BPInsights: March 13, 2021

Stories Driving the Week

BPI Website Offers Closer Look at FinTech, Big Tech Loopholes

As FinTech firms vie for a bigger slice of global financial services, policymakers must take action to ensure they don’t exploit loopholes to access the banking system without adhering to safeguards that apply to regular banks. BPI this week launched a new website, KeepBankingSafe.com, dedicated to giving a comprehensive look at how such loopholes can put consumers and the safety of the banking system at risk. If tech companies want to get into the business of banking, they need to be subject to the same consumer, safety and soundness and financial stability protections that apply to banks.

“Innovation shouldn’t come at the cost of banking’s most foundational cornerstone: banks are built on the trust that they keep customers’ money and data safe,” BPI President and CEO Greg Baer said. “Policymakers should keep this crucial balance in mind in their approach to overseeing national banks.”

ILCs in Focus at BPI Event, New Research Note

The Industrial Loan Company (ILC) charter, a type of state charter, allows companies a foothold in the banking business without Federal Reserve supervision. The traditional reason for a commercial firm to obtain an ILC charter was to provide convenient or low-cost loans to its customers or employees. They’re now stoking debate in the era of buying a car through a few taps of a keyboard or smartphone screen. But their exceptional regulatory status is a distraction from the real question they raise: should banking and commerce be allowed opportunities to mingle? Or should the longstanding wall – particularly between the economy’s biggest heavyweights and the banking system – remain steadfastly in place? Congress must close the loophole that makes ILCs exceptional, a new BPI research note by Paul Calem says.

ILCs avoid major banking supervision because they are not considered banks under the Bank Holding Company Act, a law that subjects the parent companies of banks to Federal Reserve oversight. The FDIC decides whether to grant ILCs insurance on their deposits. Last year, it broke a long period of silence on granting insurance to such firms by approving Square’s and Nelnet’s insurance applications, paving the way for firms to use this structure to gain lite-touch access to the banking system. The regulatory move comes as several firms outside of finance, including principally Big Tech, are angling to offer banking services as a new way to monetize their customer data.

Congress should close the BHC Act loophole so policymakers can focus on the real debate: whether large companies, like Big Tech, that hold a magnifying glass to customers’ daily habits should be able to offer them bank accounts, too.

ILCs were also the focus of a joint BPI, Center for Responsible Lending and Independent Community Bankers of America event March 12 exploring the regulatory and legislative environment surrounding these firms. BPI Senior Vice President and Associate General Counsel Dafina Stewart participated in the discussion, along with Rebecca Borné of the Center for Responsible Lending and ICBA’s Chris Cole. The analysis of ILCs comes as Big Tech and FinTech firms who trade in sensitive customer data are seeking access to the banking industry and federal banking backstops like the Federal Reserve’s payment system. Panelists covered potential risks of the ILC loophole such as privacy and consumer protection risks; the need for consolidated Federal Reserve supervision for ILC parent companies; and the implications of Japan’s e-commerce giant Rakuten pursuing an ILC. 

Joint Trades Urge Congress to Shield Economic Impact Payments from Garnishment

In a joint letter sent to Congress, 19 consumer and financial industry organizations urged lawmakers to protect the third round of economic impact payments (EIPs) from garnishment so the money gets to the families who most need it. Allowing EIPs to be garnished could impose significant burdens on some families, who are facing unprecedented circumstances during the ongoing pandemic.

These EIPs are intended to help families purchase food and other necessities to make ends meet. Many people were already struggling prior to the coronavirus crisis and millions have now been laid off or had their hours cut. However, EIPs from the American Rescue Plan Act of 2021 are not exempt from garnishment, unlike the second round of EIPs from the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.

BPI Blog: If the Treasury Issues Debt and the Fed Buys It, Should Bank Capital Requirements Go Up?

