May 27, 2021
Fitzpatrick Joins Coalition Opposing Attacks On Fossil Fuel Industry
Missouri State Treasurer Scott Fitzpatrick is part of a coalition of 15 state treasurers speaking out against apparent attempts by President Biden’s administration to pressure banks and other large financial institutions to divest from coal, oil and natural gas companies. According to media reports, Special Presidential Envoy for Climate John Kerry has privately pressured banks to cut off lending for fossil fuel industries. The coalition of state treasurers sent a letter to Kerry outlining its opposition to these efforts. The treasurers observed that cutting off lending to these industries would do substantial harm to states’ economies, resulting in significant job losses.
Biden Signs Sweeping Executive Order On Climate-Related Financial Risk
President Biden signed an executive order on climate-related financial risk that, among other things, directs financial regulators to take several steps to ensure the appropriate measurement and mitigation of these risks. The order directs the treasury secretary to work with the members of the Financial Stability Oversight Council to consider “assessing, in a detailed and comprehensive manner, the climate-related financial risk, including both physical and transition risks, to the financial stability of the federal government and the stability of the U.S. financial system,” as well as facilitating the sharing of climate-related risk information between FSOC member agencies and other areas of the federal government as needed.
In addition, Treasury must issue a report within 180 days on current efforts by the financial regulatory agencies to incorporate climate-related financial risk into their policies and programs. That report should include recommendations on how “identified climate-related financial risks can be mitigated, including through new or revised regulatory standards as appropriate,” according to the order. This action by the Biden administration comes after officials from the Federal Reserve, the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and Securities Exchange Commission have all recently indicated they are focusing efforts on climate related financial risks.
The executive order also directs the secretary of labor to take certain actions to address climate-related financial risks that could affect retirement savings and pension funds. Among other things, the Labor Department should “consider publishing by September 2021” proposals to “suspend, revise or rescind” the Trump administration’s finalized rules on ESG investing and proxy voting. DOL already has suspended enforcement of these rules and is in the process of re-examining them for revision.
Treasury Report Offers Limited Details On Tax Reporting Proposal
The Treasury Department released a report detailing its proposals to shrink the tax gap as part of the American Families Plan unveiled by President Biden last month. Among other things, the plan calls for a new reporting requirement that would require financial institutions to report information on account flows, including earnings from investment and business activities — an idea opposed by the American Bankers Association and several other financial trade associations based on the information provided by the administration to date. The report provided only limited operational details and reserved “significant flexibility for the [Treasury] Secretary and the IRS to design new reporting requirements.”
The proposed reporting regime “would build from the framework of the Form 1099-INT reports that taxpayers already receive from financial institutions when they earn more than $10 in interest from a bank, brokerage, or other financial institution,” the Treasury report said. Banks would be required to report “additional data on the financial accounts of these existing information returns. Specifically, the annual return would report gross inflows and outflows on all business and personal accounts from financial institutions, including bank, loan, and investment accounts but carve out exceptions for accounts below a low de minimis gross flow threshold.”
The reporting regime, which is assumed to take effect for the 2023 tax year, also would apply to payment settlement entities, foreign financial institutions and crypto asset exchanges and custodians. The Biden administration said it “would concurrently seek out ways to reduce any new burden on financial institutions associated with this information reporting requirement.”
In previous comments on the proposal, ABA emphasized that banks are already subject to robust reporting requirements and emphasized that a new reporting structure like this raises important privacy concerns and would add additional costs and complexities to an already over-complicated tax reporting structure. ABA advocated instead for more targeted auditing of questionable tax returns to address the tax gap.
NCUA’s Harper Calls For Authority To Supervise CUSOs
In testimony before a recent House Financial Services Committee, National Credit Union Administration Chairman Todd Harper urged lawmakers to give his agency examination and enforcement authority over third-party vendors, including credit union service organizations, to address what he called a “growing regulatory blindspot.” The Financial Services Committee is currently considering a bill that would reauthorize section 206A of the Federal Credit Union Act to restore this authority to NCUA after it lapsed in 2002.
