BPInsights: Jan. 25, 2025

New Era for Bank Regulators Takes Shape As Trump Takes Helm

The future of financial regulation began to shift as the Trump Administration took office on Monday. Here's a rundown of key highlights for banking policy, from executive orders to turnover in agency officials.

• First-week actions: President Trump took a flurry of executive actions on his first days in office, including a freeze on all pending federal rulemakings. BPI expressed support for this rule pause in a statement and said: "The incoming administration should extend its review beyond pending regulations to include policy statements, interpretive rules and agency actions illegally enforced by regulators as binding rules without going through the required notice-and-comment process."
• Treasury: Scott Bessent's nomination for Treasury secretary advanced through the Senate Finance Committee this week. Senate Finance Committee Chair Mike Crapo (R-ID) expressed hope for a floor vote on the nominee in the next week. Trump named David Lebryk as acting secretary for the time being.
• FDIC: Former FDIC Chair Martin Gruenberg resigned the day before Trump's inauguration. Vice Chair Travis Hill took over this week as Acting Chair, outlining priorities for the agency that included reviewing rules to ensure they promote economic growth; adopting an "open-minded" approach to technology and innovation; replacing the FDIC's 2024 M&A policy statement to ensure mergers that satisfy statutory requirements are approved in a timely way; and improving the supervisory system to focus more on core risks and less on process. Hill also previewed the intent to "withdraw problematic proposals from the past three years" such as those on brokered deposits and corporate governance.
• OCC and CFPB: CFPB Director Rohit Chopra remains in his position, although he is widely expected to be dismissed by the President - a prospect that Chopra acknowledged in recent Congressional testimony. Nevertheless, Chopra has been working at breakneck pace after the election, continuing to issue new rules at a frequent cadence. This week, Chopra said in a POLITICO interview that he is "ready to hand off the baton" if President Trump appoints a successor but plans to keep going with business as usual until that time. "I'll keep serving my five-year term until I hear otherwise," Chopra said. The Wall Street Journal Editorial Board questioned why he is still on board, characterizing Chopra's attempts to court Republicans by decrying "debanking" as hollow efforts to ingratiate. The OCC's Acting Comptroller Michael Hsu also remains in his role, although it is not clear how long he will stay under the current administration. Trump's transition team for the OCC is being led by former acting Comptroller Keith Noreika and the former OCC chief counsel Jonathan Gould, POLITICO reported this week.
• Fed: Vice Chair for Supervision Michael Barr has announced he will step down from his supervision post at the end of February, staying on the Fed's board as a governor. In order to replace him, President Trump must either elevate a current governor to the supervision role or wait until there is a governor vacancy. Governor Michelle Bowman has been noted in news reports as a potential candidate for the position.
• SEC: Trump appointed Mark Uyeda as acting SEC chair after previous Chair Gary Gensler departed. The SEC this week rescinded the Staff Accounting Bulletin 121 policy, which precludes banks from holding digital assets in custody. BPI expressed support for this action in a statement. Uyeda this week established a new Crypto Task Force at the agency led by Commissioner Hester Peirce.
• Digital assets: The White House issued an executive order on "strengthening American leadership in digital financial technology" this week. The order aims to promote U.S. growth in digital assets technology, including by supporting the development of "lawful and legitimate dollar-backed stablecoins," protecting and promoting Americans' ability to access open public blockchain networks, "protecting and promoting fair and open access to banking services for all law-abiding individual citizens and private-sector entities alike", providing regulatory clarity on digital assets and blockchain and prohibiting the issuance of a CBDC in the U.S. The order establishes a new crypto-focused council known as the President's Working Group on Digital Asset Markets, housed within the National Economic Council.

Five Key Things

1. What a Recent Bloomberg Editorial Missed About Bank Capital: The Importance of Assessing Risk

A recent Bloomberg editorial ("Fed's Bank Stress Tests Are Facing a Stress Test," Jan. 17) asserts that the Federal Reserve's stress testing regime has provided a false sense of security, stating: "At the four largest US banks, loss-absorbing equity capital as a share of total exposure has declined significantly from its peak in 2017." This assertion fails to acknowledge important changes in bank balance sheets and the level of risk they are taking.

Banks are subject to two kinds of capital requirements: risk-based ratios, which vary the required capital for a given asset with its risk; and leverage ratios, which require the same capital regardless of risk. The former requires a bank to hold less capital for a Treasury security than a subprime loan; the latter requires the same. The editorial ignores the former, and thereby paints a misleading picture.

