Hsu concluded with several other trends impacting liquidity risk management like faster payments and tokenization, expressing that continued efforts to remove frictions in the financial system and pursue digitally-enabled, “always-on” experiences present new risks and necessitate new controls.
Our Take
A preview of formal liquidity requirements with many open questions. Hsu’s remarks are just the latest in a line of public comments and guidance to adapt liquidity risk frameworks for digital-age bank runs, including to more thoroughly incorporate the discount window into bank contingency funding plans. Although past speeches show Barr and Hsu agree on the need for action regarding the stigma with discount window usage, Hsu was careful to state that a new requirement would target its use in response to acute stress rather than “in good times and bad,” as suggested by Barr. While the regulators aim to reduce the discount window stigma, it remains unclear how mandating coverage and testing would relieve banks from the consequences of potentially signaling stress. Similarly, although the OCC symposium is intended to evaluate new methods for classifying deposits in an effort to address contagion, mitigating concerns around market perceptions of “guilt by association” will be easier said than done.
Broader changes to the LCR? Hsu was clear that a new ultra-short-term ratio would be distinct from the LCR but his inclusion of midsize banks serves as a reminder that the Fed’s tailoring framework provided LCR relief for most banks with under $250 billion in assets, to the point of removing it entirely for some. If midsize banks would be subject to a new ultra-short-term ratio, it is possible regulators are also considering re-expanding the applicability of the LCR. Although they have likely been deliberating this topic since the bank failures, it will take time for the three agencies to formulate and agree on such a significant proposal - particularly as they focus on finalizing Basel III endgame.
What should banks do now? Many banks have already recalibrated liquidity stress tests and contingency funding plans to incorporate lessons learned from last spring, including increasing the assumed severity of deposit outflows. Implementing a formal metric to demonstrate coverage of an acute short-term stress should not be a large operational lift or introduce a new binding constraint for most large financial institutions. Even before a formal requirement is proposed or finalized, banks should take action to formalize new short-term scenarios into their regular suite of ongoing liquidity stress tests. In particular, because midsize banks have not had the same level of regulatory scrutiny compared to their large bank counterparts, they may need to take additional steps to enhance liquidity modeling, collateral prepositioning and operational capabilities to prepare for new requirements.
Our Take
Many banks have already eliminated or modified their overdraft fees over the past several years, especially following the CFPB’s repeated calls to address potential unfair, deceptive or abusive acts and practices (UDAAP) related to these fees. However, the agency’s research shows that the majority of firms still charge an average of $35 per overdraft.
What should banks do now? With prescriptive rules on the way, banks that still charge overdraft fees should consider the following:
As all “junk fees” including those beyond overdraft fees are a key Administration priority, we expect to see continued action - including enforcement - from the CFPB during this election year. As such, all financial institutions should make sure that they:
Our Take
More time to meet a higher standard. The affected banks will have a nine month reprieve on submitting their next resolution plans with the tradeoff of having to be fully compliant with the final guidance. Institutions will have a year to adapt to the guidance which many will need as it would likely meaningfully heighten capability expectations.
What should banks do now? Banks should not wait to start doing capability assessments based on the proposed guidance. With the additional time, some may decide to amend their resolution strategies from multiple point of entry (MPOE) to single point of entry (SPOE). Most filers will need significant capability enhancements, with capital and liquidity analysis, governance triggers and playbooks, operational capabilities including analysis related to qualified financial contracts, legal entity rationalization, and separability among the most substantial.
These notable developments hit our radar this week: