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U.S.-UK financial regulators discuss bilateral issues
On May 24, the U.S. Treasury Department issued a joint statement covering the recently held fourth meeting of the U.S.-UK Financial Regulatory Working Group (Working Group). Participants included officials and senior staff from both countries’ treasury departments, as well as regulatory agencies including the Federal Reserve Board, CFTC, FDIC, OCC, SEC, the Bank of England, and the Financial Conduct Authority. The Working Group discussed, among other things, (i) financial sector implications of the UK’s withdrawal from the EU; (ii) “cooperative efforts to promote the free flow of cross-border financial services data crucial for effective financial sector regulation and supervision”; (iii) regulatory fragmentation and data localization risks; (iv) the Financial Stability Board’s work on non-bank financial intermediation, which involves active engagement from both U.S. and UK authorities; and (v) the management of climate-related financial risks and other sustainable finance issues. Working Group participants will continue to engage bilaterally on these issues and others ahead of the next meeting planned for this fall.
Brainard provides update on central bank-issued digital currencies
On May 24, Federal Reserve Governor Lael Brainard spoke at the Consensus by CoinDesk 2021 Conference about the Fed’s exploration of central bank digital currencies (CBDCs) and cross-border payments. Brainard noted that a CBDC may address concerns regarding the lack of federal deposit insurance and banking supervision for nonbank issuers of digital assets, and that “new forms of private money may introduce counterparty risk into the payments system in new ways that could lead to consumer protection threats or, at large scale, broader financial stability risks.” She highlighted that “introducing a safe and accessible central bank money to households and businesses in digital payments systems. . .would reduce counterparty risk and the associated consumer protection and financial stability risks.” Brainard noted that a Fed-backed digital currency could cause payment transactions to be cheaper, faster, and more efficient by improving processes for sending and receiving money internationally, encouraging private-sector competition in retail payments, and increasing financial inclusion.
Brainard discussed how CBDCs could affect central banks’ ability to manage the economy, saying a digital dollar would need to be designed with safeguards to “protect against disintermediation of banks and to preserve monetary policy transmission more broadly.” She cautioned that the design should complement, not replace, existing currency and bank deposits and emphasized the need for regulators to work together “to ensure that banks are appropriately identifying, monitoring, and managing risks associated with digital assets.”
As previously covered by InfoBytes, last week Chairman Jerome Powell stated that an important step in engaging the public about CBDCs involves “publishing [a] paper this summer to lay out the Fed’s current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the U.S. context.”
Agencies to proceed with Call Report revisions
On May 24, the FDIC, Federal Reserve Board, and the OCC published a joint notice and request for comments on information collections published last December and this February (covered by InfoBytes here). The proposed reporting changes would revise and extend three versions of the Call Report—FFIEC 031, FFIEC 041, and FFIEC 051—as well as FFIEC 002, “Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks,” and FFIEC 002S, “Report of Assets and Liabilities of a Non-U.S. Branch that is Managed or Controlled by a U.S. Branch or Agency of a Foreign (Non-U.S.) Bank.” After considering comments received on the information collections, the agencies announced their intention to proceed with the proposed revisions and will submit a request to Office of Management and Budget for approval. The proposed revisions to the reporting forms, along with revised instructions related to FDIC amendments to the deposit insurance assessment system, will be effective with the June 30, 2021, report date. Additionally, the agencies noted that the exclusion of sweep deposits and certain other deposits from reporting as brokered deposits will be effective with the September 30, 2021, report date. Comments on the joint notice must be received by June 23.
Federal agencies release host state loan-to-deposit ratios
On May 21, the FDIC, the Federal Reserve Board, and the OCC released the current host state loan-to-deposit ratios for each state or U.S. territory, which the agencies use to determine compliance with Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act). Under the Interstate Act, banks are prohibited from establishing or acquiring branches outside of their home state for the primary purpose of deposit production. Branches of banks controlled by out-of-state bank holding companies are also subject to the same restriction. Determining compliance with Section 109 requires a comparison of a bank’s estimated statewide loan-to-deposit ratio to the estimated host state loan-to-deposit ratio. If a bank’s statewide ratio is less than one-half of the published host state ratio, an additional review is required by the appropriate agency, which involves a determination of whether a bank is reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches.
Fed highlights potential of central bank digital currencies
On May 20, Federal Reserve Chairman Jerome Powell released a video message outlining the potential use of central bank digital currencies (CBDCs) in the U.S. payment system. Powell discussed how “the rise of distributed ledger technology, which offers a new approach to recording ownership of assets, has allowed for the creation of a range of new financial products and services—including cryptocurrencies,” which may carry potential risks to those users and to the broader financial system. Powell highlighted that the Fed is contemplating whether and how a U.S. CBDC would impact the domestic payments system, emphasizing that CBDCs “could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar.” Powell also noted that, as part of the Fed’s ongoing efforts in exploring the potential benefits and risks of CBDCs from a variety of angles, the Fed will begin broader consideration of the creation of a U.S. CBDC by issuing a discussion paper and requesting public comment on benefits and risks. Powell stated he expects the Fed to play a leading role in developing international standards for CBDCs by “engaging actively with central banks in other jurisdictions as well as regulators and supervisors here in the United States throughout that process.”