The Fed creates bank reserves when it buys a Treasury bond: the cash used to buy the bond goes into a bank account at the Fed — an asset for the bank called reserves, an effect that ripples out across the banking system during large-scale Fed bond-buying episodes. When the Treasury Department issues trillions of dollars in debt and the Fed buys lots of it – which is happening right now as the government supports the economy in the pandemic recovery – they load banks’ balance sheets with reserves. But they also create a dilemma: putting pressure on banks’ leverage ratios, which would force them to hold more capital against those assets (despite their near-zero risk), a new BPI blog by CEO Greg Baer and Chief Economist Bill Nelson says.

The mounting reserves’ increase to banks’ capital requirements could force banks to raise capital – even though they exceed their risk-based capital requirements and buffers already – or shed other assets, such as loans or the assets most similar to reserves — Treasuries and short-term collateralized loans that fund other investors’ Treasury holdings.  So, the Fed and Treasury’s actions meant to support the pandemic recovery – by the Treasury issuing bonds and the Fed buying them – could actually undermine the recovery by forcing banks to shed Treasuries, reducing liquidity in the market. All these consequences are likely why the Fed is reportedly considering a permanent modification to the leverage ratio at the holding company level. Perhaps the OCC, as a part of Treasury, will do the same at the bank level.

POLITICO Q&A: FDIC Chair Jelena McWilliams

FDIC Chair Jelena McWilliams indicated in a wide-ranging POLITICO Q&A this week that regulators should consider “whether a longer-term solution is warranted” for the supplementary leverage ratio at the same time banks are being flooded with deposits as a result of the Fed’s large scale asset purchases and fiscal stimulus. She also noted that would be an important policy discussion “for once we’re done with the immediate dealings with a pandemic and a national emergency.” For the moment, the confluence of government spending and bond-buying policies by the Fed could prompt banks to shed Treasuries and put additional upward pressure on Treasury yields if the exemptions from the SLR denominator are not extended beyond the end of March.  

McWilliams also expressed optimism for a joint Community Reinvestment Act rulemaking among the banking agencies. “I would hope that the agencies will come together and have a uniform application of the new CRA framework for all our entities,” McWilliams said in the interview, although she said she did not think it would happen until a permanent OCC chief takes the helm. Fed Chair Jay Powell has also expressed support for a joint CRA rulemaking. BPI has urged the Fed to invite the other regulators to craft a common set of CRA rules.

House Panel Reaches Deal to Extend PPP 2 Months

The House Small Business Committee’s leaders reached a bipartisan agreement on extending the Paycheck Protection Program for two months to May 31. House Small Business Committee Chair Nydia Velazquez (D-NY) and Ranking Member Blaine Luetkemeyer (R-MO) also agreed to give the SBA authority to continue processing pending applications for 30 days after that deadline. The move comes amid concerns that the looming March 31 deadline would come too soon for some businesses to access pandemic-relief loans. The bill could reach the House floor for a vote as soon as next week and then will need to pass the Senate. BPI expressed appreciation for the measure, which will help small businesses access much-needed help to keep their doors open and pay employees, in a statement, and urged Congress to guard vulnerable families’ stimulus payments from falling into the hands of debt collectors.

In Case You Missed It

Goldman to Invest $10B in Projects Boosting Black Women’s Economic Advancement

Goldman Sachs will invest $10 billion over the next decade in projects aimed at supporting Black women’s economic advancement, the bank announced this week. The investment will take the form of grants or equity. The initiative comes alongside a commitment of $100 million in philanthropic capital and “Black Womenomics” research detailing economic inequality faced by Black women, including lower wages, lower rates of business ownership and homeownership and lower participation in the stock market. The bank estimates the project will affect 1 million women. The effort comes amid similar community investment initiatives from several BPI member banks, including Wells Fargo, JPMorgan Chase, Bank of America, Truist, U.S. Bank, PNC, Citigroup and others.