Read BPI's response to the editorial here.

2. The 10 Bank M&A Policy Reforms We Need Now, and Later

Mergers and acquisitions enable banks to reach more customers, invest in technology and operate at scale. These benefits are conduits to economic growth, efficiency and customer convenience. But current policies governing M&A are riddled with problems - unpredictable processing of merger applications, unjustified roadblocks from bank examiners unrelated to a bank's financial health, poor coordination among agencies leading to unclear rules of the road and rogue policy pronouncements that create subjective new requirements outside the standards enshrined in law.

While data show that banks are much less concentrated than other U.S. industries, bank mergers face unique scrutiny and a complex review process. Here are 10 key reforms that would help address these problems and promote responsible competition in the U.S.

Immediate Priorities:

1. Address real issues, not minor roadblocks. Too often, minor dings from examiners in overbroad "catch all" ratings categories stand in the way of a beneficial bank merger being approved. The Fed should eliminate the minor supervisory obstacles that preclude bank mergers, ensuring that only material problems affecting a bank's finances would prevent deal approval.

2. Coordination is key. Bank mergers face inconsistent guidance on M&A from multiple federal agencies. This exacerbates uncertainty in merger review. The federal banking agencies should coordinate with the Department of Justice on bank merger reform.

3. Rescind bad policy. The FDIC and OCC under the last administration issued policy statements that make bad M&A policy worse by introducing new, subjective standards for merger approval. These agencies should each rescind their policy statements through a transparent notice-and-comment process. Congress should also invalidate them with a Congressional Review Act vote.

Further steps in the right direction, in the medium term:

4. Shed light on supervision: Each of the federal banking agencies should focus supervision on material issues and make both the Large Financial Institution and CAMELS rating systems more transparent and sensible.

5. Modernize guidelines: The DOJ and banking agencies should work together to update M&A guidelines for today's banking landscape: widespread digital banking, proliferation of credit unions and competition from fintechs and other nonbanks.

6. Clearer timelines: The banking agencies should signal their commitment to expeditious timelines and clear expectations for merger review. They should issue a joint statement laying out a 120-day expectation for processing M&A applications.

To learn more about bank M&A reforms that will promote a competitive banking system, including long-term steps policymakers should take, click here. You can also access a one-page version of this blog post here.

3. How Climate Transition Targets Miss the Mark

A common tool in banks' climate transition strategy is to set an emission target - for example, to measure how well a bank's extension of credit aligns with its business strategy for financing decarbonization technologies.

Some regulatory authorities, such as the ECB, view emission targets not just as strategic planning tools, but also risk management tools that protect a bank from the risk that changes in climate policy, regulation or technology will increase the fundamental risk that a bank faces. Emission targets may also be interpreted as a climate policy enforcement mechanism.

Unintended consequences: A new BPI analysis explains how emission targets used as transition risk management tools or climate policy enforcement levers can produce harmful unintended consequences for the economy and financial system.

• Emission targets that commit banks to a coordinated view of the direction and speed of decarbonization can increase risks for individual banks and could increase systemic risk in the financial system.
• Emission targets that function as limits or constraints on bank financing decisions to enforce government decarbonization policies can lead to wasted resources, unnecessarily increased emissions and lower economic growth.

Blind spots: Emission targets used as transition risk management tools can increase risk by assuming that transition risk can only go in one direction, toward more carbonization. In fact, transition risk can go in either direction at different times and in different countries. Making the wrong assumption about transition risk can lead to losses and, if all banks are making the same assumption, systemic risk.

• The rapid shift to a lower-carbon economy will require an unprecedented technological shift and intricate coordination between new technologies that must work effectively together. Treating emission targets as climate policy enforcement mechanisms can jeopardize this delicate balance and reduce economic growth. In some cases, emission targets applied as limits would act as a permanently tight monetary policy, slowing economic growth and restricting credit to companies unnecessarily.

Key steps to avoid unintended consequences: Banks and policymakers should distinguish between emission targets and the management of transition risk. Emission targets should be used as tools to track strategic business goals, and transition risk management should be used to identify, measure and mitigate transition risks that might materialize as financial risks. Public discussion around climate goals should differentiate between binding commitments and strategic aspirations to avoid confusion or misinterpretation of such terms.

4. The Crypto Ledger

Here's the latest in crypto.

