FEDERAL GOVERNMENT RELATIONS
State AG Coalition Investigating Bank ESG Practices
A coalition of 19 state Attorneys General led by Missouri Attorney General Eric Schmitt launched an investigation this week into six banks over their environmental, social and governance investing practices. The banks implicated in this investigation are Bank of America, Citi, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo. According to the press releases, the attorneys general have issued a series of Civil Investigative Demands (CIDs) requesting documents related to the bank’s decision to join the United Nations’ Net-Zero climate pledge, the institution’s climate policy or ESG related investing factors.
The investigation was joined by the attorneys general in Missouri, Arizona, Arkansas, Indiana, Kentucky, Louisiana, Mississippi, Montana, Nebraska, Oklahoma, Tennessee, Texas and Virginia.
Appellate Court Invalidates CFPB’s Funding Structure, Small-Dollar Lending Rule
A three-judge panel of the Fifth Circuit Court of Appeals Wednesday ruled that the Consumer Financial Protection Bureau’s funding structure violates the separation of powers clause of the Constitution. Uniquely among federal agencies, the CFPB receives its funding directly from the Federal Reserve System based on a request by the bureau’s director.
In the case, the Community Financial Services Association of America and the Consumer Service Alliance of Texas challenged the Bureau’s 2017 small-dollar lending rule on several constitutional grounds. The Fifth Circuit panel agreed with the plaintiffs only on the CFPB’s “unique, double-insulated funding mechanism” and vacated the small-dollar lending rule. The case is expected to be appealed to a hearing by the full Fifth Circuit.
The court found that in setting up the CFPB’s funding structure, Congress ceded both direct control over the CFPB’s budget by insulating it from annual appropriations and indirect control by making the CFPB’s source also insulated from the appropriations process. “The Bureau’s perpetual insulation from Congress’s appropriations power, including the express exemption from congressional review of its funding, renders the Bureau ‘no longer dependent and, as a result, no longer accountable' to Congress and, ultimately, to the people,” the court found, adding that the issue is more acute because of the CFPB’s expansive powers.
FDIC Approves Increase in Deposit Insurance Assessment Rate
The Federal Deposit Insurance Corp. board unanimously voted Tuesday to raise deposit insurance assessment rates for banks by 2 basis points beginning with the first quarterly assessment period of 2023. The change will amount to a 54% increase in the current average assessment rate and remain in effect until the Deposit Insurance Fund (DIF) reserve ratio to insured deposits meets the FDIC’s long-term goal of 2%. The increase was opposed by financial industry groups and some members of Congress, all of whom warned that the decision would put further strain on an already stressed economy.
When the DIF reserve ratio fell from 1.41% in 2019 to 1.30% in 2020 due to the surge of deposits into banks in reaction to the pandemic, the FDIC approved a restoration plan to restore the fund to the statutory minimum of 1.35% by 2028. However, a sustained inflow in deposits and major unrealized losses in its securities portfolio caused the reserve ratio to decline to 1.23% in March. During the board meeting, Acting Chairman Martin Gruenberg said the rate increase is necessary because the banking industry faces significant downside risks from inflation, slowing economic growth, and geopolitical uncertainty. “It is better to take prudent but modest action earlier in the statutory eight-year period to reach the minimum reserve ratio than to delay and potentially have to consider a procyclical assessment increase,” he said.
Critics of the rate hike pointed to FDIC data showing that declines in deposit levels –including insured deposit levels – are already well underway. In a joint statement after the FDIC vote, the American Bankers Association, Independent Community Bankers of America and several other industry groups wrote they were disappointed the board voted to increase the rate based on assumptions "that are demonstrably incorrect."
“The latest data indicates that the deposit insurance fund will likely return to its statutory minimum level next year and that banks are in excellent financial condition, so the FDIC’s action is a preemptive strike against a nonexistent threat," the groups wrote. "This significant, unjustified rate increase could exacerbate the stress of a slowing economy, instead of enabling resilient banks to support economic growth.”
Banking Groups Urge Changes to FHLB Advance Qualifications
The American Bankers Association, Independent Community Bankers of America and more than 70 state banking associations have submitted a letter to the Federal Housing Finance Agency urging it to stop using tangible capital when deciding whether financial institutions qualify for federal home loan banks’ advances.
In their letter, the groups pointed to regulatory language directing FHLBs to use tangible capital in assessing a commercial bank’s creditworthiness for purposes of issuing advances. They said a far better assessment metric is Tier 1 capital, defined by the Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency, which "offers the best picture of a bank’s financial condition."