“[T]he concentration of credit union services within CUSOs and third-party vendors presents safety and soundness and compliance risk for the credit union industry,” Harper warned. “The continued transfer of operations to CUSOs and other third parties diminishes the ability of NCUA to accurately assess all the risks present in the credit union system and determine if current CUSO or third-party vendor risk-mitigation strategies are adequate. This leaves thousands of credit unions, millions of credit union members, and billions of dollars in assets potentially exposed to unnecessary risks.”
Harper’s comments came shortly after the American Bankers Association urged NCUA to refrain from finalizing a recent proposal that would expand the range of permissible lending activities for CUSOs until (among other things) NCUA is granted supervisory authority over these organizations.
Large Bank CEOs Discuss Pandemic Response During Congressional Hearing
The CEOs of the nation’s largest banks recapped their institutions’ efforts to support their customers and communities through the COVID-19 pandemic and its aftermath during a Senate Banking Committee oversight hearing this week. These efforts included approximately $93.8 billion in Paycheck Protection Program lending from the firms that participated in the program.
“The goal of all of us … was to get as much money into the hands of people who needed it, as quickly as possible,” said Citi CEO Jane Fraser. Among the challenges banks faced to roll out the massive government relief program, she added, were building out the digital platforms needed to facilitate applications for loans and forgiveness and finding ways to distribute funds quickly and “doing so in a way that wasn’t allowing fraud into the system and was protecting the intent of [taxpayers’] money supporting those who need it most.”
Looking ahead to a potential future pandemic scenario, Fraser added that “it will be a worthwhile investment to make sure we do have a technology platform at the SBA or any of the other relevant institutions helping this to be able to disburse money as effectively as possible. There were many lessons learned … that need to be applied, and investments made in technology.”
As the COVID-19 pandemic winds down and federal foreclosure and eviction moratoriums prepare to expire, the CEOs emphasized their commitment to helping borrowers who are still facing financial hardships.
“The good news is, the amount of deferrals is way down, and most of the clients have become current,” said Bank of America Chairman and CEO Brian Moynihan, adding that his bank would continue to help borrowers find loan modifications that meet their needs “irrespective of the deadline passing” and that “taking someone through the foreclosure process is something we want to avoid at all costs.”
Quarles: Financial Stability Risks Currently Moderate
Federal Reserve Vice Chairman Randal Quarles told the Senate Banking Committee that he sees the overall risks to financial stability as “moderate,” but there are some risks around nonbank financial institutions. Quarles told the committee that COVID-19 highlighted some risks in the potential exposure of nonbanks in the financial sector and that these exposures could be a source of instability. He added, however, that he does not think the risk is large at this time.
“One area where I'm particularly focused, both domestically and also in my international work as chair of the [Financial Stability Board], is on the regulatory framework for nonbank finance,” Quarles said. “I think we saw that there could be some improvements in that regulatory framework that would make the system more resilient for the next time it faces a shock like March of 2020.”
During the hearing, Quarles also addressed the Fed’s work on climate change, saying it is in the early stages of developing a framework for climate financial risk but added that “our job is ensuring the resilience of the financial system, not advancing a particular view of climate policy. That’s for Congress, perhaps other agencies—it’s not the job of the Fed or other financial regulators.”
FDIC: Bank Profits Strong In First Quarter Amid Economic Recovery
FDIC-insured banks and savings institutions earned $76.8 billion in the first quarter of 2021, a 315.3% increase from a year ago, the Federal Deposit Insurance Corporation reported in its Quarterly Banking Profile. That increase was driven by an aggregate negative provision expense of $14.5 billion, as banks released reserves set aside a year ago to deal with potential credit losses as the coronavirus pandemic took off.
The average net interest margin fell by 57 basis points year-on-year in the first quarter to 2.56%, a record low. As a result, net interest income fell 5.6% year-on-year to total $129.7 billion, the sixth consecutive quarter that net interest income declined. Despite the decline in net interest income, 64.4% of banks reported higher net interest income compared with a year ago. Average return on assets was 1.38%, up one percentage point from a year ago and up 28 basis points from fourth quarter 2020. Community banks reported a 77.5% increase in fourth quarter net income year-on-year, the FDIC said.
