BPInsights: March 29, 2025

Trio of Financial Policy Nominees Faces Banking Panel Hearing

Three notable financial policy nominees - Paul Atkins (SEC), Jonathan Gould (OCC) and Luke Pettit (assistant Treasury secretary for financial institutions) - testified at a Senate Banking Committee nomination hearing on Thursday. Here are some highlights.

• Bank supervision: Sen. Thom Tillis (R-NC) asked Pettit and Gould about the assertion that Silicon Valley Bank's failure was enabled by the S. 2155 tailoring law. "SVB's failure was a managerial and supervisory failure, not a regulatory or legislative one," Pettit said. "What it should inform us is to reassess the resource deployment that these on-site teams have been engaged in. No part of 2155 instructed … SVB's regulators to assign the highest liquidity ratings to the firm." Gould agreed and said the SVB episode indicates "a failure to focus on the material financial risks embedded with that bank's balance sheet and its unique business model."
• Account closures: In response to Banking Committee Chair Tim Scott (R-SC), Gould expressed support for removing reputational risk from bank examination, a key tenet of Scott's recent FIRM Act legislation. "I applaud the Committee's efforts to shine a spotlight on what has been going on for a while," Gould said regarding account closures. Gould committed to addressing the issue in his work at the OCC. In response to Sen. Tillis, Gould said "too often, reputation risk is used as a pretext for other motives." He added that "the regulators have at their disposal other forms of more easily quantifiable and just better understood, more precise, more objective terms, including litigation risk, BSA/AML compliance risk."
• Regulator coordination: Pettit responded to questions from Sen. Catherine Cortez Masto (D-NV) about recent remarks by Treasury Secretary Bessent recommending coordination among financial regulators. Pettit suggested the intention of those remarks was to avoid uncertainty and inconsistency among different regulatory agencies, "so the institutions that are supervised by multiple federal regulators aren't torn between conflicting guidance." He affirmed his support for the independence of regulatory agencies.
• GFC perspective: A focus on the wrong risks emerged as a theme again when Sen. Raphael Warnock (D-GA) asked Atkins to reflect on the factors behind the Global Financial Crisis. "I think focusing on the wrong things was what helped to create that crisis, being distracted by ancillary issues and not focused on what's really important to the marketplace," Atkins said.
• SEC reform: Scott asked Atkins about how the SEC can return to its core capabilities after significant challenges. "I commit to get to work, if I'm confirmed, to try to make sure that we increase the morale of the agency, that we cure some of the dysfunction that that's there, the demoralization of it, and get back to work and get back to basics, back to its mission," Atkins responded.
• Other topics: Atkins also faced questions about various other topics such as the Consolidated Audit Trail, rules involving Chinese stocks, private credit and supporting capital formation.

Five Key Things

1. Myth vs. Reality: Bank Supervision

Bank supervision is a regime whereby over 5,000 government examiners oversee every aspect of bank operations - all outside of public view. In theory, supervision is meant to ensure that banks remain in safe and sound condition, but in practice, supervision has moved toward operational control of our nation's banks. Reforming that regime would allow banks to serve customers and communities more efficiently and support economic growth. This fact sheet explains some misperceptions about bank supervision and the contrasting reality.

2. SEC Ends Defense of Climate Disclosure Rule

The SEC this week ended the legal defense of its climate risk disclosure rule, marking a significant reversal of a policy that sparked stakeholder backlash from multiple sectors of the economy. Acting SEC Chair Mark Uyeda referred to the rule as "costly and unnecessarily intrusive." The rule was approved last year and faced intense pushback, including an immediate legal challenge.

3. Report: Treasury Eyeing Regulatory Streamlining, Supervision Checks

The U.S. Treasury Department is drafting recommendations for how to streamline the banking agencies, Semafor reported this week. Efforts to streamline, rather than structurally consolidate, the agencies have emerged "after concluding that the agencies and their workers likely can't be merged without a green light from Congress," according to the article. Treasury Secretary Scott Bessent recently called for a refocus in bank supervision on material risks rather than process box-checking. Additional banking policy influence from Treasury could come from its role heading the Financial Stability Oversight Council, according to Semafor.