Oral Arguments Heard in Major Challenge to OCC ‘FinTech Charter’

The OCC’s appeal of New York State’s legal challenge to its proposal to offer “special purpose” charters to non-depository financial institutions brought FinTech’s role in the banking system under scrutiny this week as oral arguments were heard in the case March 9 in the U.S. Court of Appeals for the Second Circuit. A decision in the case could redefine the reach of FinTechs with slimmed-down business models into the regulated banking system. It could also affect FinTech firm Figure Bank’s separate bid for an OCC charter.

The case, Lacewell v. Office of the Comptroller of the Currency, stems from the New York Department of Financial Services’ challenge to the OCC’s 2018 special purpose national bank charter for financial firms that don’t take deposits but offer other payment services. The lower court had ruled in favor of the New York regulator, enjoining the OCC from issuing any such charters.

The OCC’s appeal focused on three arguments:

  • The district court incorrectly concluded that NYDFS had standing to sue, given that the OCC has not yet received or approved any bids for such a charter.
  • Assuming the New York regulator had standing to sue, “Chevron deference” – a legal doctrine that allows federal regulatory agencies a certain degree of discretion in their actions — applies to the OCC’s authority to charter a special purpose national bank that performs at least one of three core banking functions, as defined by the OCC.
  • Even if the OCC is not entitled to Chevron deference, the district court should not have enjoined the OCC from granting these charters to any FinTech in the U.S., as the NYDFS only has jurisdiction over entities with a nexus to New York state.

Questions and commentary from the three-judge panel primarily focused on whether NYDFS could claim it was harmed if the OCC hadn’t granted any charters of this type yet, and whether the OCC has the authority to issue national banking charters to financial firms that don’t accept deposits. The judges appeared to express concern at the wide range of firms that could be granted this type of charter, noting that under the OCC’s definition, any business that performs one of the three core banking activities – taking deposits, lending and taking checks – could qualify. They asked whether loan sharks or a restaurant that extends store credit could be eligible, and the OCC did not say they would be banned, although the agency argued those applications would likely be denied for other reasons. However, the panel of judges also suggested that the National Bank Act does not require an institution to take deposits in order to be a bank.

Biden Announces Names for Key Treasury Slots

President Biden intends to nominate Brookings Institution economist Nellie Liang, Obama-era NEC official Lily Batchelder, former CEA economist Ben Harris and senior Capitol Hill aide Jonathan Davidson to top Treasury Department roles, according to an announcement on March 11. Biden will tap Liang, a former Federal Reserve official who led its financial stability division, for Under Secretary for Domestic Finance. He will nominate Batchelder to the position of Assistant Secretary for Tax Policy; Harris for Assistant Secretary for Economic Policy; and Davidson for Assistant Secretary for Legislative Affairs.

Bloomberg: Biden Considering Lee, Rosenberg for Top Treasury Posts

President Biden is considering former Treasury official Nancy Lee for the role of Treasury’s top diplomat, according to Bloomberg. He is also considering Treasury adviser and former Center for a New American Security senior fellow Elizabeth Rosenberg to oversee the Terrorism and Financial Intelligence unit. The roles will be important as the department positions itself on international engagement and sanctions policy.

KeyBank Announces $40B Community Investment Push, Including Housing, Inclusion, Climate Change

KeyBank announced this week it would increase its community investment initiative to $40 billion, building on a $16.5 billion Community Benefits Plan effort it has already fulfilled. The pledge includes $36 billion toward economic equity and inclusion, which entails affordable housing, home and small-business lending in low- and moderate-income communities, philanthropy, down payment assistance and partnering with CDFIs, among other areas. The bank also committed $4 billion to sustainable energy investment.

Wells Fargo Announces Goal of Net Zero Emissions by 2050

Wells Fargo announced this week its goal to achieve net zero greenhouse gas emissions, including its financed emissions, by 2050. The effort aims to support the global transition to a low-carbon economy. The bank plans to measure and disclose financed emissions for certain carbon-intensive portfolios; set interim targets for reducing emissions; deploy capital to finance climate innovation; and continue to work with clients to support their emissions reduction efforts. The company will also launch an Institute for Sustainable Finance to manage the deployment of $500 billion in financing for sustainable businesses and projects by 2030, support scientific research on low-carbon solutions and advocate for policies that help clients transition to greener business practices. Additional BPI member banks have announced net zero pledges.

D.C. Hardware Store Boosted by Truist PPP Loan Gets Presidential Visit

A small business boosted by a PPP loan from BPI member Truist was in focus as President Joe Biden this week visited W.S. Jenks & Son, a historic Washington, D.C., hardware store, as CNN reported this week. The loan, which the store received in April 2020 from Truist, helped keep employees on the payroll during the pandemic.

BPI General Counsel John Court Joins Panel of Bank Group Top Lawyers

BPI GC John Court participated in a Women in Housing and Finance panel on March 11 of bank trade association general counsels. Other participants were Michael Briggs of the Mortgage Bankers Association, ICBA’s Karen Thomas and ABA’s Thomas Pinder. The attorneys discussed a range of banking regulatory priorities, such as enforcement and supervision, tech entry into banking, the prudential framework, AML reform and the recent rulemaking clarifying the role of supervisory guidance.

FATF’s Lewis Promotes Risk-Based Approach to AML Supervision

Global regulators policing money laundering should make the link clear between AML safeguards like customer due diligence and the real consequences of crimes those measures detect, like human trafficking, Financial Action Task Force Executive Secretary David Lewis said in a recent speech. Lewis previewed new FATF guidance for risk-based supervision, which he said will enable more effective oversight by helping supervisors understand the risks their regulated businesses face. He also endorsed an intelligence-led approach, with more information sharing between banks and intelligence services.

SoFi Buying California Bank to Fast-Track Bank Charter Goal

Student loan FinTech SoFi reached an agreement to buy Golden Pacific Bank, a small bank in California, for $22.3 million in cash, the company announced March 9. The acquisition is a critical step forward in accelerating SoFi’s quest to obtain an OCC bank charter.  SoFi was granted conditional approval by the OCC for its de novo bank plan and as a result of the acquisition will switch its de novo charter application to a change-of-control application, allowing the firm to take over a fully formed bank rather than building a new one from the ground up.

Fed to Keep PPP Loan-Buying Program Open for 3 More Months, Other Facilities to Expire

The Federal Reserve said March 8 it would keep its program for buying Paycheck Protection Program loans from banks open for three additional months until June 30, according to The Hill. The Fed buys PPP loans from lenders, who can then use the proceeds to make new loans to small businesses. The small-business pandemic relief program itself is set to expire March 31, although there is a proposal in the House to extend it two months. The central bank said it would allow three other facilities – the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility and the Primary Dealer Credit Facility – to lapse at the end of March.

EBA Discloses Cyberattack Against Microsoft Servers

The European Banking Authority said March 7 that it experienced a cyberattack against its Microsoft Exchange servers, as Microsoft recently disclosed a series of attacks on its Exchange servers from a China-based group known as Hafnium that has targeted scientists, law firms, universities and defense contractors, among others. The EBA said it took its email systems offline and was working to identify what data may have been accessed.

CFPB, SEC Nominees Approved by Senate Banking Committee

CFPB nominee Rohit Chopra received approval from the Senate Banking Committee this week in a 12-12 vote along party lines. A tied vote on a nominee can advance to the full Senate by a motion from the majority leader, which is expected to move Chopra’s nomination to the Senate floor. Gary Gensler, President Biden’s pick to lead the Securities and Exchange Commission, also advanced on a 14-10 vote by the panel this week, according to The Wall Street Journal. Two Republicans, Sens. Mike Rounds (R-SD) and Cynthia Lummis (R-WY), supported his nomination.

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Disclaimer:

The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.