Our take: financial services regulatory update - February 12, 2021

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Change remains a constant in financial services regulation. Read "our take" on the latest developments and what they mean.

Current topics - February 12, 2021

Fed releases 2021 CCAR scenarios

Earlier today, the Fed released the scenarios for the 2021 Comprehensive Capital Analysis and Review (CCAR), which is expected to evaluate 19 banks. Notably, 2021 is an off-year for 14 banks with between $100 and $250 billion in assets which are subject to supervisory stress testing only every other year based on the Fed’s regulatory tailoring framework. These banks will however be able to opt in to this year’s test and must elect to do so by April 5.

The 2021 CCAR severely adverse scenario includes the following characteristics as compared to the scenarios in the standard 2020 CCAR exercise and the September 2020 resubmission:

  • Unemployment: peaks at 10.8%, which is lower than the CCAR 2020 resubmission peak of 12.5% but higher than the cap of 10% in prior annual CCAR scenarios.
  • Equities: equity markets decline 55%, which is deeper than in both 2020 exercises although the trough is at similar levels to prior submissions.
  • Corporate Bonds: BBB corporate yield peaks at 6%, which is consistent with both 2020 exercises but the yield remains at peak levels for longer in this year’s scenario.
  • Commercial Real Estate: CRE Price index drops 40%, compared to ~30% in both 2020 exercises, and reaches a ~15% lower trough representing a more severe decline.
  • Global Market Shock: the scenario’s global market shock component - which applies to 10 of the largest banks - is consistent with the shocks applied during 2020 resubmission.

This will be the second standard CCAR cycle with the stress capital buffer (SCB), which integrates Fed-modeled start-to-trough stressed capital depletions into ongoing capital requirements. The Fed did not adjust banks’ SCBs based on the results of the 2020 resubmission. 

Our take

In the first standard CCAR cycle since the pandemic the Fed did not make any notable departures from its scenario design framework, which is inherently countercyclical. Although the peak unemployment in the severely adverse scenario is higher than the jump to 10% in last year’s scenario, it is notably lower than the actual peak unemployment of 14.8% that occurred in April 2020. The decision to remain in-line with previous years’ scenarios means that there will not likely be significant readjustments to banks’ SCBs and ongoing capital requirements. This will be particularly welcome to banks when juxtaposed with the scheduled expiration of supplementary leverage ratio (SLR) rule relief that has allowed depository institutions to opt to exclude US Treasuries and deposits at Federal Reserve Banks from the SLR calculations. The Fed opted to retain restrictions on banks’ distribution levels (with some additional flexibility) following the second round of stress tests last year and it remains to be seen whether it will extend those restrictions beyond this quarter. With strong capital levels, the prospect of stimulus and the ongoing vaccine roll out, banks are well-positioned for continued recovery, potential growth and increased capital distributions later in the year.

NYDFS provides state CRA climate activities guidance

On Tuesday, the New York Department of Financial Services (NYDFS) issued guidance alerting financial institutions that they may receive credit under the New York Community Reinvestment Act for financing activities that “support the climate resiliency” of low- and moderate-income (LMI) communities. The guidance provides a non-exhaustive list of qualifying investments, including renewable energy or energy-efficient equipment as well as initiatives to address flooding issues. In the accompanying press release, NYDFS Superintendent Linda Lacewell explained that LMI areas are not only more susceptible to risks exacerbated by climate change such as heat waves and flooding but that they often lack the resources needed for recovery.

The guidance is the latest in a series of recent steps NYDFS has taken to address climate risk since the appointment of a dedicated Sustainability and Climate Initiatives Director last year. Last October, it announced that it expects all New York-regulated financial services firms to integrate financial risks from climate change into their governance frameworks, risk management processes, and business strategies. It also released a letter containing similar guidance for insurers. 