4. Trump Issues Order to Modernize U.S. Payments

U.S. President Donald Trump this week issued an executive order directing the federal government to transition to electronic payments and move away from paper checks. "This order promotes operational efficiency by mandating the transition to electronic payments for all Federal disbursements and receipts by digitizing payments to the extent permissible under applicable law (but not, for avoidance of doubt, to establish a Central Bank Digital Currency)," the executive order stated. The order laid out a handful of exemptions to the policy, including national security or law enforcement exceptions or payments to individuals without a bank account.

5. BoE Launches 2025 Stress Test

The Bank of England on Monday announced its capital stress test for 2025. The test will subject the seven largest UK banks to a hypothetical stress scenario, which will be used to assess their resilience to a range of shocks such as recessions, drops in asset prices and higher global interest rates, similar to the U.S. stress tests administered by the Federal Reserve. The test includes three elements: a macroeconomic scenario, a financial markets and traded risk scenario and a misconduct stress (a shock involving high costs for enforcement actions). In contrast to the US, where the results of stress tests are used to set Pillar I requirements, the UK stress test results are used to inform the setting of capital buffers for the UK banking system and individual participating banks.

• What's new: The most significant change this year is the removal of adjustments to capital hurdle rates, which were originally intended to offset the impact of IFRS 9 - an accounting standard similar to CECL in the U.S., which dictates when banks can set allowances for expected loan losses. Instead, the BoE made adjustments to the macroeconomic scenario to delay the peak in the unemployment rate, GDP and property prices, allowing some credit losses to be recognized later in the projection horizon. This modification effectively neutralizes the effects of IFRS 9, which had caused banks to front-load loan loss provisions and face more severe stress tests. In addition, the BoE also indicated that it expects to reduce the overlays it will apply to banks' own submission of consumer credit losses in the 2025 Bank Capital Stress Test compared to past exercises.

In Case You Missed It

Federal Banking Agencies Announce Plans to Rescind 2023 CRA Rule

The Federal Reserve, the FDIC and the OCC announced on Friday that they would rescind the 2023 Community Reinvestment Act final rule and reinstate the prior framework. BPI issued this response to the announcement:

"Today's sensible action signifies a welcome return to the longstanding approach to the CRA. The 2023 rule went beyond the statute set by Congress and risked exerting undue influence on how banks allocate credit and undermining the goals of the CRA. We are encouraged by the decision to rescind the flawed 2023 rule."

FDIC's Hill Previews Supervision Overhaul

Acting FDIC Chair Travis Hill outlined a forthcoming revamp to the agency's supervision approach in a recent to Rep. Dan Meuser (R-PA), who had called for FDIC action to prevent unnecessary bank account closures. Hill laid out steps that the agency is taking or considering to improve supervision. One step: eliminating "reputational risk" from the FDIC's supervisory approach. Hill said the FDIC is working on a rulemaking to ensure supervisors do not use the concept as the basis for examination criticisms. "While a bank's reputation is critically important, most activities that could threaten a bank's reputation do so through traditional risk channels (e.g., credit risk, market risk, etc.) that supervisors already focus on," Hill wrote.

• Need for reform: More broadly, Hill expressed support for the need "to reform our supervisory approach to focus more on core financial risks and less on process, administration, and documentation, and to apply clear and consistent standards to supervised institutions." Such reform would involve policy changes to CAMELS ratings and the FDIC examination manual, as well as shifts in examiner training and changes in tone from agency leadership.
• Account closures: Hill also pointed to a key tension in bank regulation related to account closures: the inability for banks to share why an account has been closed. "[I]t is worth exploring ways for financial institutions to provide explanations to a customer in the event of an account closure." Hill noted the disclosure limitations imposed by the Bank Secrecy Act. "To the extent Congress considers amendments to the BSA more broadly, I believe these statutory provisions may worth be revisiting."
• Digital assets: Hill previewed a "new direction on digital assets policy" that reverses the FDIC's previous overly restrictive posture on blockchain technology. The FDIC is working to provide a pathway for banks to "engage in digital asset- and blockchain-related activities while still adhering to safety and soundness principles," he said.