• mBridge backlash: Discontent from central bankers regarding the Bank for International Settlements' innovation hub - a think tank focused on technological advancements in central banking - is putting pressure on incoming BIS chief Pablo Hernandez de Cos, according to Bloomberg. Much of the backlash has centered on mBridge, a controversial cross-border payments pilot that sparked concerns about sanctions evasion, according to the article. "Controversy around mBridge - a cross-border payments pilot that the BIS abandoned after it emerged as a potential tool for Russia to evade sanctions - rocked governors' confidence in the hub, one person said. They are also preoccupied with other issues and have less appetite for blue-sky initiatives, according to the person."
• Custodia: An attorney representing crypto special-purpose bank Custodia argued this week that the Federal Reserve rejected the firm's application for a master account because of the lack of a federal regulatory framework for crypto, according to Bloomberg this week. Custodia is disputing a previous court ruling that the Fed has the discretion to grant or deny access to master accounts, a key conduit to the U.S. payments system.

5. President Orders Freeze on Pending Rulemakings

President Trump this week issued a memorandum directing executive branch agencies to freeze all pending rulemakings. The memo also instructed government agencies to immediately withdraw all rules that were sent to the Federal Register but not yet published in it so that they can be reviewed and approved by a department or agency head designated by the President. BPI expressed strong support for this action in a statement. "We strongly support President Trump's decision to pause all pending rulemakings," BPI's Greg Baer said in the statement. "Regulatory actions should be grounded in the law, backed by data and developed through a transparent process that ensures accountability and public input - the foundations of good governance. The incoming administration should extend its review beyond pending regulations to include policy statements, interpretive rules and agency actions illegally enforced by regulators as binding rules without going through the required notice-and-comment process."

In Case You Missed It

Trump Invokes Debanking in Davos Remarks. A Major Cause of Debanking: Supervision

President Trump on Thursday called for a solution to the problem of debanking in remarks at the Davos financial conference. BPI that day also expressed concern about the issue and agreed with President Trump's diagnosis. "Banks are in the business of attracting and retaining customers, and debanking is bad for business," BPI CEO Greg Baer said in a statement. "We agree with President Trump's diagnosis that much debanking occurs as a result of an anti-money laundering and 'reputational risk' regime administered by the federal banking agencies where certain types of customers are designated as 'high risk.' Over 5,000 government examiners administer this regime, and pressure banks to defend retention of any 'high risk' customer and expend extraordinary resources monitoring those accounts. These examiners operate in secret, without checks and balances, and banks that deviate from their directives risk severe fines and penalties. Fix supervision, fix debanking. We look forward to working with the administration to address this problem and enable banks to provide more services to more customers."

UK's PRA, FCA Respond to Starmer on 'Pro-Growth' Policies

Officials from key UK financial regulatory authorities responded to a recent letter from Prime Minister Keir Starmer by affirming their openness to policies that promote economic growth. In his letter in late December, Starmer had laid out his administration's approach to regulation, calling for policies that bolster economic growth. In response, Bank of England Deputy Governor Sam Woods, head of the Prudential Regulation Authority, described actions the BoE is taking or planning to take that aim to boost economic vitality.

• Basel: Woods noted the UK's effort to implement "Basel 3.1," its iteration of the international Basel capital agreement. (The Bank of England last week announced it has postponed the implementation of the rules by one year, attributing the delay to uncertainty about the U.S. adoption of the rule and considerations on economic growth and competitiveness.) In his letter to the prime minister, Woods said there is "scope to tailor the international rules for our market and we have used this scope to make important adjustments … to support competitiveness and growth - with the most material ones being changes to lower capital requirements in order to support lending to SMEs and infrastructure and to support trade finance."
• Other BoE measures: Woods also mentioned the BoE's efforts to review the Senior Managers and Certification Regime, aiming to increase flexibility and streamline the regime. In addition to several measures affecting insurers, Woods noted the BoE's plans to simplify data reporting from banks and to simplify the prudential regime for small banks.
• FCA letter: The Financial Conduct Authority, another major UK financial regulator, also responded recently to Starmer's letter. In the response, FCA Chief Executive Nikhil Rathi outlined pro-growth reforms that his agency is undertaking or considering, including enabling more flexibility in contactless payments, working with the BoE to make the SM&CR more flexible and removing redundant or overlapping standards.
• Growth agenda: Chancellor of the Exchequer Rachel Reeves is also hosting workshops with financial industry participants to discuss ways to grow the economy.

