BPInsights: September 26, 2020

BPInsights: September 26, 2020

Stories Driving the Week

Assessing the Severity of Mid-cycle Stress Tests

BPI Senior Vice President and Head of Research Francisco Covas published a new blog post this week titled, “Assessing the Severity of Mid-cycle Stress Tests,” which looks at two stress scenarios (“severely adverse” and “alternative severe”) that will be used in the second stress tests of 2020 and makes a prediction for what the Fed’s models will show when the results are published.

The analysis indicates that while both scenarios are tougher than the severely adverse scenario used in the June 2020 stress test, stronger banking conditions at the jumping-off point of the exercise will mitigate the decline in bank capital over the planning horizon and the aggregate decline in capital ratios will be similar to the one reported in the first round of stress tests.

Additionally, the post argues that in light of the increased strength of bank balance sheets at the end of the second quarter and the severity of the scenarios being considered for the resubmission of capital plans, there is no empirical basis for the Fed to extend limitations on capital distributions into the fourth quarter. Learn More >>

The Truth About Suspicious Activity Reports

The International Consortium of Investigative Journalists and BuzzFeed released a report about more than two thousand illegally leaked Suspicious Activity Reports (SARs). The report titled “FinCEN Files” is based on limited information and lacks a full understanding of the anti-money laundering (AML) framework, which in turn provides a skewed and misleading perception of AML enforcement efforts. Responding to the report, BPI President and CEO stated:

It does not make sense that the basis for media allegations that banks knowingly hid illegal activity consisted solely of Suspicious Activity Reports that those banks filed alerting law enforcement to that very activity. Clearly, there is more to this story, but unfortunately, the reporting failed to unearth it, and the banks are legally prohibited from telling their side. In some cases, if the past is any guide, that story likely includes law enforcement asking a bank to keep open an account it has identified as suspicious so that law enforcement can track where the money is going and gather further evidence to support an arrest and conviction.

He also discussed the issue in more detail on CNBC’s Squawk Box Asia. Since the report completely misses the purpose of SARs and demonstrates an uninformed view of how they are generated by banks and used by law enforcement, BPI published a blog which provides questions and answers about how banks file SARs to help provide leads to law enforcement.

Following the global media attention related to FinCEN Files, the American Banker reported this week that the release has renewed focus on Congressional effort to reform the anti-money laundering/Bank Secrecy Act framework. Learn More >>

Federal Reserve Issues ANPR to Modernize Community Reinvestment Act

On September 21, the Board of Governors of the Federal Reserve System announced its proposal to modernize the Community Reinvestment Act (CRA) regulatory framework through the release of an Advance Notice of Proposed Rulemaking (ANPR). The ANPR solicits feedback from stakeholders and is the second CRA proposal considered this year by the federal banking agencies. In May, the OCC finalized the CRA rule that it had been working on since the first ANPR was issued in 2018. Federal Reserve Governors expressed their desire that interagency agreement on the CRA regulations would still be possible and indicated that the 120-day comment period was chosen in furtherance of that goal. Responding to the Fed’s announcement, Acting Comptroller of the Currency Brian Brooks expressed encouragement that fellow regulators are recognizing the “need to act to improve upon a system that was not working,” and was “pleased” that many of the principles agreed upon in early negotiations among regulators would be part of the rulemaking decision.

BPI President & CEO Greg Baer issued the following statement in response to Fed’s proposal:

Today’s issuance by the Federal Reserve is a welcome addition to the conversation on modernization of the CRA regulatory framework. We continue to agree with the statements of several of the Federal Reserve governors that interagency cooperation is key for a regulatory framework that best achieves the goals of CRA.

Learn More >>

Venmo’s Lack of Consumer Safeguards Puts Customers at Odds with Scammers and Debt Collectors, Reports WSJ

On September 24, the WSJ published an article sharing the experience of several Venmo customers who are now facing collections after the company forwarded their information to debt collectors because of negative account balances brought about by scams. Many of the customers whose experiences are shared identified the scam shortly after issuing payments through Venmo; however, despite being able to freeze the payment at their banks, many of the customers remained on the hook for thousands of dollars due to the way Venmo advances payments to recipients before the money actually clears the sender’s account, leaving the sender liable for the loss. Learn More >>

Why Do Banks Need a Credit Sensitive Lending Benchmark?

The U.K. Financial Conduct Authority plans to end support for the London Interbank Offered Rate (LIBOR) in 2021, which led to the emergence of the secured overnight financing rate (SOFR) as the leading replacement candidate. In a blog post published Wednesday, “Why Do Banks Need a Credit Sensitive Lending Benchmark?” we note that SOFR is an appropriate benchmark for derivatives and debt instruments but less effective as a benchmark for commercial loans, such as term loans and lines of credit.

