May 14, 2021
New MBA Podcast Episode Previews MBA School Of Bank Management
The latest Our Two Cents with MBA podcast episode previews the MBA School of Bank Management, which will be held June 13-18 in Columbia. The school was one of the last in-person events hosted by MBA before the pandemic, and we are excited to bring a new class together for 2021. Mike Wasson and Adam Trower, seasoned bankers and faculty members at the school, join us to discuss the value of in-person schools, how the school is evolving and why students should be excited about the chance to take part this year. Make sure you join us for the 2021 School of Bank Management!
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ABA: Time For Congress To Act On Credit Union Acquisitions Of Taxpaying Banks
Ahead of oversight hearings of the prudential regulatory agencies scheduled for next week, the American Bankers Association called on Congress to address the changing face of large credit unions, as highlighted by a recent announcement by Vystar Credit Union — a $10 billion tax-exempt institution — that it plans to acquire a $1.6 billion taxpaying Georgia bank. If completed, the transaction would mark the largest bank acquisition by a credit union in history.
In a letter to members of the House Financial Services and Senate Banking Committees, the American Bankers Association emphasized that several credit unions, including Vystar, “have become indistinguishable from traditional tax-paying banks” yet continue to enjoy an exemption from most federal and state taxes, lighter regulation and no federal community reinvestment obligations.
ABA noted this acquisition attempt follows a concerning trend of credit unions acquiring taxpaying banks, which has accelerated in recent days. These acquisitions ultimately reduce the tax base that supports local communities and national needs, disadvantage low- and moderate-income communities and threaten safety and soundness and consumer protection, ABA said.
“It is time for Congress to engage and determine whether credit union acquisitions of banks and the negative consequences that follow these transactions meet the public policy goals Congress intended when it created tax-exempt credit unions in the first place,” the association said. “We believe any thoughtful review will lead lawmakers to firmly conclude that it is time for Congress to make the changes needed to return credit unions to their original mission or at least end their outdated tax-exemption.”
ABA Slams Fed’s Proposal To Re-Open Durbin Amendment Rulemaking
Amid substantial growth in online purchases in recent years, the Federal Reserve reopened its rule on the Durbin Amendment. Specifically, the Fed issued a proposal that would amend Regulation II, which implements Durbin, to apply the requirement that debit card transactions be able to be processed on at least two unaffiliated payment card networks — for example, a PIN debit and a signature debit network — to card-not-present transactions, which have grown from 10% of debit purchases in 2009 to 23% in 2019.
When the Fed first issued Reg II, “the market had not developed solutions to broadly support multiple networks over which merchants could choose to route [CNP] transactions,” the Fed said, noting that technology has since evolved to address these issues. “Despite these developments, and in contrast to the routing choice that currently exists for card-present transactions, merchants are often not able to choose from at least two unaffiliated networks when routing card-not-present transactions, according to data collected by the Board and information from industry participants,” the Fed said.
However, the American Bankers Association and several trade associations warned that revisiting the “flawed from the beginning” Durbin Amendment would make it harder for banks to deliver low transaction prices to acquirers and consumers.
“The Fed's decision to revisit Reg II risks causing even further consumer harm,” the groups said. “The Fed's own study of debit card transactions, both in person and online, shows that merchants and consumers are increasingly benefitting from significant investments in innovation and fraud detection embedded in the nation's payment rails today. By reopening the rules surrounding debit card transactions, the Fed could put the convenience, safety, and security that Americans have come to expect when they use their debit card at risk. We will vigorously oppose any attempt to undermine the payments system at the expense of consumers.”
The proposal also would clarify that the debit card issuer is responsible for ensuring at least two unaffiliated networks have been enabled and would standardize and clarify certain terms and phrases in the Fed’s Reg II commentary. Comments are due 60 days after the rule is published in the Federal Register.
