May 27, 2022

Kansas City Fed’s George To Retire In 2023

Esther George, the president of the Federal Reserve Bank of Kansas City since 2011, announced that she will retire in January 2023. George will have reached the Fed’s mandatory retirement age for reserve bank presidents. During her time as president of the bank, she led the Fed’s faster payments initiatives, including the in-development FedNow payments service, and championed right-sized regulations for community banks.

A graduate of the ABA Stonier Graduate School of Banking, George joined the Kansas City Fed more than 40 years ago and spent much of her career in the bank’s supervision and risk management division, including a decade as chief financial institution supervisor for Fed-supervised banks and holding companies in the Kansas City Fed’s territory.

CSBS Urges Lawmakers To Include SAFE Banking Act In Competes Act

As lawmakers attempt to reconcile the House and Senate versions of the America Competes Act, the Conference for State Bank Supervisors advocated for the SAFE Banking Act to be included in the final version of the bill. The provision, which would enable banks to serve legitimate cannabis businesses in states where it is legal, was included in the House version of the Competes Act.

CSBS noted that allowing cannabis businesses to access banking services would help reduce risk, increase public safety and facilitate tax collection, among other things.

“By granting a safe harbor for financial institutions, Congress can bring regulatory clarity to the financial services industry, address public safety concerns and ensure access to financial services for state-compliant marijuana and marijuana-related businesses,” said CSBS Acting President and CEO James Cooper.

MBA continues calling on all bankers to write to their members of Congress and urge them to support the inclusion of the SAFE Banking Act.

ABA: Case Not Yet Made For U.S. CBDC

It is not necessary to digitize the dollar because the dollar functions primarily in digital form today, and issuing a central bank digital currency doesn’t solve a specific financial problem or respond to a pressing economic need, the American Bankers Association said in a statement submitted ahead of House Financial Services Committee hearing held Thursday on the benefits and risks of a CBDC in the United States. The association echoed that message in a joint letter to lawmakers signed by several other financial trade groups.

ABA emphasized that legislation would be required to authorize the Federal Reserve and Treasury Department to take such a step. But at a fundamental level, “the main policy obstacle to developing, deploying and maintaining a CBDC in the real economy is the lack of compelling use cases where CBDC delivers benefits above those available from other existing options,” ABA wrote.‌

According to ABA, a CBDC would serve as an “advantaged competitor” to retail bank deposits, ultimately moving money away from banks and into accounts at the Fed where the funds cannot be lent back into the economy. It would “fundamentally rewire our banking and financial system by changing the relationship between citizens, financial institutions and the Federal Reserve,” reducing the availability of credit and increasing its cost. ‌

The Fed has said that any CBDC should be “privacy-protected, intermediated, widely transferable and identity-verified,” which means any U.S. digital currency would be distributed through private-sector financial institutions, but individual holdings would sit at the Federal Reserve.

“These deposit accounts represent 71% of bank funding today,” ABA wrote. “Losing this critical funding source would undermine the economics of the banking business model, severely restricting credit availability increasing the cost of credit, and causing a slowdown of the economy.” 

Fed’s Brainard, House Committee Debate Need For U.S. CBDC

At Thursday’s hearing on central bank digital currency, House Financial Services Committee members grilled Federal Reserve Vice Chairwoman Lael Brainard on the benefits and risks of implementing a U.S. CBDC, with questions ranging from the timing of implementing a CBDC and the breadth legislation needed to enact such a system to economic equality and ensuring a level playing field for competition and innovation in the financial system.

“We still have many unanswered questions,” said Rep. Patrick McHenry, R-N.C., the committee’s ranking member, echoing concerns from other lawmakers. “There is potential for significant harm to our financial system if we move forward without sorting through potential consequences. We should be thorough in our review. Congress should not rush to issue a digital currency, nor should the Fed. We both should understand whether the benefits of a digital currency actually outweigh the risks before any further congressional action is considered.”

Reps. Brad Sherman, D-Calif., Bill Posey, R-Fla., and Andy Barr, R-Ky., expressed concern that a CBDC would threaten the viability of commercial banks’ deposits and lending activities, ultimately affecting consumers’ options when seeking credit. The Fed has previously indicated a preference for any U.S. digital currency to be distributed through private-sector financial institutions, but individual holdings would reside within the Federal Reserve, which critics claim would limit bank lending.

