The U.S. Senate Committee on Banking, Housing and Urban Affairs (the “Senate Banking Committee”) considered legislative proposals on capital formation and corporate governance.
Chair Senator Mike Crapo (R-IA) stated that the Banking Committee has held three hearings in 2018 on legislative proposals – (i) the Helping Angels Lead Our Startups Act, (ii) the Fair Investment Opportunities for Professional Experts Act and (iii) the JOBS and Investors Confidence Act of 2018 – with respect to capital formation, corporate governance and the proxy process. Mr. Crapo said the purpose of the hearing is to address these bills again “in the context of identifying areas where we can find bipartisan consensus in the new Congress.” Mr. Crapo described the importance of unified legislative action, and added that it is “time to re-examine the standards of inclusion” for proposals that pursue environmental, social or political agendas.
In a separate statement, Senator Sherrod Brown (D-OH) touched on the importance of putting workers before Wall Street when considering these bills. He criticized the notion that it was a necessity for bills that facilitate capital formation, stating that time is better spent making sure that workers at companies such as Uber are receiving the wages and benefits they have earned, rather than “letting companies cut corners on their accounting controls.” Mr. Brown emphasized the importance of protecting ordinary American investors, noting that support for American companies should put employees first.
Lofchie Comment: It is disappointing that Senator Brown thinks it productive to attack the supposed “shortsighted obsession” of Wall Street. If he believes that the private sector is particularly cursed by an inability to think into the future, he should suggest a cure, rather than merely rehearse a cliché. Or is he suggesting that everything would be better if only elected officials made decisions as to capital allocation? That seems unlikely on its face, but if he believes it to be so, he should try to make the case for it. To what government – federal, state, or city – would he point as a model of long range investment planning?
Executive Vice President and General Counsel of the Federal Reserve Bank of New York (“New York Fed”) Michael Held urged firms to prepare for the transition from LIBOR to an alternate interest rate. He cautioned that the transition from LIBOR has been identified by the Financial Stability Oversight Council as a financial stability risk. Mr. Held stated that “[t]he gross notional value of all financial products tied to U.S. dollar LIBOR is approximately $200 trillion – about 10 times U.S. GDP.” He further reported that approximately 95 percent of LIBOR exposure is in derivatives contracts.
In remarks at the SIFMA Compliance and Legal Society luncheon, Mr. Held stated that market participants with LIBOR exposure must undertake two tasks: (i) begin using the Secured Overnight Financing Rate (“SOFR”) or another robust alternative to LIBOR (or make sure that new contracts have workable fallback language) and (ii) deal with the “trillions of dollars of existing contracts that extend past 2021” which don’t currently have a sufficient fallback. According to Mr. Held, understanding the scope of an institution’s exposure to LIBOR-based products, and the contractual impact on those products when LIBOR is no longer available, is an important risk management assessment that should be completed as soon as possible.
In a Joint Statement, the Bank of England (“BoE”), the Financial Conduct Authority (“FCA”) and the CFTC said that the United Kingdom’s withdrawal from the European Union would not serve to disrupt existing agreements as to the regulation, or exemptions from regulation, of firms engaged in the trading or clearing of derivatives.
The parties said that:
- by the end of March 2019, the BoE, FCA and CFTC will put in place “information-sharing and cooperative arrangements to support the effective cross-border oversight of derivatives markets and participants and to promote market orderliness, confidence and financial stability”;
- post-Brexit, U.S. trading venues, firms and central counterparties may continue to operate in the United Kingdom on the same basis that they do today; and
- post-Brexit, the CFTC intends to issue new no-action letters and orders to permit UK firms to continue to operate in the United States on the same basis that they do today.
The notes to the document provide a “non-exhaustive list” of existing cooperation documents among the BoE, FCA and CFTC that will require amendment or reaffirmation post-Brexit.
