FEDERAL GOVERNMENT RELATIONS
Gruenberg: Incentive Pay Rulemaking Likely Delayed Until 2024
Federal Deposit Insurance Corp. Chairman Martin Gruenberg said Wednesday that a proposed interagency rulemaking to implement incentive pay requirements in the Dodd-Frank Act likely won’t happen before the end of the year. During a House Financial Services Committee oversight hearing on banking and credit union regulators, Rep. Nydia Velázquez, D-N.Y., asked Gruenberg about comments he made in May suggesting that the regulators would move forward with rulemaking to implement Section 956 of the Dodd-Frank Act by year’s end. The provision requires disclosure of executive incentive-based pay and prohibits incentive packages that result in excessive risk-taking, among other things.
Gruenberg told Velázquez that he no longer expects the rulemaking to come before the year's close. “This is a joint rulemaking involving six agencies…I think we are in general alignment, and I think we're going to move toward a re-proposed rule. It may not come until the early part of next year.”
Basel Committee Paper Seeks Discussion on Digital Fraud
The Basel Committee on Banking Supervision Wednesday released a discussion paper for comment on digital fraud and banking. The paper explores the supervisory and financial stability implications of digital fraud, including existing data availability and risk mitigation measures.
According to the BCBS, the discussion paper provides “a high-level assessment of the supervisory and financial stability implications” of digital fraud in the global banking system. The paper explores the defining features of digital fraud, how it affects banks and how policymakers should think about it. It also addresses how supervision and financial stability are affected by digital fraud in addition to what currently is being done to mitigate digital fraud risks within the banking sector at local, regional and global levels. Comments are due by Feb. 16, 2024.
Senators Concerned About Possible Economic Fallout from Capital Requirements
Senators from both parties Tuesday expressed concern that the proposed Basel III endgame capital requirements would hurt small businesses, curb affordable housing efforts and drive banking activity to the nonbank sector. During a Senate Banking Committee oversight hearing of banking regulators, Federal Reserve Vice Chairman for Supervision Michael Barr was repeatedly asked about the justification for the proposed requirements and what analysis the Fed has conducted about its potential economic effects. Several committee members were skeptical about the need for the proposal, given its possible drawbacks.
The proposed standards would apply to banks with at least $100 billion in consolidated assets, which means they would apply to less than 40 of the nation’s more than 4,000 banks, Barr said. However, some committee Democrats said they have heard from constituents about its potential negative effects on housing and businesses. “From a small-business standpoint, if this rule doesn’t work, it’s going to raise hell with the economy in my state,” Sen. Jon Tester, D-Mont., said.
Republicans were also critical, with Sen. Mike Rounds, R-S.D., noting the rulemaking comes amid several other proposed banking regulations on issues ranging from the Community Reinvestment Act to climate change. “We find it concerning you have failed to consider how these rules will impact banks and businesses of all sizes, ultimately harming the American people,” Rounds said. “As a direct result of these regulations and proposals, banks will now spend more time complying with Washington bureaucratic red tape instead of investing that time or resources into their local communities.”
Barr was pressed about the timing of a holistic review of the bank capital standards used to justify the proposal, noting that the review was released as part of the proposal. Barr also said he is seeking “broad” consensus from the Fed board in approving the standards rather than unanimous consent. “I want to reiterate that we are interested in public input,” he said. “We have recently announced an extension of the comment period [to Jan. 16, 2024]. With this extension, we are providing the public with nearly six months to review the proposal so they can provide meaningful comments.”
Senate Republicans Tell Regulators to Nix Proposed Capital Standards
Banking regulators have failed to provide the proper analysis or data to justify the need for proposed capital standards for financial institutions with at least $100 billion in assets and should withdraw the rulemaking as a result, a group of 39 Republican senators said Monday. In a letter to the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, the senators said the proposed standards – which would implement the Basel III “endgame” – could negatively affect affordable housing, lending, credit card access, and home equity lines of credit.
“Similarly concerning, this proposal will ultimately put U.S. companies at a competitive disadvantage globally and could force U.S. companies to search for access to financial services from financial institutions abroad rather than those here at home,” the senators said. “Moreover, the proposal disproportionately harms companies that are not publicly listed, who happen to be middle market, private entities and our millions of small businesses across the country.”
Fed’s Bowman: Lowering Debit Card Fees Would Harm Low-Income Consumers
A proposal to significantly lower the cap on debit card interchange fees earned by banks is unfair to many issuers and, in some ways, regressive in its effects, Federal Reserve Governor Michelle Bowman said last week. The Fed last month proposed to revise Regulation II to lower the cap from its current rate of 21 cents and .05% of the transaction, plus a one-cent fraud-prevention adjustment, to 14.4 cents and .04% per transaction and a 1.3 cents fraud-prevention adjustment, effective June 30, 2025. The proposal would apply to debit card issuers with at least $10 billion in consolidated assets, according to the Fed.
Bowman was the only Fed board member to vote against moving forward with the proposal. In a speech at a New York Bankers Association conference, Bowman reiterated her belief that lowering the cap would raise consumer costs with no guarantee that merchants would lower their prices in return for lower fees. She said that despite the proposal being targeted at financial institutions over $10 billion, she expects it to affect smaller community banks and credit unions. “Issuers of all sizes use the same payment rails, and smaller issuers will inevitably face some pricing pressure, at least indirectly, from the interchange fee cap,” she said.
“Retail banking is an essential, core function for many smaller issuers, so this pricing dynamic may not ultimately lead them to abandon their debit card programs,” Bowman said. “Under the proposed rule, a staggering one-third of bank issuers would not be able to recover even the partial costs that factor into the interchange fee cap. For banks that operate debit card programs at a loss, presumably, those costs will need to be recovered elsewhere, such as through higher borrowing costs for bank customers or through other fees for services provided, which are also targeted by the banking agencies for elimination.” Higher borrowing costs or fees could be particularly harmful for low-income customers who may not qualify for credit card products or other alternatives, as banks may be forced to discontinue their lowest-margin products, she added.
Powell: Further Rate Hikes Not Off the Table
Federal Open Market Committee members are not confident that current monetary policy is restrictive enough to bring inflation down to its target of 2%, Federal Reserve Chairman Jerome Powell said last week. Speaking at an economic conference in Washington, D.C., Powell said the FOMC is making decisions “meeting by meeting” on whether to further raise the federal funds rate or leave it untouched at its current level of 5.25-5.5%.
“Inflation has given us a few head fakes,” he said. “If it becomes appropriate to tighten policy further, we will not hesitate to do so. We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data and the risk of overtightening.”
Powell also said that while pandemic-caused supply chain disruptions drove the initial surge in inflation, it is not clear that recent improvements in those supply chains will be enough to reach the Fed’s 2% goal. “Going forward, it may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy restraining the growth of aggregate demand,” he said.