FSB Lays Out 2025 Priorities

The Financial Stability Board issued its 2025 work plan this week. The agenda outlines priorities for the global regulatory consortium, including supporting global cooperation on financial stability; enhancing resilience of nonbank financial intermediation; harnessing the benefits of digital innovation while containing its risks; completing resolution reforms; enhancing cross-border payments and addressing financial risks from climate change.

• In the pipeline: The plan also previewed forthcoming publications that the FSB expects this year. Those publications include the final Format for Incident Reporting Exchange, a standardized template for financial firms to report cyber or other operational incidents; policy recommendations on nonbank financial firms' leverage; a progress report on the climate roadmap; and a report on vulnerabilities associated with AI in finance.

Federal District Court Allows NYAG Wire Fraud Lawsuit to Proceed

A federal judge in New York enabled a lawsuit against Citibank accusing the bank of failing to reimburse customers who lost money to online wire-transfer fraud to move forward. The lawsuit alleged that the bank responded inadequately to customers' reports that scammers stole money by initiating wire transfers from the customers' online bank accounts. One of the questions at the heart of the case is whether all of the components of a transaction conducted by a bank on behalf of a consumer via wire transfer is governed by the Electronic Fund Transfer Act. Citi argued that wire transfers are exempt from the EFTA, but the judge ruled that the relevant exemption is aimed at bank-to-bank transfers only, so it "does not preclude EFTA liability for a fraudulent payment order resulting in a debit from a consumer account in connection with a wire transfer." Citibank could potentially pursue an appeal of the decision.

• BPI's view: BPI expressed support for Citi in the case in an amicus brief. The EFTA expressly does not apply to wire transfers, which are governed instead by Article 4A of the Uniform Commercial Code (UCC), BPI noted in the brief. If EFTA were broadened to include wire transfers, this would result in higher costs for customers and potentially hurt their access to low-cost, convenient instant payments.
• Other context: One notable development associated with the case was the CFPB's highly unusual action - through a blog post by its General Counsel - expressing a view that the EFTA covered wire transfers. "The CFPB has the law wrong here: Wire transfers are excluded from the Electronic Fund Transfer Act," BPI and other trades wrote in a joint statement. "The CFPB cannot reinterpret a statute and reverse decades of settled law in an amicus brief and then use a blog post to suggest that its position is the law. The Bureau is supposed to be educating consumers, not confusing them."

JPMorgan's Dimon: Debanking, Demystified

JPMorgan Chase CEO Jamie Dimon put the issue of "debanking" into context in a recent interview on the Unshakeables podcast. After venture capitalist Marc Andreessen accused banks of debanking crypto firms in a Joe Rogan interview, Dimon said he called Andreessen to explain: "We have not debanked anyone because of political or religious relationships, period. Now, when we debank someone, they often blame that reason, but that's not a reason. We don't bank marijuana companies because there's no federal law around it. … If there's a federal law, we probably would. And we do bank some crypto companies and very carefully." Dimon explained that banks must abide by the Bank Secrecy Act.

• Examiner pressures: Dimon said the pressures of the regulatory and examination regime encourage banks to be very risk-averse. "Where Marc is right is all these examples where they put a lot of pressure on us and they tell us … it's high risk, and if we don't debank someone and something goes wrong, we can pay hundreds of millions [of] dollars of fines," Dimon said. "So, a lot of banks are guessing like, 'We should get rid of these people because we don't get rid of them, we'll be fined.' And you've seen that over and over and over."
• 'Not allowed to tell you': "We're not allowed to tell you why we debanked you," Dimon said. "So, if we think there's a risk of fraud, we think there's a risk of money laundering, if we don't debank you, we'll get in big trouble. There's even a chance that they might be stepping over the line. But you know what? If someone who's innocent and then five years later they're proven guilty, it can cost us a hundred millions of dollars." Dimon suggested this system should change: "I think we should be allowed to tell you. And I think when we report stuff to the federal government should probably know about it, and there should be far cleaner lines about what we have to do and we don't have to do or things like that. So, we've been complaining about this for years. We need to fix it. But it wasn't for all the things that Joe Rogan and Marc Andreessen spoke about."
• Judgment calls: Banks comply with the law, but the law is ambiguous and banks are punished even in hindsight. "We're punished if we make a mistake in our judgment." As "guardians of the financial system," banks play an important role in fighting terrorism, sex trafficking and the illicit financing that supports it, Dimon noted. At the same time, "Banks have to make risk judgments … We need to make judgment calls."

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