BPInsights: Nov. 16, 2024

Would Basel Endgame Affect Backup Credit Cards?

The U.S. Basel Endgame proposal would jeopardize consumers' backup credit cards, threatening a critical source of liquidity for lower-income families.

What's happening: The Basel proposal would impose an unnecessarily high capital charge on unused portions of consumer credit lines. The proposal would apply a risk weight to 10 percent of the unused credit line amount - known as a credit conversion factor. This charge increases banks' costs to maintain lightly used credit card lines and could therefore pressure them to reduce credit limits or close such accounts. Many consumers, including many with low- or moderate-incomes, hold a spare credit card for backup liquidity, and this regulatory approach could put that source of liquidity at risk.

Diving deeper: A new BPI research note focuses on two key issues: the practical implications for consumers with multiple cards, and the implications for consumers' credit scores and access to mortgage credit.
Extending risk weights to undrawn credit card balances via the proposed CCF may be particularly detrimental because many consumers hold at least one credit card in reserve for unexpected liquidity needs. The analysis shows:

• Nearly 3 in 4 consumers with two or more credit cards have overall utilization under 50 percent.
• These consumers usually maintain at least one card in reserve; for instance, 2 in 3 consumers with two cards keep less than 10 percent of their overall balance on one card.

This uneven distribution of balances makes consumers more vulnerable to line reductions or cancellations.

The analysis also demonstrates that extending risk weights to undrawn credit card balances via the proposed CCF could harm consumers' credit scores and access to affordable credit. We quantify this impact through a hypothetical credit line reduction scenario and its effect on consumer credit scores.

The analysis shows significant detrimental effects on credit scores for many consumers. For instance, in the case of consumers without a mortgage, who typically face more credit constraints than homeowners, we find:

• Within the population of consumers with low overall utilization rates (25 percent or less), which represents the majority, about one in five would see their credit scores decline by more than 10 points.
• Such declines could significantly increase the cost of obtaining a mortgage, putting homeownership out of reach for some consumers.

These effects are unjustified by the data: BPI estimates suggest the proposed CCF is roughly double what historical experience would justify. The Fed's stress tests already provide additional protection against the same risk through their stress exposure-at-default projections for credit card lines.

What's next: It is encouraging that Federal Reserve Vice Chair for Supervision Michael Barr stated in a recent speech that he intends to recommend a reduction in the proposed credit conversion factor.

Bottom line: The proposed capital charge on unused portions of credit card lines exceeds what is justified based on the data. Significant cuts to consumers' credit card capacity would harm their access to backup liquidity and hurt their credit scores. Lower credit card utilization rates increase the risk of major credit card line cuts that could harm consumers' credit scores, so the regulatory agencies should consider implementing a sliding scale where the credit conversion factor decreases as account utilization rate falls.

Five Key Things

1. Media Reports Raise Questions About President's Power to Fire the Fed Chairman

Multiple stories swirled about the legal power of the President to dismiss the Federal Reserve chair or demote top officials. This week, the Wall Street Journal reported that President-elect Donald Trump could confront an "unprecedented legal battle" if he tries to fire Federal Reserve Chair Jerome Powell. When Trump considered removing Powell during his first administration, "Fed leaders privately readied a break-glass-in-case-of-emergency response: a legal challenge against the president to protect the integrity of America's central bank," the Journal reported. When asked at a recent press conference if he would resign if the president told him to do so, Powell replied "no." In response to a follow-up question - "Do you believe the president has the power to fire or demote you? And has the Fed determined the legality of a president demoting at all any of the other governors with leadership positions?" - Powell said it is "not permitted under the law."

• Barr: Michael Barr's position may be vulnerable. Asked recently on Bloomberg TV about Michael Barr, Vice Chair of Supervision, Sen. Bill Hagerty (R-TN), a senior member of the Banking Committee and an influential figure in Trump's economic circles, said: "Everything should be on the table here. If you think about what Michael Barr has done as the Vice Chair, he's taken a regulatory role here. I don't think that deserves the same sort of protection that our monetary policy has. And his regulatory role has been actually contradicting Congressional legislation … This Basel III Endgame - this has been, in my view, a rogue operation." Hagerty added: "Michael Barr is somebody that has come into a position and I think in a very political way, in a way that's had a dampening effect on our economic growth, has not done our nation any good … I would look at any legal option that we might have to make a change there."
• Independence: In a Q&A with the Washington Post's Catherine Rampell on Thursday, Powell responded to a question about why central bank independence is important. The topic arose in a speech the same day by Fed Governor Adriana Kugler. "There's been a lot of research about central bank independence, and what it shows is that central banks who are independent … do a better job on inflation," Powell said. When asked about the possibility of a "shadow Fed chair" being announced early as his successor, and if he would consider staying on the Fed board after his chairmanship ends, Powell said he plans to serve until the end of his chair term and "that's really all I've decided."

