January 20, 2022

Brainard: Fed Will Not Tell Banks To Restrict Lending To Oil, Gas Firms

With regulatory scrutiny of climate change-related risks growing, Federal Reserve Governor Lael Brainard promised the Fed’s climate risk supervision will not include directives for banks not to lend to specific industries like oil and gas. “That’s not our job. We don’t tell banks which sectors to lend to,” said Brainard during her confirmation hearing to be vice chair of the Fed, in response to questions from Sen. John Kennedy, R-La. “We ask them to risk manage and we make sure they have good processes in place.”

During the hearing, responding to questions from Ranking Member Pat Toomey, R-Pa., Brainard also said she has “not suggested we should do stress tests for climate,” although she noted that “geo-economic” risks have historically been incorporated into the Dodd-Frank stress testing process. Instead, she said the supervisory approach the Fed has taken is to “ask large institutions in particular, ‘Do you have a good risk management framework for assessing all of your material risks?’ ... It is very well known to the large institutions and really not very different from what they’re doing today.”

Brainard added she did not think climate-related supervisory guidance is “appropriate for small institutions ... they’ll decide what their risks are. I’m really more focused on the large institutions, who themselves come in to tell us that they’d like to have more consistent expectations in this area across jurisdictions.”

Thompson: Congress Must Determine Future Of Fannie, Freddie

Federal Housing Finance Agency Acting Director Sandra Thompson, President Biden’s nominee to lead the agency on a permanent basis, told lawmakers that Congress must determine whether and how Fannie Mae and Freddie Mac will exit conservatorship.

“The end state of the enterprises is something that Congress would have to legislate,” Thompson said during a nomination hearing before the Senate Banking Committee. She added that she would “commit to positioning the enterprises and working with Congress to do whatever’s necessary to move them out of conservatorship in a responsible timeframe.”

Thompson also emphasized the importance of the GSEs’ credit risk transfer program, noting that Fannie and Freddie “don't have enough capital to sustain a severe event.”

“It is important for us to continue to encourage the credit risk transfer program so that the taxpayers are not on the hook for any extreme events,” she said. “We just believe that it is critical for enterprises, especially while they're under-capitalized, to continue to transfer credit risk away from the taxpayers and into the hands of private investors.”

Hsu Advocates More Regulatory Structure For Cryptocurrency

The pace of innovation in cryptocurrency is “exciting” and the industry’s growth presents “a host of opportunities” for banks, according to Acting Comptroller of the Currency Michael Hsu. The risks and pace of change mixed with a lack of standards and controls, however, makes a cautious approach to this evolving sector necessary, Hsu said recently at an industry event.

Hsu noted that cryptocurrency has “gone mainstream” with consumers. “Sixteen percent of U.S. adults say that they have owned, traded or used some form of cryptocurrency,” he said. “Notably, the underbanked and minorities have been especially interested in crypto. One survey found that 37% of the underbanked indicated that they own cryptocurrency, compared to 10% of the fully banked. A Harris poll reported that 18% of Blacks and 20% of Hispanics reportedly own crypto.”

This mainstreaming has occurred despite regulatory and legal uncertainty, Hsu said, adding that financial regulators need ask important questions: Where should regulatory attention be focused? What should be done? By whom and why? A good place to be begin would be in stablecoins, he said, insisting that “bank regulation would give credibility to the ‘stable’ part of stablecoins.” He also stressed the need for a coordinated and collaborative regulatory approach domestically and internationally.

Bank Economists Expect Economic Growth To Slow

The nation’s top economists forecast that economic growth will slow from 5.5% last year to 3.3% in 2022 and 2.3% next year, according to the American Bankers Association’s Economic Advisory Committee. The committee said it expects that the unemployment rate will decline to 3.5% by the end of the year from the present rate of 3.9%, with 280,000 new jobs on average expected to be added monthly.

“The tight labor market continues to drive wage gains across all income segments, which will encourage more people to go back to work,” said Ellen Zentner, managing director and chief U.S economist at Morgan Stanley, who chaired the EAC meeting. “More jobs with rising wages will ensure the consumer remains the bulwark of our economy in the year ahead.”

The committee forecast that resolution of supply chain issues should allow for inflation to slow from its 6.7% increase in 2021 to 3% this year and 2.4% next year. The committee also expects three interest rate increases from the Federal Reserve this year, with the economy approaching full employment and inflation above the Fed’s 2% long-term average goal.

“Inflation surprises and labor market tightening necessitate an appropriate response from the Federal Reserve,” said Zentner.

The 30-year mortgage rate is expected to rise from 3.2% now to 3.7% later this year, according to the EAC forecast. Average existing home prices are expected to rise 7% this year on top of the nearly 19% increase in 2021.

Banking Trades Urge Further Study Of Overdraft Use

A group of financial trade associations led by the American Bankers Association urged the Consumer Financial Protection Bureau to conduct a study of consumers’ preferences on overdraft and release the findings for public comment before undertaking any additional actions related to overdraft practices.

The groups’ letter came after the bureau in December released two research reports on overdraft and signaled that it was “considering additional policy guidance outlining unlawful practices.” The groups highlighted findings from a recent Morning Consult survey that nine in 10 U.S. adults find their bank’s overdraft protection valuable and that three in four were happy when their payment was covered when overdraft protection was used.

“Restrictions on overdraft may lead financial institutions to stop offering these services to their customers, which would result in significantly more returned checks and declined transactions,” the groups cautioned. “This may lead to unnecessary credit rating harm; returned item fees charged by the institution or by the merchant; fees from landlords and others; or requirements to pay using alternative methods such as money order.” They also cited a survey by research firm Curinos, which found that 62% of consumers would reconsider their support for new regulation of overdraft if it limited access to the service.

