BPInsights: October 18, 2019 - Bank Policy Institute

Top of the Agenda

House Plans Votes on Legislation to End Anonymous Shell Companies and AML Reform

Next week, the House is expected to consider HR 2513, the Corporate Transparency Act, which would help to end anonymous shell companies and HR 2514, the COUNTER Act to reform the Bank Secrecy Act. The House will debate and vote on HR 2513 by Congressman Maloney (D-NY) next week and consider the COUNTER Act by Congressman Emanuel Cleaver (D-MO) under suspension of the rules. BPI is a strong supporter of ending the use of anonymous shell companies and modernizing the AML regime. As BPI noted in a joint trade group letter, HR 2513 “strikes the right balance between imposing minimal requirements on small businesses while providing critical information to law enforcement and financial institutions performing due diligence.” We expect the measures to be a combined product sent to the Senate upon passage.

In the Senate, a group of eight senators, comprised of Senators Mark Warner (D-VA), Tom Cotton (R-AR), Doug Jones (D-AL), Mike Rounds (R-SD), Bob Menendez (D-NJ), John Kennedy (R-LA), Catherine Cortez Masto (D-NV), and Jerry Moran (R-KS), have 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. In advance of the House floor consideration, on October 17 BPI and the FACT Coalition hosted a panel discussion featuring leading experts to discuss how criminals use shell companies to facilitate their illicit activities, and why a legislative solution is critically needed.

5 Stories Driving the Week

1. Reducing Spurious Volatility in the Federal Reserve’s Supervisory Stress Tests

On October 16, BPI published a new research note documenting some undesirable variability in the Federal Reserve’s supervisory stress tests. The uncertainty and volatility of capital requirements can cause banks to pull away from lending to households and businesses and even reduce the willingness to provide funding for financial market activities that carry very little risk. The note finds that the opacity of supervisory models, on top of the variability of model projections, leads to uncertainty as to what level of capital is appropriate for banks to hold.

2. FDIC Approves Resolution Planning, Tailoring Rules

On October 15, the FDIC voted to finalize changes to Dodd-Frank Section 165(d) resolution planning requirements, issued jointly with the Federal Reserve, which will provide relief for small banks from submitting “living will” resolution plans and modify the frequency with which the plans must be submitted, though the agency did not offer clarity on timing expectations for its anticipated proposed rule revising resolution planning requirements for insured depository institutions. The FDIC also followed the Federal Reserve in approving final interagency rules to tailor post-crisis 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 rules were approved by a vote of 3 to 1, with former FDIC Chairman Martin Gruenberg opposing.

3. Federal Reserve’s Brainard Warns of Risks Posed by Digital Currencies, Libra

On October 16, Federal Reserve Governor Lael Brainard said digital currencies, such as Facebook’s proposed Libra, could pose major concerns for consumers, financial stability, cybersecurity, bank business models and monetary policy. “If a large share of domestic households and businesses come to rely on a global stablecoin not only as a means of payment but also as a store of value, this could shrink demand for physical cash and affect the size of the central bank’s balance sheet,” Brainard said in a speech before the Peterson Institute for International Economics. Brainard said Libra must address a “core set of legal and regulatory challenges” before it can launch.

The Libra Association has already lost a quarter of its membership as PayPal, Visa Inc., Mastercard Inc. and four other companies have left the controversial cryptocurrency project. Yet David Marcus, Head of Libra, told an audience at an IMF conference that he still expects to get 100 banks and financial firms on board once regulatory concerns are addressed, according to a report from Reuters.

4. BPI, Trades Respond to CFPB Home Mortgage Disclosure Data Points ANPR

On October 15, BPI joined the American Bankers Association, Consumer Bankers Association, Housing Policy Council, and Mortgage Bankers Association in a letter responding to the CFPB’s advance notice of proposed rulemaking on the costs and benefits of the expanded data reporting requirements associated with the CFPB’s 2015 final rule under the Home Mortgage Disclosure Act (HMDA). Citing data from a survey of mortgage lenders, the letter highlights the significant cost of compliance with the requirements of the 2015 rule and identifies data points whose informational benefit is outweighed by the burden of collection, maintenance, and reporting.

