Top of the Agenda
Two Little-Noticed and Self-Inflicted Causes of the Fed’s Current Monetary Policy Implementation Predicament
BPI published a blog post that explains how volatility in two little-known Federal Reserve liabilities–the Treasury General Account (TGA) and the Foreign Repo Pool–was an important reason why the Fed decided in January to continue implementing monetary policy using the large-balance-sheet approach that it adopted during the financial crisis, as opposed to the small-balance-sheet approach it used before the crisis. Changes in the TGA and the Foreign Repo Pool cause one-for-one shifts in bank deposits at the Fed (a/k/a “reserve balances” or “reserves”) unless the Fed engages in offsetting changes in the size of its balance sheet. Pre-crisis, the Fed offset such volatility in reserves by varying the size of its book of repurchase agreements. Given the volatility of those two liability items, the Fed concluded that conducting policy in the pre-crisis manner would require repo operations that were undesirably large and frequent.
Implementing monetary policy with a large-balance-sheet approach was one way to adjust monetary policy for increased volatility in those accounts. But, as described in this post, another would have been, and still would be, simply to reduce that volatility.
5 Stories Driving the Week
1. Federal Reserve on Oct. 10 Will Finalize Tailoring Rules for Domestic, Foreign Banks
The Federal Reserve will meet Oct. 10 to finalize rules that will tailor the post-crisis Dodd-Frank 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 tailoring is expected to set forth four main categories into which firms will fall based on their asset size and other key risk-based indicators, and the stringency of the prudential requirements (including capital, liquidity, living wills, etc) will adjust to reflect the actual risk of the firms in each category. BPI had submitted extensive comment letters on both the domestic and foreign bank proposals. [include links]
2. Support Builds For Treasury Collection Of Shell Company Data
Legislation mandating the collection of the true owners of anonymous shell companies is gaining momentum as a bipartisan group of senators recently introduced legislation, reported Bloomberg. The ILLICIT CASH Act was introduced on September 26 by one-third of the Senate Banking Committee members and its approach to ending anonymous shell companies is comparable to provisions of a leading House bill. The Senate bill “meets the threshold” of effective legislation and its strong committee support “sends a message that there is a pathway through the Senate,” said Gary Kalman, executive director of the Financial Accountability and Corporate Transparency (FACT) Coalition, [the article reports].
3. Visa, Mastercard, Others Reconsider Involvement In Facebook’s Libra Network
The Wall Street Journal reported that Visa, Mastercard, and other financial partners that initially signed on to help build Facebook’s global cryptocurrency system are now reconsidering their involvement, following backlash from global government officials. “Their reluctance has Facebook scrambling to keep Libra on track,” the Journal reported. “Without a network of financial partners that could help transfer currencies into Libra and global retailers to accept it as a form of payment, Libra’s reach would be limited.”
4. BPI Comments on Fed’s Proposed CECL related Changes to CCAR Reporting Requirements
On September 26, BPI submitted a comment letter to the Federal Reserve on proposed changes to the Capital Assessments and Stress Testing (CCAR) Reports (FR Y-14A/Q/M) related to the implementation of CECL. The letter highlights the disparities between firms’ company-run Dodd-Frank Act Stress Tests (DFAST) numbers incorporating CECL versus Fed DFAST/CCAR disclosed results not including CECL and how the public may attribute these differences to perceived differences in risk profiles rather than the different assumptions used in CECL. The letter recommends that the Fed provide a template disclosure for firms to include in their own DFAST disclosures explaining that the disparities are the result of the different methodological approaches and the different assumptions related to CECL across firms. In addition to technical changes and clarifications, the letter also encourages more transparency in the Fed’s approach to incorporating CECL into supervisory stress tests.
5. Federal Reserve’s Quarles Provides Update on Supervisory Expectations
In September 27 remarks at the Georgetown University Law Center, Federal Reserve Vice Chair for Supervision Randal Quarles outlined the global evolution of macroprudential regulation, highlighting its role in international efforts to promote global economic stability in the years following the financial crisis. Of note, Quarles also invited “greater legal scholarship on the due process considerations associated with bank supervision,” citing specifically the “processes and activities identified with…checking compliance with laws and regulations, assessing bank capital and liquidity levels, assigning supervisory ratings to banks, and taking formal and informal enforcement actions.” “While it is important for bank supervision to be up to the task of assessing the world’s largest banks,” Quarles said, “an equally important task is making sure that supervisors are acting fairly.”
6. FDIC Chairwoman Pushes for Common Data Standards for Core Processors, Talks Open Banking, AI/Machine Learning
FDIC Chairman Jelena McWilliams on October 2 called for shared data and interface standards for core service providers to improve inter-operability among banking platforms. Banks have frequently pushed core processors to be more transparent. The processors have so far resisted, claiming their processes are proprietary.
McWilliams spoke about the benefits of consumer data access and open banking, referencing industry efforts to replace screen-scraping with the use of application programming interfaces (APIs) that reduce information and identity security concerns. Regarding AI and machine learning, McWilliams noted the potential benefits of using alternative data in credit underwriting. She cited the Interagency Guidance on Model Risk Management and the FDIC’s Guidance on Managing Third-Party Risk as a “solid foundation” for managing the risk associated with their use in underwriting.
In Case You Missed It
The Public Option For Real-Time Payments Is Taking Too Long
In a column in American Banker, Luanne Cundiff, President and CEO of First State Bank of St. Charles in Missouri, said the public needs a real-time payment system now. She noted that the Federal Reserve has said it would be years before their system is ready. To act swiftly, Cundiff said her bank’s core service provider is working with the Clearing House on its RTP network. “Our vision and strategic decisions will always be customer-centric, without prejudice, while ensuring the safety and soundness of our institution. Moving forward now makes sense for us and our customers rather than waiting,” Cundiff wrote.
Eyeing That Sweater? It’s Yours In Four Easy Payments
Merchants and lenders are tapping into small-dollar lending options, according to a report from the Wall Street Journal. The Journal noted that big financial companies, eager to expand their consumer lending, have “introduced or are working on payment programs for cardholders that resemble installment loans.”
Regulators Finalize Rule on Real Estate Appraisal Requirements
On September 30, the federal banking agencies finalized a proposal increasing the threshold for residential real estate transactions, requiring an appraisal, from $250,000 to $400,000, reflecting appreciation in residential real estate values since the rule was last updated in 1994. BPI’s February 2019 comment letter recommended increasing the threshold to $500,000.
Agencies Issue Final Rule Increasing Asset Thresholds for Restriction on Management Interlocks
On October 2, the federal banking agencies finalized a rule increasing the asset thresholds at which the prohibition on “management interlocks,” where directors or other managers of one financial institution also serve at a second institution, applies. BPI’s April 2019 comment letter supported the agencies’ proposal to increase the threshold to $10 billion.
- 10/10/2019 — BPI Hosts Bank Regulation 101: BPI will host an educational presentation on bank regulation. Topics to be covered include how banks are structured and chartered, how capital and liquidity requirements work, and how regulatory agencies oversee the banking system.
- 10/16/2019 — The House Financial Services Committee will convene a hearing entitled, “Who is Standing Up for Consumers? A Semi-Annual Review of the Consumer Financial Protection Bureau.”
- 10/17/2019 — Banking Committee CFPB Semi-Annual Hearing with Director Kathleen Kraninger
- 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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