“Today’s FDIC report shows that banks of all sizes continue to serve as a source of strength for economic recovery from the COVID-19 recession. In addition to helping businesses and consumers navigate evolving conditions, banks continued to demonstrate their own resiliency,” noted American Bankers Association Senior Economist Rob Strand.
He added that “consumer and business financial health turned out better than expected in the quarter, as stimulus payments and other government assistance helped Americans meet their financial obligations. As a result, banks were able to recapture loan loss reserves, yielding the first-ever recorded quarter of overall negative provisioning.”
Compared with the same quarter last year, total loan and lease balances declined 1.2% to $136.3 billion, the first year-over-year contraction in loan and lease volume since the third quarter of 2011. The total net charge-off rate declined by 20 basis points year-on-year to 0.34%, and the noncurrent loan rate declined five basis point to 1.14% from the previous quarter. During the first quarter, three new banks were added and no banks failed. The number of banks on the FDIC’s problem bank list declined by one from the prior quarter to 55.
New ABA Report Examines Americans' Access To Banking Services
An estimated 124.2 million households were considered “banked” in 2019, with at least one member having a checking or savings account, according to figures from the Federal Deposit Insurance Corporation that were highlighted in a new American Bankers Association report on access to the banking system
. The report found that banking services are widely available to Americans, with the average person living within commuting distance of 25 branch locations.
Recent research suggests that consumers are increasingly turning toward mobile channels to access financial services. Before the pandemic, 34% of American households used mobile channels as their primary channel to access their bank accounts. COVID-19 caused a further uptick in preference for mobile banking options: 97% of banks reported an acceleration in mobile adoption among their customers as a result.
Findings from a recent ABA/Morning Consult survey highlighted the important role these digital services play when it comes to banking system access — 84% of Americans agreed that innovation and technology and innovation improvements by banks are making it easier for them to access financial services, and 99% rated their bank’s online or mobile experience as “good,” “very good” or “excellent.” In addition, 91% of Americans agreed that their overall access to banking services was good, very good or excellent.
According to the FDIC, approximately 7.1 million U.S. households — or 5.4% — remain completely unbanked. While that figure represents the lowest level of unbanked households since 2009, banks continue to actively promote financial inclusion, including through offering Bank On certified accounts. As of May 2021, 88 financial institutions with more than 32,000 branches nationwide were offering Bank On certified accounts, which offer features including low costs, online bill pay capabilities, no overdraft fees and certain transaction capabilities.
Fed Advisory Council Urges Scrutiny Of Fintechs Seeking Payments System Access
Members of the Federal Reserve’s Community Depository Institutions Advisory Council raised concerns about the growing number of nonbank competitors seeking to offer banking products and services while circumventing the traditional regulatory structure, according to minutes released by the Fed.
“Regulations exist for a reason; they protect consumers and other financial institutions that provide services and conduct transactions as counterparties,” council members noted. “When one segment of the industry is allowed to operate under fewer rules that provide economic gain to that segment at the cost of greater counter-party and systemic risk, the overall financial ecosystem is placed at greater risk.”
The groups also raised concerns about an increase of special purpose charter applications by novel financial firms and emphasized that the Federal Reserve should “carefully review any applications to the payments system from nontraditional, more lightly regulated financial institutions.”
Brainard: Fed Sharpening Focus On Central Bank Digital Currency Research
In remarks at a virtual industry event this week, Federal Reserve Governor Lael Brainard said the Federal Reserve is sharpening its focus on central bank digital currencies and that it is working on several areas of research about the technology. She also discussed several potential benefits a CBDC could offer, including improved efficiencies, increased competition and diversity and lower transaction costs, reduced cross-border frictions, and an increase in financial inclusion.
In any assessment of a CBDC, she noted it is important to be clear about what benefits a CBDC would offer over and above current and emerging payments options, what costs and risks a CBDC might entail, and how it might affect broader policy objectives.
In a partnership with the Massachusetts Institute of Technology, the Fed is working on building and testing a hypothetical digital currency platform to research the feasibility of the core processing of a CBDC, Brainard said. Future work with MIT will explore how addressing additional requirements, including resiliency, privacy and anti-money laundering features, will affect core processing performance and design.