5. Agencies Request Comment on Proposed Interagency Policy Statement on Allowances for Credit Losses and Proposed Interagency Guidance on Credit Risk Review Systems

On October 17, the OCC, Fed, FDIC, and NCUA released for comment a proposed interagency policy statement on allowances for credit losses as well as proposed interagency guidance on credit risk review systems. The proposed interagency policy statement describes the measurement of expected credit losses under the current expected credit losses (CECL) accounting methodology and outlines supervisory expectations for designing, documenting, and validating expected credit loss estimation processes, including the internal controls over these processes. The proposed interagency guidance on credit risk review systems discusses ongoing credit risk review, management of credit risk, and communication with management regarding the performance of a firm’s loan portfolio. Comments for both proposals are due December 16.

In Case You Missed It

CFPB Announces Taskforce on Federal Consumer Financial Law
On October 11, the CFPB announced the creation of a “Taskforce on Federal Consumer Financial Law” focused on ways to “harmonize and modernize” the consumer financial laws and their implementing regulations. Through new research and legal analysis, the taskforce will examine “the existing legal and regulatory environment facing consumers and financial services providers” and make recommendations for improvements to CFPB Director Kathleen Kraninger with a specific focus on the enumerated consumer credit laws to allow for more simplified and modernized regulation.

FASB Delays CECL Accounting Implementation for Small Companies
On October 16, the Financial Accounting Standards Board (FASB) extended the implementation deadline for the current expected credit losses (CECL) accounting standard until 2023 for small reporting companies, public companies that don’t file with the SEC, and private and nonprofit companies. CECL will require banks to establish reserves upon origination of a loan to capture “expected losses” that would occur over the life of a loan. Large and smaller public banks were unaffected by the delay. BPI research has found that CECL would make lending procyclical and have significant unintended consequences on lending during an economic downturn.

Rise Of Fintech Weakens Law To Prevent Lending Discrimination
Roll Call reported that the Community Reinvestment Act needs to be updated to consider the growth of online banks. “A 2018 study by the Federal Reserve Bank of Philadelphia showed banks made 10 to 20 percent more loans to low- and moderate-income residents inside their assessment areas than outside. But the growth of online banks is poking holes in the law’s coverage.” Officials at federal banking regulatory agencies are working to update the 1977 regulations. On October 16, FDIC Chairman Jelena McWilliams said that her goal is for the agencies to “move together,” but that “a scenario in which the agencies do not move forward at the same time is also on the table.”

Better Business Bureau Finds Business Email Compromise Scams Skyrocketing
The Better Business Bureau recently released a report finding business email compromise (BEC) scams are skyrocketing in frequency and have cost businesses more than $3 billion since 2016. BEC is a form of fraud in which the fraudster poses as a reliable source who sends an email from a spoofed or hacked account to an individual who pays bills in business, government or non-profit organizations. BPI, through its technology policy division, BITS, runs a fraud reduction program that is working with financial institutions to enhance interbank communications with the goal of mitigating consumer losses from BEC fraud.

Upcoming Events

10/18/2019 — FDIC Consumer Research Symposium
10/18/2019 — House Task Force on AI Hearing on Cloud Computing
10/21/2019 — Georgetown Law Fintech Week Forum with FDIC Chairman McWilliams
10/22/2019 — House Financial Services Hearing on Administration’s Housing Finance Plans
10/22/2019 — FDIC Economic Inclusion Advisory Committee Meeting
10/22/2019 — Senate Banking Committee Hearing on Consolidated Audit Trail
10/22/2019 — House Financial Services Subcommittee on Minority Depository Institutions
10/23/2019 — Facebook CEO Mark Zuckerberg Testifies on Libra in House Financial Services Committee
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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