Four Commissioners of the CFTC urged U.S. banking regulators to amend the calculation of the supplementary leverage ratio in order to recognize client-posted initial margin in cleared derivatives. The Commissioners’ comments came in response to a rule proposal by the banking regulators to update the calculation of derivative contract exposure amounts under the regulatory capital rules, previously covered here.
In a comment letter, CFTC Commissioners Dan Berkovitz, Rostin Behnam and Brian Quintenz said that the banking regulators (the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency) neglected to acknowledge the “risk-reducing impact” of client initial margin that the clearing member banking organization holds on behalf of clients. The Commissioners contended that a supplementary leverage ratio (“SLR”) calculation that permits initial margin to offset potential future exposures would eliminate an unnecessary impediment to banks offering client clearing services.
According to the Commissioners, the adoption of the standardized approach for counterparty credit risk (SA-CCR) without offset will:
- “maintain or increase the clearing members’ SLRs by more than 30 basis points on average”;
- continue to “disincentivize clearing members” from supplying clearing services; and
- limit access to clearing in “contravention of G20 mandates and Dodd-Frank.”
Commissioner Dawn Stump recused herself from providing commentary on the proposed rule.
The Center for Financial Stability (CFS) was delighted to co-host a conference with the Central Bank of Iceland and the University of Iceland.
Leaders in academia, government, and finance from around the world joined together to present and discuss notable and pointed papers. Held on the tenth anniversary of the Global Financial Crisis, discussions delved into crisis causes, the regulatory response, and lessons for the future.
Agenda and working papers can be found here
A conference volume published by Palgrave Macmillan will be forthcoming.
The Office of the Comptroller of the Currency (“OCC”) proposed amending the OCC’s company-run stress testing requirements for national banks and federal savings associations. The proposal is consistent with section 401 of the Economic Growth, Regulatory Relief and Consumer Protection Act. Comments on the proposal must be submitted by March 14, 2019.
The proposal would, among other things:
- increase the minimum threshold for national banks and federal savings associations to conduct stress tests from $10 billion to $250 billion;
- reduce the frequency with which certain banks would be obligated to conduct stress tests; and
- cut the number of required stress testing scenarios from three to two.
In a letter to Federal Reserve Board (“FRB”) Chair Jerome Powell, Senator Elizabeth Warren (D-MA) raised questions about the FRB’s approval process for bank mergers and acquisitions (“M&A”). Ms. Warren first wrote to the FRB about its review of bank mergers in April 2018.
Ms. Warren voiced concern about FRB’s high rates of M&A application approvals. She also expressed concern about the FRB’s practice of allowing consultations between FRB staff and M&A applicants, which raise “questions about transparency and fairness.”
Ms. Warren’s letter was released after SunTrust Banks, Inc. and BB&T Corporation announced an agreement to merge, which would create the sixth-largest U.S. bank. Ms. Warren stated that the FRB’s record of “summarily” approving all M&A requests could have substantial impacts on consumer choice and competition.
Ms. Warren requested answers to her questions on the factors underlying increased bank M&A activity by February 21, 2019.
Lofchie Comment: Senator Warren’s concerns as to the percentage of bank merger applications that are approved totally misses the point, at least if the point is good financial regulation. If the regulators are (i) transparent as to what the standards are and (ii) consistent in the application of those standards, then it follows that a very high percentage of applications will be approved. Market participants know what the rules are. Conversely, if the regulators are opaque as to the standards, and if application of those standards is inconsistent (in other words, if the regulatory system is not working well), the percentage of applications approved may be much lower because the regulators are being more arbitrary in their exercise of power.
Senator Warren should focus on the standards by which approvals are granted and not on the percentage of applications granted.
The Consumer Financial Protection Bureau (“CFPB”) proposed rescinding the mandatory underwriting provisions of a final rule governing “Payday, Vehicle Title and Certain High-Cost Installment Loans.” Additionally, the CFPB proposed to delay the compliance date for the mandatory underwriting provisions of the final rule (originally August 19, 2019) until November 19, 2020.
