We recall a halcyon era when August meant a Congressional recess and a sleepy Washington DC. Welcome to 2019 and our ICYMI edition of BPInsights, highlighting the many goings-on from Washington during August.
1. Agencies Approve Volcker Rule Reforms
On August 20, the federal banking regulators voted to finalize amendments to the Volcker Rule, which restricts financial institutions’ ability to invest in private equity funds and engage in proprietary trading. Among other reforms to the regulation, the new rule further tailors compliance requirements based on the size of banks’ trading assets and liabilities and makes several revisions to the scope of the proprietary trading prohibition. Notably, the final rule also removes the “accounting prong” test, consistent with BPI’s recommendations in its 2018 comment letter on the proposed changes. “The changes in the new rule will help reduce the incidental damage the original rule has done to responsible banking activity and legitimate market-making activity, and the massive and needless compliance costs it imposed,” said BPI President and CEO Greg Baer in an August 20 statement. “We commend the regulators for their willingness to rethink and recalibrate.”
2. BPI Joins ABA to Oppose Ratuken ILC Charter in Letter to FDIC
On August 30, BPI joined the American Bankers Association in a letter to the FDIC opposing Japanese e-commerce firm Rakuten’s application to operate as an insured industrial loan company (ILC). Of note, the letter highlights the risk posed by the close affiliation of Rakuten’s financial and non-financial businesses and potential threats to privacy associated with its proposed business plan, which would rely on the use of customer information across its bank and non-financial affiliates.
3. One Hand Clapping: Why the Fed Must Act for Mortgage Reform to Succeed
In a new blog post, BPI explains how currently, a combination of the Federal Reserve and Federal Housing Finance Agency regulations impose dramatically higher capital requirements on banks than on government-sponsored enterprises (GSEs) for the holding and servicing of mortgages and make it uneconomic for banks to be engaged in those activities or make markets in any mortgage-backed security not guaranteed by the GSEs. Maybe it’s time for the two regulatory agencies to have a conversation.
4. BPI Applauds Banking Agencies Collaboration on Cybersecurity
BPI welcomed the Federal Financial Institutions Examination Council (FFIEC) statement encouraging a standardized approach for assessment and naming the Financial Services Sector Cybersecurity Profile one of those assessment tools. The Cybersecurity Profile integrates widely used industry and regulatory standards to help financial institutions develop and maintain cybersecurity risk management programs. The BPI-led effort, managed under the Financial Services Sector Coordinating Council (FSSCC), was co-developed with the American Bankers Association and over 300 industry experts from 150 financial institutions worldwide, ranging from community banks to large multi-national firms.
5. Capital / Liquidity Primers
School and Congress are back in session. Anyone needing to hone up on (or who has students who need to hone up on) basic banking terms should check out BPI’s primers on capital and liquidity. They discuss what capital and liquidity are, some regulations, some relevant statistics, and economists’ estimates of their optimal levels. Capital, for instance, isn’t an asset; it is the amount by which assets exceed liabilities. It’s the buffer that enables banks to take losses without becoming insolvent. Liquidity is the ability to meet scheduled payments and demand for funds without incurring high costs. Banks are inevitably somewhat illiquid because they fund themselves with deposits and invest in loans. They manage that liquidity risk partly by maintaining stocks of liquid assets, but mostly by maintaining diversified and robust market sources of funds.”
Capital Primer >>
Liquidity Primer >>
6. BPI Comments on Proposed Changes to Confidential Supervisory Information Rules
On August 16, BPI submitted a comment letter to the Federal Reserve on its proposed changes to rules governing the disclosure and use of confidential supervisory information (CSI) and other nonpublic information. BPI provides several recommendations for further refinement of the framework that encourages the creation of clear standards that are consistently and rationally applied. Of note, the letter recommends further revisions to the restrictions and requirements on sharing Federal Reserve CSI among supervised financial institution affiliates and with third-party consultants and other government agencies and seeks clarification that documents prepared and retained by a supervised institution for its own businesses purposes is excluded from the CSI definition.
7. Impending Money Market Volatility Prompts Warning Light for LCR Tune-Up
This post explains that over the next four weeks there is going to be a kerfuffle in money markets, and we highlight our previously proposed solution. Because Treasury tax receipts will be building up and Treasury securities issuance will be heavy, banks’ reserve balances at the Fed are going to decline rapidly and significantly to $1¼ trillion from their current level of $1½ trillion. As a result, money market rates will become volatile as banks scramble for reserves. The Fed can avoid this outcome by making some warranted adjustments to the liquidity coverage ratio (LCR) requirement (and similar liquidity requirements) that will reduce banks’ demand for excess reserve balances by an amount similar to the decline in supply, but it must act fast.
8. Design Challenges for a Standing Repo Facility
At its June meeting, the FOMC discussed opening a standing repo facility. Such a facility would allow eligible counterparties to receive cash loans from the Federal Reserve in the form of repos against government securities. Outlined in a BPI blog post is a discussion of how the facility could be designed to accomplish different objectives and of how those design choices can conflict.
9. Fed Undercuts Own $6 Billion Effort to Reduce Sweep Accounts
When you make a deposit at a bank, the bank is required by the Fed to hold 10 percent of that deposit as cash. Confusingly, the Fed does not allow the bank to count that cash as available to help meet a bank run in an emergency. In fact, as explained in our blog post, the more cash the Fed requires a bank to hold, the less prepared the Fed considers a bank to be in order to meet such a run. As a result, the Fed has not accomplished its primary objective for paying interest on required reserves for over 10 years. The Fed can easily fix this expensive mistake by simply judging a bank that holds more cash at the Fed’s own behest to be better prepared to meet its liquidity needs in a financial panic.
10. BPI Adds Leading Household Finance Economist to Research Team
Last month, BPI announced it has hired Paul Calem to the role of Senior Vice President in Research. Dr. Calem joins BPI from the Federal Reserve Bank of Philadelphia where he was a Vice President in the Supervision, Regulation and Credit Department. Dr. Calem will enhance BPI Research’s work on assessing the impacts of banking regulation and encouraging policies that maximize economic growth while preserving bank safety and soundness and consumer wellbeing. Dr. Calem will concentrate on household finance, and he will start on September 23, 2019.