2. FDIC Survey: Unbanked Rate at Record Low

The latest FDIC National Survey of Unbanked and Underbanked Households found the overall rate of unbanked households (4.2%) is at the lowest level since the survey began. Nearly 96% of U.S. households were banked in 2023, according to the survey, which was released this week.

• Reasoning: The most frequently cited reason for not having a bank account was inability to meet minimum balance requirements. This response highlights the importance of avoiding unintended consequences of rules like the debit interchange proposal, which would render banks less able to offer low-cost checking accounts.
• Digital banking: Nearly half (48%) of households with a bank account used mobile banking as their primary method of accessing banking services, according to the survey. The prevalence of online banking underscores the need for banks to invest in technological innovation and prevent fraud.
• Crypto: The latest version of the survey included new questions on crypto use. In 2023, 4.8% of all households used or owned crypto in the last year. The use of crypto in 2023 was more common among underbanked households (6.2 percent) than among fully banked households (4.8 percent) and unbanked households (1.2 percent).

3. Secret Enforcement, Ratings Bizarro World and Supervision 'Miasma': Highlights from Supervision Discussion at TCH Conference

Former Fed Vice Chair for Supervision Randal Quarles, Simpson Thacher & Bartlett attorney Stephen Cutler, BPI President and CEO Greg Baer and former FDIC chair Jelena McWilliams discussed what ails bank supervision at a conference this week hosted by The Clearing House.

• Supervision 'miasma': Quarles described a toxic atmosphere in the supervisory process, which gravitates toward a focus on governance and procedures instead of on pressing, material risks. "It doesn't address the real issues that the public and the official sector have in the operation of the system, and it imposes an intolerable burden on the regulated entities for no good benefit."
• Due process: Cutler said banks should fight back against examiner determinations with which they disagree: "The onus has to be on banks to say no, this is not the right way to operate."
• Too many cooks: Cutler said that one weakness of supervision is a glut of regulatory requirements and too many overlapping regulators.
• Behind closed doors: Baer decried the secrecy of the examination regime and the weaponization of the subjective "management" component of the CAMELS rating system. This lever gives examiners the ability to make intrusive demands about banks' business decisions. It's "basically a wild card that's being used to enforce the system that I think we've all found fairly troublesome," Baer said. Regulators should "repeal all of the sanctions that come with the management rating," he said.
• Between reality and ratings: Large banks are increasingly situated in a "bizarro world" where they are in sound financial condition but still receive a poor management rating from the Fed, Baer said. McWilliams urged banks to have the backbone to fight the regulators when necessary. She described the unbalanced world of bank examination in which little due process exists and banks tend to accept the findings of their examiners even if they disagree, for fear of retaliation. McWilliams described the challenges of reforming the CAMELS process during her previous service at the FDIC.

4. Fed's Waller: More Legal Clarity Needed Before Moving Forward with Debit Interchange Revisions

Federal Reserve Governor Christopher Waller said he would like more clarity on the legal uncertainty from recent Supreme Court rulings before moving forward with new measures such as the Fed's Regulation II proposal. "The legal uncertainty around things now, with Chevron, Corner Post, all the legal cases, for me … I'd like a little more clarity on how the courts are going to be interpreting things, like how we interpret Reg II, before we put up a big new proposal or new stage," Waller said at a conference hosted by The Clearing House. "I'd like to see how fast that will happen." Waller referred to Loper Bright, the Supreme Court ruling that overturned Chevron deference, a key principle that directed courts to defer to federal agencies on their interpretation of the law, and to the Corner Post challenge to the Federal Reserve's 2011 debit interchange rule.

• Federal role in payments: Waller delivered a speech at the conference discussing the federal government's role in payments. Waller espoused an approach where the private sector "continues to have a significant footprint, with the role of government limited." The Fed can serve as a complement to the private sector by providing infrastructure to help the thousands of banks in the U.S. connect and coordinate to settle payments, he said. "The role we're playing with FedNow is to help with that coordination problem using our existing connections to those thousands of institutions," he said. "And that approach is consistent with my overall view of the appropriate role of government-to narrowly address problems like those of coordination that can't always be efficiently solved by the private sector alone."
• CBDC skepticism: Waller reiterated his skeptical view of central bank digital currency. "In a speech I gave in August 2021, I asked, what problem would a CBDC solve? In other words, what market failure or inefficiency demands this specific intervention?" he said. "In more than three years, I have yet to hear a satisfactory answer as applied to CBDC."

