Banking and Finance Law Daily Banking agency heads, Fed governor, see increasing strength in industry
Tuesday, March 8, 2016

Banking agency heads, Fed governor, see increasing strength in industry

By Colleen M. Svelnis, J.D.

Heads of banking regulatory agencies and a Federal Reserve Board Governor spoke at the Institute of International Bankers annual Washington conference, held in Washington, D.C., on March 6-8, 2016. Comptroller of the Currency Thomas J. Curry, Undersecretary of the Treasury Nathan Sheets, Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation, and Fed Governor Lael Brainard delivered remarks on the state of the U.S. banking industry and efforts for cross-border cooperation.

Global cooperation and collaboration. According to the OCC’s Curry, financial stability isn’t something we can ever take for granted. Curry spoke about the current turbulence in the global financial markets and efforts the regulatory agencies have taken toward the goal of preserving and enhancing the stability of the global financial system. Curry described how the OCC “moved quickly to highlight areas of emerging risk and provide supervisory resources” to help banks manage and mitigate those risks. He also stated that the “vast majority” of the institutions the OCC supervise have solid programs in place to manage and control Bank Secrecy Act/Anti-Money Laundering (BSA/AML) risk.

Curry emphasized the increased interaction and cooperation on cross-border issues relevant to national regulators. Curry praised the Basel Committee’s efforts in developing and implementing minimum global capital and liquidity standards. In particular, he highlighted cybersecurity and anti-money laundering as two areas that demand a comprehensive, cross-agency, cross-border response.

Curry also spoke about de-risking, or risk re-evaluation, the way banks evaluate the BSA/AML risk posed by their customer relationships, including risks posed by the activities of foreign correspondent banks. These re-evaluations have led banks to terminate some of these relationships. He pointed out that decisions to terminate relationships can have consequences including disrupting longstanding business associations and driving transactions underground. The OCC has taken a deeper look at how banks conduct risk re-evaluation and, when completed, may issue guidance to OCC-supervised institutions, said Curry.

Treasury agenda. The Treasury Department’s Sheets spoke about its financial regulatory agenda as well as the G-20’s major achievements and ongoing work on international financial stability and regulatory reform. According to Sheets, the G20’s financial regulatory agenda has included four core areas of reform: bank capital and leverage, resolution, market-based finance – also called “shadow banking,” and derivatives.

Sheets also discussed potential interactions between Treasury’s regulatory agenda and the functioning of financial markets, including market liquidity, as well as financial inclusion and “de-risking.” He elaborated on Treasury’s focus on implementation of financial system reform, stating that “we must also remain vigilant to new risks.” He spoke about the trend of de-risking, where some large global banks are withdrawing from correspondent banking relationships and restricting the access of money services businesses to bank accounts, often citing regulatory obligations as the key driver. According to Sheets, de-risking has resulted, in certain jurisdictions, in a decline in the number of correspondent bank relationships and in a loss of access to bank services by money service businesses.

Steady growth and resilience. Fed Governor Lael Brainard lauded the continued strength of the U.S. labor market and praised the housing sector’s steady growth in her remarks. However, she did note that sectors of the economy that are sensitive to energy prices or international demand are down. Investment in drilling and mining structures fell 50 percent last year, and firms and workers in the energy sector have experienced extreme financial difficulties and severe job losses. Additionally, weak foreign demand relative to the United States has pushed down net exports.

With regard to monetary policy, Brainard argued for patience, stating that, “given weak and decelerating foreign demand, it is critical to carefully protect and preserve the progress we have made here at home through prudent adjustments to the policy path.” Brainard said evidence shows that inflation is moving towards the 2 percent target.

According to Brainard, the Fed’s surveillance of liquidity conditions shows that while day-to-day liquidity has not declined notably, some characteristics of liquidity provision are changing. Brainard stated that, from a broader financial stability perspective, the possible deterioration in the resilience of liquidity “suggests a special focus on segments where price gaps are most likely to arise at times of stress between holders of relatively illiquid or thinly traded securities that want to sell and dealers with an apparently reduced willingness to take the other side of the trade, as indicated, for example, by leaner dealer inventory holdings.” She also discussed the effects on liquidity of changes in technology and market structure and changes in broker-dealer risk management practices in the wake of the crisis and enhanced regulation.

Brainard described the results of stress testing and other efforts to strengthen the resilience and resolvability of systemic banking organizations. The eight most systemic U.S. banking organizations are now holding $800 billion more in high-quality liquid assets than they were in 2011, and $500 billion more in common equity capital than they were in 2008, according to Brainard.

Stronger banking sector. In his remarks, FDIC Chairman Gruenberg focused on two issues: the ongoing recovery of the U.S. banking industry and the progress that has been made to foster cross-border cooperation among the major jurisdictions of the world on the resolution of systemically important financial institutions. Gruenberg said the U.S. banking sector is much stronger position than before the financial crisis and reported that FDIC-insured institutions earned nearly $164 billion in 2015, which Gruenberg said is a new record. Additionally, almost two-thirds of all institutions reported higher earnings in 2015 than in 2014 and only eight institutions failed last year, the lowest number since 2007.

According to Gruenberg, supervisory challenges and priorities include monitoring the following:

  • uncertainty about global economic growth;
  • interest rate risk;
  • credit risk and the economy;
  • increase in lending in higher-risk loan categories;
  • effects of decline in energy prices;
  • declining prices for agricultural commodities; and
  • cybersecurity.

Gruenberg discussed the FDIC’s work addressing the orderly resolution of systemically important financial institutions, including the Orderly Liquidation Authority. He touched on the importance of cross-border cooperation, giving examples to show how relationships and protocols with foreign regulatory authorities are essential to resolving globally systemic institutions in crisis.

Companies: Institute of International Bankers

MainStory: TopStory BankingOperations BankSecrecyAct CapitalBaselAccords FinancialStability

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