This post follows a virtual symposium on efforts to create a credit-sensitive benchmark hosted by BPI on September 18. The symposium brought together bankers, academics, policymakers and consultants to participate in a robust discussion on the current status of efforts to establish a benchmark for bank lending rates that is sensitive to the credit-spread component of bank funding costs. Learn More >>

Powell and Mnuchin Testify on the Hill Regarding Fed’s Pandemic Response and CARES Act Implementation

Jerome Powell, Chair of the Federal Reserve, and Steve Mnuchin, Secretary of the Treasury, made multiple appearances on the Hill this week to participate in Congressional hearings on the status of the Fed’s emergency lending facilities establish in response to the pandemic, and implementation of the CARES Act. The hearings covered a variety of supervisory and regulatory matters across three committees: the Senate Banking Committee, the House Financial Services Committee and the House Select Subcommittee on the Coronavirus Crisis.

In all three hearings, Powell fielded questions related to the current status of the Fed’s Main Street Lending Program (MSLP), including responding to the recent release of the Fed’s MSLP FAQs which noted their decision to not pursue an asset-based lending facility at this time and also addressed concerns about the delayed launch and sluggish demand for the program, of which only approximately $2 billion out of $600 billion in authorized loans have been made. Powell remarked that there is “nowhere near the degree of standardization” in bank-based lending as there is in the bond market, as “every bank credit agreement for every company is basically individually negotiated,” and said the MSLP “was a much more complicated problem [for the Fed] to solve.” Although he acknowledged that uptake in the MSLP is “modest” as “credit is pretty broadly available in the space of small and medium-sized companies,” he stressed that the program “will be there to take on a heavier load” and act “as a backstop” if “the economy performs worse than [the Fed] expects.” He also noted at this time that “the evidence suggests that most creditworthy small and medium-sized businesses can currently get loans from private-sector financial institutions,” which is a point that BPI raised at a Congressional Oversight Commission hearing back in August.

At the Senate Banking Committee held on Thursday, which featured testimony from Powell and Secretary of the Treasury Steven Mnuchin, Chairman Mike Crapo (R-ID) raised concerns regarding regulatory capital thresholds, cautioning that “[t]heir role and these unique circumstances threaten to cause key regulatory thresholds to be breached and a ratcheting up of regulation that would otherwise not occur that could keep them on the sidelines” and, accordingly, stressed that the “regulatory framework should account for these unique circumstances, and enable banks and credit unions to continue supporting the recovery.” With respect to the potential for a “Phase IV” stimulus package, Secretary Mnuchin and Chair Powell both agreed that additional “targeted” fiscal relief measures are needed.

Additionally, Secretary Mnuchin received several questions urging for Treasury and the SBA to work together to help further simplify the loan forgiveness process for PPP loans, given that many lenders and small businesses are having difficulties with the current system and prospects for legislation that would provide additional simplification is uncertain at this time. Secretary Mnuchin responded that they have already created an EZ form application process and believe that any further simplification would need to be legislated, but he did commit to discussing and revisiting the issue with SBA.

In Case You Missed It

BPI Members Continue to Invest in Efforts to Further Diversity and Financial Inclusion Goals

On September 23, two BPI members announced new investments to improve economic mobility and financial inclusion in their communities. Citi and the Citi Foundation launched a $1 billion campaign, “Action for Racial Equity,” featuring significant investments in black-owned businesses and entrepreneurs and additional investments to support homeownership for people of color, and Truist Financial established a $40 million non-profit loan fund that will help to support women and black-owned businesses through the support of Community Development Financial Institutions.

Bill Nelson, BPI Chief Economist, Joins the Hidden Forces Podcast Series to Talk Monetary Policy

BPI Chief Economist Bill Nelson was recently featured on an episode of Hidden Forces, a podcast series that explores major changes in the world and the influencing factors that affect science, finance, politics and culture. The episode explored monetary policy and how the practice and regulatory landscape has changed since 2008, and Bill provided some predictions and expectations for the outlook on inflation and whether the Fed can retain its independence. To listen to the episode, please click here.

BPI Submits Comment Letter to Banking Agencies on Revisions to Call Report

On September 21, BPI submitted a comment letter to the Fed, OCC and FDIC responding to proposed reporting revisions to bank Call Reports. The letter requests that the agencies better align the Call Report and FR 2900 in light of recent revisions to both reports to reflect changes to Regulation D that remove the numeric limits on transfers and withdrawals from the definition of “savings deposits.

Upcoming Events

  • 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”
  • 09/30/2020 – Women in Housing & Finance host: “Is Valid When Made…Valid?”
  • 10/16/2020 – 10th Annual FDIC Consumer Research Symposium
  • 12/11/2020 – Fed Research Conference on Bank Supervision