BPInsights: September 7, 2018

BPInsights: September 7, 2018

Top of the Agenda

ICBA Offers No Evidence Supporting Call for Higher Capital

In a blog late last week, BPI’s Greg Baer pushes back against the American Banker Bank Think column from ICBA’s Rebeca Romero Rainey that calls for maintaining capital standards for the nation’s largest banks without offering any data-based evidence to support her positions. In her column, Romero Rainey writes that policymakers “should not be tempted … to weaken vital safeguards on our financial system,” without offering any suggestions as to the proper level of safeguards. Instead, Romero Rainey points to the repercussions from the financial crisis and says that large banks “should not be allowed to operate without elevated levels of high-quality capital.”

Baer, who notes that BPI “prides itself on making only evidence-based arguments about regulatory design and calibration,” cites BPI research notes on the GSIB surcharge and the supplementary leverage ratio to support its position. On the GSIB surcharge, a recent BPI note offers “a data-based analysis by which the Fed could adjust its formula to account for economic growth and for the risk-reducing effect of other post-crisis regulations,” Baer says. On the supplementary leverage ratio, Baer writes: “we have published easily replicable evidence that leverage ratios are poor predictors of bank failure, and the New York Fed recently published an analysis finding that binding leverage ratios lead banks to take on more, not less, risk.”

Of Note

BPI Responds to WSJ Op-Ed: Furman Is Wrong About Bank Capital Buffer

Bill Nelson, chief economist at BPI, penned a letter to the editor responding to Jason Furman’s Wall Street Journal op-ed, The Fed Should Raise Rates, but Not the Ones You’re Thinking. Nelson refuted all four reasons Furman presented calling for the Federal Reserve to use the so-called countercyclical capital buffer (CCyB) to increase bank capital requirements. “All his reasons are wrong,” Nelson wrote. He noted, among other items, that while some risks are elevated, they are “offset by the robust state of the banking system.” Also, while the CCyB could be used to slow economic growth, if needed, the Fed “can raise interest rates, which will restrain the economy broadly.”

Group of 30 Finds U.S. Banks Sound but Crisis Tools Not

In a report issued on “Managing the next financial crisis” the G30, a group of 30 leaders in international finance led by Timothy Geithner and Guillermo Ortiz, found that while banks had become significantly more resilient since the crisis, “…the enhanced oversight of the traditional, regulated banking sector could have the effect of pushing more and more activity into the shadow banking sector where less oversight exists. Paradoxically, the preventive steps taken to bolster big banks, while welcome, could increase the likelihood that prevention by itself will not be enough given that a corresponding effort was not made with respect to systemically important non-bank financial institutions that could play a bigger role in the financial system as a result.” The report also observed that countries were increasingly forcing international banks to concentrate their operations in local holding companies. They found that such ex ante ringfencing “…might lead to trapped pools of resources and thereby weaken the stability of global financial institutions” and should be replaced by “…trust and institutionalized cooperation among the authorities…” The report also expressed significant concern that the ability of U.S. authorities to address the next crisis had been excessively constrained and could prove inadequate.

Are Public Banks Doomed From the Start?

In a recent post on its Economic Equality blog, Federal Financial Analytics examines the history of public banks, increasingly backed in the decade following the financial crisis, and warns of the “sorry legacy of banks organized for public purpose that succumb to political self-interest.” With a few notable exceptions, the blog post argues, public banks are “doomed from the start,” with those exceptions largely distinguished by their “joint arrangements with local for-profit banks and credit unions, which control for risks based on private-sector, regulated underwriting discipline.” The blog calls for transparency and effective risk controls in public banks but emphasizes that, even then, they remain susceptible to credit allocation patterns dictated by political, not equality, motives. Fed Fin proposes a solution in “‘Equality Banks’ and other private-sector efforts,” which “provide a sound, transparent, and regulated way to harness private-sector discipline for public-policy objectives,” structured for distinct goals and subject to specially tailored rules.