The Crypto Ledger

Here's the latest in crypto.

• House stablecoin bill: House lawmakers released a bill on stablecoin regulation, known as the STABLE Act and led by Reps. Bryan Steil and French Hill. The Senate advanced its own stablecoin legislation through the Banking Committee two weeks ago. The House bill, which the House Financial Services Committee is expected to mark up on April 2, prohibits issuance of stablecoins by any entity that is not a permitted stablecoin issuer and sets out limits on these firms, such as capital requirements, a ban on paying interest and mandates to maintain reserves. It also lays out requirements for supervision and examination, including for nonbank stablecoin issuers. An important consideration in stablecoin legislation is whether nonbank stablecoin issuers would have access to Federal Reserve master accounts and therefore the federal payments system.
• Custodia stablecoin: Custodia, a Wyoming-based crypto depository institution that filed a lawsuit over Fed master accounts, has collaborated with Texas-based Vantage Bank to issue what the firms are calling "America's first bank-issued stablecoin." This week, the firms completed the first tokenization of a bank's U.S. dollar demand deposits on a permissionless blockchain by issuing, transferring and redeeming Avit stablecoins for a bank customer, they announced.
• Ripple effect: Crypto firm Ripple neared a legal victory this week in the form of a settlement proposal that would have the SEC return $75 million of a $125 million fine the firm paid last year. The proposed settlement is still subject to commissioner and court approval. It comes a week after the SEC agreed to drop its appeal of a lower court ruling in favor of Ripple. The regulator had accused Ripple of violating securities laws in its sales of the XRP token.

Senate Passes Bill to Invalidate CFPB Overdraft Rule

The Senate this week passed a Congressional Review Act bill to overturn the CFPB's rule limiting large bank overdraft fees to $5. A House companion measure is awaiting a vote. The bill cleared the Senate on a 52-48 vote. The overdraft rule, issued under former CFPB Director Rohit Chopra, faced opposition that included a court challenge.

Treasury's Faulkender Confirmed by Senate

The Senate this week confirmed Michael Faulkender as Deputy Treasury Secretary in a vote of 53-43. Faulkender has served as a finance professor at the University of Maryland and was Treasury's point person for the COVID-era Paycheck Protection Program, which offered loans to small businesses in the pandemic.

The Latest on CFPB's Section 1033 Rule

A fintech trade group this week revived a request to defend the CFPB's Section 1033 data sharing rule from a challenge by BPI and co-plaintiffs. The Financial Technology Association argued that "[t]he recent steps taken by the Consumer Financial Protection Bureau, including agreeing to toll the compliance deadlines of the rule for 30 days and requesting an additional tolling period of 60 days, make clear that the CFPB cannot adequately represent FTA's interests." The CFPB had reached an agreement with BPI and its co-plaintiffs to delay the rule's implementation while the litigation proceeds.

House Panel Considers 'New Era' for CFPB

The House Financial Services Subcommittee on Financial Institutions this week held a hearing titled "A New Era for the CFPB: Balancing Power and Reprioritizing Consumer Protections." Republican lawmakers, including Subcommittee Chair Andy Barr (R-KY), heralded a new approach at the consumer regulatory agency under the current administration. Barr referred to this change as "an era where the Bureau's approach is not opaque and abusive, but transparent and fair, an era where those in charge prioritize administrative law over overregulation by enforcement." Democratic lawmakers expressed criticism of the administration's staffing changes at the CFPB. Witnesses at the hearing included credit union executive Ana Fonseca on behalf of America's Credit Unions, former CFPB General Counsel Seth Frotman, attorneys Bryan Schneider and Rebecca Kuehn and the Consumer Bankers Association's David Pommerehn. Topics discussed at the hearing included the CFPB's enforcement authority, civil investigative demands and the CFPB's use of UDAAP authority.

