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Our Take: The changing regulatory landscape

Change is a constant so move with confidence by staying up to date.

Change remains a constant in FS risk & regulation. Here’s “our take” on key developments impacting the industry.

Current topics - September 10, 2021

OCC formally proposes rescinding 2020 Community Reinvestment Act reform

On Wednesday, the OCC released a proposal to rescind its 2020 Community Reinvestment Act (CRA) reform rule and revert back to the 1995 rule adopted jointly with the Fed and FDIC. The CRA seeks to encourage lending, investment, and services in low- and moderate-income (LMI) communities where a bank has branches or deposit-taking ATMs. It is jointly administered with the Fed and FDIC, but former Comptroller Joseph Otting opted in May 2020 finalize the reforms without the other two agencies. In July, the agencies issued a joint statement pledging to work together to develop a “consistent, modernized (CRA) framework.” 

In an interview following Wednesday’s announcement, Acting Comptroller Michael Hsu indicated that the joint rulemaking would build on a framework proposed by the Fed in September 2020. Similar to the OCC’s rule, the Fed’s proposal would expand and clarify qualifying activities to meet CRA obligations, including by publishing an illustrative list and establishing a pre-approval process for activities not on the list. It would also address a number of goals of the OCC’s rule but would diverge in its approach such as placing a greater weight on the overall number of loans offered in low- and moderate-income communities as opposed to the OCC’s emphasis on the total value of loans. While it shares the OCC’s focus on updating the CRA to recognize the shift toward digital banking, the Fed’s proposal would evaluate banks without physical branches based on a nationwide assessment area as opposed to where they derive 5% or more of their deposits. Both the Fed’s proposal and the OCC’s rule create objective metrics for evaluation, but the Fed’s approach would allow banks to rely on existing data while the OCC currently requires that banks expand their data collection and recordkeeping practices.

The proposal is open for comment until October 29, 2021.

Our Take

Since stepping into the Acting Comptroller role in May, Hsu has consistently remarked that he plans to rescind last year’s rule to develop a unified framework with the other banking agencies. So while this week’s proposal comes as little surprise, many in the industry will welcome the near-certainty that the 2020 rule’s days are numbered, especially considering that many firms have waited to see whether the rule will become a reality before beginning working toward the prospect of complying with different standards and developing new data collection practices. Hsu’s statement that the joint reform effort will build from the Fed’s proposal was expected considering his background at the Fed and its generally more positive reception from consumer advocacy groups. While the Fed’s proposal provides a starting point for the joint reform, it will take much time and deliberation for the three agencies to get on the same page – particularly as the Fed and FDIC are still led by Trump appointees and there is no confirmed Comptroller. Accounting for a public comment period, revisions, and implementation periods there is still plenty of time before institutions will need to comply with any new standards. 

For more information on the 2020 CRA rule, see our First take: Five key points from the OCC’s final CRA rule.

ISDA publishes ESG papers

On Tuesday, the International Swaps and Derivatives Association (ISDA) published two papers on environmental, social and governance (ESG) issues. One of the papers is focused on key performance indicators (KPIs) for sustainability linked derivatives (SLDs). SLDs, which have been in existence for just over two years, add a pricing component linked to an ESG goal to a conventional derivative. The report explains that in order for SLDs to function as intended, the ESG goals need to have KPIs that “(i) can be objectively verified and (ii) have legal certainty over how they operate.” To that end, the paper provides a number of examples and guidelines for KPIs to be specific, measurable, verifiable, transparent, and suitable.

The other paper discusses issues with the accounting treatment and reporting of ESG factors under Generally Accepted Accounting Principles (GAAP). It describes challenges with determining whether an ESG component of a transaction needs to be separately accounted at fair value as well as difficulties in determining that value due to a lack of observable data. The paper discusses two potential solutions to these issues: 1) adapting existing guidance from International Financial Reporting Standards (IFRS) Foundation on non-financial variables and 2) expanding the existing narrowly defined scope exception under GAAP to cover certain ESG elements. ISDA explains that these solutions could dismiss the need to separately value such elements.

Our Take

These papers from ISDA join other papers and initiatives from industry groups, standards setting organizations and regulators in attempting to reduce uncertainty and advance consistency around ESG issues. As the papers acknowledge, the ESG landscape has been rapidly evolving over the last several years with institutions having to adapt existing models and frameworks to concepts with little standardization and data to inform their treatment. ISDA has provided a useful starting point by explaining the key questions and concepts at hand, but it will take a great deal of study and debate to settle the accounting treatment and reporting of ESG factors. For example, scope exceptions to GAAP have traditionally been very narrowly defined and any endeavors to expand them will require consensus on metrics and limitations to avoid misuse. With the dynamic nature of ESG factors and the variety of opinions as to how they should be measured, that consensus is unlikely to come any time soon.

