BPInsights: Feb. 1, 2025

Criminals Aren't Stuck in the 1970s. Banks' AML Rules Shouldn't Be, Either

As "debanking" garners public attention, it's time for policymakers to make overdue changes to a regulatory requirement that drives unnecessary account closures: the Currency Transaction Report, or CTR, filed whenever a customer makes a large cash deposit or withdrawal. This outdated requirement should be eliminated in favor of smarter, more modern approaches to identifying financial crime, BPI's Greg Baer and Gregg Rozansky wrote in a recent American Banker op-ed.

• More than obsolete: The $10,000 threshold for filing CTRs has stayed the same since the 1970s ($10,000 in 1972 would be more than $75,000 today), but this half-century-old benchmark is just one symptom of an outdated approach. CTR made sense in the 1970s, but now provide next to nothing of value in the fight against money laundering, terrorism financing and other financial crime.
• Debanking connection: CTRs offer little usefulness and significant opportunity costs, including their role as a precursor to "debanking" honest customers and businesses. These opportunity costs also include wasted resources that could be better spent on detection methods that match the technological sophistication of today's money launderers and drug traffickers.
• Route to reform: Reform is overdue, and was already prescribed by law several years ago in the Anti-Money Laundering Act of 2020, which directed the Treasury Department to adopt rules encouraging innovation, reallocating bank resources away from lower-risk targets and eliminating unnecessary compliance obligations. The act specifically directed Treasury to consider where the CTR framework had been made redundant or obsolete by SAR filing requirements (introduced in the 1990s). Those recommendations were required to be reported to Congress within a year of enactment, but they were never adopted.
• Bottom line: "As Congress suspected, CTRs are no longer "highly useful" but rather are a prime example of government bureaucracy on autopilot, immune from any cost-benefit or common-sense analysis," the op-ed stated. "It is time to shift resources to more sophisticated means of identifying criminal or terrorist activity, and leave honest citizens and businesses out of the crosshairs of a dysfunctional AML regime."

Five Key Things

1. State Bank Groups Express Support for Bowman as Fed Supervision Chief

A coalition of state banking associations representing banks in all 50 states plus Puerto Rico expressed support for Federal Reserve Governor Michelle Bowman to be elevated to the Vice Chair for Supervision position at the central bank. "Having already been confirmed by the US Senate, Governor Bowman can immediately step into the role of Vice Chairman and be effective on an acting basis from day one," the banking groups wrote in a letter to Treasury Secretary Scott Bessent. "We have great confidence in her ability to serve in this capacity and strongly recommend the President nominate Governor Bowman for a full term as Vice Chairman for Supervision."

• Recent remarks: Bowman reiterated her call for pragmatic and transparent regulation in a speech on Friday. Bowman called for greater transparency and efficiency in supervision, expressed concern about uncertain regulatory expectations and pointed to long and uncertain approval timelines for bank M&A. She called for regulators to focus on payment fraud. She also said that "the banking agencies' climate-related financial risk guidance arguably pushes the boundaries of appropriate regulatory responsibilities", and cautioned that banking regulators should not "be used to limit or exclude access to banking services for legitimate customers and businesses in a way that is meant to further unrelated policy goals".

2. CRS Report Provides Regulatory Context to Account Closures

The Congressional Research Service this week published a report titled "De-Banking/De-Risking: Issues for the 119th Congress," outlining the regulatory issues that may drive customer account closures. The report described the Bank Secrecy Act and other anti-money laundering requirements, noting that banks can face severe penalties if they violate these requirements. It also delved into the concept of "reputational risk" in bank examination and the history of Operation Choke Point. In addition, the report described potential conflicts between state and federal laws and the potential effects of "de-risking" in the banking system.

3. Bessent Confirmed by Senate

The Senate this week confirmed Scott Bessent as U.S. Treasury secretary in a bipartisan 68-29 vote. In the new role, Bessent will lead U.S. policy on a range of issues, from financial crime prevention to the federal deficit, Treasury market and tax framework.

4. GAO Report Takes Deeper Dive into SVB Systemic Risk Exception Call

The Government Accountability Office recently released a report examining actions by the Federal Reserve, FDIC and Treasury Department to invoke the systemic risk exception to the least-cost resolution test amid the failures of Silicon Valley Bank and Signature Bank in March 2023. This emergency action protected uninsured depositors from losses at the failed banks. The GAO analyzed documentation from the agencies as well as financial market data and conducted interviews with agency staff and academics. The GAO found that, in support of the Fed and FDIC's decision to invoke the exception, the agencies cited continued deposit outflows that could have "impair[ed] the banks' ability to meet depositor demands or payment obligations to creditors". Treasury reviewed and analyzed public financial filings data and considered the views of external parties, such as asset management firms. The GAO said that the FDIC's actions "likely helped prevent further financial instability," although it acknowledged it is impossible to know how economic indicators would have performed without the systemic risk exception. In particular, the Federal Reserve's Bank Term Funding Program coincided with the systemic risk exception and GAO said it is impossible to separate the impact of the SRE from that program.

