end anonymous shell companies and reform the Bank Secrecy Act/anti-money laundering (BSA/AML) regime. The event included participants from the Treasury Department, BPI, and the German Marshall Fund. The Treasury Department’s Terrorist Financing and Financial Crimes Senior Policy Advisor Young Lee discussed the Administration’s support for legislation to end anonymous shell companies and said the legislative efforts are “making very good progress…This is something that Treasury has long been focused on. Secretary Mnuchin has articulated his commitment to the House on numerous occasions that he views this as a critical national security priority,” Lee said. BPI’s Angelena Bradfield, Senior Vice President, AML/BSA, presented the private sector’s views and said that under the current regulatory compliance system, banks are examined based on procedures and documentation compliance, not on whether they are providing highly useful information to law enforcement. She also echoed the view of other panelists that the anonymous shell company system is “a significant loophole in the U.S. system.” She said it’s something that we at BPI “really do believe should be closed. It’s used by money launderers, human traffickers, terrorists, sanctions evaders.”
The event follows congressional legislative momentum to reform the AML regime and end anonymous shell companies. On October 22, the House of Representatives passed (HR 2513, the COUNTER Act of 2019) along with legislation to end anonymous shell companies (HR 2513, the Corporate Transparency Act of 2019) with a bipartisan vote. In the Senate, a bipartisan group of eight Senators has introduced the Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act to end anonymous shell companies and update the AML regime.
5 Stories Driving the Week
1. CFPB Hosts Symposium on Implementation of Dodd-Frank Section 1071, Small Business Lending Data Reporting
On November 6, the CFPB hosted a public symposium on implementing section 1071 of the Dodd-Frank Act, which calls for the Bureau to collect information on credit applications by women-owned, minority-owned, and small businesses. The symposium included remarks from CFPB Director Kathleen Kraninger and two panel discussions with participants from banks, fintech firms, regulatory agencies, research institutions, and nonprofit lending institutions. Director Kraninger emphasized the goal of collecting data appropriate to fair lending enforcement and other statutory objectives without introducing undue costs or regulatory burdens.
The first panel focused on evolving issues in the marketplace, including the growing role of fintech and other nonbank lenders in small business credit. There was general agreement that small business borrowers need more transparency in the market and that the new data can help in that regard. The second panel focused on specific ways to make the new data collection more efficient and potentially less burdensome. The panel emphasized the need to harmonize the Section 1071 data collection with similar data being collected for the Community Reinvestment Act and other regulatory purposes, and the need to identify data items that will add major value.
2. As Federal Fintech Charter Plans Flounder, Tech Companies Look for Alternative Approaches
Recent court challenges have stymied the effort to create a national fintech charter, leaving fintech and tech companies exploring alternative paths to enter the banking industry. On November 5, American Banker reported that the fintech industry is exploring alternative “flexible” supervisory regimes with a collaborative approach from state regulators, and noted recommendations from the Information Technology & Innovation Foundation, a Washington think tank, for fintechs to enter the regulated financial system. On November 6, The Financial Brand reported on the multiple ways fintechs and tech companies are attempting to enter the banking system, from a national fintech charter to the industrial loan company (ILC) charter route. BPI and the American Bankers Association previously submitted a comment letter opposing Japanese e-commerce company Rakuten’s ILC charter application.
3. BPI Hosts Symposium on Repo Market Volatility, Regulations and the Fed’s Balance Sheet
On November 6, BPI hosted its third half-day symposium on money markets, regulations, and Fed operations. For a summary of the previous two symposiums, visit here and here. The most recent symposium focused on the implications of the severe volatility in repo markets observed in September. The symposium was attended by market participants, academics, and staff from the IMF, Fed, OCC, and FDIC. The first panel set the stage by discussing what happened in repo markets in mid-September, the Fed’s response, and the outlook for further turmoil at year end. The second panel discussed the role of regulations in the repo event, including how leverage ratio and GSIB surcharge requirements have increased the cost of repo intermediation and how liquidity rules and supervisory expectations have made banks unwilling to substitute cash for repo. The third panel discussed what the event revealed about banks’ demand for reserve balances, the resulting implications for monetary policy, and the prospects for a Fed standing repo facility. The final panel discussed the implications of repo volatility for the transition from LIBOR to SOFR.