"As the bank regulators have recognized, looking to tangible capital could create confusion and, in a rising interest rate environment such as today’s, incorrectly suggest that otherwise sound banks are not creditworthy for purposes of access to FHLB advances. This is particularly true for community banks," they said.
The groups suggested the switch could be done most efficiently through an interim final rule. "Making the change from tangible capital to regulatory capital in the near term, prior to any future stress, would help to ensure that banks, particularly smaller banks, have seamless access to an important liquidity tool without compromising the FHLBs’ ability to screen for troubled institutions or work with a bank’s PFR [Primary Federal Regulator]," they said. "Failure to fix this inconsistency in the regulations may exacerbate a stress as banks continue to navigate rising rates and the ongoing macroeconomic volatility."
Court Overturns HMDA Reporting Threshold for Small Entities
A federal judge recently moved to vacate Consumer Financial Protection Bureau regulations that expanded the number of small-volume lenders deemed exempt from Home Mortgage Disclosure Act reporting requirements. In National Community Reinvestment Coalition v. Consumer Financial Protection Bureau, the D.C. District Court partly invalidated legal exemptions that allowed small mortgage lenders to avoid reporting closed-end loan data under HMDA.
HMDA rules provide that mortgage lenders must report HMDA data where their loan volume meets specific thresholds in the two preceding calendar years. Regulation C provides two thresholds, one for reporting closed-end mortgage loans and the other for reporting open-end lines of credit. The CFPB refers to the thresholds as "institutional and transactional coverage thresholds." Lenders that do not meet either threshold in a given year are not required to collect and report any HMDA data.
In 2015, the CFPB set the closed-end threshold at 25 closed-end mortgage loans in each of the two preceding calendar years and the open-end threshold at 100 open-end lines of credit in each of the two preceding calendar years. After multiple adjustments to these numerical thresholds, in 2020, the Bureau acted to address “considerable burdens associated with reporting” this data by increasing the threshold of exempt institutions to 100 closed-end mortgage loans in each of the two preceding calendar years. The 2020 rule also set the permanent threshold for open-end lines of credit at 200 open-end lines in each of the two preceding calendar years, starting in the calendar year 2022.
In its decision, the District Court invalidated the closed-end loan exemption expansions but let stand the threshold of 200 open-end lines of credit originated in each of the prior two years. The court vacated and remanded the closed-end mortgage loan reporting threshold to the CFPB. The CFPB is expected to issue instructions on how to comply with the HMDA requirements to institutions affected by the ruling in the coming days.
Fed’s Waller: U.S. CBDC Comes with ‘Costs and Risks’
During an address at an industry event last Friday, Federal Reserve Gov. Christopher Waller reiterated that he is “highly skeptical” that there is a compelling need for the Fed to create a central bank digital currency and cautioned against following international moves to do so. The focus, Waller posited, should be on CBDC-related topics, such as effects on financial stability, payment system improvements and financial inclusion.
“A U.S. CBDC is unlikely to dramatically reshape the liquidity or depth of U.S. capital markets,” Waller said. “It is unlikely to affect the openness of the U.S. economy, reconfigure trust in U.S. institutions or deepen America's commitment to the rule of law.” A U.S. CBDC would come with “a number of costs and risks,” he added, including cyber risk and the threat of disintermediating commercial banks, “both of which could harm, rather than help,” the dollar's international standing.
Waller said international efforts to improve cross-border payments don’t come from CBDCs but from improvements to existing payment systems. “The factors supporting the primacy of the dollar are not technological but include the ample supply and liquid market for U.S. Treasury securities and other debt and the long-standing stability of the U.S. economy and political system,” he said. For non-U.S. companies already conducting business in dollars, a U.S. CBDC would not create benefits “over and above the current reasons for making U.S. dollar-denominated payments.” In addition, Waller said, making a U.S. CBDC globally available would raise money laundering issues and international financial stability concerns.
Stablecoins, he said, may be “more attractive” than existing options for payments due to their ability to provide real-time, lower-cost payments between countries previously poorly served and for those with “weak economic fundamentals.” This is different than an intermediated U.S. central currency, for which access in developing economies would depend on banks' incentives to provide access, he explained. At the same time, stablecoins may be held anywhere that allows its citizens to do so. Stablecoins, however, still must be risk managed and subject to a “robust supervisory and regulatory framework,” Waller cautioned.