5. House Retains GOP Majority; Warren Poised to Lead Senate Banking Dems

Republicans maintained control of the U.S. House of Representatives, winning a majority of seats in the lower chamber. This sets up a Republican-majority government in the White House and both chambers of Congress for 2025. The result raises the stakes for Reps. Andy Barr (R-KY), French Hill (R-AR), Bill Huizenga (R-MI), Frank Lucas (R-OK) and other GOP contenders to lead the House Financial Services Committee as Chair Patrick McHenry (R-NC) heads into retirement. Meanwhile, Sen. John Thune (R-SD) was elected leader of the upper chamber for the next Congress. On the Senate Banking Committee, Sen. Elizabeth Warren (D-MA) is planning to take the Democratic helm as Ranking Member alongside incoming Chairman Tim Scott (R-SC) after Sen. Mark Warner (D-VA) said he will stay on as top Democrat on the Intelligence Committee.

In Case You Missed It

Washington Post: CFPB Seeks to Place Google Under Supervision

The CFPB has moved toward placing Google under formal federal supervision, although the order may not be final, according to The Washington Post this week. Such an action would introduce more direct oversight equivalent to the CFPB's supervision of banks. CFPB Director Rohit Chopra has taken steps to scrutinize Big Tech in areas such as digital wallets. "Google has fiercely resisted the idea over months of highly secretive talks, according to two people familiar with the discussions, who spoke on the condition of anonymity to describe them - setting up what may ultimately be a major legal clash with vast implications for the CFPB's powers in the digital age," the Post reported. The article notes that the exact scope of the CFPB's concerns with Google's financial products is not clear.

U.S. Regulators Decline to Endorse Basel Climate Risk Disclosure Measure

U.S. regulators led by the Federal Reserve will not endorse a plan by the Basel Committee on Banking Supervision to push banks to disclose climate risk, according to a Bloomberg article this week. The Basel Committee has already made significant changes to the proposal in response to U.S. regulators, according to the report. "The group is now bracing for a scenario in which its work on adding climate considerations to global bank reporting regulations may be shelved indefinitely," the article states.

• Next steps: The Basel Committee will meet on Nov. 19, with plans to discuss the disclosure framework.
• Big picture: This development is occurring as a new Administration, skeptic of multilateral climate-related initiatives like the Paris Agreement, prepares to take over in the US. SEC Chair Gary Gensler, who has proposed climate disclosure requirements for public companies in the U.S., is expected to step down as President-elect Trump takes the White House. And there may soon be a retreat by U.S. policymakers from international climate measures. However, the Fed made its concerns about this measure known well before the election and Fed Chair Jerome Powell has long emphasized the limited role that central banks should play in climate policy. While the Basel Committee's measures do not have the force of law, they are standards that many global regulators follow as a baseline.

BPI Taps Leading Litigator Michael Coyne as Senior Fellow, Strategic Litigation Advisor

BPI this week announced the hiring of Michael Coyne, a seasoned banking litigator, as a new Senior Fellow and Strategic Litigation Advisor. Mike started in the position Tuesday.

Mike most recently served as General Counsel and Senior Legal Officer for the Americas for Mitsubishi UFJ Financial Group (MUFG), which included MUFG Americas Holdings Corporation and its primary subsidiary, MUFG Union Bank, N.A. At MUFG, Mike provided legal support for the U.S. board of directors and oversaw all regional litigation, government affairs functions, mergers and acquisitions, regulatory matters and securities and credit transactions, among other responsibilities. Prior to MUFG, Mike spent over 20 years at JPMorgan Chase & Co., ultimately rising to Senior Vice President, Associate General Counsel and Global Co-Head of Litigation.

In this newly created position, Mike will work with BPI's members to make the banking industry an effective force in efforts to constrain regulatory overreach - whether through amicus litigation at the state or federal level, principal litigation, or working with federal officials seeking to identify and reform regulations that have no legal basis.

"With decades of experience in banking litigation, Mike is the ideal pilot to help BPI navigate challenges to regulatory overreach," said Greg Baer, BPI president and CEO. "Several recent legal developments - including the prominent emergence of the major questions doctrine, the official end of Chevron deference, the ability to challenge rulemakings past the APA's 6-year statute of limitations period, and renewed focus on the legality of the administrative judicial process - mean that there are now crucial opportunities to re-shape the bank administrative legal framework, potentially in profound ways. Mike's expertise will be invaluable at a moment when the fundamentals of the bank administrative state are in flux."

UK's Reeves: Post-Crisis Regulation Has 'Gone Too Far'

UK Chancellor of the Exchequer Rachel Reeves said in a speech this week to Mansion House that post-Global Financial Crisis financial regulation has resulted in unintended consequences. "While it was right that successive governments made regulatory changes after the Global Financial Crisis, to ensure that regulation kept pace with the global economy of the time, it is important that we learn the lessons of the past," she said. "These changes have resulted in a system which sought to eliminate risk taking. That has gone too far and, in places, it has had unintended consequences which we must now address."

