With next Tuesday’s election looming, financial institutions are closely tracking the polls and assessing what the various outcomes could mean for them. In a crowded Democratic primary, Vice President Joe Biden was considered one of the more moderate candidates and did not have any specific financial services policies on his platform at that time. His campaign eventually released a document containing various policy proposals including establishing a postal banking system, strengthening Dodd-Frank requirements, and creating a public credit rating agency within the CFPB. Meanwhile, President Trump has not included specific financial services policy positions in his campaign but has promised to continue rolling back “wasteful” and “costly” regulations.
Although the spotlight is naturally on who will occupy the White House, the impact of the Presidential election will be influenced by the results of the Senate races as cabinet and senior financial services agency positions are subject to Senate confirmation. This year, 35 Senate seats are on the ballot with Republicans defending 23 of those Senate seats and Democrats defending 12. Democrats need to have a net gain of at least four seats to have a chance of controlling the Senate. All the House seats are up for election but most election models do not expect Democrats to lose their majority.
A Trump victory would likely come with a narrow Republican Senate majority, meaning financial services institutions could expect a continuation of relaxing and tailoring existing requirements. A Biden victory could be limited if Republicans retain the Senate, but even if Democrats win a majority his Administration would not likely make dramatic changes to the current regulatory landscape. Although the Biden campaign’s policy document includes a number of lofty ideas, we instead expect a Biden Administration to focus on incrementally strengthening consumer protection as well as environmental, social and governance (ESG) standards through the financial services agencies. In addition, financial services policy will take a backseat to the tough issues of the day, especially the response to the pandemic. A major part of that issue has been the prospect of a new stimulus and relief package, which would likely be an immediate priority for a Biden Administration but could be difficult to achieve if Congress remains split.
The nature of the ongoing recovery will be significant in determining the position of financial services over the next four years. If financial institutions continue to show strength and ability to lend, even the most vocal bank critics would likely face strong headwinds against unwinding reforms and instituting significant new capital or liquidity requirements. This does not mean that requirements will continue to be eased, nor does it mean that the largest banks will get any significant relief even if President Trump is re-elected. They are continuing to get larger and thus far the regulators have continued to hold them to the highest standards through the behind-the-scenes supervisory process.
See Election 2020: The stakes for financial services for a more in depth look at what we expect from either a second term for President Trump or a Biden Presidency.
Yesterday, the New York Department of Financial Services (NYDFS) 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. Specifically, firms will be expected to incorporate climate change into their enterprise risk management function, including by conducting climate change risk assessments, developing processes to manage these risks, and designating a board member or board committee as well as a senior management function to be responsible for doing so. They will also be expected to develop an approach to climate-related financial disclosures, suggesting that they consider engaging with recognized frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD).
The announcement follows last month’s NYDFS guidance containing similar expectations for insurers. Together, they represent the department’s first major climate change-related actions following the appointment earlier this year of a dedicated Sustainability and Climate Initiatives Director. NYDFS has indicated that it will publish additional detailed guidance and organize a series of webinars to allow industry participants to share their goals, experiences, and lessons learned in their efforts to manage financial risks from climate change.
On the heels of last month’s letter to insurers, this week's NYDFS communiqué is another indication that regulatory authorities are taking the challenge of mitigating climate risk seriously. Financial institutions outside of the insurance sector that took note of last month’s letter will find that these expectations look familiar, but they may have not expected to face them so soon. While there has been an increase in climate change risk disclosures overall, they are often boilerplate and lack the specificity required to meet the NYDFS’s expectations. Considering the numerous risks presented by climate change - including physical, transition, legal, technology and market risks - firms should consider conducting scenario analyses as they work to implement the NYDFS’s expectations.
Going forward, next week’s election could influence the direction of federal climate change policy, with a “blue wave” of Democrats winning the Presidency and Congress potentially leading to new climate-related risk management, disclosure, and even stress testing requirements. In the absence of federal action, state regulators will continue to step in. While the NYDFS is a state regulator, their domain is expansive, overseeing 1,500 banks and 1,800 insurers as well as a host of fintechs and payments firms. With seasoned prosecutor Linda Lacewell at its helm, particularly considering her track record of not being afraid to use her enforcement powers to the fullest extent, it’s clear that financial institutions shouldn’t delay integrating climate-related financial risks any longer. As the NYDFS letter states, “There is no time to wait. Let’s get to work.”
