(Oct. 22, 2021) “FedNow” – the Federal Reserve’s much-anticipated (and delayed) round the clock payment system – will be ready “sooner rather than later,” Federal Reserve Bank President Esther George (the “executive sponsor” of the Fed initiative) told a bankers’ group Tuesday, reiterating that a 2023 debut is on track. Her comments confirmed an announcement by the Fed made in February, also targeting 2023 as the debut for the system. Originally, the Fed had set the system’s debut for as late as 2024 … Likely in response to strong political pressure brought by both the credit union and banking industries, the Treasury this week raised the proposed threshold to $10,000 for reporting of balances at accounts held at credit unions and banks to the IRS. The banking industry immediately rejected the amended proposal (as it had the previous threshold of $600 or more). Under the proposal, meant to find and track account holders who are not paying their taxes, credit unions and banks would have to provide data on accounts with total annual deposits or withdrawals worth more than $10,000, not including payroll and beneficiary deposits … Large technology companies operating U.S. payments systems were ordered this week by the CFPB to provide information on their business practices, which CFPB said would help it better understand how the firms use personal payments data and manage data access to users in order to ensure adequate consumer protection. CFPB said the initial orders were sent to Amazon, Apple, Facebook, Google, PayPal, and Square. CFPB said it will also be studying the payment system practices of Chinese tech giants, including Alipay and WeChat Pay.
LINKS:
Statement by Secretary of the Treasury Janet L. Yellen on Congressional Tax Compliance Proposals
CFPB Orders Tech Giants to Turn Over Information on their Payment System Plans
(Oct. 15, 2021) It’s “time to move” from LIBOR now by slowing the use of the reference rate by year’s end to foster a smooth completion of the rate’s overall use, according to a Federal Reserve-sponsored group that has developed an alternative rate.
LIBOR – the London Interbank Offered Rate – is used widely in derivative contracts, and other financial vehicles, as a reference rate. It is also used by many financial institutions as a reference rate for adjustable rate mortgages and student loans (particularly among credit unions).
However, the rate is being discontinued for new contracts after Dec. 31 (and completely defunct for existing contracts after June 30, 2023). “As a result, USD LIBOR’s liquidity and usefulness will likely diminish as new use comes to an end,” the Alternative Reference Rate Committee (ARRC) stated in a press release this week.
NCUA and the federal banking agencies have issued supervisory guidance to credit unions and banks reminding them that LIBOR will be discontinued after year’s end, and that the institutions should take steps to find alternative rates. ARRC said its recommendation is consistent with steps that “it understands a number of firms are already taking to significantly slow new USD LIBOR activity ahead of year-end in order to ensure that they will be in a position to meet the supervisory guidance.”
ARRC has recommended, as an alternative, the Secured Overnight Financing Rate (SOFR), which the group helped to develop. The Federal Reserve has recommended that firms switch to SOFR for such items as derivative contracts but has made no such recommendation for specific use of SOFR for loans (NCUA and the other banking agencies have likewise made no specific recommendation).
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(Oct. 15, 2021) California legislation was signed into law this week, the California and Nevada Credit Union Leagues reported. The new law for state credit unions: allows expulsion of members for abusive behavior; simplifies how an expelled member may appeal; allows non-member deposits from other credit unions (giving CA CUs parity with FCUs and low-income designated credit unions); makes changes to how audit committees are governed; and makes other technical changes … Two jobs have opened up at the Oregon Department of Consumer and Business Services (DCBS); see the NASCUS Career/Job Postings page for more details … Federal Reserve Board Vice Chair for Supervision Randal Quarles – whose term in that role ran out this week, but who continues to serve until a successor is confirmed – will no longer chair the Fed Board’s committee on supervision and regulation. Instead, the Fed said this week, the three-member committee will only advance agenda items before it when there is “broad consensus” among Federal Reserve officials. That essentially means that all three committee members will have to agree to any rule changes to be proposed to the full board.
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(Oct. 8, 2021) LIBOR is coming to an end – for the most part, at the end of this year – and it’s time to stop “magical thinking” that it won’t, Federal Reserve Board Vice Chair for Supervision Randal Quarles said this week. In remarks to the Structured Finance Association Conference in Las Vegas this week, Quarles said the “reign” of the London Interbank Offered Rate (LIBOR) will end at year’s end “and it will not come back.” He noted that a handful of financial firms have said that they may want more time to evaluate potential alternative rates. “There is no more time, and banks will not find LIBOR available to use after year-end no matter how unhappy they may be with their options to replace it,” he said. Some credit unions use LIBOR as a reference rate, particularly for student loans … Monday is a holiday for some (Columbus Day/Indigenous People’s Day); have a terrific weekend!
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(July 23, 2021) New regulations on anti-redlining rules will be rescinded, and federal banking agencies vowed to work together to develop a new proposal, the agencies announced this week.
On Tuesday, the OCC announced that it would propose rescinding its Community Reinvestment Act (CRA) rule adopted in 2020. Acting Comptroller Michael J. Hsu said a review he started shortly after taking office in early May led to his decision to make the proposal. However, he indicated strengthening and modernizing the CRA rules – which implement 1970s legislation designed to thwart redlining in lending by banks – was necessary to ensure fairness during “persistent and rising inequality and changes in banking.”