Proposed new bank sues fed for right to arbitrage fed deposits

BPI Chief economist Bill Nelson is one of the few left arguing that the Federal Reserve should return to conducting monetary policy roughly the way it did before the crisis, with a relatively small balance sheet, as opposed to the way it has done for the last several years, with a large balance sheet. One of his main arguments is that with a large balance sheet and, as a result, market interest rates roughly equal to the interest rate the Fed pays on reserves, the Fed will inevitably end up much more entangled with the financial system. On Wednesday, the entanglements began to manifest, as TNB USA sued the Federal Reserve Bank of New York to get an account so it can earn interest on its deposits. The bank, led by the previous head of research at the New York Fed James McAndrews, intends to only take deposits from institutional investors and invest only in deposits at the Fed, allowing it to avoid deposit insurance. Although the New York Fed has approved the application, the Fed Board is sitting on the application.

Powell Stresses Importance of Waiting on Incoming Economic Data When Shaping Monetary Policy

In Jerome Powell’s speech at a symposium in Jackson Hole, Wyoming last week – his first since confirmation in January – the Federal Reserve Chairman presented the broad outlines of his approach to monetary policy. Chairman Powell emphasized the importance of observing real economic outcomes along with model-based forecasts, suggesting a policy doctrine shaped as much by current economic realities as by projections. The Fed’s “gradual process of normalization remains appropriate,” he said, in light of the expectation that the economy’s “strong performance will continue.” He defended the Fed’s current approach, characterizing its gradual elevation of interest rates as “taking seriously” the dual risks of “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating.” Finally, he added, “If the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.”

BPI News


Payments Policy Meets Monetary Policy: Are These Two Hands Coordinated at the Fed?

In a blog on Tuesday, Bill Nelson questions if it is a good time for the Federal Reserve to consider changing its Payment System Risk (PSR) policy, given all of the other items on the Fed’s agenda. The PSR imposes limits and fees on intrabank payments over the Fed’s payment platforms, and last December the Board proposed lowering significantly the “net debit caps” of the U.S. branches and agencies of foreign banking organizations (FBOs). Nelson writes that it will be hard to access the potential impact to the proposed change for a number of reasons, including the current abundance of reserve balances. If the PSR proposal is adopted, Nelson notes, in times of stress, FBOs may be forced to alter their payments activity which could raise “liquidity and operational risks in the markets.” Nelson suggests that there is no rush to approve the new PSR policy. “Given all the balls the Fed currently has in the air, now seems a bad time to toss another into the mix,” he writes.


National Institute of Standards and Technology Announces Development of Privacy Framework

The National Institute of Standards and Technology (NIST) announced on Tuesday the beginning of a collaborative multi-stakeholder project to develop a voluntary national privacy framework. The advancement of technology has made protecting consumer privacy increasingly difficult. It is challenging for organizations to design, operate or use technologies in ways that are mindful of the diverse privacy needs in today’s complex environment. NIST envisions a privacy framework that will provide a voluntary enterprise-level approach to help organizations prioritize strategies for flexible and effective privacy protection solutions. NIST will collect input from stakeholders through a series of public workshops. The first workshop is set for October 16 in Austin, Texas.

BPI Events


Registration is now open for the 2018 BPI & TCH Annual Conference, the premier gathering for senior financial services executives, regulators, policymakers, and academics focused on the changing regulatory landscape and the future of payments.
Register Today!
November 26-28, 2018, The Pierre, NYC


The Bank Policy Institute and Columbia University’s School of International and Public Affairs invite the submission of papers for a conference on Bank Regulation, Lending and Growth. The purpose of the conference is to bring together academics, market participants, and policymakers to discuss the latest research on how regulation affects credit formation and economic activity. Paper submission deadline is November 1, 2018.
March 1, 2019, Columbia University, NYC

Industry News

Banking Agencies

OCC Conditionally Approves Charter for FinTech Firm

On Tuesday, the Office of the Comptroller of the Currency (OCC) granted preliminary and conditional approval to Varo Bank, a financial technology startup, to form a de novo national bank. Varo Bank is the first fintech firm to be granted a charter by the OCC and will become the first all-mobile national bank in the United States. Varo Bank will receive a full bank charter, rather than the special purpose bank charter specifically designed for fintech firms. In addition to completing organizational steps and satisfying the OCC’s conditions, Varo Bank will need to secure approval from the FDIC to obtain deposit insurance and Federal Reserve membership in order to obtain its national bank charter.