Our take

When viewed in combination with last year’s guidance, NYDFS is now encouraging its supervised institutions to act on climate through incentives in the form of credit for climate-friendly investments as well as potential supervisory findings for inadequate risk management. Although this move has no bearing on the federal Community Reinvestment Act (CRA), it could be a bellwether for potential future policy change as the Fed and FDIC continue their modernization efforts. The OCC finalized its CRA reform shortly before the departure of former Comptroller Joseph Otting, but considering the recent change in administration and the significant opposition to the rule from Congressional Democrats, a new Biden-appointed Comptroller is likely to revisit the rule and could take the NYDFS’s example into account. In addition, other state regulators with similar community reinvestment mandates may also take notice and follow New York’s lead. Institutions have already been exploring and making climate-friendly investments as a strategic priority and will now have additional regulatory wind in their sails.

Crypto receives more mainstream acceptance and regulatory attention

This week saw a number of developments in the cryptocurrency space as the market continues to receive increasing attention from mainstream industry participants and regulators. Yesterday, the Bank of New York Mellon (BNY Mellon) announced the formation of a new Digital Assets Unit. According to the press release, the unit is developing the industry's “first multi-asset digital custody and administration platform for traditional and digital assets.” BNY Mellon plans to offer services to hold, transfer and issue digital assets later this year, pending regulatory approvals. Crypto also edged further into the payments space, with several payments players announcing plans and partnerships. One payments processor explained that when considering whether to support particular currencies it will look at the following four factors: 1) consumer protections, including privacy and security; 2) compliance with regulatory expectations, including Know Your Customer (KYC) requirements; 3) adherence to local laws in the regions they are used; and 4) the stability needed for payments rather than investments.

Meanwhile, at the Treasury Department’s Financial Sector Innovation Policy Roundtable, Treasury Secretary Janet Yellen expressed concern that cryptocurrencies are being misused for money laundering and terrorist financing activities. She also expressed her support for the use of innovation to help prevent and detect these activities. Her comments come one week after the United Nations Security Council released a report on terrorist financing including information on how cryptocurrencies are being misused to fund terrorist groups and follow recent actions highlighting the use of cryptocurrency by North Korea and Venezuela to evade sanctions. 

Our take

The world of cryptocurrencies continued down the path of mainstream acceptance this week as some of the largest participants in the financial ecosystem announced their plans to become involved with the growing market. For large institutional investors, BNY Mellon’s announcement is a welcomed and much-anticipated move towards more broad adoption of cryptocurrencies following the OCC’s statement last year that banks are permitted to provide crypto custody services. The announcements from payments services also reflect this entry into the mainstream, but they also come with noteworthy expectations that highlight the high bar cryptocurrencies must pass before being accepted for wide-reaching use by regulated entities. In particular, the expectation that cryptocurrencies must offer price stability calls into question the extent to which the largest coins by market cap such as Bitcoin will become fully accepted in the payments space considering their significant price volatility. While this week’s events indicate growing acceptance in the marketplace, public policy concerns around anti-money laundering, terrorist financing and other misuse remain. 

On our radar

These notable developments hit our radar over the past week:

  • OCC publishes LIBOR transition checklist. On Wednesday, the OCC published a self-assessment tool for banks to evaluate their preparedness for LIBOR’s cessation. The tool includes 30 “yes or no” questions on banks’ transition planning, execution of transition plans, fallback language in new contracts, remediation strategy for legacy exposures and oversight and reporting.

Join the conversation: Register HERE for PwC’s upcoming webcast “The Move Away from LIBOR: Bringing non-LIBOR loans to market within the next 300 days” on February 23, 2021.

Subscribe to PwC’s LIBOR Transition Market Update here to read more about these and other developments.

  • Exchanges file suit to halt SEC public market data rule. The New York Stock Exchange and Nasdaq both filed suit against the SEC this week over its December 2020 final rule that would require that the exchanges expand the pricing data available in their public data feeds for national market system (NMS) stocks.
  • SEC restores investigative authority to senior officers. On Tuesday, the SEC announced that it is expanding the authority to issue formal orders of investigation to senior officers. Under the previous Administration, the SEC had restricted the ability to only two officials, claiming it would result in more consistent decisions. 

Contact us

Julien Courbe

Financial Services Leader, PwC US

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