Brainard said the Fed’s TechLab group is working on research and experimentation about potential future states of money, payments and digital currencies. A second group at the Fed, the digital innovations policy program, is considering a broad range of policy issues associated with the rise of digital payments, including the potential benefits and risks associated with CBDC.
To explore the broader issues around CBDC, the Federal Reserve also is undertaking research on financial inclusion. The Federal Reserve Bank of Atlanta is launching a special committee on payments inclusion to ensure that cash-based and vulnerable populations can safely access and benefit from digital payments while the Federal Reserve Bank of Cleveland is launching an initiative to explore the prospects for CBDC to increase financial inclusion.
ARRC To Recommend CME Group To Administer Forward-Looking SOFR Term Rate
The Alternative Reference Rates Committee said it plans to recommend CME Group as the administrator for a Secured Overnight Financing Rate term rate, once market indicators outlined earlier this month are met. CME Group announced in April that it has begun publishing CME Term SOFR Reference rates for one-, three- and six-month tenors that are anchored in CME SOFR futures and are available for licensing at no charge with use limited to cash transactions initially until June 20, 2023.
The ARRC made its selection after a robust RFP process that evaluated proposals based on technical criteria, firm criteria, public policy criteria and calculation methodology criteria. Along with recommending a SOFR term rate, the ARRC also will recommend best practices for the use of the term rate, “including for example as a fallback rate for legacy cash products referencing Libor and in new loans where the borrowers otherwise have difficulty in adapting to the new environment.”
ABA Urges FDIC To Modernize Signage, Advertising Requirements
The American Bankers Association urged the Federal Deposit Insurance Corporation to modernize its signage requirements to reflect new technologies and provide clarity about requirements regarding displays, promotional materials and social media advertising. In response to an FDIC request for information about revisions to sign and advertising rules, ABA in a joint letter with the Bank Policy Institute said that it supports effort to modernize these rules, which were last updated in 2006.
The groups recommended that signage requirements permit depository institutions to display a single sign in one prominent location per branch, “allowing for electronic displays and that similarly, signage requirements should be updated to require insured depository institutions to display an FDIC sign or logo only on the homepage or landing page of their online or mobile platform.” ABA and BPI also recommended that the FDIC increase the accessibility and transparency of its tools to help consumers differentiate between insured banks and noninsured financial providers.
In addition, the groups emphasized that “any changes or clarifications the FDIC makes should be flexible enough to adapt to both the present and the future,” and enable banks to address yet-unknown challenges. “Ensuring flexibility, rather than implementing prescriptive requirements that may impose additional burdens on banks, will better permit banks to adjust to the needs of an ever-changing marketplace.”
FFIEC Finalizes Call Report Changes
The Federal Financial Institutions Examination Council has finalized several changes to the Call Report.
The first set of changes, which were proposed last December, will allow the Federal Deposit Insurance Corporation to implement recently proposed amendments to address the temporary deposit insurance assessment effects resulting from the CECL transition. These changes will take effect with the June 30, 2021, report date.
The second set of changes, which were proposed in February, address the exclusion of sweep deposits and certain other deposits from reporting as brokered deposits. These changes will take effect with the Sept. 30, 2021, report date.
OCC Issues Final Rule On Collective Investment Funds
The Office of the Comptroller of the Currency finalized a rule
on prior notice periods for withdrawals from collective investment funds that are invested in real estate or assets not readily marketable. The final rule, which codifies an interim final rule issued by the OCC last year, allows banks to apply to the OCC to extend the one-year redemption period by another year because of unanticipated and severe market conditions for specific assets held by the fund, subject to meeting certain conditions.
The final rule is substantively similar to the IFR. However, OCC made a minor revision to one of the conditions necessary for the extension. The rule takes effect upon publication in the Federal Register.
ABA To Host Webinar On Core Platforms Committee Update
The American Bankers Association will host a free webinar at 11:30 a.m. Wednesday, June 9, about the work of its Core Platforms committee. Attendees will learn about the progress the committee has made during the last two years in identifying and acting on actions that can strengthen the relationship between banks and core providers so banks can deliver the innovative products and services customers want and need.