On Tuesday, the OCC issued a final rule clarifying the “true lender” for loans made by partnerships between fintechs and national banks, specifically providing that a bank is the true lender if, on the date of origination, it 1) is listed as the lender on the loan application or 2) provides the funding for the loan. The final rule adds additional clarifications to the earlier proposal, providing that in situations where one organization is listed as the lender and another provides the funding for the loan, the organization listed as the lender will be considered the true lender. In May, the agency finalized a rule codifying the “valid-when-made” principle, which allows nationally chartered banks to transfer loans to other banks and nonbanks such as fintechs even if state interest rate caps would prohibit the transferee from issuing the loan. However, that rule left open the question as to which organization is deemed the “lender” in bank partnerships, with some critics expressing concerns that nonbank lenders could simply use their bank partners as cover in order to avoid state requirements. Earlier this year, a group of 22 state attorneys general and a group of consumer groups sent letters to the OCC urging the agency to reconsider the rule, and in August the attorneys general for New York, California and Illinois sued the agency, claiming that it would allow the federal government to in effect unconstitutionally override state interest caps.
Shortly after his appointment as OCC Acting Comptroller, Brian Brooks explained that the “true lender” rule would contain bright line criteria to determine when fintech-bank lending partnerships are merely “rent-a-charters” used to avoid state interest caps. However, by allowing partnerships to essentially assign banks the “true lender” designation by simply listing their name in the loan application, the proposal appears to be more of a removal of obstacles than an addition of guardrails. Fintech lenders will welcome this straightforward clarification as it provides an attractive path to partner with national banks and avoid complex state-by-state regulations, and banks will welcome the opportunity to expand their lending for Community Reinvestment Act purposes. However, they should not start celebrating just yet. The recent lawsuits from the state attorneys general are just the beginning of the long legal battle that the valid-when-made rule and true lender definition will undoubtedly face, and banks and fintechs may be hesitant to enter into partnerships prior to receiving legal certainty. The rules could also get reversed or scaled back if Biden wins the election, especially if he is able to name a new Comptroller.
These notable developments hit our radar over the past week:
1. Crisis response continues. Over the past week, the federal regulatory agencies continued to take steps to support the economy while Congress remained deadlocked on relief. Specifically:
Today, the Fed updated the loan terms of the Main Street Lending Program (MSLP). Tthe minimum loan size was lowered from $250,000 to $100,000 for three of the lending facilities and fee structure changes were made for loans with a principal amount of less than $250,000. In addition, the FAQs were updated to clarify that Paycheck Protection Program loans of up to $2 million may be excluded as outstanding debt for purposes of determining the MSLP maximum loan size.
Yesterday, the New York Fed released updated FAQs on the Term Asset-Backed Securities Loan Facility.
2. Agencies on operational resilience. Today, the Fed, FDIC and OCC released a paper outlining practices drawn from existing regulations, guidance, statements, and common industry standards to help large banks increase operational resilience.
3. LIBOR Transition. As the official sector continues its various efforts to facilitate the transition away from LIBOR, two items hit our radar this week:
Legislative proposal to address legacy LIBOR exposures introduced in NY. On Wednesday, New York State Senator Kevin Thomas, chair of the state’s Senate Consumer Protection Committee, introduced legislation to address the issue of legacy LIBOR-based contracts without, or insufficient, fallback language. The bill, which is modeled after ARRC’s proposed legislative solution published earlier this year, would provide for a statutory replacement of LIBOR with SOFR, the recommended alternative to USD LIBOR, in such contracts that are governed by New York state law.
FASB issues exposure draft to clarify scope of relief. Yesterday, the Financial Accounting Standards Board (FASB) published a proposed Accounting Standards Update to clarify that contracts impacted by the transition to alternative reference rates would be eligible for certain relief even if they do not reference LIBOR directly. Comments on the exposure draft are due by November 13.
Subscribe to PwC’s LIBOR Transition Market Update here to read more about these and other developments.
4. SEC finalizes framework for use of derivatives. On Wednesday, the SEC voted 3-2 to finalize a framework governing investment funds’ use of derivatives. Under the framework, mutual funds and ETFs will be permitted to enter into derivatives contracts if they adhere to certain conditions such as maintaining a derivatives risk management program and complying with a limit on leverage-related risk.
5. SoFi receives preliminary charter approval. On Wednesday, the OCC granted preliminary approval for fintech lender Social Finance (SoFi) to receive a national bank charter, which would allow it to take deposits, offer loans and provide other banking services directly rather than relying upon banking partners. Its application will still need to be approved by the Fed and FDIC.
Financial Services Leader, PwC US