STATE GOVERNMENT RELATIONS
Communities Can Now Apply for Help With Housing Infrastructure Costs
State Rep. Doug Miller, R-Elkhart, announced communities looking to increase housing stock can now apply for state funding through the Residential Housing Infrastructure Assistance Program. The fund helps local governments cover the costs of housing infrastructure like water distribution systems, electric or gas distribution lines, and new streets, roads and bridges.
The IBA is tracking several bills as the 2024 legislative session progresses, including:
Senate Bill 188 – Actions on deposit accounts
House Bill 1084 – Privacy of firearms financial transactions
House Bill 1284 – Deposit account agreements
Senate Bill 200 – Nonprofit loan center loans for state employees
Senate Bill 220 – Financial institutions and consumer credit
FEDERAL GOVERNMENT RELATIONS
Hsu Discusses Possible Changes to Liquidity Regulation and Supervision
A new targeted regulation requiring midsize and large banks to show they can maintain sufficient liquidity for at least five days during bank runs and other times of stress deserves "serious consideration," Acting Comptroller of the Currency Michael Hsu said Thursday. Speaking at a Columbia Law School event, Hsu shared what he characterized as his preliminary thoughts on possible regulatory and supervisory changes in response to lessons learned from last year's failures of Silicon Valley Bank and Signature Bank. Hsu did not indicate whether the other banking agencies are open to his ideas and offered no timeline for possible formal proposals.
The bank failures illustrated the speed at which uninsured deposits can flow out of a bank, Hsu said. They also showed that having liquid assets is necessary but not sufficient for banks to endure acute liquidity stress – banks need to be adequately prepared and have the operational capacity to monetize those assets quickly. The liquidity coverage ratio already requires large banks to hold high-quality liquid assets sufficient to meet stressed liquidity outflows over a 30-day period. Still, he said the SVB and Signature Bank failures illustrated how current calculations for certain high-risk deposits – including uninsured deposits – result in under-calibration of risk. "Better classifying higher risk deposits to better capture the heightened risk of herding and applying the appropriate outflow rate could help address this risk more effectively."
Also, Hsu added that a new targeted regulatory requirement for midsize and large banks to have sufficient liquidity to cover stress outflows over a five-day period warrants serious consideration. "The denominator should consider the potential speed and severity of uninsured deposit outflows, while the numerator should consider the liquidity value of pre-positioned discount window collateral, in addition to reserves. The rule should also clarify operational preparedness expectations related to the [Federal Reserve] discount window, perhaps even including a requirement to do periodic test draws."
Fed's Barr: Banks Need to Think Beyond Cyber Defense
Cybersecurity preparedness has become increasingly important for banks, but focusing on defense is not enough – banks must also develop and regularly test business continuity plans, Federal Reserve Vice Chairman for Supervision Michael Barr said Wednesday. At a Boston conference on cyber risk in the financial sector, Barr said techniques to quantify cyber risk are still at "a nascent stage," partly because of a lack of good data.
"Cyber threats are constantly evolving, and we can expect them to become increasingly disruptive as technology advances and our financial system becomes more interconnected," Barr said. "In the past few months, ransomware attacks have disrupted the ability of some financial institutions to offer a variety of banking and market services, including Treasury clearance and settlement and access to online banking and ATM operations. These incidents were resolved without significant disruption to the broader market, but they are stark reminders of the potential for cyber incidents to generate broader, even systemic risks, and the importance of addressing these risks."
Barr also said that reliance by banks on third-party vendors has grown in recent years, which introduces the potential for greater cyber risk. "It is ultimately the responsibility of banks to manage their third-party risk, and we have historically seen gaps in this regard," he said, pointing to guidance issued by the Fed last year for managing third-party risk.
CFPB Proposes to Apply Reg Z to Overdraft Protection at Large, Midsize Banks
In a backdoor move to impose a de facto price cap on overdraft fees, the Consumer Financial Protection Bureau Wednesday proposed to apply requirements of Regulations Z to overdraft fees at banks and credit unions with more than $10 billion in assets. The proposal would also require banks to calculate and disclose an annual percentage rate on each overdraft fee.
The CFPB noted that overdraft fees have, since the passage of the Truth in Lending Act in the 1960s, been excepted from Reg Z's definition of finance charges. Under this proposal, Regulation Z would apply to overdraft protection services provided by banks and credit unions with assets over $10 billion unless the overdraft services are "provided at or below costs and losses as a true courtesy to consumers." The proposal envisions two ways of determining cost: allowing covered institutions to calculate their own costs and losses using the bureau's proposed standards, or by relying on a benchmark fee set by the bureau. The CFPB asked for comment on $3, $6, $7, or $14 as proposed benchmarks.
The bureau also proposed to amend Regulation E to prohibit the compulsory use of preauthorized electronic fund transfers for repayment of transactions paid into overdraft by institutions covered by the proposal that charge overdraft fees above a certain threshold.
