BPInsights: October 11, 2019 - Bank Policy Institute

Top of the Agenda

Federal Reserve Finalizes Tailoring Rules for Domestic, Foreign Banks

On October 10, the Federal Reserve finalized rules that will tailor the post-crisis Dodd-Frank Act prudential standards applicable to large U.S. and foreign banks, implementing last year’s Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155). The final rules establish a “framework that sorts banks with $100 billion or more in total assets into four different categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure.” The final rules will apply liquidity requirements for the U.S. intermediate holding company (IHC) of a foreign bank based on the risk profile of the IHC, rather than on the bank’s combined U.S. operations (CUSO). BPI had submitted extensive comment letters on both the domestic and foreign bank proposals.

“The Federal Reserve has implemented faithfully the tailoring mandated by S. 2155, which leaves in place all core post-crisis reforms. The next step is equally important: to ensure that the examination process is aligned with the new regulatory framework and not allowed to reimpose the same old requirements,” BPI President and CEO Greg Baer said in a statement.

5 Stories Driving the Week

1. Scrutiny Continues of Facebook’s Libra with Lawmaker and Industry Concerns

Facebook Chairman and CEO Mark Zuckerberg will testify before the House Financial Services Committee on October 23. In July, Committee Chairman Maxine Waters (D-CA) requested a moratorium on the implementation of Facebook’s Libra digital currency initiative until critical financial regulatory questions were addressed and held an oversight hearing in July with Calibra CEO David Marcus. On October 8, Senator Sherrod Brown (D-OH), Senate Banking Committee Ranking Member, and Senator Brian Schatz (D-HI) sent letters to the CEOs of Visa, MasterCard and Stripe to urge the companies to consider the risks of backing Facebook’s Libra. “Facebook is currently struggling to tackle massive issues, such as privacy violations, disinformation, election interference, discrimination, and fraud, and it has not demonstrated an ability to bring those failures under control,” the Senators wrote. They urged the companies to “consider Facebook’s inability to manage current risks from its core business lines when making a decision about whether to proceed with Libra.” The Senators’ letter follows PayPal Holdings Inc. withdrawal from the Libra Association in a statement on October 4. In addition, the Wall Street Journal reported that European Union will introduce legislation aimed at preventing Libra’s from “undermining Europe’s single currency and being used as a money-laundering tool.”

2. Federal Reserve Approves Volcker Rule Reforms

On October 8, the Federal Reserve became the fifth and final agency to finalize interagency changes to the Volcker Rule, which restricts financial institutions’ ability to invest in private equity funds and engage in proprietary trading. Among other reforms to the regulation, the new rule further tailors compliance requirements based on the size of banks’ trading assets and liabilities and makes several revisions to the scope of the proprietary trading prohibition. Notably, the final rule also removes the “accounting prong” test, consistent with BPI’s recommendations in its 2018 comment letter on the proposed changes. The Fed approved the rule by notional vote, with Governor Lael Brainard dissenting.

3. House May Join Money Laundering, Disclosure Bills To Gain Votes

An anti-money laundering bill and legislation to end anonymous shell companies are expected to be merged and head to the House floor after Congress returns from recess in October, according to a report from Roll Call. The House Financial Services Committee unanimously approved by a vote of 55-0 a bill, HR 2514 by Representative Emanuel Cleaver (D-MO), that would provide updates to the Bank Secrecy Act and on June 11, the committee approved by a bipartisan vote H.R. 2513 by Congresswoman Carolyn Maloney (D-NY) to address illicit activity through shell corporations. Combining the bills would garner more support and the merged legislation would largely match a measure introduced by a bipartisan group of eight Senate Banking Committee members, according to Roll Call.

4. Trump Issues Executive Orders to Curb Use of Federal Guidance In Regulations

On October 9, President Donald Trump signed a pair of executive orders limiting agencies’ use of guidance, including a requirement that significant guidance be made available for public comment, stating that “[agencies] may not treat noncompliance with a standard of conduct announced solely in a guidance document as itself a violation of applicable statutes or regulations.” The orders also require agencies to provide opinion letters upon request, to compile guidance in a searchable online database, and to include in each guidance document language “clearly stating that it does not bind the public, except as authorized by law or as incorporated into a contract.”

5. California AG Releases Proposed Consumer Privacy Rules

On October 10, the California Attorney General (CA AG) proposed regulations to implement the California Consumer Privacy Act. The proposed regulation discusses how covered businesses should verify requests for information and disclose covered information. It states that certain sensitive pieces of information – such as social security numbers, and financial account numbers – should never be disclosed, particularly if the disclosure “creates a substantial, articulable, and unreasonable risk to the security of that personal information, the consumer’s account with the business, or the security of the business’s systems or networks.” Comments are due December 6.

In Case You Missed It

BPI’s Bill Nelson Discusses Repo Market Stress, Fed Operating System and Prospects for Standing Repo Facility
On October 7, BPI’s Chief Economist Bill Nelson joined the Mercatus Center’s “Macro Musings” podcast to discusses the causes of the recent turmoil in money markets, the contributing role of regulations, and the implications for the Fed’s operations including the prospect of opening a standing repo facility. On a standing repo facility, Nelson said, it “may be a good immediate solution, but it also highlights the fact that the way things are currently arranged, the Fed kind of has to be the counterparty to all. It has to be the market-maker of first resort.” He also discussed the post-crisis regulatory regime and applauded regulators’ recent review of those regulations. “It’s inconceivable that all of those things would have been done and done exactly right,” Nelson said.

BPI Comments on BEA’s Benchmark Survey on Operations of US Operations of Foreign Affiliates
On October 7, BPI submitted a comment letter to the Bureau of Economic Analysis regarding proposed changes to the 2019 BE-10, Benchmark Survey of U.S. Direct Investment Abroad. The BE-10, Benchmark Survey is a mandatory survey conducted once every five years by the BEA to secure current economic data on the operations of U.S. parent companies and their foreign affiliates. All U.S. persons that own, either directly or indirectly, 10 percent or more of the voting securities of an incorporated foreign business enterprise or an equivalent interest in an unincorporated foreign business enterprise are required to complete the survey. BPI’s letter encourages the BEA to provide a number of clarifications of proposed changes and added questions, specifically those related to sales of selected services recognized as “prevalent in the digital economy.”

Upcoming Events

10/16/2019 — House Financial Services CFPB Semi-Annual Hearing
10/16/2019 — House Financial Services Subcommittee TRIA Reauthorization Hearing
10/17/2019 — Senate Banking CFPB Semi-Annual Testimony
10/17/2019 — House Financial Services Subcommittee Hearing on Stock Buybacks
10/17/2019 — House Financial Services Subcommittee Hearing on Diversity Workforce Practices
10/18/2019 — FDIC Consumer Research Symposium
10/18/2019 — House Task Force on AI Hearing on Cloud Computing
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.

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