The June 2020 rule was finalized by the OCC alone; neither the Federal Reserve Board nor the FDIC was party to that action, and the final OCC rule received a lackluster response from the banking industry. Meanwhile, the Fed issued its own advance notice of proposed rulemaking (ANPR) on modernizing CRA rules in September 2020, with a 120-day comment period. The notice was issued on a 5-0 vote by the Fed board.
This week, following OCC’s action, the OCC, Fed and FDIC issued a joint statement that they want to work together to jointly strengthen CRA rules. “Joint agency action will best achieve a consistent, modernized framework across all banks to help meet the credit needs of the communities in which they do business, including low- and moderate-income neighborhoods,” the agencies stated.
LINKS:
Interagency statement on Community Reinvestment Act joint agency action
OCC Statement on Rescinding its 2020 Community Reinvestment Act Rule
(July 2, 2021) A new tool aimed at helping smaller banks calculate their allowances under the new current expected credit loss (CECL) accounting standard was announced by the Federal Reserve this week.
The Fed said the spreadsheet-based tool — dubbed the “Scaled CECL Allowance for Losses Estimator” (SCALE) — draws on publicly available regulatory and industry data to aid community banks with assets of less than $1 billion.
The CECL accounting standard took effect for most public financial institutions in 2020; smaller banks (as with most credit unions) are not required to meet the standard until 2023.
SCALE will be officially launched July 15 in conjunction with a webinar, the Fed said, when it will also answer questions about the new tool. The event is geared to community banks and will feature representatives from the Financial Accounting Standards Board (FASB, the group that established the accounting standard) and the Conference of State Bank Supervisors (CSBS).
The Fed said registration instructions are available at the link below.
(June 4, 2021) A “new and comprehensive” set of rules – but with concepts that are like existing regulations – to govern the Federal Reserve’s new round-the-clock instant payments service was proposed this week by the agency.
The new rules apply to the Fed’s upcoming “FedNow” service, expected to be available in 2023. The service, the Fed has said, will support instant payments in the U.S. (using concepts similar to existing provisions) 24 hours a day, seven days a week, 365 days a year.
In a release, the Fed said the rules it is proposing detail legal rights and obligations of Federal Reserve Banks and FedNow participants. Under the proposal, the Fed would amend its Regulation J (which governs funds transfers, particularly by check processing and Fedwire funds, among other things), establishing a new subpart C. That subpart would set up the new rules governing funds transfer using FedNow; the current subpart B (applying to Fedwire Funds Service) of the rule would no longer apply to transfers over FedNow.
Subpart B would be altered to reflect the fact that the reserve banks will be operating a second funds transfer service in addition to the Fedwire Funds Service, the Fed said. Some technical changes to subpart A, governing the check processing service, are also proposed.
The proposal was issued with a 60-day comment period.
(June 4, 2021) Frequently asked questions (FAQs) about mortgage servicing were updated this week by the CFPB, concerning escrow account compliance under Regulations X and Z (RESPA and TILA, respectively). The new questions added 11 pages to the agency’s mortgage servicing queries list, covering an array of issues related to escrow accounts (including: a basic definition) … Written communication providing specific direction on use of alternative data at financial institutions – including credit unions — is required from regulators, the GAO indicated in reports it issued this week. Additionally, the GAO wrote, regulators should be collaborating on the specifics in that written communication. The GAO detailed an outstanding 2018 recommendation that has not yet been addressed by the Fed and the FDIC, asserting that “continued attention to this issue could improve (the agencies’) ability to more effectively oversee risks to consumers and the safety and soundness of the U.S. banking system.” The GAO did note that federal financial regulators (including NCUA) in late 2019 issued an interagency statement highlighting potential benefits and risks of using alternative data and encouraged financial firms to use it. However, GAO noted, that statement does not provide firms or banks with specific direction on the appropriate use of that data, including issues to consider when selecting types of alternative data to use.
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Mortgage Servicing FAQs, last updated June 2, 2021.
Priority Open Recommendations: Federal Deposit Insurance Corporation
Priority Open Recommendations: Federal Reserve
(May 28, 2021) Discussion of digital currency and if (or when) the Federal Reserve will begin issuing its own version of the new money was ramped up over the last week following comments by the agency board’s chair and the board member who watches over the nation’s payments system.
First up was Fed Chair Jerome H. (“Jay”) Powell, who last week said the development and enablement of a central bank digital currency (CBDC) for use by the general public is among the technological advances being explored by the Federal Reserve. Further, he revealed, the agency plans to publish a “discussion paper” this summer that will delve into the implications of digital payments – including possibly a U.S.-issued digital currency.
The key focus for the Fed, Powell said, is whether or how a CBDC could improve on what he called the existing “already safe, effective, dynamic, and efficient U.S. domestic payments system” in serving households and businesses. In any event, he said the Fed does not see digital currencies as a replacement for cash and coin – at least for now.