While the proposal does not cover financial institutions with assets of $10 billion or less, the bureau warned that it "plans to monitor the market's response to this rule before determining whether to alter the regulatory framework for financial institutions with assets less than or equal to $10 billion." Comments on the proposed rule are due April 1.
Bowman: Proposed Capital Standards Should be Revised
The proposed Basel III endgame capital requirements could result in significant harm to the U.S. economy through its effects on U.S. businesses while failing to achieve the intended goals of improving safety and soundness and promoting financial stability, Federal Reserve Governor Michelle Bowman said Wednesday. Speaking at an event hosted by the U.S. Chamber of Commerce, Bowman noted that despite her concerns, she saw a path forward for the proposal if it was revised to address what she viewed as its two greatest shortcomings: "over-calibration" – that is, establishing capital requirements far more stringent than what was recommended in the international Basel framework – and a lack of regulatory tailoring.
Bowman and Fed Governor Christopher Waller voted against moving forward with the rulemaking when it came before the Fed board last year. Since then, Bowman said much of the public feedback has been about its potential negative effects on a wide range of industries, including concerns from small business owners that it would make borrowing costs unaffordable and capital inaccessible. "These consequences could disproportionately harm underserved markets, businesses and communities as bank customers will bear the cost of these increased capital requirements," she said.
Still, Bowman listed several changes that could be made to improve the proposal. For example, she said it should not penalize noninterest and fee-based income through the proposed operational risk requirements. "I do not view these differences as insurmountable obstacles to achieving a more effective and efficient set of Basel capital reforms," Bowman said. "Unlike many other areas of reform, the impact of changes to bank capital can be analyzed and understood, which provides a much better ability to compare and reconcile the tradeoffs of specific reforms."
Lawmakers Raise Concerns About Proposed Capital Standards
In a series of letters this week, Republican and Democratic lawmakers in the House and Senate expressed concern that the proposed Basel III endgame capital requirements could have negative consequences on the banking sector and the broader U.S. economy. Among the lawmakers who commented were 11 House Financial Services Committee members, who asked banking agencies to consider the effects of the proposed rulemaking on a range of capital market activities as well as on investors, consumers, and businesses.
"We urge you to continue to do your best to have capital requirements that reflect the actual risk of a bank asset or activity and weigh the societal benefits against any adverse economic impacts," they said. Other lawmakers who submitted comments include Sens. Joe Manchin, D-W.Va., Tim Scott, R-S.C, Krysten Sinema, I-Ariz., and Mike Crapo, R-Idaho.
In related news, Reps. Andy Barr, R-Ky., and Bill Foster, D-Ill., said Wednesday during a U.S. Chamber of Commerce event that the proposed requirements would reduce the availability of business credit and possibly lead to more bank consolidation.
"The purpose of the Basel III endgame was to actually elevate the standards for European institutions to make them comparable to U.S. standards, but that's not what the proposal that was released July 27 [2023] actually does, or what it proposes to do," said Barr, who is chairman of the House Financial Services Subcommittee on Financial Institutions and Monetary Policy. "It's a 1,089-page monstrosity that would dramatically increase costs and decrease the available ability of credit for a whole range of businesses across America.
Fed's Waller: Proposed Capital Standards Should be Pulled
Federal Reserve Governor Christopher Waller said Tuesday that the proposed Basel III endgame capital standards should be pulled and reintroduced after several problems are fixed. Speaking at a virtual event hosted by the Brookings Institution, Waller noted that he voted against the proposal when it was first introduced last year, and that time hasn't changed his opinion that it is fundamentally flawed.
"The original intent, I believe, was not to have a big increase in capital, but that is what's happening," Waller said. "We're basically going to impinge on capital market functioning in terms of products, services and pricing…I've made a big deal about operational risks, which is more than half of the increase, and the way it is calculated makes absolutely no sense to me. So there's a lot of reasons why I was opposed to this and voted not to bring it up, and I think the blowback that we've seen from the banking industry and [Capitol] Hill has shown this is not necessarily a good rule."
Waller added there needed to be a "major overhaul" to win broad support from the Fed board, but "it might even be best to just pull it back and work on this and then put it back on at a later date."
Watch a recording of the event
Senators Call for Agency Review of Navy Federal Credit Union
Senate Banking Committee Chairman Sherrod Brown, D-Ohio, and nine senators last week called on the Consumer Financial Protection Bureau and Department of Housing and Urban Development to review Navy Federal Credit Union's mortgage lending practices following media reports that it denied mortgages to Black and Hispanic applicants at high rates.
In a letter, the senators pointed to a CNN report that found that the credit union was twice as likely to deny a loan from a Black applicant as a white applicant and that Hispanic applicants were around 85% more likely to be denied compared to white applicants. They urged the agencies to "thoroughly review" Navy Federal's mortgage lending practices and compliance with federal fair housing and fair lending laws and regulations.
In related news, a group of 40 House lawmakers requested a meeting with Navy Federal CEO Mary McDuffie last week about what actions the credit union is taking to address the alleged bias in its lending practices.