“Anything we do in this space would have to be consistent with banks remaining important intermediaries. Banks are very important in terms of credit provision, in terms of monetary policy,” Brainard said, responding to Posey. “We're already seeing massive changes, where payments are made increasingly through mobile payments apps. We've seen those having implications for cash usage. Any future evolution of the financial system with digitalization is going to lead to some diminished use of cash and some diminution of bank deposits,” adding that it will be “very important” to consider ways to limit CBDC competition with deposits.

ABA: No Compelling Case Exists For U.S. CBDC

The creation of a central bank digital currency “should only be pursued as a final option to meet clearly defined public policy goals that cannot be achieved through payments innovations that leverage existing digital dollars,” the American Bankers Association told the Federal Reserve in a comment letter. The association emphasized that a CBDC would “fundamentally change the role of the central bank in the United States and reshape the banking system,” and that at this time, use cases have not emerged to justify the creation of one.

In its response to the Fed’s recent discussion paper on CBDC, ABA noted the potential benefits of a CBDC that are often touted by proponents — such as promoting financial inclusion and promoting the dollar as a reserve currency — are uncertain, and alternative solutions to these challenges already exist. With respect to financial inclusion, for example, ABA pointed out that banks are already working to promote financial inclusion through the Bank On initiative.

ABA also warned policymakers of the significant cost associated with offering a CBDC. Specifically, the creation of a CBDC could ultimately position the Fed as a competitor for bank deposits, which could cripple the flow of credit to businesses and households, the association said. ABA analysis shows that 71% of banks' funding is at risk of moving to the Fed. In addition, a CBDC could balloon the Fed’s balance sheet and impede the transmission of monetary policy, introduce privacy and financial stability risks, and expand and politicize the role of the Fed, among other things.

Finally, the association emphasized that there are better ways to addressing the challenges of the modern financial system without putting the financial system or economy at risk via the creation of a CBDC.

“As we have evaluated the likely impacts of issuing a CBDC it has become clear that the purported benefits of a CBDC are uncertain and unlikely to be realized, while the costs are real and acute,” ABA said. “Based on this analysis, we do not see a compelling case for a CBDC in the United States today.”

ABA’s Nichols: Despite Economic Headwinds, Banks Are Healthy, Prepared

While uncertainty surrounds the U.S. economy at present, America’s banks remain healthy and prepared to support the communities they serve, said American Bankers Association President and CEO Rob Nichols during an online forum discussing recent economic conditions and longer-term outcomes.

“It’s a challenging moment for the U.S. economy, with inflation running at its highest level in a generation, hitting every American in their wallet. We continue to suffer supply disruptions due to the lingering effects of the pandemic and the Russian aggression in Ukraine,” Nichols said, adding that the Federal Reserve has been working to slow demand by raising interest rates and plans to do so until inflation is under control.

Nichols pointed to the Fed’s recent Financial Stability Report to highlight banks’ resiliency. He noted that banks have maintained risk-based capital ratios well above regulatory minimums, credit quality remains robust and funding risks at domestic banks remain low after the deposits they received during the pandemic. Bank reserves remain above pre-pandemic levels, which Nichols noted is “another sign of the prudent planning and risk management underway as our industry prepares for potential headwinds.”

A significant threat to the financial system right now cited by the Fed report is the growing number of nonbanks looking to offer banking services without being subject to the same regulation as banks.

“We have some concerns about that,” Nichols said. “New financial players should have to meet the same rigorous requirements as banks if we want to ensure that consumers and the financial system are protected. Innovation is critical to our competitiveness, but markets are also built and sustained on trust.”

FDIC Lookback: Banking Conditions Improved In 2021

The Federal Deposit Insurance Corporation said that the banking environment improved in 2021 as the economy recovered from a period of economic hardship the year prior. In its annual risk review, the agency noted that financial market conditions “were generally supportive of the economy and banking industry” throughout 2021, although they began to deteriorate with the onset of the Russian invasion of Ukraine in early 2022.