“We think it is important that any potential CBDC could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar, such as deposits at commercial banks,” Powell said. “The design of a CBDC would raise important monetary policy, financial stability, consumer protection, legal, and privacy considerations and will require careful thought and analysis—including input from the public and elected officials.”
This week, Fed Gov. Lael Brainard (who chairs the Fed’s payments committee) said this summer’s paper on digital money will be used to solicit public comment on a range of questions related to the use of the new currency, including payments, financial inclusion, data privacy and information security.
She also said that a digital dollar would be a new type of central bank money issued in digital form for use by the general public. “By introducing safe central bank money that is accessible to households and businesses in digital payments systems, a CBDC would reduce counterparty risk and the associated consumer protection and financial stability risks,” she said. She added that introducing a CBDC may provide an “important foundation” for beneficial innovation and competition in retail payments in the U.S.
LINKS:
Transcript of Chair Powell’s Message on Developments in the U.S. Payments System
(May 7, 2021) A new federal credit union chartered late last month in Kendall Park, N.J., to serve a local Islamic community will offer its members non-interest-bearing consumer loans, among other services, NCUA said this week. Maun FCU will be an Islamic-faith-based, no-interest credit union whose not-for-profit, cooperative business model will fill a need for affordable, federally insured financial services among members of its community, the agency said in a release. The new credit union will serve employees and members of the New Brunswick Islamic Center in New Brunswick, N.J., and employees and members of the Islamic Society of Central Jersey in Monmouth Junction, N.J. … the Federal Reserve this week called for comments on proposed guidelines it would use to evaluate requests for accounts and payment services at Federal Reserve Banks presented by “novel types” of banking institutions attempting to leverage new and emerging technologies and techniques. Generally, principles outlined in the guidelines would require the requesting entity to be eligible to receive Fed services, and cannot present “undue risk” to the Fed system or the financial system at large.
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NCUA Charters Maun Federal Credit Union
Proposed Guidelines for Evaluating Account and Services Requests (PDF)
(April 30, 2021) A two-page fact sheet that lays out what’s behind the demise of the London Interbank Offer Rate (LIBOR), a widely used rate used for such lending products as adjustable rate mortgages, has been published by the New York Fed’s Alternative Rate Reference Committee (ARRC). The fact sheet explains (among other things) LIBOR, the problems it poses, why it is being replaced at the start of next year, and the Fed’s favored replacement for the rate, the Secured Overnight Financing Rate (SOFR). A “part II” of the sheet, available separately (and linked to the first fact sheet) outlines how SOFR will work … Readings on inflation are likely to rise more in the coming weeks before moderating,Federal Reserve Chair Jerome H. (“Jay”) Powell said this week, adding that, ultimately, there will only be a “transitory” effect on inflation. Powell said the rise in inflation indicators will be partially due to supply bottlenecks from a rebound in spending as the economy continues to reopen. Those indicators likely will also be driven by emerging reports of a strengthening economy: Real GDP increased at a seasonally adjusted annual rate of 6.4% during the first quarter of 2021, the federal Bureau of Economic Analysis said this week. In the fourth quarter of last year, real GDP increased 4.3%.
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Background on USD LIBOR
(March 26, 2021) Two new Federal Reserve committees will focus on the impact of climate change on financial stability, Fed Board Gov. Lael Brainard said this week, as the agency finds it “increasingly clear” that climate change could have “important implications” for the central bank in carrying out its responsibilities.
Climate change and its impact on credit union regulation was a key topic at last week’s virtual National Meeting of state regulators, sponsored by NASCUS. Brainard made her remarks in a speech this week to a New York-based group focusing on addressing climate change and other issues.
Brainard said the new Supervision Climate Committee (SCC) will address the microprudential side by strengthening the agency’s ability to consider climate change risk and develop an “appropriate program to ensure the resilience of our supervised firms” to the risks posed.
The second committee – the Financial Stability Climate Committee (FSCC) – will, Brainard said, identify, assess, and address climate-related risks to financial stability through a macroprudential approach (one that considers the potential for “complex interactions across the financial system,” she said). In that regard, she added, it will complement the work of the SCC.
“Microprudential and macroprudential objectives are often aligned,” she said. “For example, consistent disclosures are important not only to enable individual financial firms to measure and manage their exposure to climate-related financial risks, but also to support financial stability more broadly by helping the market to accurately price that risk. Given the importance of consistent, comparable, and reliable disclosures to financial stability and prudential objectives, mandatory disclosures are ultimately likely to be important.”
She also said the Fed is investing in new research, data, and modeling tools to support the work of the committees. “In light of the high uncertainty inherent in estimating climate-related shocks, scenario analysis may be a helpful tool to assess the effects on the financial system under a wide range of assumptions,” Brainard said. “Climate scenario analysis identifies climate-related physical and transition risk factors facing financial firms, formulates appropriate stresses of those risk factors under different scenarios, and measures their effects on financial intermediaries and the financial system.”
LINK:
FRB Gov. Lael Brainard: “Financial Stability Implications of Climate Change”