SCOTUS Overturns Ruling on False Statements to FDIC

The U.S. Supreme Court late last week overturned a ruling in the Seventh Circuit that upheld a former Chicago city official's conviction for making false statements to the FDIC about his bank loans. The Supreme Court opinion clarified that the federal law at the heart of the case criminalizes false statements, but not those that are misleading rather than false. The unanimous court opinion referred to Title 18, Section 1014 of the U.S. Code, which prohibits knowingly making false statements. The court remanded the case back to the Seventh Circuit for a jury to determine whether former alderman Patrick Daley Thompson made false statements or merely misleading ones. "Certainly, a statute that criminalizes 'false' statements also criminalizes statements that are both false and misleading, or false statements made with intent to mislead," Chief Justice John Roberts wrote in the opinion. "But the question before us is whether such a statute also criminalizes statements that are misleading but not false. The answer to that question must be no."

Looking Back: Climate and Bank Risk

In 2021, BPI published a note that argued that if bank examiners' work on climate policy was really motivated by concerns about bank safety and soundness, they would be recommending that banks hold a diversified portfolio of green and brown firms. The fact that examiners were telling banks to invest in green firms but not brown firms demonstrated that the examiners (and their agencies) were really motivated by a desire to fight global warming. The note also pointed out that green firms appeared to be experiencing a bubble. Any regulatory guidance on green vs. brown firms in bank portfolios should be based on risk data rather than untested assumptions, the note recommended.

• Key quote: "To the extent that banking regulators are focused on financial risk, these results suggest caution about constructing scenario analyses that produce a risk profile at odds with actual performance data. At the least, as these analyses proceed, they should be back-tested against actual performance; to the extent that green portfolios continue to demonstrate high risk, scenario analyses should be reviewed to ensure that they are not biased. If these results persist in further research, bank regulators should perhaps be hesitant to use the examination process to mandate shifts in asset mix for assumed but unproven safety and soundness or financial stability reasons."

• Current state of play: Since the publication of that post, the value of the ETF of brown firms used in the analysis has increased 90 percent. The ETF of green firms that was used has declined 51 percent. (The S&P has gone up 30 percent.)

ECB's Elderson Calls for Regulatory Harmonization

Top ECB official Frank Elderson emphasized the importance of banking system resilience and the need for regulatory harmonization in a recent speech. Elderson, a member of the ECB executive board and vice chair of its supervisory board, framed resilient banks as a competitive advantage, warned against citing competitiveness concerns to justify "watering down regulation" and recommended a focus on harmonizing European rules. "Rather than reducing complexity by lowering regulatory requirements, it would be more effective to achieve simplification through European harmonisation: don't cut rules, harmonise them," Elderson said. Harmonization is key for growth, he noted: "Financial markets would also greatly benefit from the harmonisation of corporate insolvency rules, accounting frameworks and securities laws." The speech offers an alternative perspective amid efforts in Europe and the UK to eliminate overly complex and excessive regulations in order to support economic growth and global competitiveness.

• Status check: Elderson noted that European banks have grown significantly stronger over the past decade, citing a recent ECB statistics release that showcased ample capital and liquidity.

• Fragmented: He pointed to fragmentation among EU national regimes as a "primary root cause of complexity" in regulation. This fragmentation is "often overlooked yet crucially important aspect that has significant simplification potential and does not come at the expense of resilience," Elderson said.

• Need for scale: Elderson noted the need for economies of scale in banking, which enhances efficiency and enables vital investments. "Scaling up would enable banks to arrive at the investment budgets they need for digitalisation and cybersecurity," he said. Such benefits can arrive through M&A.

Upcoming Events

• 4/1/2025: House Financial Services Subcommittee on National Security, Illicit Finance and International Financial Institutions hearing on fraud
• 4/2/2025: House Financial Services Committee markup

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