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

Federal financial regulators are preparing to dramatically reshape several major banking rules and create others, filling the policymaking void left by a bitterly divided Congress.

In the absence of congressional action, they’re moving quickly on a number of fronts, from providing guidance on digital currencies to more strictly scrutinizing bank mergers to modernizing the Community Reinvestment Act. Regulators in some cases are seizing the opportunity to fulfill the Biden administration’s liberal agenda even in the face of massive pushback from industry.

The top financial regulatory agencies have, or will soon have, new Democratic appointees eager to make their mark. Once Federal Deposit Insurance Corp. Chair Jelena McWilliams, a Trump administration appointee, steps down in February, Democrats will fully control the agency’s board. The new director of the Consumer Financial Protection Bureau and the acting comptroller of the currency are Democrats, too. Meanwhile, President Biden recently announced three nominations to fill out the remainder of the Federal Reserve Board.

One of the highest–profile efforts is the Fed’s exploration of the feasibility of a central bank digital currency. Regarding mergers and acquisitions, some regulators want more thorough consideration of community impact and systemic risk when weighing applications for larger deals — the very threat of which could have a chilling effect on combinations involving big regional banks. In addition, regulators are plowing ahead to update CRA rules in light of the rise of digital banking, establish rules around climate-change risk and give consumers’ more control of their personal financial data.

Here is a look at the issues regulators are seeking to address this year.

Stablecoins and crypto regulation

Congress has dragged bank regulators to Capitol Hill more than a few times over the past several months to press them on the financial risks of emerging cryptocurrencies and stablecoins. Regulators, for their part, issued a report in November noting how helpful it would be if Congress introduced a regulatory framework for stablecoins. But there’s little indication that lawmakers will enact significant crypto legislation anytime in the near future, leaving the ball in regulators’ court.

Outside of November’s stablecoin report, federal regulators have taken a disparate approach to the future of crypto regulations so far. The Federal Reserve, led by Chair Jerome Powell, has largely sought to assure Congress and the private sector that the agency would not ban crypto outright, and the central bank has only recently begun exploring the potential ramifications of an official “digital dollar.” At the Office of the Comptroller of the Currency, acting Comptroller Michael Hsu (a former Fed official) has frequently discussed the potential risks that crypto poses for national banks and in November issued an interpretive letter instructing them to “not engage” in crypto-related activities without “written notification of the OCC supervisory office’s nonobjection.”

Eventually, many banks hope that regulators will come together to develop initial guidelines and guardrails for crypto activity. The Federal Deposit Insurance Corp. may have a big hand in determining what that guidance will look like. Jelena McWilliams’ tenure as FDIC chair was defined in part by a friendliness to innovation, and in November she told reporters the agency was actively exploring whether stablecoins could be covered by deposit insurance. But with McWilliams on her way out and Democrats poised to run the board, it’s unclear what the agency's approach to the subject will be.

Merger reviews

Tougher scrutiny of bank mergers has been a top priority for the White House since July, and Democrats’ assumption of control of the federal banking agencies means that effort will likely influence banking policy.

Advocates on the right and left have urged the federal regulators for years to update the process that they use to evaluate the impact of a potential bank merger. While the financial services industry has asked that the antitrust analysis of their potential deals better incorporate the competition posed by credit unions and fintechs, progressives have argued that current merger review is far too lenient and fails to account for community access to credit as well as what risks a merger may pose to the financial system’s stability.

Biden’s financial regulators have already taken their first steps towards introducing stricter review for bank mergers. In December, the three Democrats on the board of the Federal Deposit Insurance Corp. announced they had voted to issue a request for information on bank merger policy, setting up a power struggle with Chair Jelena McWilliams that culminated in her resignation.

Come February, Democrats will have free rein over the FDIC’s policymaking and be able to officially publish that request for information, which some analysts expect will result in new policies that make it more difficult for banks — particularly large regional banks — to merge with one another or with their fintech competitors.