OCC Issues ANPR on Modernizing the Regulatory Framework for the CRA

On August 28, the Office of the Comptroller of the Currency issued an Advance Notice of Proposed Rulemaking (ANPR) inviting public comment on modernizing the regulatory framework implementing the Community Reinvestment Act (CRA). The ANPR is subject to a 75-day comment period with comments due November 19, 2018. The ANPR does not propose specific revisions to the CRA regulations, but requests comment on a series of 31 questions on how the CRA regulatory framework may be changed to bring greater clarity, consistency, and certainty to the evaluation process, as well as to provide flexibility to accommodate banks with different business strategies. While both the Vice Chairman Quarles at the Federal Reserve and the Chairman McWilliams at the FDIC have expressed support for CRA reform, neither agency joined the ANPR.

Agencies Extend Comment Period for Proposed Simplifying and Tailoring of the “Volcker Rule”

On Tuesday, five federal agencies extended until October 17 the comment period for a proposed rule to simplify and tailor compliance requirements for the “Volcker rule.” With the extension, the Federal Reserve Board, the CFTC, the FDIC, the OCC, and the SEC will have provided interested parties with approximately four and a half months to submit comments from the date the proposal was released on June 17.

International Developments

BCBS Issues ECL Technical Amendment to Pillar 3 Disclosure Requirements

Last week the BCBS issued what it describes as technical amendments to its Pillar 3 disclosure requirements regarding the transitional effects of expected credit loss (ECL) accounting provisions on regulatory capital and to provide further information on the allocation of ECL accounting provisions during the interim period. Template KM2 (Key Metrics – Total Loss-Absorbing Capacity (TLAC) requirements at resolution group level) is amended to require banks to disclose the “fully loaded” impact of ECL transitional arrangements used in TLAC resources and ratios. Template CR1 (Credit quality of assets) is amended to require additional disclosures on the allocation between general and specific provisions for standardized exposures. Table CRB (Additional disclosures related to credit quality of assets) is amended to require the disclosure of the rationale for banks’ categorization of ECL accounting provisions in general and specific categories for standardized approach exposures. The amendments are effective January 1, 2019.

Capitol Hill

Senate Banking Committee Hearing: Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act

The Senate Banking Committee will hold a hearing on Thursday, September 13 at 10am on “Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act.” The witnesses will be: The Honorable Joseph M. Otting, Comptroller, Office of the Comptroller of the Currency; The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System; The Honorable Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation; and The Honorable J. Mark McWatters, Chairman, National Credit Union Administration. The hearing is the first such hearing following the passage of S. 2155.

  • Both the House and Senate will be in session next week.

Research Rundown

The Salience Theory of Consumer Financial Regulation (Sarin)

This article offers an empirical evaluation of three consumer finance reforms that restrict banks’ ability to generate fee revenue. Applying the shrouded pricing model, the author finds evidence that regulation of non-salient prices is more effective than that of salient prices. The author also suggests behavioral tools as an alternative to price regulation.

FRB Atlanta working paper: Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom

This working paper analyzes the geography of housing price and subprime mortgage lending changes during the U.S. housing boom. It shows that increases in housing prices and subprime lending occurred in different parts of the country, challenging the narrative that the increase in subprime mortgage lending in the early 2000s contributed directly to the housing price bubble and subsequent crisis.

Competition, Stability, and Efficiency in Financial Markets (Corbae, Levine)

Using both a dynamic model of the banking system under imperfect competition and regression analyses of U.S. data, the authors find that greater competition among banks increases both their efficiency and fragility and that the costs of fragility can be mitigated by enhancing bank governance and tightening leverage requirements. They also find that greater competition increases the responsiveness of bank lending to a central bank’s changes in interest rates.

NBER working paper: The Spread of Deposit Insurance and the Global Rise in Bank Asset Risk

The authors of this working paper develop a new measure of changing generosity of deposit insurance and empirically model the adoption and generosity of deposit insurance. They find that the expansion of deposit insurance generosity has increased bank asset risk, partly explaining the correlation between deposit insurance and systemic banking crises.