Banks reported “substantially higher net income in 2021, primarily due to lower credit loss provisions,” the agency said, with banks reporting a significant 89.7% increase year-over-year. Meanwhile, net interest margin declined, despite a slight increase in net interest income and strong asset growth, the FDIC noted.

Bank liquidity remained strong in 2021 as the industry saw a record increase in deposits, which “resulted in in high levels of cash on bank balance sheets while lending growth remained slow, contributing to higher levels of liquid assets.” While market risk remained moderate overall, the FDIC did caution that rising interest rates “could be a source of risk for banks with substantial exposure to longer-term assets.”

In assessing the key risks to the banking system, the FDIC found that credit conditions generally improved overall in 2021 but flagged various sector-specific challenges that could emerge in the months ahead. Meanwhile, operational risks — including cyber risks and risks related to illicit finance remain “elevated,” the FDIC said. The agency also flagged climate-related financial risk as an area of emerging risk.

FDIC: Increase In Provision Expense Drives Bank Net Income Down

FDIC-insured banks and savings associations earned $59.7 billion in the first quarter of 2022, a 22.2% decrease from the year prior, the Federal Deposit Insurance Corporation reported in its Quarterly Banking Profile. The decrease was driven by an increase in provision expense. Despite the decrease, FDIC Acting Chairman Martin Gruenberg said that “capital and liquidity levels remain strong” and that “loan growth and credit quality metrics remain generally favorable.”

The average net interest margin edged down one basis point from the previous quarter to 2.54%, four basis points higher than the record low in the second quarter 2021. Net interest income rose 6.4% from the fourth quarter to $138 billion — the fourth consecutive increase. Meanwhile, a 65.9% decline in income from loan sales drove a reduction in noninterest income from the same quarter last year. Community banks reported a $1.1 billion decline in first quarter net income year-on-year, the FDIC said.

American Bankers Association Chief Economist Sayee Srinivasan emphasized the continued strength of the banking industry. “Credit quality is exceptionally strong and lending continues to gain steam following robust growth in the previous quarter,” Srinivasan said. “Banks increased loan-loss provisions in the first quarter due to heightened uncertainty, which lowered industry net income. Nonetheless, banks are well capitalized and the industry remains well positioned to handle the challenges caused by the Fed’s efforts to combat inflation.”

The average net charge-off rate fell 12 basis points year-on-year to 0.22%, and the noncurrent loan rate fell five basis points to 0.84%. During the first quarter, three banks opened and no banks failed. The number of banks on the FDIC’s problem bank list declined by four to 40, a new record low.

FDIC Weighing Raising Assessment Rates

In June, the Federal Deposit Insurance Corporation will consider “options to amend [the 2020 Deposit Insurance Fund] restoration plan, including increases to assessment rates,” FDIC Acting Chairman Martin Gruenberg said in remarks following the release of the Quarterly Banking Profile.

That statement came after the DIF balance fell $102 million in the first quarter to $123 billion — the first DIF balance decline in more than a decade. The decline was attributed to unrealized losses on available-for-sale securities in the DIF portfolio, driven by rising interest rates, which offset insurance assessment income. At the same time, industry-insured deposits continued to grow at an elevated pace. These two factors dropped the DIF reserve ratio to 1.23% as of March 31.

After the DIF reserve ratio dipped below the statutory minimum reserve ratio of 1.35% in June 2020, the FDIC announced a plan to restore the fund by September 2028 with no anticipated increase in the assessment rate schedule. However, Gruenberg noted that “a key assumption surrounding the restoration plan was that insured deposit growth would normalize and the surge of insured deposits associated with the pandemic would recede over time. However, more than one year after the most recent round of pandemic-related fiscal stimulus, the industry has continued to report strong insured deposit growth.”

CFPB To Lenders: Algorithms, AI Used In Credit Decisions Must Be Explainable

In a new circular, the Consumer Financial Protection Bureau said that under the Equal Credit Opportunity Act and Regulation B, creditors are not permitted to use complex algorithms in credit decision-making if doing so means they are unable to provide “the specific and accurate reasons for adverse actions.” Under ECOA and Reg B, creditors are required to provide such reasons to any applicant against whom adverse action is taken.