5. EU Under Pressure to Adjust Regulatory Approach Amid Competition Concerns

The European Union is facing pressure from business groups and national governments to temper sustainability rules, according to the Financial Times this week. Energy industry companies have decried complex, vague definitions and unclear reporting scopes and disclosure requirements in forthcoming climate rules. Some observers have raised concerns about European competitiveness in the global economy. Countries such as France and Germany have also called for caution and delay in climate directives.

• Competitiveness: In other news, the European Commission this week released a "Competitiveness Compass for the EU" charting reforms that could strengthen the Continent's competitive position in the global economy. The document, which referred to Mario Draghi's assessment of Europe's competitive position in the so-called Draghi Report, sets out measures that the EU can take to boost growth and solidify competitiveness, including supporting innovation, removing barriers within the single market, promoting high-quality jobs and strengthening coordination at the EU and national level. It also calls for Europe to "confront other potential brakes on its competitiveness. The transition to a decarbonised economy must be competitiveness-friendly and technology neutral, while the shift to cleaner sources of energy must reduce energy costs and price volatility. EU regulation must be proportionate."

In Case You Missed It

UK Officials Tout Growth Plans, Flag Capital Rules Delay

As UK Chancellor of the Exchequer Rachel Reeves outlined plans to boost British economic growth this week, Bank of England Governor Andrew Bailey noted the need to achieve financial stability goals while supporting growth and competitiveness. "Financial stability is a foundation for growth. There isn't a trade off in a fundamental sense," he said in remarks this week. "Having said that, there are choices to be made about the particular choice of regulatory instruments and how regulation is operating to enable us to achieve the primary objective of financial stability, while also supporting the growth and competitiveness objective."

• Basel delay: Bailey called for agreement on the Basel capital rules in the future, saying "We have delayed that because of the uncertainty from the U.S. angle because there's a competition issue." He said he was "optimistic" on the prospect of future agreement and said the new U.S. administration needs time to get into place.

• Reserves: Bailey discussed the Bank's plans to unwind reserves accumulated through the quantitative easing process. "We talk to the banks a lot about it, they give us numbers which are in the range of £400bn to £500bn - but we don't precisely know and it can change over time," he said.

BoE Opens Nonbank Repo Facility

The Bank of England recently finalized the Contingent Non-Bank Financial Institution Repo Facility (CNRF) for applications. The facility would be made available when necessary to address future episodes of gilt market dysfunction arising from liquidity shocks among nonbanks.

The Crypto Ledger

Here's what's new in crypto.

• Central banking and crypto: Czech central bank chief Aleš Michl wants to invest a portion of the country's reserves into bitcoin as a means of diversification. The Czech National Bank could eventually hold as much as 5 percent of its billions of euros in reserves in bitcoin if Michl's plan is approved by the central bank's board, according to the Financial Times.

• CFTC roundtables: Acting Commodity Futures Trading Commission Chair Caroline Pham has launched a new series of public roundtables on "evolving trends and innovation in market structure," including digital assets issues. Pham recently made significant changes to the agency's senior staff, including the selection of former DOJ prosecutor Brian Young as acting enforcement director, the elevation of Nicholas Elliot to acting legislative affairs director and the installation of Harry Jung as Pham's acting chief of staff. Jung will also lead the CFTC's work on digital assets.

Gunjan Kedia Named as Next U.S. Bank CEO

Gunjan Kedia will serve as the next chief executive of U.S. Bancorp, succeeding Andy Cecere, the bank announced this week. Kedia, currently the bank's president, joined U.S. Bancorp in 2016 and previously served in executive positions at State Street Financial and BNY. She is expected to assume the new position in mid-April.

BPI Job Bank

• Vice President, Creative Director
• Junior Event Planner & Administrative Coordinator

Upcoming Events

• 2/5/2025: Senate Banking Committee hearing on "Investigating the Real Impacts of Debanking in America"
• 2/5/2025: House Financial Services Committee hearing titled "Make Community Banking Great Again"
• 2/6/2025: House Financial Services Oversight and Investigations Subcommittee hearing: "Operation Choke Point 2.0: The Biden Administration's Efforts to Put Crypto in the Crosshairs"
• 2/27/2025: Columbia University SIPA/BPI Bank Regulation Research Conference

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