The CFPB proposed to rescind:
- the “identification” provision, which establishes that it is an “unfair and abusive practice for a lender to make covered short-term loans or covered longer-term balloon-payment loans without reasonably determining that consumers will have the ability to repay the loans”;
- the “prevention” provision, which creates underwriting requirements for these loans to prevent the “unfair and abusive practice”;
- the “conditional exemption,” for particular covered short-term loans;
- the “furnishing” provisions, which obligate lenders who are making covered short-term or longer-term balloon-payment loans to “furnish certain information regarding such loans to registered information systems”; and
- the parts of the recordkeeping provisions that are associated with the mandatory underwriting requirements.
The CFPB also proposed to rescind the Official Interpretations linked to these five provisions. Comments on the proposal to rescind the mandatory underwriting provisions must be submitted no later than 90 days following publication of the proposal in the Federal Register.
Comments on the proposal to delay the compliance date for mandatory underwriting provisions of the final rule must be submitted no later than 30 days following publication of the proposal in the Federal Register.
Lofchie Comment: The CFPB’s payday lending requirements seem intended as much to prevent payday lending by imposing regulations that are impractical to follow. The policy question is whether this effective prohibition is good for those who actually need to borrow money or whether government’s protective or prohibitive policies hurt those whom it purports to help. This is not an easy question, but query whether the CFPB really tried to answer it before it adopted its anti-payday lending rules. See also CFPB Imposes Stricter Rules for Payday Lending.
FDIC Chair Jelena McWilliams highlighted agency priorities to ensure that banks offer “affordable, responsible financial products and services to consumers across the spectrum.”
In remarks at the Florida Bankers Association Leadership Dinner, Ms. McWilliams stated that the agency’s priorities include:
- encouraging de novo bank formation; she said that de novo banks are a “key source of new capital, talent, ideas, and ways to serve customers”;
- tailoring FDIC’s regulations to permit banks to serve customers more efficiently while also making sure banks stay “safe and sound”;
- taking a “holistic” look at the FDIC’s supervision of banks;
- ensuring that banks “leverag[e] technology” to reach unbanked and underbanked consumers;
- “protecting the Deposit Insurance Fund and maintaining financial stability [while] allowing banks room to be nimble and make the right business decisions to better serve their customers and communities”; and
- ensuring that the FDIC and the banking industry respond to changes in consumer behavior.
Lofchie Comment: FDIC Chair McWilliams’ comments focused to a significant degree on assisting banks in providing services to the poor and overextended, those who live “paycheck to paycheck” and who sometimes “need immediate access to cash to cover an unexpected cost before the next paycheck.” The business of lending money to those who urgently need small amounts for short periods was disparagingly referred to as “payday lending.” Under the CFPB’s prior administration the CFPB adopted rules that would have significantly discouraged such lending. See, e.g., CFPB Imposes Stricter Rules for Payday Lending. While it is all well and good to regulate practices that protect disadvantaged consumers, it is not so great if the protection leaves these consumers worse off by depriving them entirely of access to credit. Ms. McWilliams comments suggest that she will be more attuned to the costs as well as the benefits of regulation.
New York State Department of Financial Services (“NYDFS”) Superintendent Maria Vullo reminded NYDFS-regulated entities that they must be in full compliance with the requirements of the NYDFS’s cybersecurity regulation by March 1, 2019.
The NYDFS cybersecurity regulation requires banks, insurance companies and other institutions regulated by the NYDFS (“covered entities”) to implement a cybersecurity program to protect consumer data (see previous coverage). The NYDFS cybersecurity regulation went into effect on March 1, 2017, subject to a two-year implementation timeline. The final step in the implementation timeline requires covered entities to adopt policies governing arrangements with third-party providers that have access to firms’ nonpublic information. The NYDFS also reminded firms to file a certificate of compliance for the prior calendar year by February 15, 2019.
Lofchie Comment: As previously described, the NYDFS rules are open-ended, complex and burdensome and will result in creating many new ways for the government to collect fines when something goes wrong.