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Fed’s Bowman speaks on bank liquidity a year after banking crises
On April 3, Fed member Michelle Bowman delivered a speech on “Bank Liquidity, Regulation, and the Fed’s Role as Lender of Last Resort.” Her speech highlighted three points: first, she discussed how the Fed supported liquidity in the banking system; second, she discussed the broader framework that supported bank liquidity, including regulatory requirements, bank supervision, and deposit insurance; and third, she discussed the challenges the Fed faced in implementing liquidity tools. On the Fed’s role in banking system liquidity, Bowman mentioned how the banking system was stronger today than before the 2008 financial crisis due to having more capital and more liquidity, as well as new stress testing requirements. The Fed’s emergency lending authority also changed to be broad-based, as opposed to having designed it for individual companies, and now required approval by the Secretary of the Treasury. On challenges, Bowman highlighted how to reduce the stigma associated with discount window borrowing by mandating that banks “pre-position collateral” and “periodically borrow from the discount window.”
Maryland finalizes money transmitter regulation; adds agent of the payee exemption
On November 17, the Maryland Commissioner of Financial Regulation recently adopted edits to proposed regulations, Code Md. Code Regs. 09.03.14.01, .03-.18, bringing Maryland generally in alignment with the CSBS Money Transmitter Model Law which has been recently adopted by several other states (covered by InfoBytes here, here, and here). Some provisions in the new regulation conform with the model law, while a few stand out as unique additions in Maryland.
For example, among the newly adopted regulations, amended Regulation .03 provides an exemption for persons appointed as an agent of the payee if (i) there is a written agreement between the payee and agent for payment processing, aligning with Maryland law; (ii) there is public recognition of the agent collecting payments on behalf of the payee; (iii) upon the agent’s receipt of payment, the payor’s obligation ends without risk; (iv) the agent is not serving in an escrow capacity; (v) the agent is not acting as an agent to more than one party; and (vi) the agent mandates prompt, unconditional payment without tying it to future events or performances. This agent of the payee exemption deviates from the model law’s version of the same exemption.
Additionally, amended Regulation .08 establishes corporate governance standards that require money transmitter licensees to maintain a framework that is commensurate with the size, operational complexity, and overall risk profile of the licensee. This standard also sets expectations around internal audit, external audit, and risk management functions of a license. While this concept is not provided for in the model money transmission law, it aligns with the CSBS model state regulatory prudential standards for nonbank mortgage servicers (covered by InfoBytes here).
The final regulation will be effective December 11, 2023.
Fed releases report on banking supervision and regulation
On November 10, the Fed released its biannual Supervision and Regulation Report ahead of congressional oversight hearings next week. The report covers banking system conditions, regulatory developments, and supervisory developments. The report stated that “[t]he banking sector remains sound overall.” After learning from the recent bank failures last spring, the Fed’s report aims to improve its supervision of “liquidity and interest rate risks by conducting targeted reviews… as well as conducting focused training and outreach… for banks and examiners.” Proposed regulatory developments include the Basel III endgame, long-term debt, and discount window preparedness. For supervisory developments, the Fed created the Novel Activities Supervision Program (previously covered by InfoBytes here) in August to supervise novel banking activities such as “crypto-assets, distributed ledger technology, and complex, technology-driven partnerships with nonbanks.”
UK Government finalizes cryptoasset guidance with financial promotions
On November 2, the UK Financial Conduct Authority (FCA) finalized guidance informing individuals and firms regarding the communication and promotion of cryptoassets. The final guidance follows a consultation period that closed on August 10.
In UK law, Section 21 of the Financial Services and Markets Act 2000 prohibits any person from, in the course of business, communicating a financial promotion – an invitation or inducement to engage in investment activity – unless such person is an authorized person, the content is approved by an authorized person, or another exemption applies. The guidance describes the application of the financial promotion oversight regime to “qualifying cryptoassets” and expresses the expectation that all “cryptoasset financial promotions must be fair, clear and not misleading.”
The guidance reiterates that it “does not create new obligations for firms but relates to firms existing regulatory obligations” and that persons and firms that act in accordance with the guidance will be considered “as having complied with the rule or requirement to which that guidance relates.”
UK Government to regulate cryptoassets more strictly under a new regulatory regime
On October 30, the HM Treasury of the UK Government released a report titled “Future Financial Services Regulatory Regime for Cryptoassets,” confirming its plans to regulate digital assets more strictly. The regulatory framework includes descriptions of requirements for the admission of digital assets to a trading venue, including disclosure documents. To make cryptocurrencies subject to the FCA’s rule-making powers, the HM Treasury expanded the definition of “specified instruments” to include digital currencies, but not its definition of “financial instrument.”
The UK Government created the report based on stakeholder feedback on an extensive survey on cryptoassets. The report summarizes responses to 51 survey questions and provides explanations regarding the UK government’s intentions to proceed with the framework. The report outlines how the UK can attract more crypto businesses while also protecting consumer interests. Topics include, among other things, (i) confirmation that the proposed regime does not intend to capture activities relating to cryptoassets which are specified investments that are already regulated; (ii) information regarding the future FCA authorization process for cryptoasset activities; (iii) the UK government’s support for the use of publicly available information to compile appropriate disclosure and admission documents; and (iv) acknowledgment of the potential need for a staggered implementation for cross-venue data sharing obligations. The report recognizes the rapidly evolving nature of the crypto sector and emphasizes that “the government continues to consider that developing a fully bespoke regime outside of the FSMA framework would risk creating an un-level playing field between cryptoasset firms and the traditional financial sector.”
