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Request for GAO examination of agencies’ role in Basel III endgame proposal
The Chairman of the Financial Services Committee, Patrick McHenry (R-NC), and Representative Andy Barr (R-KY), Chairman of the Subcommittee on Financial Institutions and Monetary Policy, sent a letter to the U.S. Government Accountability Office (GAO) requesting the GAO to “examine the role U.S. federal banking agencies played in work at the Basel Committee on Banking Supervision to develop the recent Basel III Endgame proposal, which calls for massive increases in capital requirements for already well-capitalized U.S. financial institutions.”
As previously covered by InfoBytes, the federal banking agencies issued a notice of proposed rulemaking that would substantially revise the capital requirements of large U.S. banking organizations. According to the letter, Congress has very little insight into the basis of such policy changes that “would fundamentally change the policy of the U.S. banking system.”
The letter requests the GAO to evaluate each federal banking agency’s participation in the development of Basel III Endgame. GAO’s evaluation should include: (i) a summary of each material proposal submitted by a federal banking agency to the Basel Committee; and (ii) a summary of concerns raised by a federal banking agency with respect to a consultative document or other proposal considered by the Basel Committee.
Further, the letter requests the GAO prioritize each proposal or concern from the federal banking agencies related to:
- Any proposals or concerns from the federal banking agencies that did not receive a fulsome response by the Basel Committee.
- Any evidence or rationale supporting the requirement that a “corporate entity (or parent) must have securities outstanding on a recognized securities exchange for an exposure to that entity (or parent) to be eligible for the reduced risk weight for investment-grade corporate exposures;”
- The absence of a tailored approach to “high-fee revenue banks under the Basel III Endgame business-indicator approach to operational risk capital”;
- The calibration of the “scaling factor, multiplier, dampener, and other coefficients for that business-indicator approach”; and
- The calibration of the “correlation factors and the profit-and-loss attribution test thresholds for the models-based measure of market risk capital.”
Congressional Democrats urge White House to make AI principles mandatory
On October 12, a coalition of more than two dozen Democratic senators and House members urged President Biden to make any anticipated executive order on how the federal government handles artificial intelligence (AI) technology binding on the federal government and those who receive federal funds, and not a mere statement of principles. “By turning the AI Bill of Rights from a non-binding statement of principles into federal policy, your administration would send a clear message to both private actors and federal regulators: AI systems must be developed with guardrails,” the Democrat’s letter states. Additionally, these legislators asked the president to incorporate the White House Blueprint for an AI Bill of Rights, a voluntary roadmap that identifies five principles intended to guide both the government’s and private companies’ design, use and deployment of automated systems fueled by AI (covered by InfoBytes here).
Congressmembers urge SEC’s Gensler to approve spot Bitcoin ETPs
On September 26, a group of bipartisan members from the House Financial Services Committee sent a letter to Gary Gensler, the Chair of the SEC, to promptly approve the listing of spot Bitcoin exchange-traded products (ETPs). They have criticized the SEC's stance on these products, which they deem to be discriminatory, arguing that the commission’s purpose of making compliant products available to investors. In addition, the letter cites the recent D.C. Circuit decision that overruled the SEC’s denial of a company’s application to convert its Bitcoin trust into an ETF (covered by InfoBytes here). The members, including Tom Emmer (R-MN), Mike Flood (R-NE), and Wiley Nickel (D-NC) and Ritchie Torres (D-NY), argue that approving Bitcoin ETPs would enhance investor safety and transparency by providing a regulated framework.
Biden signs H.R. 5860 into law, prevents shutdown
On October 1, President Joe Biden signed H.R. 5860, a government spending bill to avert a government shutdown. The President’s remarks note that although a budget agreement was reached months ago, House Republicans made a last-minute push for spending cuts, derailing the original agreement. Among other things, the bill extends (i) government funding through November 17; and (ii) the National Flood Insurance Program through November 17.
GAO calls for enhanced oversight of blockchain, alternative data
On August 8, the U.S. Government Accountability Office (GAO) released letters sent to the OCC, SEC, FDIC and the Fed to provide an update on GAO’s “priority open recommendations” for each regulator. Priority open recommendations refer to suggestions from GAO to bank regulators that have the potential for cost savings, elimination of mismanagement, fraud, and abuse, or addressing high-risk or duplication issues. GAO suggested that all four agencies follow its recommendation to coordinate oversight of blockchain technology. GAO referenced recent “volatility, bankruptcies, and instances of fraud in the crypto asset markets” and underscored the dangers to consumers and investors without safeguards. GAO suggests regulators jointly establish a formal coordination method to promptly identify and address risks tied to blockchain.