ABA Opposes NCUA’s Capital Simplification Proposals
The American Bankers Association panned two proposals by the National Credit Union Administration to simplify current risk-based capital requirements for “complex” insured credit unions with more than $500 million in assets. The association noted that “neither suggested approach fully and appropriately implements the requirement for a risk-based net worth calculation generally comparable to that applicable to banks insured by the [FDIC].”
NCUA’s proposed first approach would replace the risk-based capital rule with a risk-based leverage ratio requirement, which uses relevant risk attribute thresholds to determine which complex credit unions, if any, would be required to hold additional capital. Under the second approach, NCUA would establish a “complex credit union leverage ratio” modeled after the community bank leverage ratio framework. This approach would retain the 2015 risk-based capital rule but would enable eligible complex credit unions to opt into the CCULR framework.
Rather than pursue either of these approaches, which ABA said would not sufficiently capture risk, the association urged NCUA to draw on banking industry experience and adopt provisions similar to the risk-based capital rules that banks are required to adhere to. (ABA noted that NCUA’s 2015 capital rule is conceptually similar to bank risk-based capital rules, but NCUA twice voted to delay the rule, a move strongly opposed by ABA.)
“The generally desirable objective of regulatory simplification cannot justify compromise of legally required safety and soundness standards,” ABA emphasized. “An effective [risk-based capital] regime is critical to the safety and soundness of the federally insured credit union industry and the protection of the public resources that support it. NCUA’s [risk-based capital] development process … must be concluded, and the path to an appropriate RBC rule is clear.”
ABA Calls For Changes To CFPB Proposal To Assist Borrowers Affected By COVID-19
The American Bankers Association offered several changes to a recent proposal by the Consumer Financial Protection Bureau to facilitate streamlined loan modification efforts and establish a temporary COVID-19 emergency pre-foreclosure period under Regulation X that would prohibit servicers from making the first notice or filing required to initiate foreclosure until Dec. 31. This “pre-foreclosure” period would apply to mortgage loans secured by the borrower’s principal residence.
ABA noted that there is broad consensus among several financial trade associations on core requests related to the rulemaking. Specifically, the CFPB should do the following.
- include clear exceptions to the moratorium provisions to prevent the harm the proposed rule seeks to address
- augment and clarify the scope of the streamlined modification exemption to reduce hurdles for borrowers
- streamline the proposed early intervention requirements to ensure efficiencies
These recommendations will help to “ensure that the servicing rules provide appropriate protection for those borrowers who need it the most, reduce the risk of borrower confusion and frustration, and are appropriately limited in scope so that servicer resources can be dedicated to working with consumers—not on implementing the final rule,” ABA said in its comment letter.
ABA, Trade Groups Oppose Debt Collection Bill
The American Bankers Association and a group of financial trade associations expressed opposition to legislation that would reverse a U.S. Supreme Court decision clarifying that a business engaged in nonjudicial foreclosure proceedings is not a debt collector.
The Non-Judicial Foreclosure Debt Collection Clarification Act (H.R. 2547) would reverse a unanimous March 2019 Supreme Court ruling in Obduskey v. McCarthy and Holthus LLP, which clarified that entities enforcing a security interest, without also seeking repayment or deficiency judgement, generally do not qualify as debt collectors under the Fair Debt Collection Practices Act.
“Our country’s mortgage lending system continues to rest on the foundation of enforceable security interests in real property,” the groups wrote in a joint letter to congressional leaders. “By allowing lenders to take possession of collateral through foreclosure when a borrower defaults, the law reduces the risk to lenders—which in turn allows them to make credit available to more homebuyers at a much lower interest rate than available for unsecured credit.” They added that more than half of states have designed their legal systems to provide for non-judicial foreclosures “which maintain significant state and federal procedural protections for borrowers while streamlining the foreclosure process.”
McWilliams: FDIC To Seek Comments On Digital Assets
The Federal Deposit Insurance Corporation will issue a request for information seeking additional information on how banks are using or planning to use digital assets, and “what, if anything, the FDIC should be doing in this space,” FDIC Chairman Jelena McWilliams said in remarks
during a legal issues conference this week.
“In light of the rapid pace of technological change worldwide, including by countries who are not saddled with legacy systems that can slow the adoption of new technologies, the challenge for regulators is to create an environment in which fintechs and banks can collaborate and in which banks are given the space and opportunity to pursue innovative solutions for their customers,” McWilliams said.
FDIC: Banks Remains Resilient Despite Pandemic
The Federal Deposit Insurance Corporation said the banking industry remained resilient entering 2021, despite the extraordinary challenges of the pandemic. In its annual risk review publication, the agency said that the banking sector in 2020 was helped by strong capital and liquidity levels and “was a source of stability to the economy.”
Banking industry balance sheets remained strong in 2020, the agency said, but banking income declined substantially as FDIC-insured banks reported a 36.5% decline in income between 2019 and 2020, “primarily driven by a sharp increase in provision expense during the first half of the year.”
Bank liquidity in 2020 was supported by a record increase in deposits, according to the report, as deposits increased 22.6% between 2019 and 2020. The FDIC noted the “strong liquidity and capital levels at the start of the year should mitigate potential asset quality deterioration across loan portfolios.” The low interest rate environment presents earnings challenges to banks, but liquidity positions remain strong as deposits grew rapidly in 2020, the FDIC said.
The FDIC noted that credit risk also remains heightened, as “institutions with elevated levels of credit exposure to affected sectors are potentially more vulnerable to market disruptions and could present risk management challenges.”
Fed: Systemic Risk Eases In Several Dimensions
While risky asset prices have been rising relative to historical norms, and thus vulnerable to significant declines, other measures of financial stability have remained stable over the past several months, according to the Federal Reserve’s latest financial stability report
. Borrowing by households and businesses remained stable, banks remain well-capitalized and funding risks at domestic banks remain low, the Fed said.
Regarding asset valuations, the Fed cautioned that “asset prices may be vulnerable to significant declines should investor risk appetite fall, progress on containing the virus disappoint, or the recovery stall,” adding that “[s]ome segments of the economy — such as energy, travel, and hospitality — are particularly sensitive to pandemic-related developments.” Pandemic-related disruptions continue to make it hard to assess commercial real estate valuations, the Fed said.
Vulnerabilities from household and business debt have fallen, the Fed said, with consumers and small businesses receiving continued support from government programs. With credit quality holding up “better than many had expected,” bank capital ratios remained healthy. Bank liquidity remained high as well, although the Fed noted “structural vulnerabilities … associated with liquidity transformation” at money market funds.
The Fed also flagged several near-term risks to the financial system, including a worsening of the pandemic at home or abroad and a potential rapid rise in global interest rates that could create instability in emerging market economies.
ARRC Publishes Indicators To Support Recommendation For Forward-Looking Rate, Releases Guide To Published SOFR Averages
The Alternative Reference Rates Committee published a set of market indicators it will consider in recommending a forward-looking Secured Overnight Financing Rate term rate, which it expects to do “relatively soon,” according to a press release from the committee.
The ARRC will consider three indicators.
- continued growth in overnight SOFR-linked derivatives volumes
- visible progress to deepen SOFR derivatives liquidity, consistent with ARRC best practices
- visible growth in offerings of cash products, including loans, linked to averages of SOFR, either in advance or in arrears
Calling the market indicators “clear and achievable,” ARRC Chairman Tom Wipf, who is also vice chairman at Morgan Stanley, noted that “given recent market progress, I am optimistic that they can realistically be met as soon as market participants continue to accelerate their move away from Libor to SOFR derivatives.” While the ARRC has not yet recommended any forward-looking SOFR term rate or administrator, it will continue to consider the proposals to do so submitted to a recent RFP. Read more.
ARRC also released a new guide to published SOFR averages. The guide is intended to provide market participants with key information on the Libor transition, as certain tenors of Libor are scheduled to sunset Dec. 31, 2021. The guide specifically focuses on the SOFR averages published by the Federal Reserve Bank of New York.