The groups recommended the CFPB study frequent overdraft users in particular to ensure they fully understand how and why these consumers use overdraft and gauge their level of understanding about overdraft offerings.

“Absent compelling evidence of knowledge gaps or that consumers are using the product irrationally — i.e., evidence that regular users of overdraft protection do not understand the product and its costs relative to available alternatives — people should be assumed to be the best judges of what is in their best interests and should remain free to choose.”

GAO Report Highlights Federal Response To Trafficking, Money Laundering

A recent report issued by the Government Accountability Office highlights the strategies and techniques used by criminal groups to engage in trafficking and money laundering, as well as efforts by the federal government to combat these illegal activities. The report was issued as required by the fiscal year 2021 National Defense Authorization Act.

The report describes how criminal groups move illicit goods and launder money across borders, using bulk cash smuggling, “funnel” accounts, gold and other high-value assets and real-estate purchases, among other techniques. The report also discusses how detailed case studies would help financial institutions’ ability to identify or report information useful for law enforcement investigations.

In addition, the report describes how information sharing through the 314(b) program could be improved with clearer expectations and standards around response times for requests from other institutions or around what information can be shared.

FinCEN Exploring Creation of Regulatory Sandboxes

The Financial Crimes Enforcement Network is exploring the creation of regulatory sandboxes to test new methods of transaction monitoring, FinCEN Acting Director Him Das said recently. Das said the idea stemmed from conversations FinCEN has been having with banks over the past two years as part of its Innovation Hours program.

The sandboxes would be a series of “interim but formal frameworks” for how institutions can pilot technologies like artificial intelligence to “transform traditional rules-based transaction monitoring,” Das said. He acknowledged that FinCEN needs additional staff and budget to build the program but said it is working on getting those additional resources and requested input from banks about the potential use and risks of the program.

“We cannot design these sandboxes without knowing how your institutions would like to use them. What are you interested in building? What assurances do you need to start? What risks should we be on the lookout for?” Das said.

FinCEN also is considering other new ideas, Das said, including new approaches to customer risk rating and institutional risk assessment, digital identity tools and utilities, and automating the adjudication and filing of suspicious activity reports related to certain types of activity.

CDIAC Calls For Framework For Better Collaboration On Cyber Threats

Members of the Federal Reserve’s Community Depository Institution Advisory Council flagged cybersecurity threats, particularly related to ransomware, as a top threat facing community banks and noted that “a framework needs to be put in place that encourages cooperation and reduces risks of transparency (which currently is seen as leading primarily to punishment and reputational damage).” Council members added that the framework should require closer collaboration between regulators and the industry.

The council also highlighted challenges that community banks face to remain competitive with nonbank fintech firms, noting that “regulators could help [community depository institutions] by promoting trust in advertising by fintechs, especially when fintechs purport to be banks or offer services intended to usurp banks at the expense of safety and soundness and consumer protections.”

The council also addressed current banking and economic conditions, examination practices and regulatory matters.

Survey: Community Banks Keeping Branches Open

Community banks are keeping bank branches open, with 84% responding to a recent survey that they have not closed a single branch in the past 12 months. The State of Community Banking survey also found that 32% of community banks have their farthest branches 10-20 miles from their headquarters and 23% have their farthest branches more than 41 miles away from their headquarters.

The survey of 177 community banks in 33 states also found that community banks are increasing the services they offer, with 77% responding that they have added wealth advisory services in the past three years. Fifty-six percent of banks responded that they have added trust services in the last three years, and the same percent said they have added insurance services in that time. Community banks also are exploring adding cryptocurrency services, with 29% saying that they expect to add these services within the next 18 months.

A top concern for community banks was talent management, the survey found, with 74% rating it as a primary concern. Nearly half said a labor shortage is a factor in talent management and 67% said they are “extremely concerned” about employee retention and recruitment.

CFPB: Banks Providing Most Public D&I Information Of Financial Services Providers

The Consumer Financial Protection Bureau found that depository lenders had the highest amount of publicly available information about diversity and inclusion in the financial services sector. The CFPB’s report by its Office of Minority and Women Inclusion, based on publicly available data from 2019 of 270 entities, found that few organizations in financial services besides banks had either a dedicated diversity and inclusion executive or a formal body directing those efforts.

Banks also had the strongest showing in supplier diversity in the financial services sector, the CFPB said. Fifty-nine percent of sampled depository lenders had minority and women-owned business programs, according to the report, and the CFPB found that almost half of sampled banks published information on their diversity and inclusion strategic plans.

Many large organizations in financial services have invested in infrastructure and resources dedicated to diversity and inclusion programming, the CFPB said, adding that some small institutions have shown “impressive diversity and inclusion policies and programming.”

The CFPB said it plans to use the data collected as part of the report to provide examples of diversity and inclusion best practices, resources and peer success stories to financial institutions.

FDIC, National Bankers To Host Webinar On Diversity, Inclusion

The Federal Deposit Insurance Corporation and the National Bankers Association will host a free webinar at 10 a.m. Friday, Jan. 21, about advancing diversity and inclusion across the financial services sector and the role of minority depository institutions in creating jobs, growing small businesses and building wealth in low- and moderate-income communities. During the event, leaders from FDIC and NBA will discuss ongoing efforts to preserve and promote minority depository institutions and ensure access to capital and other resources that support economic development and mobility in minority communities.