BPInsights: September 19, 2020

Stories Driving the Week

BPI, Covington & Burling LLP Identify Opportunities to Expand Access to Credit through Responsible AI Implementation

On September 14, the Bank Policy Institute (BPI) and Covington & Burling LLP published a white paper that identifies outdated regulatory frameworks hindering the adoption of responsible artificial intelligence (AI) practices within the financial services industry. The paper provides a background on the current regulatory framework that applies to AI underwriting and proposes the regulatory agencies take joint efforts to coordinate and modernize existing rules. The use of AI in financial services has enormous potential to improve underwriting and expand access to credit, most notably among underserved communities frequently excluded from the FICO-based credit system.

In preparation for the release of the white paper, BPI solicited feedback from numerous stakeholders through a discussion draft published in late 2019. BPI also hosted an event on Capitol Hill attended by leading policymakers, academics and lawmakers, including House Financial Services Committee Trask Force on Artificial Intelligence Chair, Representative Bill Foster (D-IL) and Ranking Member, French Hill (R-AR). Learn More >>

Federal Reserve Releases Two Hypothetical Scenarios for Second Round of Bank Stress Tests

On September 17, the Federal Reserve published two stress scenarios (“severely adverse” and “alternative severe”) to be used in the second stress test of 2020. The first scenario includes a rapid economic decline resulting in a 12.5% unemployment rate by the end of 2021 before improving to 7.5% in mid-2022. The scenario also features a sharp slowdown abroad. The second scenario captures a prolonged downtown in economic conditions with unemployment reaching 11% by late 2021 and staying at elevated levels for several quarters before economic conditions improve slightly by the end of the scenario. Both scenarios include a global market shock component and a large counterparty default component that only apply to the largest and most complex firms. The Fed expects to release firm-specific results under both scenarios by the end of this year. The Fed also announced that it is considering whether to extend restrictions on capital distributions into the fourth quarter. A final determination on capital distributions will be announced by the end of the month. Learn More >>

The Net Stable Funding Ratio Would Have Made Things Worse, Not Better (So Why Adopt It?)

The Net Stable Funding Ratio (NSFR) is one of two liquidity requirements included in the set of international bank regulation standards established by the Basel Committee on Banking Supervision (BCBS) following the 2007-09 financial crisis. The U.S. banking agencies put the NSFR out for public comment in April 2016 but have not adopted it. The Fed is under pressure from other countries on the Basel Committee to adopt the NSFR, which is an odd position for the Fed to be in, having implemented more-restrictive-than-required versions of most other Basel standards.

In a new blog post, BPI Chief Economist Bill Nelson argues that adopting the NSFR at this time would be counterproductive. As discussed in this blog, had the NSFR been in place in the United States, it would have made the September 2019 episode of repo market volatility and the March 2020 episode of Treasury market volatility — when the financial system walked up to the edge of catastrophe — worse. It would have done so because, despite being a liquidity requirement, the NSFR punishes banks for holding two of the most liquid investments available to banks: lending overnight with Treasury securities as collateral (aka “Treasury reverse repo”) and outright holdings of Treasury securities. Consequently, the NSFR would have added a further hindrance to banks providing the type of intermediation that was most needed during those events. Learn More >>

FinCEN ANPR Addressing Efficiency And Effectiveness Of U.S. AML/CFT Regime

On September 17, FinCEN released an advance notice of proposed rulemaking (ANPR) establishing an AML program definition along with a series of additional questions on how to better achieve a more efficient and effective U.S. anti-money laundering/combatting the financing of terrorism (AML/CFT) regime. As indicated in the notice, the proposal was informed by work undertaken by the Bank Secrecy Act Advisory Group (BSAAG), a public and private-sector consultative body, and discusses recommendations made by the BSAAG on how to best reallocate resources away from resource-intensive, lower-value activities towards more effective systems designed to produce highly-useful information to support national security and law enforcement. These recommendations reflect numerous ideas proposed by The Clearing House (BPI’s predecessor organization) in a 2017 reform report.

In response, BPI President & CEO Greg Baer issued the following statement:

FinCEN’s proposal is a meaningful step forward towards addressing some long-overdue deficiencies in the U.S. AML/CFT regime. It has the potential to improve the efficiency and effectiveness of the regime to stop money launderers, terrorists, human traffickers and other illicit actors, and we look forward to providing substantive feedback on the proposal and questions posed by the agency.