“Whether a creditor is using a sophisticated machine learning algorithm or more conventional methods to evaluate an application, the legal requirement is the same: Creditors must be able to provide applicants against whom adverse action is taken with an accurate statement of reasons,” that are specific and indicate the principal reasons for the adverse action, the CFPB said in the circular, adding that “a creditor cannot justify noncompliance with ECOA and Regulation B’s requirements based on the mere fact that the technology it employs to evaluate applications is too complicated or opaque to understand.” 

ABA Recommends Reauthorizing NFIP On Five-Year Basis

The American Bankers Association called for long-term reauthorization of the National Flood Insurance Program ahead of a House Financial Services hearing on the program this week. According to association, the ongoing series of short-term extensions of program authority and the potential for lapses in authority can destabilize the mortgage process. In addition, the NFIP is “essential” to ensure borrowers in flood-prone areas can access mortgage collateral and insurance to protect their properties, ABA noted.

ABA urged the committee to advance legislation to reauthorize the program on a five-year basis and to include a requirement for the regulating agencies to update the interagency questions and answers regarding flood insurance on a regular basis.

“There is a growing focus by banks and regulators to ensure that physical risks posed by climate change are adequately addressed,” ABA wrote. “The availability of flood insurance, and particularly the NFIP, is an essential element of those efforts. Long-term reauthorization of the program is vital to a coordinated approach to ensuring resiliency of the housing finance system and to the continued ability of low- and moderate-income borrowers to access mortgage credit.”

ABA Raises Compliance Concerns About RMD Proposal For IRAs

The American Bankers Association raised concerns about the Internal Revenue Service’s proposed required minimum distribution rule for retirement plans and IRAs, implementing Sections 114 and 401 of the bipartisan Secure Act of 2019. The proposal affects administrators, participants, owners, beneficiaries of plans and IRAs, as well as addresses the act’s requirements for designated beneficiaries, trusts as plan and IRA beneficiaries including multi-beneficiary trusts, see-through trusts and conduit trusts. ‌

Among other things, the Secure Act amended the Internal Revenue Code to require complete distributions within 10 years from inherited IRAs belonging to noneligible beneficiaries, no longer allowing distributions to be “stretched” over the life expectancy of the beneficiary. In the comment letter, ABA flagged concerns regarding the IRS’ interpretation of the 10-year rule to require distributions in years one through nine if the decedent had already started taking distributions before death. Many banks had been communicating to IRA beneficial owners that they were not required to take RMDs each year, but only that they must take complete distribution within 10 years.

“We have concerns from an administrative and compliance perspective on aspects of the proposal, in particular the interpretation of the 10-year rule when the employee has started taking distributions, the proposed effective date, waivers of RMD accumulations and access to confidential client information,” ABA said. The association also urged the IRS to extend the proposed rule’s effective date until 12 to 18 months after a final rule is issued and to provide additional relief. 

CFPB Overhauls Office Of Innovation To Focus On ‘Promoting Competition’

The Consumer Financial Protection Bureau announced it will open a new Office of Competition and Innovation. This new office will replace the bureau’s existing Office of Innovation, which was established in 2018 and focused on allowing companies to apply for no-action letters and regulatory sandboxes in order to test specific innovative product offerings. In a press release, the CFPB said that “after a review of these programs, the agency concludes that the initiatives proved to be ineffective.”

The bureau further stated that the purpose of the new office will be to “focus on how to create market conditions where consumers have choices, the best products win, and large incumbents cannot stifle competition by exploiting their network effects or market power.” Specifically, the CFPB said the office will seek to make it easier for consumers to switch accounts and service providers; research “structural problems” that create obstacles to innovation; understand dynamics between large and small players with regard to competition; and host events that explore barriers to entry and other obstacles.

Study: Fraud Attempts Rise 41% In 2021

Fraud attempts shot up 41% year-over-year in 2021, according to a new survey released by NICE Actimize. In an analysis of fraud data, the survey, which analyzed fraud data from banking and payments transactions representing more than $110 trillion in value. found that fraud attempts increased most rapidly among P2P payments, with P2P transactions seeing a 38% increase in the volume of attempted fraud transactions and a 63% increase in the dollar values involved with fraud attempts. Fraud attempts were most prevalent in instances where a card was not present (46.9%) and when a mobile app was used (21.2%).