Any legislative changes in response to this report on how the UK Government regulates cryptoassets will occur in 2024, “subject to Parliamentary time.”
Treasury stresses importance of regulating stablecoins
On February 8, Under Secretary for Domestic Finance Nellie Liang testified before the House Financial Services Committee that more must be done to clearly and consistently regulate stablecoins. Stablecoins’ “exponential growth” heightens “the urgency of ensuring that an appropriate regulatory framework is in place,” Liang stressed, adding that the value of stablecoins has grown over the last two years from roughly $5 billion in 2020 to approximately $175 billion today.
Liang encouraged lawmakers to consider two additional issues as they create policy: (i) regulations for “intermediaries” in the digital asset markets, including traditional financial actors such as banks and investment companies, as well as stablecoin issuers, custodial wallet providers, and digital asset exchanges; and (ii) potential systemic risk that may result from the build-up of leverage against digital assets, which “can play a key role in catalyzing and accelerating financial instability.” Liang compared the second issue to the 2007-2008 financial crisis. To address this risk, Liang stated that the Biden Administration is examining the role that leverage plays in the digital asset market, as well as the implications that leverage may have on the rest of the financial system. She also reiterated concerns raised in the President’s Working Group (PWG) on Financial Markets’ report on stablecoins (covered by InfoBytes here), which emphasized that stablecoins may be more widely used in the future as a means of payment and could increase “risks to users and the broader system.” Liang stressed that “[w]hile Treasury and the PWG fully support efforts by state and federal agencies to use existing authorities in support of their statutory mandates, we do not believe existing authorities provide a sufficient basis for comprehensive and consistent oversight of stablecoins.”
Fed highlights potential of central bank digital currencies
On May 20, Federal Reserve Chairman Jerome Powell released a video message outlining the potential use of central bank digital currencies (CBDCs) in the U.S. payment system. Powell discussed how “the rise of distributed ledger technology, which offers a new approach to recording ownership of assets, has allowed for the creation of a range of new financial products and services—including cryptocurrencies,” which may carry potential risks to those users and to the broader financial system. Powell highlighted that the Fed is contemplating whether and how a U.S. CBDC would impact the domestic payments system, emphasizing that CBDCs “could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar.” Powell also noted that, as part of the Fed’s ongoing efforts in exploring the potential benefits and risks of CBDCs from a variety of angles, the Fed will begin broader consideration of the creation of a U.S. CBDC by issuing a discussion paper and requesting public comment on benefits and risks. Powell stated he expects the Fed to play a leading role in developing international standards for CBDCs by “engaging actively with central banks in other jurisdictions as well as regulators and supervisors here in the United States throughout that process.”
Maryland regulator extends foreclosure restrictions
On January 28, the Maryland commissioner of financial regulation issued guidance that extends the “re-start date” for the initiation of residential foreclosures to March 1, 2021. The guidance is issued pursuant to the Maryland governor’s executive order 20-12-17-02, which amended and restated previous executive orders covered here, and here.
Illinois reissues and extends several Covid-19 executive orders
On January 8, the governor of Illinois issued Executive Order 2021-01 extending numerous executive orders through February 6, 2021 (previously covered here, here, here, here, and here). Among other things, the order extends: (i) Executive Order 2020-07 regarding in-person meeting requirements, (ii) Executive Order 2020-23 regarding actions by individuals licensed by the Illinois Department of Financial and Professional Regulation engaged in disaster response, (iii) Executive Order 2020-25 regarding garnishment and wage deductions (previously covered here), (iv) Executive Order 2020-30 regarding residential evictions (previously covered here and here).
Fed report highlights banks’ Covid-19 responses
On November 6, the Federal Reserve Board (Fed) issued its Supervision and Regulation Report, which summarizes banking system conditions and the Fed’s supervisory and regulatory activities. The current report discusses the safety and soundness of the banking industry, especially with respect to economic and financial stresses resulting from Covid-19 containment measures. The report highlights, among other things, that Fed programs “have helped to preserve the flow of credit” and that banks have taken several actions to maintain financial and operational resiliency. These actions include providing access to substantial lines of credit for corporate borrowers and playing a significant role in supporting small businesses through the Paycheck Protection Program. In addition, the report notes that loan growth has grown slightly since the beginning of the year and that capital positions and liquidity conditions remain strong. However, the report cautions that while “economic indicators have shown marked improvement since the second quarter, a high degree of uncertainty persist.” The report also details the Fed’s current areas of supervisory focus and describes how banks have adapted to a largely remote working environment.
The same day, the Fed also announced updates to the list of firms supervised by its Large Institution Supervision Coordinating Committee Program, which is responsible for supervising the largest and most complex firms. As a result, “certain foreign banks with U.S. operations that have substantially decreased in size and risk over the past decade will move to the Large and Foreign Banking Organization supervision portfolio, where they will be supervised with other banks of similar size and risk.” The Fed stresses that the “portfolio move will have no effect on the regulatory capital or liquidity requirements of any firm.”