STATE GOVERNMENT RELATIONS
State Treasurer Places BlackRock on ESG Watchlist
Indiana State Treasurer Daniel Elliott has placed BlackRock Inc. on a watchlist after claiming that the investment firm made an environmental, social and governance (ESG) commitment.
New York City-based BlackRock is the world's largest asset manager and a leading investment, advisory and risk-management service provider. It is the first company to be placed on the watchlist, and the treasurer's office is examining others.
The Indiana Public Retirement System (INPRS) and its board can take further action, which could mean divesting BlackRock from the state's retirement investment portfolio.
Indiana passed a law in 2023 (HEA 1008) directing the INPRS board to refrain from making investments with the purpose of "influencing any social or environmental policy or attempting to influence the governance of any corporation for nonfinancial purposes." The law also asks that a comparable anti-ESG replacement fills the gap of a divested company.
FEDERAL GOVERNMENT RELATIONS
Supreme Court Rules SEC Adjudication Process Unconstitutional
The U.S. Supreme Court ruled 6-3 Thursday that when the Securities and Exchange Commission seeks civil penalties against a defendant for securities fraud, the defendant is entitled to a jury trial under the Constitution. The case, SEC v. Jarkesy, concerned a petition brought by a hedge fund founder challenging the constitutionality of the commission's in-house tribunals in adjudicating SEC penalties – a policy established by the Dodd-Frank Act. Among other things, the challenge argued that the tribunals violate the Seventh Amendment, which guarantees the right to a jury trial in civil affairs.
A majority of justices upheld a Fifth Circuit Court of Appeals ruling finding the SEC's adjudication process unconstitutional. "A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator," said Chief Justice John Roberts, writing for the majority. "Rather than recognize that right, the dissent would permit Congress to concentrate the roles of prosecutor, judge and jury in the hands of the executive branch."
Read the Supreme Court decision
CFPB Extends Compliance Dates for Small-Business Lending Rule
The Consumer Financial Protection Bureau Tuesday issued an interim final rule to formalize its previous announcement that it had extended by 290 days the compliance dates for its Section 1071 small-business data collection rule. Under the change, lenders with the highest volume of small-business loans must begin collecting data by July 18, 2025; moderate-volume lenders by Jan. 16, 2026; and the smallest-volume lenders by Oct. 18, 2026. The deadline for reporting small-business lending data to the CFPB remains June 1, following the calendar year for which data is collected.
The CFPB also announced that it does not intend to assess penalties for reporting errors for the first 12 months of collection. It intends to conduct examinations only to assist lenders in diagnosing compliance weaknesses "so long as lenders engage in good faith compliance efforts."
Last year, a federal court in Texas stayed the rule in a lawsuit filed by the American Bankers Association, Texas Bankers Association and others challenging the regulation, ruling that the CFPB could not enforce it until the U.S. Supreme Court decided on the constitutionality of the bureau's funding structure in a separate case. The high court upheld the CFPB's funding earlier this year. The Texas court also ruled that the CFPB must extend the rule's compliance deadlines to compensate for the period stayed.
OCC Proposes New Recovery Plan Requirements for $100M-plus Banks
The Office of the Comptroller of the Currency Monday proposed a new rule to expand its enforceable recovery planning guidelines to national banks, federal savings associations and federal branches with at least $100 million in assets, down from the current limit of $250 million. According to the agency, the proposed revisions would also create a new testing standard for recovery plans and require that banks consider the role of operational, strategic and other nonfinancial risk in those plans.
In the proposed rulemaking, the OCC cites last year's failure of Silicon Valley Bank and two other institutions as a major reason for the revisions. "The events, coupled with the OCC's supervisory experience, made clear the importance of ensuring that banks in [the $100 million-$250 million] size range are adequately prepared and have developed a plan to respond to the financial effects of severe stress, particularly in light of the contagion effects and systemic risks they may pose," the agency said.
Among the proposed revisions is a change to the definition of "average total consolidated assets" to instead be based on the "total assets" line in an institution's call report. The OCC said the change may affect the quarter in which a bank becomes a covered bank. Another change is the proposed testing provision, requiring covered banks to test their overall recovery plans "to ensure that it will be an effective tool during periods of severe stress." The guidelines would not mandate what form that testing takes other than it "should be risk-based and reflect the covered bank's size, risk profile, activities and complexity."
Finally, recovery plans would be required to consider both financial and non-financial risks and identify non-financial stress and triggers. Banks would have a year to comply with the guidelines once they are finalized, although they will be given 18 months to comply with the testing requirements.
Analysis: Proposed Capital Requirements Would Harm GDP, Bank Lending
The proposed Basel III endgame capital requirements are likely to have a negative effect on GDP and lead to reduced borrowing and higher lending costs, according to a new analysis of the proposal by PricewaterhouseCoopers. The firm assessed the proposal in its current form, although it noted that regulators have suggested that "broad and material" changes will be made before the rule is finalized. PwC also said that if enacted, the rule potentially would be the most consequential change to U.S. banking regulation since the 2010 passage of the Dodd-Frank Act.
Among its findings, PwC concluded that the rule is expected to harm GDP, regardless of what else is happening in the economy. "Reviews of academic literature suggest that U.S. banks are currently operating at or near optimal levels of capital," the firm said. "Accordingly, negative effects on GDP growth would likely not be offset by the long-term gains achieved by reducing the probability of a financial crisis as the [proposed rulemaking] assumes."
PwC said the rule would lead to less borrowing and high lending costs, which could reduce returns to bank shareholders or increase costs to consumers. The firm also noted that the differences between the U.S. proposal and the Basel III framework, as adopted by other countries, would result in different capital treatment for similar risks across global banks.
"The [proposal's] requirements would raise costs for U.S. banks in ways that would not apply to foreign competitors for the same transactions," PwC said. "This outcome would undermine the goal of having globally consistent capital requirements and create a misalignment of risk, whereby capital requirements for the same risks would differ by jurisdiction."
Fed's Bowman Rejects SVB Failure as Justification for Proposed Capital Standards
In a speech Tuesday, Federal Reserve Governor Michelle Bowman said she does not view undercapitalization of large banks as a current vulnerability of the U.S. financial system, adding that any argument using last year's bank failures as justification for increasing capital standards "lacks a solid foundation."
Federal regulators have proposed increasing capital standards for large banks as part of U.S. implementation of the Basel III endgame, with some advocates of the proposal citing last year's failure of Silicon Valley Bank and two other institutions as a justification for the policy change. Bowman, speaking during an event in London, said there was no evidence that capital contributed to SVB's failure or that undercapitalization is a broader problem in the banking system. She also raised concerns about the proposal in a speech at a different event on Wednesday.
"This argument seems to rely on the philosophy that more capital makes stronger banks, regardless of costs and tradeoffs, or possible more efficient approaches," Bowman said. "Linking the proposed capital increases to the bank failures in the spring of 2023 should not be used as a pretext to avoid the challenges of identifying and evaluating the tradeoffs involved with setting capital requirements, nor should it excuse regulators from taking a hard look at the root causes of the bank failures with the goal of identifying more targeted solutions than across-the-board capital increases."
Still, Bowman said there is "a path forward" for Basel III implementation if it reflects elements of the internationally agreed-upon standards rather than exceeds them. The next step in the rulemaking "should also be accompanied by a data-driven analysis of the proposal and informed by the significant public input received during the rulemaking process," she said. "This should assist policymakers in creating a path to improve the rulemaking."