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Concerns over excessive bank regulation

Federal Reserve Governor Michelle Bowman criticized the recently proposed bank reforms as excessive, stating that they present an increased regulatory burden for banks, which would be "distracted" from more material concerns, according to prepared remarks for the New York Bankers Association's Financial Services Forum in Palm Beach, Fla.

"Many of the rules will be costly and burdensome to implement and are not based on any identified deficiencies in our regulatory toolkit," Bowman said.

Bowman took aim at the Basel III endgame proposal, highlighting a lack of "data-driven analysis" that says that the current capital levels in the banking system are "improperly calibrated."

Bowman also expressed concerns that increased capital requirements would lead to firms without sufficient scale exiting certain markets, which would have a "detrimental impact" on US market liquidity and lending, ultimately hurting customers in underserved markets.

While Bowman supports the Community Reinvestment Act, she called it "unnecessarily complex," "overly prescriptive" and something for which the benefits do not outweigh the costs.



Source: S&P Global Market Intelligence; Federal Reserve

Open banking rule could force defending core deposits

Financial institutions will have to level up their games to hold onto core deposits under a newly proposed rule requiring banks to share consumer data.

The Consumer Financial Protection Bureau has proposed an "open banking" rule that would require financial institutions to set up data connectivity to make customer data available to third parties for free upon consumers' request. The agency envisions a more competitive banking system for consumers to switch providers more easily, and hopes to create an incentive for banks to provide cheaper loan rates and higher yields on deposits.

Core deposits — stable, relationship-driven and less sensitive to interest rate changes — are central to regulators' assessments of banks' safety and soundness, and banks lean on core deposit relationships for detailed, real-time insights into customer behavior, including deposit flows and payment history. Open banking has the potential to erase that advantage, because consumers can choose to hand over their profiles to other providers, which can compete for their business.

"Having access to the spending behavior is going to really empower banks to provide more personalized solutions," said Britney Pope, associate vice president at banking software company nCino. "It's going to be who is faster, who has the better rates or the better experience — they're going to win."

The convenience of switching banks could make deposits more fluid, and some banks fear that it will be easier for longtime customers to leave, said Ian Katz, managing director at policy research firm Capital Alpha Partners.

In its consultations with regulators including the Federal Reserve, the CFPB has not heard any concerns about open banking spurring instability, and there is no evidence to suggest that it would be an increased concern, a senior CFPB official said in a press briefing Oct. 19.

Proponents of the proposed rule argue that the stability of core deposits is rooted in banks' products and services. When open banking unlocks more consumer insights, they say, banks that are able to take advantage of what they have learned will gain more consumers.

While large banks have been practicing open banking proactively, there are concerns that smaller financial institutions cannot benefit equally.

"The smaller banks and credit unions have much longer time frames to come into compliance because many of them are going to have to depend on their core providers to set this up," said John Coleman, a partner at Orrick Herrington & Sutcliffe LLP. "Depending on their customer base and the current core provider, there could be significant expense associated with that."



The CFPB estimates that up to one-third of depository institutions would need to change core banking vendors to set up compliant API. The cost to change a core vendor can range from $50,000 to $350,000 upfront, and another $200,000 to decommission the prior vendor. For small depository institutions to build API in-house, the upfront cost could be $250,000 to $500,000, in addition to ongoing technology and staffing costs.

Source: S&P Global Market Intelligence

Summary of FHLBank report

ICBA issued a high-level summary of the Federal Housing Finance Agency report on the Federal Home Loan Banks.

The ICBA summary outlines the key FHFA actions that are most likely to affect community banks and ICBA’s views on the agency’s policy recommendations, which will likely lead to numerous rulemakings and potentially legislation.

The agency’s report includes recommendations for rulemakings, guidance, and legislation to reform the FHLBs and their membership requirements.

In a national news release this week, ICBA urged the FHFA to ensure it does not disrupt the FHLBs as an important source of liquidity for community banks.