El Salvador adopts Bitcoin as legal tender

On Tuesday, El Salvador began accepting Bitcoin as legal tender, allowing the digital currency to be used within the country to discharge debts, make payments, and pay taxes. Accounting standards will continue to use the US dollar as the reference currency, but the government will provide a system to allow users to automatically and instantaneously convert Bitcoin into US dollars. El Salvador’s President Nayib Bukele has cited decreasing costs associated with international remittances as a key reason for embracing Bitcoin, explaining that over 20% of El Salvador’s GDP comes from remittances, but costs of sending a remittance can be as high as 50% of its total value. He has also noted that Bitcoin adoption could promote financial inclusion, especially considering that approximately 70% of Salvadorans do not have bank accounts.

To support the facilitation of Bitcoin as legal tender, the Salvadoran government began offering a digital wallet called Chivo, which provides custody and fee-free exchange services to its users. It also has developed network capabilities and installed over 200 Bitcoin ATMs. 

Our Take

As the global economy continues to become more digital and less dependent on cash, policymakers and central banks around the world have increasingly explored moving toward digital currencies. Over 60 central banks have begun research and development of central bank digital currencies (CBDCs), but other governments have looked at stablecoins and - as evidenced by El Salvador’s move - cryptocurrencies. While President Bukele’s goals of promoting financial inclusion and reducing transaction fees for remittances are certainly worthwhile causes, the decision to move to Bitcoin brings a number of risks and challenges. Tuesday, the first day El Salvador began accepting Bitcoin, demonstrated several of these risks, with Bitcoin’s sharp 17% plummet highlighting concerns around volatility and technical glitches in the Chivo wallet highlighting technology and resilience risks. Medium term, such hiccups could undermine the trust and  confidence needed for more widespread adoption. Other risks include the lack of control around monetary policy as well as anti-money laundering and counter-terrorist financing concerns. It remains to be seen if El Salvador’s experiment can weather these risks and challenges, but the world will be watching as national governments decide whether and how to pursue moving toward digital currencies.

For more on CBDCs, see our Regulatory Brief: Why Financial Institutions Should Start Paying Attention to CBDCs.

On our radar

These notable developments hit our radar over the past two weeks:

  • IOSCO issues warning over credit-sensitive alternatives to USD LIBOR. On Wednesday, the International Organization of Securities Commissions (IOSCO) called on greater attention to its principles on financial benchmarks. The statement directly appeals to administrators of credit-sensitive rates (CSRs) that have recently been proposed as additional replacement options for LIBOR, supplementing the risk-free rates recommended by the various national working groups. Specifically, IOSCO highlights that benchmarks will need to adhere to its principles relating to the relative size of a benchmark’s underlying market and its ability to accurately and reliably represent that market. Banking regulators both in the US and UK have recently been vocal about their concerns that CSRs might not be sufficiently robust, and that their similarities to LIBOR, including the relatively low volume of underlying transactions, might eventually pose many of the same challenges that ultimately led to LIBOR’s demise.

    Subscribe to PwC’s LIBOR Transition Market Update here to read more about these and other developments.
  • CFTC Commissioner Dan Berkovitz to depart. Yesterday, CFTC Commissioner Dan Berkovitz announced that he plans to step down on October 15, 2021. Following his departure, the agency will have only two of its five seats filled, with Democrats and Republicans each having one representative. President Biden will then be able to appoint three new Commissioners, although one of the appointments must be from the Republican party. He can also decide whether to select one of the nominees as Chair or nominate current Acting Chair Rostin Behnam to fill the role on a confirmed basis.
  • CSBS releases payments model law. Yesterday, the Conference of State Bank Supervisors (CSBS) released the Uniform Money Transmission Modernization Act, a model law for states to adopt in place of their existing disparate requirements for payments firms. The law covers requirements for licensing, reporting, disclosures, prudential standards, and enforcement mechanisms. It also includes a section on conditions, disclosures, and other requirements unique to firms engaged in cryptocurrency activities.
  • CFPB wins payday lending court battle. On Tuesday, a federal court upheld the CFPB payday lending rule’s provision that prohibits lenders from attempting to withdraw from customers’ bank accounts after two failed attempts. Acting Director Dave Uejio released a statement applauding the court’s decision and reminding firms of the rule’s upcoming compliance deadline of June 13, 2022.


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Julien Courbe

Financial Services Leader, PwC US

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