BPInsights: September 27, 2019 - Bank Policy Institute

Top of the Agenda

Bank Regulations and Turmoil in Repo Markets

Our research team has continued to look into the turmoil in the repo market to try and better understand the causes of the volatility. In a new blog post out today, BPI SVP and Head of Research Francisco Covas and Chief Economist Bill Nelson write that, “last week’s turmoil in repo markets provided a relatively benign demonstration of how banking regulations have reduced financial market resilience… A question many are asking is: Why didn’t banks step in and supply the missing repo financing? The answer is that doing so would have required them to obtain the funds from their own deposits at the Fed or by borrowing. Regulations or supervisory expectations stood in the way of either course of action.” The post details how regulations are preventing banks from playing a more active role in fixing market dislocations in the repo market.

5 Stories Driving the Week

1. Senators Introduce Bipartisan Legislation to End Anonymous Shell Companies

On Thursday, U.S. Senator Mark R. Warner (D-VA), Tom Cotton (R-AR), Doug Jones (D-AL), Mike Rounds (R-SD), Bob Menendez (D-NJ), and John Kennedy (R-LA), Catherine Cortez Masto (D-NV), and Jerry Moran (R-KS) introduced the Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act. The bipartisan legislation would prevent the formation of anonymous shell companies and modernize the anti-money laundering (AML) and combating the financing of terrorism (CFT) policies. BPI President and CEO Greg Baer welcomed the new legislation stating, “We appreciate Senators Warner, Cotton, Jones, Rounds, Menendez, Kennedy, Cortez Masto, and Moran’s hard work in building additional bipartisan support and pushing this legislation forward. Their legislation would both modernized our antiquated AML regime and help law enforcement and national security officials by closing the anonymous shell company loophole exploited by human traffickers, drug smugglers, and terrorists.” BPI is a strong supporter of ending the use of anonymous shell companies and modernizing the AML regime. In early 2017, BPI’s predecessor organization, The Clearing House, published an anti-money laundering report that identifies fundamental problems with the anti-money laundering framework and proposed a series of reforms to remedy them. The Senate draft includes several ideas highlighted in the 2017 report, including focusing on the use of technology in detecting suspicious activity, using a risk-based approach for threat detection, streamlining the SAR and CTR process as well as establishing processes for improving feedback amongst law enforcement, regulators, and financial institutions.

2. Fed at a Crossroads

In a new blog post, BPI Chief Economist Bill Nelson writes that the turmoil in money markets last week has demonstrated that the Federal Reserve has to either operate with a balance sheet that is much bigger even than its current vast size or take steps to reduce the variability of reserve balances. Either course changes the calculus that went into the Fed’s recent decision on how to conduct monetary policy—either the costs of the large-balance sheet approach the Fed choose are higher, the benefits lower or both. The Fed should consider reversing its decision and returning to the small-balance sheet approach that it employed before the financial crisis.

3. Senate, House Hold Hearings to Examine Real-Time Payments

On September 25, the Senate Banking Committee held a hearing on real-time payments. Committee Chairman Mike Crapo (R-ID) noted in his opening statement that, “some financial institutions have raised concerns about the Fed’s analysis and process, the cost and amount of time it would take to develop its own real-time payment system, its prospects for achieving interoperability, inherent conflicts of the Fed operating its own system and its prospects for negatively affecting existing real-time payment systems.” Senator John Kennedy (R-LA) questioned why the Fed planned to create a competing system if the Fed had not found any problems with the private sector RTP system. Senator Pat Toomey (R-PA) questioned Esther George, President and CEO of the Federal Reserve Bank of Kansas City, about whether the Fed would commit to flat pricing for all banks regardless of size just as the Clearing House has done. She responded stating that the Fed has “not identified the pricing” and instead noted volume pricing benefits. The House Financial Services Committee also held a hearing on real-time payments on September 26, where members similarly raised questions about pricing, ubiquity, and interoperability.

3. CFPB Director: For-Cause Removal Provision ‘Unconstitutional’

CFPB Director Kathleen Kraninger advised, in a letter to Congressional leadership, that the CFPB has determined that the “for-cause” removal provision in the Consumer Financial Protection Act of 2010 (CFPA) is unconstitutional, Politico reports. In a September 17 letter to House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Mitch McConnell (R-KY), Kraninger stated that this provision in CFPA, which provides that a CFPB Director can be removed only for cause — which the CFPB had previously defended in a number of court challenges — is “unconstitutional,” bringing the agency’s official position in line with that taken by the Department of Justice in 2017. Kraninger noted that the CFPB had urged the Supreme Court to grant a pending petition for certiorari, which was filed in conjunction with an ongoing case, CFPB v. Seila Law, to resolve this question regarding the constitutionality of the for-cause removal provision.

4. Reforms Have Made Banks Safer but Markets More Brittle

The Wall Street Journal published a quick and cogent explanation of the current dislocation in money markets and why it is occurring. As the WSJ notes, since the global financial crisis, banks are “far less likely to fail or need a taxpayer bailout,” and yet in other ways the financial system is “also more brittle, as the channels that carry cash and securities between investors, banks and foreigners repeatedly clog in the face of stresses they once easily absorbed.” A key constraint is the “stiffened capital requirements” placed on the eight globally systemically important banks that penalizes them for adding new loans. “It makes them less able to respond to asset-price movements as a buffer against big swings in supply and demand,” said Bill Nelson, BPI Chief Economist.

5. Facebook Tries to Reassure Lawmakers on Libra Launch

In a letter sent to Congressman Emanuel Cleaver (D-MO), David Marcus, the head of Facebook’s Calibra digital wallet division, said the Libra digital currency won’t lunch until policymaker concerns in the U.S. are resolved, according to a report by Politico. “We will not launch until we have addressed all U.S. regulatory concerns.” Marcus also said Facebook was willing to provide “any and all information” needed for a review by the Financial Stability Oversight Council or by the government’s Office of Financial Research.

In Case You Missed It

House Votes to Advance Cannabis Banking Legislation
On September 25, the House approved by a vote of 231-103 the SAFE Act, which would clarify that banks can provide financial services to cannabis companies that comply with state law. In the final vote, 91 Republicans joined 229 Democrats to pass the legislation.

SEC Proposes Updates to Statistical Disclosure Requirements For Banking Institutions
On September 17, the SEC proposed revisions to its Industry Guide 3 (“Guide 3”) governing statistical disclosure requirements by bank and savings and loan holding companies, last revised in 1986. The SEC’s announcement follows a 2017 request for industry feedback on the existing Guide 3 (BPI’s response can be found here). The proposed changes to Guide 3 would eliminate disclosures that overlap with provisions of International Financial Reporting Standards or U.S. Generally Accepted Accounting Principles (GAAP), or with other SEC rules. Comments on the proposal are due 60 days after its publication in the Federal Register.

BPI Comments on Fed’s Proposed Changes to CCAR Reporting Requirements
On September 23, BPI submitted a comment letter to the Federal Reserve on proposed changes to the Comprehensive Capital Analysis and Review (CCAR) stress test reports (FR Y-14A/Q/M). The letter emphasizes the potential for significant implementation challenges associated with the proposed effective date of the changes, which would be effective as of the same date as the close of the comment period. The letter also includes a number of requests for technical changes and clarifications.

FinCEN Director Kenneth Blanco Targets Financial Aggregators as AML Risk
In a speech on September 24, FinCEN Director Kenneth Blanco noted emerging anti-money laundering risks from financial aggregators and integrators. “Criminals can leverage vulnerabilities in identity technologies and governance to commit crimes, further their criminal activity, and hide from authorities,” said Blanco. He said that, in some cases, these fintech companies are being used “to facilitate account takeovers and fraudulent wires.” Also, he called for legislative efforts to end anonymous shell companies. Blanco said, “now is the time to take bipartisan action and address this serious and growing gap in our national security.”

Repo-Market Volatility Raises Concerns About New Benchmark Rate
The recent tumult in the market has raised some analyst concerns about the Federal Reserve’s proposed replacement for the London interbank offered rate (LIBOR), reports the Wall Street Journal. The secured overnight financing rate, known as SOFR, rose to a record 5.25 percent last week. Participants in the working group of banks convened by the New York Fed to manage the transition said the one-day spike “would barely register for users of the rate.” LIBOR is slated for replacement in 20121.

House Financial Services Committee Adds Additional Republican Member
House Financial Services Committee Ranking Member Patrick McHenry (R-NC) announced on September 26 that he selected Congressman William Timmons (R-SC) to join the committee. “Congressman Timmons’ experience as a small business owner will make him a valuable addition to the Financial Services Committee as Republicans continue to work to find solutions for investors, consumers, and job creators of all sizes,” McHenry said in a release.

Upcoming Events

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.
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.
The Pierre, New York

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