For the three banking regulators in particular—the OCC, FDIC, and Fed—GAO noted that in 2011 it recommended that the three banking regulators implement noncapital triggers for early regulatory intervention tied to risky banking practices, but that such triggers had not yet been implemented. GAO also suggested that banking regulators and the “communicate the appropriate use of alternative data in the underwriting process with banks that engage in third-party relationships with fintech lenders.”
GAO’s letter to the Fed restated GAO’s 2016 recommendation that the Fed design “a process to communicate information about the uncertainty surrounding post-stress capital ratio estimates” and “articulate tolerance levels for key risks identified through sensitivity testing and for the degree of uncertainty in the projected capital ratios.” GAO also recommended that the Fed revisit its “prompt corrective action framework” by “adopting noncapital triggers that would require early and forceful regulatory actions tied to unsafe banking practices.”
Republicans seek to overturn student loan relief program
On March 27, Republican lawmakers Representative Bob Good (R-VA) and Senator Bill Cassidy (R-LA) introduced a joint resolution of disapproval under the Congressional Review Act to overturn the Department of Education’s (DOE) student loan debt relief program, which has yet to take effect. As previously covered by InfoBytes, the three-part debt relief plan was announced last August to provide, among other things, up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the DOE, and up to $10,000 in debt cancellation to non-Pell Grant recipients for borrowers making less than $125,000 a year or less than $250,000 for married couples.
Opponents of the debt relief program immediately filed legal challenges after the plan was introduced last August. On December 1, the U.S. Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibited the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan (covered by InfoBytes here). In a brief unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. Shortly after, the Supreme Court also granted a petition for certiorari in a challenge currently pending before the U.S. Court of Appeals for the Fifth Circuit, announcing it will consider whether the respondents (individuals whose loans are ineligible for debt forgiveness under the plan) have Article III standing to bring the challenge, as well as whether the DOE’s debt relief plan is “statutorily authorized” and was “adopted in a procedurally proper manner” (covered by InfoBytes here). The Supreme Court heard oral arguments in both cases at the end of February.
Good noted in his announcement that more than 120 members of the House signed an amicus brief expressing concerns about the constitutionality of the debt relief program. And last month, the Government Accountability Office issued a letter of opinion stating that the final waivers and modification rules submitted by the DOE last October to streamline and improve targeted debt relief programs (covered by InfoBytes here) constitute rules under the CRA and shall have no force or affect.
Republican lawmakers ask about risks of customers’ digital assets on balance sheets
On March 2, Senator Cynthia M. Lummis (R-WY) and Representative Patrick McHenry (R-NC) sent a letter to the Federal Reserve Board, FDIC, OCC, and NCUA requesting input on SEC guidance issued last year that directs cryptocurrency firms to account for customers’ digital assets on their balance sheets. Last April, the SEC issued Staff Accounting Bulletin No. 121 (SAB 121), covering obligations for safeguarding crypto-assets held by entities for platform users. Among other things, SAB 121 clarified that entities should track customer assets as a liability on their balance sheets. “[A]s long as Entity A is responsible for safeguarding the crypto-assets held for its platform users, including maintaining the cryptographic key information necessary to access the crypto-assets, the staff believes that Entity A should present a liability on its balance sheet to reflect its obligation to safeguard the crypto-assets held for its platform users,” SAB 121 explained.
Claiming that SAB 121 “purports to require banks, credit unions and other financial institutions to effectively place digital assets on their balance sheets,” the lawmakers argued that this “would trigger a massive capital charge,” and in turn would likely prevent regulated entities from engaging in digital asset custody. Rather, regulators should encourage regulated financial institutions to offer digital asset services, since they are subject to the highest level of oversight, the letter said. Among other things, the letter asked the regulators whether the SEC contacted them prior to issuing the guidance, and if they have directed regulated financial institutions to comply with SAB 121. The lawmakers also inquired whether the regulators “agree that SAB 121 potentially weakens consumer protection by preventing well-regulated banks, credit unions, and other financial institutions from providing custodial services for digital assets[.]” The letter pointed to the bankruptcy case of a now-defunct crypto lender, which classified all customers as unsecured creditors, as an example of the legal risk of requiring customer custodial assets be placed on an entity’s balance sheet. “SAB 121 places customer assets at greater risk of loss if a custodian becomes insolvent or enters receivership, violating the SEC’s fundamental mission to protect customers,” the lawmakers wrote.