Source: ICBA; FHFA

Concerns with GSE credit score change

A key member of the House Financial Services Committee raised concerns with the Federal Housing Finance Agency’s plan to change credit report requirements for Fannie Mae and Freddie Mac mortgages.

Rep. Blaine Luetkemeyer (R-Mo.), chairman of the panel’s national security subcommittee, took issue with the FHFA’s plan to transition from requiring three credit reports (tri-merge) to requiring two credit reports (bi-merge) for single-family loan acquisitions. In a letter to the FHFA, Luetkemeyer said the proposal, which also would replace the Classic FICO credit score model with FICO 10T and VantageScore 4.0, risks unnecessary exposures to the enterprises’ balance sheets.

The FHFA in August said it is considering adjustments to its transition plan following outreach from ICBA and other groups representing the mortgage industry. In a letter to the organizations, the agency said it is considering adjustments to the proposed timeline, understands the need for data to support stakeholder analysis of the impacts of the new credit score models, and is developing several mechanisms to ensure robust stakeholder engagement.

In a previous letter, the groups:

• Expressed concerns with the FHFA plan to replace the Classic FICO credit score model with FICO 10T and VantageScore 4.0.
• Said the implementation timeline and plan lack data and transparency and fail to address the far-reaching effects of the proposed policy changes.
• Called for stakeholder engagement, robust data transparency, and a recalibrated timeline.

Source: ICBA

Supervisory quid pro quo for nonbanks

The Consumer Financial Protection Bureau is proposing a new rule under which larger nonbank companies that offer services like digital wallets and payment applications will be subjected to the same supervisory examination process as banks and credit unions.

Under the proposed rule, the consumer agency would conduct regular examinations on nonbank, digital consumer payment companies that handle more than 5 million transactions per year.

The CFPB estimates that about 17 companies would be subject to the rule. Those companies have over 88% market share in consumer digital payments and sent almost 13 billion transactions in 2021, or an equivalent of $1.7 trillion, a CFPB official said during a press briefing.

The CFPB will send examiners to the office locations of those companies, if applicable, to dig through records and interview their employees.

"Today's rule would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other nonbank payments companies are subjected to appropriate oversight," CFPB Director Rohit Chopra said in a statement.

Source: S&P Global Market Intelligence

Warning of money-laundering threats

The Financial Action Task Force—a global anti-money-laundering watchdog—updated its list of jurisdictions with strategic AML, terrorist-financing, and weapons-proliferation deficiencies.

The FATF added Bulgaria to its list of jurisdictions under increased monitoring and removed Albania, the Cayman Islands, Jordan, and Panama from that list. Its list of high-risk jurisdictions is unchanged.

The FATF also:

• Adopted a report on how terrorist groups such as Hamas use crowdfunding techniques to raise money for their attacks.
• Reiterated that all jurisdictions should be vigilant about risks from the circumvention of measures against Russia, whose FATF membership remains suspended due to the war in Ukraine.

The Treasury Department’s Office of Foreign Assets Control separately announced sanctions against Russian national Ekaterina Zhdanova for using virtual currency to evade sanctions against Russian elites.

The FATF earlier this year said three-quarters of jurisdictions do not comply with its AML standards for virtual assets and virtual asset service providers. The intergovernmental organization’s “Travel Rule” requires obtaining, holding, and transmitting originator and beneficiary information relating to virtual asset transactions.



Source: ICBA; FATF; US Treasury Department

FDIC meeting on special assessment

The FDIC board of directors is scheduled to meet Thursday to finalize the agency’s special assessment to replenish the Deposit Insurance Fund following large bank failures earlier this year. The proposal released in March would exempt community banks under $5 billion in assets.

Source: ICBA

Agencies adjust regulatory thresholds

Federal regulators announced 2024 updates to key regulatory thresholds.

Mortgage Loans: The threshold for exempting loans from special appraisal requirements for higher-priced mortgage loans will increase from $31,000 to $32,400, effective Jan. 1.

Consumer Transactions: Truth in Lending Act and Consumer Leasing Act protections generally will apply to consumer credit and lease transactions of $69,500 or less in 2024.

Source: ICBA