• Bank of England view: Bank of England Governor Andrew Bailey also gave a speech this week focused on growth.
• Growth focus: Reeves said she has urged the UK's financial regulators to focus on economic growth, and that "parts of the regulatory system will be rebalanced to drive economic growth and competitiveness." This came in the form of growth-focused "remit letters" to the Financial Conduct Authority, Prudential Regulation Authority, Financial Policy Committee and Payment Systems Regulator. The remit letters will reinforce the expectation on these agencies to support the government's goals on economic growth and adds to the competitiveness objective given last year.
• Call for Evidence: Alongside the Mansion House speech, the U.K. government launched a Call for Evidence - open until Dec. 12 - setting out strategy objectives and policy pillars to support growth priorities in fintech, sustainable finance, asset management and wholesale services, insurance and reinsurance and capital markets. One key area of focus is the regulatory environment. The Call for Evidence is intended to support the government's Financial Services Growth & Competitiveness Strategy. The Strategy will be published in Spring 2025.
• Reforms: Reeves previewed a series of overhauls: modernizing the Financial Ombudsman Service framework (similar to the U.S. CFPB complaints system), urging stronger action on fraud reduction from the tech and telecom sectors, focusing on innovation in payments and reinvigorating UK capital markets and a blockchain-based gilt project.
• Other announcements: Reeves also referred to other goals such as UK leadership in sustainable finance, a relevant topic during the week of the COP29 climate conference. In addition, this week, the UK government unveiled several other initiatives: a flurry of sustainability announcements including a consultation on the value of implementing a "UK green taxonomy"; a paper setting out the next steps for reforming MIFID; a "payments vision" including developments on open banking regulation, fraud and Big Tech; a pensions reform report; and several other announcements.

FSB Widens View of Bank Resolution Beyond Largest Global Banks

The Financial Stability Board this week issued a public statement on "expanding the framework traditionally applied to GSIBs to what it calls "banks systemic in failure", known as DSIBs. "The FSB's work on bank resolution until now has primarily focused on global systemically important banks (G-SIBs). Significant progress has been made to enhance their resolvability since the adoption of the FSB's Key Attributes," the statement said. "However, existing FSB guidance on resolution planning and resolution execution may also be relevant for other banks that may be systemically significant or critical if they fail ("banks systemic in failure")."

• 2023 context: The lessons of the 2023 bank failures "reinforced the need to maintain momentum and advance the work on bank resolvability and to avoid complacency," the statement said. The turmoil underscored that "any financial institution that could be systemically significant or critical if it fails should be subject to a resolution regime that has the attributes" set out in a previous FSB document published earlier this year.
• Loss-absorbing capacity: The statement describes the importance of loss-absorbing capacity (the layer of equity and "bail-in" debt issued by banks to investors that is meant to "absorb" losses before affecting taxpayers in a bank failure). This concept has been incorporated for GSIBs in the U.S. as total loss-absorbing capacity or TLAC. The statement also suggests an additional layer of loss-absorption may prevent uninsured-depositor risk and therefore deposit runs. The statement set out considerations for TLAC holdings covering those "banks systemic in failure" but acknowledging that different jurisdictions have different traits and they should each consider how best to implement the loss-absorbing capacity concept in their own areas. But it appears to suggest that such requirements would benefit banks beyond GSIBs, pointing out global jurisdictions like the EU and Hong Kong that have put external LAC requirements in place beyond just GSIBs. The statement refers to the U.S. long-term debt proposal as an example of such principles.
• Moving forward: The statement notes that the FSB will continue to consider "banks systemic in failure" in its future work on bank resolution planning topics.
• Considerations for regulators: The statement lays out various considerations for regulatory authorities around the world, suggesting that they assess which banks may be systemically important; that such banks and their regulators should be prepared for resolution; and should consider the need for loss-absorbing capacity.

The Crypto Ledger

Here's what's new in crypto.

• U.S. seeks crypto tied to alleged FTX bribes: In a court filing this week, U.S. prosecutors sued to obtain cryptocurrency held in an account connected to alleged bribes paid to Chinese officials, according to Bloomberg. Prosecutors eventually dropped bribery charges against FTX founder Sam Bankman-Fried, but they had accused Bankman-Fried of authorizing bribes to Chinese officials to unfreeze Chinese bank accounts connected to FTX's trading affiliate.
• Crypto-on-crypto conflict: Collapsed crypto firm FTX is suing erstwhile rival Binance and its former CEO Changpeng Zhao, accusing them of fraudulently transferring $1.8 billion from FTX management to Binance and its executives.

Citi, Fidelity International Demonstrate Tokenized Money Market Fund Innovation

Citi and Fidelity International recently announced the proof-of-concept of an on-chain money market fund with digital foreign exchange swap solution which demonstrates real-time settlement. The solution was unveiled at the Singapore FinTech Festival 2024 earlier this month.

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