States, Democrats urge card companies to create gun-store MCC
On September 2, the California and New York attorneys general sent a letter to the CEOs of three credit card companies asking for the establishment of a unique merchant category code (MCC) for gun store purchases, writing that a specially-designated MCC would help companies flag suspicious activity. The letter follows recent requests sent by several congressional Democrats to the same companies urging them to establish an MCC code for guns. According to the Democrats’ letter, MCCs are four-digit codes maintained by the International Organization for Standardization (ISO) that classify merchants by their purpose of business and are used “to determine interchange rates, assess transaction risks, and generally categorize payments.” The letter noted that according to ISO’s criteria, “a new MCC may be approved if (a) the merchant category is reasonable and substantially different from all other merchant categories currently represented in the list of code values; (b) the merchant category is separate and distinct from all other industries currently represented in the list of code values; (c) the proposal describes a merchant category or industry, and not a process; (d) the minimum annual sales volume of merchants included in the merchant category, taken as a whole is, US$10 million; and (e) sufficient justification for the addition of a new code is found.” The letter stated that a “new MCC code could make it easier for financial institutions to monitor certain types of suspicious activities including straw purchases and unlawful bulk purchases that could be used in the commission of domestic terrorist acts or gun trafficking schemes,” and could garner coordination between financial institutions and law enforcement to aid efforts across the federal government to identify and prevent illicit activity. The letters requested feedback to better understand the companies’ positions.
FTC issues report to Congress on use of AI
On June 16, the FTC issued a report to Congress regarding the use of artificial intelligence (AI), warning that policymakers should use caution when relying on AI to combat the spread of harmful online conduct. In the 2021 Appropriations Act, Congress directed the FTC to study and report on whether and how AI “may be used to identify, remove, or take any other appropriate action necessary to address” a wide variety of specified “online harms,” referring specifically to content that is deceptive, fraudulent, manipulated, or illegal. The report suggests that adoption of AI could be problematic, as AI tools can be biased, discriminatory, or inaccurate, and could rely on invasive forms of surveillance. To avoid introducing these additional harms, the report suggests lawmakers instead focus on developing legal frameworks to ensure no additional harm is caused by AI tools used by major technology platforms and others. The report further suggests that Congress, regulators, platforms, scientists, and others focus their attention on creating frameworks to address the following related considerations, among others: (i) the need for human intervention in connection with monitoring the use and decisions of AI tools intended to address harmful content; (ii) the need for meaningful transparency, “which includes the need for it to be explainable and contestable, especially when people’s rights are involved or when personal data is being collected or used”; and (iii) the need for accountability with respect to the data practices and results of the use of AI tools by platforms and other companies. Other recommendations include use of authentication tools, responsible use of inputs and outputs by data scientist, and using interventions, such as tools that slow the viral spread or otherwise limit the impact of certain harmful content.
The Commission voted 4-1 at an open meeting to send the report to Congress. Commissioner Noah Joshua Phillips issued a dissenting statement, finding that the report provides “short shrift to how and why AI is being used to combat the online harms identified by Congress,” and instead “reads as a general indictment of the technology itself.”
FTC reports on older adult fraud
On October 18, the FTC issued its annual report to Congress on protecting older adults. Among other things, the report, Protecting Older Consumers, 2020-2021, A Report of the Federal Trade Commission, evaluates fraud trends impacting older adults and provides details on enforcement actions and efforts to combat scams related to the Covid-19 pandemic. According to the report, there were more than 334,000 fraud reports filed by consumers age 60 or older totaling more than $600 million in losses. While the FTC found that older adults were the least likely of any age group to report fraud monetary losses, older adults tended to report losing substantially more money than younger age groups. Older adults were also more likely to report financial losses related to tech support scams, prize, lottery or sweepstake scams, friend or family impersonation, and romance scams. Additionally, as online shopping has increased, the report noted that losses attributed to online shopping fraud among older adults rose sharply during the second quarter of 2020 and remained far higher than pre-pandemic levels in early 2021. The report also discussed significant FTC enforcement actions taken to protect older adults, as well as outreach and education efforts focusing on fraud prevention.