Federal regulators discuss Covid-19 responses and priorities
On May 19, the House Financial Services Committee held a hearing entitled “Oversight of Prudential Regulators: Ensuring the Safety, Soundness, Diversity, and Accountability of Depository Institutions.” Committee Chairwoman Maxine Waters (D-CA) opened the hearing by expressing her concerns about the “harmful deregulatory actions” taken by the previous administration’s appointees to “roll back key Dodd-Frank reforms and other consumer protections.” She noted, however, that she was pleased that the Senate is moving forward to reverse the OCC’s true lender rule and commented that she has asked House leadership to address the related Congressional Review Act resolution as soon as possible.
Fed Vice Chair for Supervision Randal K. Quarles provided an update on the Fed’s Covid-19 regulatory and supervisory efforts, noting that the Fed has “worked to align [the Fed’s] emergency actions with other relief efforts as the economic situation improves” and is maintaining or extending some measures to promote continued access to credit. When Congresswoman Velazquez inquired how government programs like the Paycheck Protection Program helped to stabilize businesses and improve the overall economy, Quarles answered, “We would have experienced a much deeper and more durable economic contraction, and would have had more lasting economic scarring with closed businesses and defaulting obligations [] had those programs not been put in place.”
OCC Comptroller Michael Hsu discussed the agency’s increasing coordination with other federal and state regulators on fintech policy, in addition to OCC efforts to strengthen Community Reinvestment Act (CRA) regulations and address climate change. The OCC has been encouraging innovation, Hsu said, but added that his “broader concern is that these initiatives were not done in full coordination with all stakeholders. Nor do they appear to have been part of a broader strategy related to the regulatory perimeter.” In his written testimony, Hsu emphasized his concerns with providing charters to fintechs, noting that in doing so, it would “convey the benefits of banking without its responsibilities,” but also “that refusing to charter fintechs will encourage growth of another shadow banking system outside the reach of regulators.” Hsu expressed in his oral statement the importance of finding “a way to consider how fintechs and payment platforms fit into the banking system” and emphasized that it must be done in coordination with the FDIC, Fed, and the states. He also explained that “the regulatory community is taking a fragmented agency-by-agency approach to the technology-driven changes taking place today. At the OCC, the focus has been on encouraging responsible innovation. For instance, we updated the framework for chartering national banks and trust companies and interpreted crypto custody services as part of the business of banking.” When Congressman Bill Huizenga (R-MI) asked how the OCC planned to address the “true lender” rule, which would soften the regulations for national banks to sell loans to third parties, Hsu stated that the OCC originally intended to review the rule, but that after the Senate passed S.J.Res. 15 to invoke the Congressional Review Act and provide for congressional disapproval and invalidation of the rule (covered by InfoBytes here), the agency decided to leave it up to congressional deliberation and will monitor it instead.
FDIC Chairman Jelena McWilliams discussed, among other things, the FDIC’s policy of granting industrial loan company charters. As previously covered by Infobytes, the agency approved a final rule in December 2020 establishing certain conditions and supervisory standards for the parent companies of industrial banks and ILCs. McWilliams defended the FDIC’s new rule during the hearing, stating it “ensures that the parent company serves as a source of financial strength for the ILC while providing clarity about the FDIC's supervisory expectations of both the ILC and its parent company.”
NCUA Chairman Todd Harper also outlined agency measures taken in response to the pandemic. Among other things, Harper noted that the NCUA is supporting low-income credit unions through the Community Development Revolving Loan Fund and that the agency is working to strengthen its Consumer Financial Protection Program (CFPP) to ensure fair and equitable access to credit. During the hearing, Harper stated, “there is an increased emphasis on fair lending compliance, and agency staff are studying methods for improving consumer financial protection supervision for the largest credit unions not primarily supervised by the CFPP.”
Fed continues to allow bank insiders access to PPP loans
On May 14, the Federal Reserve Board announced the third extension of a temporary exception from the requirements of section 22(h) of the Federal Reserve Act and corresponding provisions of Regulation O to allow certain bank directors and shareholders to apply for Small Business Administration (SBA) Paycheck Protection Program (PPP) loans from their affiliated banks. The extension is effective immediately and applies to PPP loans made from March 31 through June 30. If the PPP is extended, the rule change will ultimately end on March 31, 2022. The Fed reiterated that any PPP loans extended to bank directors and shareholders must be consistent with SBA’s PPP lending restrictions and done without favoritism from the bank. The original extension was announced on April 17 (covered by InfoBytes here).