Learn More >>

CFPB Moves to Implement Dodd-Frank-Mandated Demographic Data Collection Requirements

On September 15, the CFPB released an outline of proposals under consideration to begin moving forward with the implementation of Section 1071 of the Dodd-Frank Act, which amends the Equal Credit Opportunity Act to require financial institutions to collect demographic information on women- and minority-owned businesses and report this information to the agency annually. This announcement marks the first major move by the agency since it conducted field hearings, issued a Request for Information, and published a report on the implementation back in 2017. The announcement states that the CFPB plans to convene a Small Business Advocacy Review panel in October 2020 to determine the impact on businesses before undertaking the formal rulemaking process. Learn More >>

FRB Implements Final Rules on Confidential Supervisory Information Sharing and Technical Changes to FOIA

The Federal Reserve Board finalized rules governing the use and disclosure of confidential supervisory information (CSI), which was published in the Federal Register on September 15 and is scheduled to become effective on October 15. Several of the changes align with the recommendations proposed by BPI in an August 2019 comment letter submitted to the agency and will make it easier to share CSI with personnel at affiliates, outside counsel, independent auditors and other service providers, such as consultants and contingents. The final rule also institutes certain technical changes to its Freedom of Information Act regulations to bring the regulation up-to-date with recent changes in law and guidance. Learn More >>

In Case You Missed It

FDIC Finalizes IFR on Treatment of Certain Emergency Facilities in Regulatory Capital Rule and LCR Rule

The FDIC Board of Directors met on September 15 to consider several matters, including finalizing an Interim Final Rule (IFR) regarding “Treatment of Certain Emergency Facilities in the Regulatory Capital Rule and the Liquidity Coverage Ratio Rule,” which the board approved without changes. The IFR was originally introduced in April as a response by the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency to enhance the effectiveness of relief efforts in response to the COVID-19 pandemic. The IFR will permit banks to continue to neutralize the regulatory capital effects, and will require banks to continue to neutralize the LCR effects of participating in the Money Market Mutual Fund Liquidity Facility and the Paycheck Protection Program Liquidity Facility. Additionally, the IFR reduces the risk percent weight of PPP loans to zero under regulatory capital rules.

Judy Shelton Lacks Necessary Votes for Fed Nomination, Says Sen. Thune

Judy Shelton, one of two current nominees for the Board of Governors of the Federal Reserve System, may lack the necessary votes to achieve a Senate confirmation according to a statement made earlier this week by Senator John Thune (R-SD) and reported by Bloomberg. Shelton’s nomination was forwarded to the Senate floor after a narrow vote of 13 to 12 in the Senate Banking Committee. When asked about his statement from various news sources, Senator Thune responded by saying, “We’re still working it. It’s the Federal Reserve, it’s important so obviously we want to get it done. But we’re not going to bring it up until we have the votes to confirm her.”

American Banker: “Banks Are Stepping Up Tech For People With Disabilities”

On September 11, American Banker’s Miriam Cross published an article exploring the investments banks are making to better serve their customers by improving the accessibility at bank branches and through mobile apps and digital resources. The article features examples from many BPI member banks and explores many of the accessibility requirements that are considered when delivering new products or services to make these offerings more inclusive.

China Implements Financial Holding Company Requirements on FinTech, Reports WSJ

On September 13, the WSJ reported that China’s central bank announced new financial regulations requiring any company operating two or more financial businesses in China, or companies with financial assets representing 85% or more of total assets, to register as a financial-holding company. The new rules apply to many FinTechs and digital payment companies, including popular Chinese payment network Alipay, and was reportedly implemented to strengthen supervision and protect against systemic risk.

Trevor Reeve Appointed Director of FRB Division of Monetary Affairs

The Federal Reserve Board appointed Trevor Reeve as the new director of the Division of Monetary Affairs according to a September 14 release. Reeve has worked for the FRB since 1998 and most recently served as deputy director of the Division of Monetary Affairs.

Upcoming Events

  • 09/21/2020 – Board of Governors of the Federal Reserve to consider ANPR on Community Reinvestment Act Regulation
  • 09/22/2020 – House Financial Services Committee hosts hearing titled “Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response
  • 09/23/2020 – House Select Subcommittee on the Coronavirus Crisis hosts “Hybrid Hearing With Federal Reserve Chair Jerome H. Powell”
  • 09/24/2020 – Senate Banking, Housing and Urban Affairs committee hosts “The Quarterly CARES Act Report to Congress”
  • 09/29/2020 – House Financial Services Committee Hosts Virtual Hearing “License to Bank: Examining the Legal Framework Governing Who Can Lend and Process Payments in the Fintech Age”
  • 10/16/2020 – 10th Annual FDIC Consumer Research Symposium
  • 12/11/2020 – Fed Research Conference on Bank Supervision