4. Questions Remain on Facebook’s Libra Digital Currency Plans
Following a recent five-hour House Financial Services Committee hearing with Facebook CEO Mark Zuckerberg, questions remain on how Facebook will address regulatory concerns before launching its digital currency, Libra. Roll Call reported that Facebook would need to satisfy the Securities and Exchange Commission, the Federal Reserve, the Commodity Futures Trading Commission and the Treasury Department to move forward. In a New York Times op-ed, Saule Omarova, a professor at Cornell University, and Graham Steele, director of the Corporations and Society Initiative at Stanford Graduate School of Business, said that while last month’s hearing focused on consumer protection concerns and money laundering vulnerabilities, “there are much broader dangers in creating a global payments system controlled by the world’s largest social media company… These dangers are real, and they are serious, especially in light of Facebook’s troubling track record.” On November 7, Bloomberg reported on Facebook’s continued struggle to regain trust over how it handles user data.
5. BPI Comments on FDIC’s Proposal on Interest Rate Restrictions on Less Than Well-Capitalized Institutions
On November 4, BPI submitted a comment letter to the FDIC on its proposed revisions to regulations restricting less than well-capitalized institutions from offering interest rates that significantly exceed the prevailing rates in their normal market areas or the FDIC’s “national rate cap” for out-of-area-deposits. BPI recommends an alternative to the proposal’s revised national rate calculation, arguing that this alternative would better reflect the market in different economic cycles and advancements in online and digital banking, and account for a variety of business segments. The letter further recommends changes to the FDIC’s supervisory practices to prevent the treatment of high interest rates as a proxy for liquidity risk, noting that in this regard the national rate calculation negatively affects even healthy, well-capitalized institutions.
In Case You Missed It
BPI Comments on Fed’s Proposed Changes to FR Y-15 Banking Organization Systemic Risk Report
On November 7, BPI submitted a comment letter to the Federal Reserve on proposed revisions to its Banking Organization Systemic Risk Report (FR Y-15) that is used to determine whether a financial institution is designated a globally systemically important bank (GSIB) and for purposes of the pending macroprudential tailoring rules for U.S. bank holding companies (BHCs) and intermediate holding companies (IHCs) for reports reflecting year-end 2019 reporting. The letter urges the Federal Reserve to initiate a notice and comment rulemaking process for the holistic review and recalibration of the global systemically important bank holding company (GSIB) capital surcharge and recommends that the effective date for the proposed FR Y-15 changes be extended until June 30, 2020 (subject to our other comments in the Supplemental Tailoring Comment Letter) to allow firms adequate time to come into compliance with the new requirements.
Regulators Release Revised Effective Date for Simplifications to the Capital Rule
On November 4, the FDIC, OCC and Federal Reserve issued a final rule that allows depository institution holding companies to implement the recently finalized simplifications to capital rules beginning on January 1, 2020, rather than April 1, 2020. Banking organizations may elect to use the revised effective date or wait until the quarter beginning April 1, 2020.
New York Fed Seeks Comment on Proposed Publication of SOFR Averages, in Transition from LIBOR
On November 4, the New York Federal Reserve, in conjunction with the Treasury Department’s Office of Financial Research (OFR), requested comment on a proposal under which the New York Fed would publish daily three compounded Secured Overnight Financing Rate (SOFR) averages with tenors of 30, 90 and 180 calendar days, in addition to a daily SOFR index. In the statement, the New York Fed indicated that it plans to begin publication of these averages in the first half of 2020. Comments are due December 4.
Basel to Consult on Adjustments to Credit Valuation Adjustment Risk Framework
On October 31, the Basel Committee on Banking Supervision (Basel) announced that it plans to consult on a final set of “limited and targeted” changes to its credit valuation adjustment (CVA) framework, which governs how the riskiness of certain trades is calculated for purposes of determining a bank’s risk-based capital requirements under the Basel III framework. The consultation paper is expected to be published this month.
Don’t Get Hooked on Phishing
On November 1, BPI’s BITS published a new blog post titled, “Don’t Get Hooked on Phishing,” educating readers on how to identify common phishing attacks, including eight-critical steps to avoid falling victim to phishing. The post also describes just some of the many investments that banks are making to maintain global trust and keep customers safe online.
- 11/13/2019 — Joint Economic Hearing with Fed Chairman Powell
- 11/13/2019 — House Financial Services Hearing on Multilateral Development Institutions
- 11/14/2019 — Cato Annual Monetary Policy Conference Featuring Opening Keynote Remarks by Fed’s Richard Clarida and Panel Discussions Including Participation by BPI Chief Economist Bill Nelson
- 11/14/2019 — AEI Event Titled “Can the Federal Reserve Manage the Next Economic Crisis?”
- 11/19/2019 — The Clearing House + BPI 2019 Annual Conference: The Clearing House and BPI will host the 2019 Annual Conference from November 19 to 21. The event provides a forum for the industry’s leaders to examine the changing dynamics of the bank regulatory and payments’ landscapes with two and half days of high-level keynote speakers, in-depth expert panels, and networking. Registration is now closed.
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