Fed will resume HMDA quarterly reporting
On May 14, the Federal Reserve’s Division of Consumer and Community Affairs issued a letter informing supervised financial institutions that HMDA quarterly reporting will resume beginning with institutions’ 2021 first quarter data, due on or before May 31, 2021, for all covered loans and applications with a final action taken date between January 1 and March 31, 2021. As previously covered by InfoBytes, last year the Fed eased quarterly HMDA reporting requirements during the Covid-19 pandemic in order to provide supervised institutions with flexibility to reallocate resources to serving customers. The Fed’s newest letter, which supersedes previous guidance, notes that it “does not intend to cite in an examination or initiate an enforcement action against any entity that did not make the quarterly filing for data collected in 2020.”
Fed proposes changes to its PSR Policy governing intraday credit
On May 7, the Federal Reserve Board issued a notice of proposed rulemaking (NPRM) seeking comments regarding proposed amendments to Regulation II, which implements Section 920 of the EFTA, that would require banks to ensure that two unaffiliated payment networks are available on their debit cards for online purchases. In a memo to the Board, Fed staff noted that due to the growth in online commerce, “card-not-present transactions have become an increasingly significant portion of all debit card transactions, and technology has evolved to enable multiple networks for these transactions.” However, “[d]espite this, two unaffiliated payment card networks are often not available to process card-not-present transactions, such as online purchases, because some issuers do not enable multiple networks for such transactions.” This outcome, Fed staff stated, is “inconsistent with Regulation II’s requirement that at least two unaffiliated networks be available to process each debit card transaction.”
The NPRM addresses this issue by amending Regulation II and its official commentary to (i) “clarify that the requirement that each debit card transaction must be able to be processed on at least two unaffiliated payment card networks applies to card-not-present transactions”; (ii) clarify requirements imposed “on debit card issuers to ensure that at least two unaffiliated payment card networks have been enabled for debit card transactions”; and (iii) “standardize and clarify the use of certain terminology.” Notably, Fed staff emphasized in their memo that the NPRM would not impact Regulation II’s provisions governing interchange fees for certain debit card transactions. As previously covered by InfoBytes, last month, two North Dakota trade associations filed a complaint against the Fed claiming that the agency has “failed to properly follow Congress’s instructions to ensure that debit-card processing fees are reasonable and proportional to the costs of debit-card transactions.”
The Fed published its report on debit card transactions in 2019, and noted it “will continue to review the parts of Regulation II that directly address interchange fees for certain electronic debit transactions in light of the most recent data collected by the Board pursuant to section 920 of the EFTA and may propose revisions in the future.”
Fed shaping “novel institutions” guidelines
On May 5, the Federal Reserve Board issued a notice and request for comments on proposed guidelines for evaluating account and service requests that would allow companies with “novel types of banking charters” to access the Fed’s payments system. Among other things, the notice outlines six proposed principals for Reserve Banks to consider when an institution requests access. These include:
- Whether the institution is eligible under federal statute to maintain an account at a Federal Reserve Bank and has a “well-founded, clear, transparent, and enforceable legal basis for its operations.”
- Whether the provision of an account and services to an institution would “present or create undue credit, operational, settlement, cyber or other risks to the Reserve Bank.”
- Whether the provision of an account and services to an institution would “present or create undue credit, operational, settlement, cyber or other risks to the overall payment system.”
- Whether the provision of an account and services to an institution would “create undue risk to the stability of the U.S. financial system.”
- Whether the provision of an account and services to an institution would “create undue risk to the overall economy by facilitating activities such as money laundering, terrorism financing, fraud, cybercrimes, or other illicit activity.”
- Whether the provision of an account and services to an institution would “adversely affect the Federal Reserve’s ability to implement monetary policy.”
“With technology driving rapid change in the payments landscape, the proposed Account Access Guidelines would ensure requests for access to the Federal Reserve payments system from novel institutions are evaluated in a consistent and transparent manner that promotes a safe, efficient, inclusive, and innovative payment system, consumer protection, and the safety and soundness of the banking system,” Fed Governor Lael Brainard said in the announcement.
If the Fed decides to grant an access request, “it may impose (at the time of account opening, granting access to service, or any time thereafter) obligations relating to, or conditions or limitations on, use of the account or services as necessary to limit operational, credit, legal, or other risks posed to the Reserve Banks, the payment system, financial stability or the implementation of monetary policy or to address other considerations,” the notice stated, adding that the “account-holding Reserve Bank may, at its discretion, decide to place additional risk management controls on the account and services, such as real-time monitoring of account balances, as it may deem necessary to mitigate risks.”
Comments on the proposal are due 60 days following publication in the Federal Register.