As mobile apps continue to gain popularity with consumers, the survey also found that 61% of fraud attacks perpetrated through mobile apps occurred via account takeover. In addition, fraudsters also are targeting older devices, with cell phones using older operating systems or made before 2016 having three times more fraud attempts associated with them than newer devices or operating systems.

Fed Survey: Americans’ Financial Well-Being Improves In 2021

Nearly eight in 10 U.S. households surveyed in late 2021 said they were “doing OK” or “living comfortably,” according to the Federal Reserve’s annual Report on the Economic Well-Being of U.S. Households. The combined 78% was the highest level recorded by the survey, up three points from 2020 and up 16 points since 2013. Although the report does not specifically address households’ views of consumer price inflation, the survey was fielded in fall 2021 after consumer prices had risen at year-over-year rates exceeding 5% for several months.

The share of unbanked American adults was virtually unchanged at 6% in 2021, down from 8% in 2015. The report showed the share of adults considered “fully banked” — those who had a bank account and also did not use a number of nonbank financial alternatives — held steady at 81%. The report also showed that 11% of adults with a bank account paid an overdraft fee at some point in the prior year.

The survey also saw households’ savings practices improve in the aggregate. Sixty-eight percent (up 4 points from 2020 and up 18 points from 2013) said they could cover a $400 emergency expense in cash, a benchmark often cited by policymakers. The survey found that 25% of nonretired respondents reported having no retirement savings or pension, down a point from 2020 and marking continued progress from previous years.

Fed: Roughly One In 10 Americans Using Crypto, BNPL

The Fed Reserve’s annual Report on the Economic Well-Being of U.S. Households asked questions about cryptocurrencies for the first time and found that 12% of adults had held or used crypto in the prior year — with almost all of these using it as an investment vehicle, not a form of payment. Crypto holders tended to be higher-income, with 46% of those using it as an investment earning more than $100,000 per year. Ninety-nine percent of crypto investors also had bank accounts, but of those who used crypto for transactions, 13% reported being unbanked.

Also for the first time, the survey covered the growth of “buy now pay later” loans, which 10% of respondents reported using in the prior year. Nearly 8 in 10 BNPL borrowers cited convenience as one reason while 53% said they used BNPL because they did not want to use a credit card, 51% said it was the only way they could afford the purchase and just under one-fifth said it was the only payment method they had. Among BNPL borrowers, just 15% had been late making a payment in the prior year.

Verizon Report: Cyber Incidents, Breaches Driven By External Actors

A majority of data breaches during 2021 — 73% — were perpetrated by external actors, according to findings from Verizon’s latest global data breach investigations report. In cyber incidents, denial of service attacks were the most prevalent actions, representing 46% of total incidents, followed by backdoor or C2 malware at 17%. With regard to breaches, the most common types were use of stolen credentials, ransomware, phishing and backdoor or C2 malware.

The study also found that 82% of breaches and cyber incidents overall involved a human element. “Whether it is the use of stolen credentials, phishing, misuse, or simply an error, people continue to play a very large role in incidents and breaches alike,” Verizon noted, adding that “error continues to be a dominant trend and is responsible for 13% of breaches,” and can often be attributed to misconfigured cloud storage.

Turning to the financial services industry in particular, which includes both financial services and insurance firms for the purposes of this report, the survey found that basic web application attacks, system intrusion and miscellaneous errors represented 79% of all breaches or incidents. Driving the increase in basic web application attacks was a specific variety of “server-web application” attacks, which usually involve use of stolen credentials obtained by brute force hacking and credential stuffing. These types of attacks have risen from 12% to 51% from 2016 to today, Verizon noted. The survey also found that with respect to miscellaneous errors, misdelivery was a common cause of data compromise — where personally identifying information or other sensitive information is delivered to the wrong recipient.

Meanwhile, system intrusion attacks have doubled from 14% of breaches in 2016 to 30%, and Verizon observed an increasing share of these types of attacks being attributable to organized crime. The report noted that ransomware in particular continues to be a high-profit, low-risk tactic in this category, along with denial of service attacks, which account for 58% of security incidents in financial services.