Crypto, CRA, data sharing: Bank regulators’ ambitious priorities for 2022

Crypto, CRA, data sharing: Bank

regulators’ ambitious priorities for 2022

This year we might see a big overhaul in the crypto world as the federal financial regulators are geared up towards reshaping several banking rules and create some others.

We all know that our congress is deeply divided on this issue, which means oversight of this new world of digital assets remains lacking. In absence of congressional actions, the federal financial regulators are moving quickly to provide the much needed oversight. First, we see the financial watchdogs provide guidance on the digital currencies. Furthermore, they’ve also seen these bodies strictly scrutinize bank mergers and finally modernizing the Community Reinvestment Act.

But what’s the agenda here? Well, despite the heavy backlash from the industry players, regulators are seeing this as a unique opportunity to fulfill the current administration’s liberal agenda. Before long, the regulators will begin planting new democratic appointees just to ensure that and perhaps leave their mark while at it. The current Federal deposit insurance Corp chairperson Jelena McWilliams who by the way was appointed by the Trump’s Administration stepped down last month leaving full control of the Agency to Democrats. Meanwhile, it is worthwhile noting that the Consumer Financial Protection Bureau and the Comptroller of the Currency are all headed by democrats. As if that’s not enough, President Biden recently released three nominations to fill out the gaps in the Federal Reserve Board.

One of the issues the Fed has been trying to explore at deeper lengths is the possibility of a central bank digital currency and whether the idea is feasible (even remotely). On the issues to do with mergers and acquisitions, some of the regulators are looking for thorough consideration of the impact this would have on the community and also a systemic risk assessment when weighing applications for larger deals. And this is not as simple as it may sound, some of these dealings have chilling effects on combinations involving large regional banks which makes sense why the financial watchdogs are interested. In addition to that, the regulators are also interested in laying the groundwork to update CRA rules especially given the rise of digital banking, possibly to give consumers more control over their personal financial data.

Some of the issues the regulators will be looking at include;

There has been some push and pull relationship between the bank regulators and congress about this issue. Congress is looking for a way where bank regulators could impose more stringent rules to manage the financial risks of the emerging cryptocurrencies and stablecoins. In November last year, the regulators issued a report which highlights how helpful it would be if congress was to introduce a regulatory framework for the digital assets. To that effect, congress remains utterly uninterested in coming up with crypto legislation anytime in the near

future (or at least it looks that way) which leaves the matter in the hands of the regulators.

But away from the recommendations of the Regulators in the November report, it would seems that they have so far taken a more disparate approach to the future of crypto regulations. Jerome Powell, the Chair of Federal Reserve has sought to assure congress and the private sector that the Fed will not ban crypto outright and that the Fed is proactively looking for possible ramifications of an official ‘digital dollar.’ Meanwhile, at the Office of Comptroller of the Currency, the acting Comptroller Mr. Michael Hsu has on several occasions discussed the potential risks that crypto poses for the national banks. In November last year, the OCC released an interpretive letter to the banks instructing them not to engage in any crypto-related activities without a ‘written notification’ of the OCC supervisory office’s nonobjection.”

In the end of it all, whether Congress flexes its muscles first or the regulators, banks hope that there will be an initial guideline and guardrails for the crypto activity. FDIC has a big influence in determining what the guidelines will look like. Jelena’s tenure was marked by a friendliness approach to innovation and actually in November she alluded that the agency is looking for ways to cover the stablecoins. But now that Democrats are poised to take on the agency, it is unclear the direction they will take.

COMMUNITY REINVESTMENT ACT REFORMS

We’ve talked about CRA before and it looks like we are not going to stop any time soon. CRA is a complicated reform that has taken year in formation and right now it’s on a bumpy ride. Under Trump’s administration, the former comptroller, Joseph Otting, was instrumental in pushing for an anti-redlining law that directs banks to provide a certain amount of lending, investment and services in low to moderate income communities. However, even before the efforts took hold, they collapsed after community groups, lawmakers, civil rights organizations and banks objected to the changes proposed by Otting without other bank regulators on board.

The CRA rulemaking process has since been restarted by Biden regulators who have committed to an interagency approach to reform. This reform push has been led by the Fed Gov. Lael Brianard who was very critical to the Otting led approaches.

It is likely that the modernization effort will look like the current framework. According to a policy outline released by the Fed in September 2020, banks would be subjected to separate tests to evaluate their performance in retail lending and community development and to also rely on existing data sources like the U.S. Census Bureau data and the Home Mortgage Disclosure Act. Unsurprisingly, the challenges Biden-Era policymakers will face are the same challenges Trump’s administration faced: reshaping the law’s obligations to account for the rise of digital finance. Since the Bank’s CRA are much more concentrated in areas where the bank has branches which by the way continue to dwindle in number, regulators have sought to be more flexible about where banks can meet their obligations.

Allowing banks to receive the CRA credit for the activities done outside their branch based assessment areas could open doors to historic investment in places largely without bank branches including poor, rural communities. But, regulators are afraid that too much flexibility in where the banks can receive credit could lead large swaths of the industry to pursue CRA projects where they’re most profitable, rather than being obligated to give back to their local communities.