In a blog post published in December, shortly after the request for information became public, Consumer Financial Protection Bureau Director — and FDIC board member — Rohit Chopra asked how bank regulators should “review a merger’s impact on families and businesses in local communities” and asked whether banks that “routinely violate consumer protection laws” should be allowed to acquire other banks.

Chopra also pointed to a novel statutory requirement in the Dodd-Frank Act that bank regulators must assess mergers for potential financial stability risk — a requirement that Chopra and other progressives say has never been implemented into a rule. “Should we create more clarity and simplicity in the merger review process by establishing thresholds where banks of a certain size will receive heightened scrutiny?” Chopra asked.

Climate-change risk

Regulatory efforts to address the financial system’s vulnerabilities to climate change are expected to accelerate this year.

Since the Biden administration took office, early discussions about those risks have coalesced into new efforts to start sizing up the potential financial impacts of them.

The Securities and Exchange Commission is working on a climate-risk disclosure rule for publicly traded companies. And the Office of the Comptroller of the Currency recently outlined its expectations for how national banks with over $100 billion of assets should manage climate risk. In draft principles released in December, the OCC recommended that banks identify relevant climate risks for their organization and incorporate those risks into internal risk management processes.

Among other steps, the agency also recommended that those banks make sure their boards are educated on climate risk and that they adopt climate-related scenario-analysis frameworks. Crucially, the OCC distinguishes climate-risk scenario analysis from more traditional stress testing intended to gauge short-term capital adequacy. In the context of climate risk, scenario analysis is meant to help banks better understand how various types of climate risks will affect their portfolios and business strategies in the long term.

Federal Reserve Gov. Lael Brainard has said the central bank is exploring scenario-analysis exercises, but a recent nomination at the Fed could also accelerate the dialogue around climate risk and capital rules. Sarah Bloom Raskin, a former Treasury Department official and Fed governor during the Obama administration, was recently nominated by President Biden to be the Fed’s next vice chair of supervision. Favored by progressives, she has taken a keen interest in climate change and its impact on risk management since leaving government.

While it’s not clear yet what the next steps will be, many of the very biggest banks have voluntarily released their own initial climate-risk disclosures, and some experts have called on the industry to take a proactive approach.

CRA reform

A complicated reform years in the making, the effort to modernize the Community Reinvestment Act has been bumpy. Under the Trump administration, former Comptroller Joseph Otting led the push to update the anti-redlining law that directs banks to provide a certain amount of lending, investment and services in low-to-moderate income communities. But the effort collapsed after community groups, lawmakers, civil rights organizations and even some banks objected to the far-reaching changes Otting proposed without other bank regulators on board.

The rulemaking process has since been restarted by Biden-era regulators, who have committed to an interagency approach to reform. The new CRA reform push has been led primarily by Fed Gov. Lael Brainard, who had strongly criticized the approach taken by Otting.

Analysts now expect the modernization effort will largely resemble the current framework: a policy outline released by the Fed and Brainard in September 2020 would continue to use separate tests to evaluate banks’ performances in retail lending and community development and to rely on existing data sources like U.S. Census Bureau data and the Home Mortgage Disclosure Act. Moreover — like the OCC’s original reform — it is expected to include a list of activities that most often qualify for CRA credit.

But the core challenge for Biden-era policymakers remains the same as under Trump: reshaping the law’s obligations to account for the rise of digital finance. Because a bank’s CRA obligations are currently organized around where the institution has branches, which continue to dwindle in number, regulators have sought to be more flexible about where banks can meet their obligations.

Allowing banks to receive CRA credit for activities outside of their branch-based assessment areas could open the door to historic investment in places largely without bank branches, including poor, rural communities. But regulators also fear that too much flexibility in where 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.

Consumer data access

The Consumer Financial Protection Bureau is working to fundamentally change the way consumers’ financial data is being accessed and used in the digital economy.

CFPB Director Rohit Chopra is in charge of enacting a rule that would address consumers’ right to control their own financial data, mandated by section 1033 of the Dodd-Frank Act. The rule would create data security and privacy standards that would allow consumers to give third-party companies access to their bank transaction data.

But the rulemaking is complicated and contentious because it potentially could result in data aggregators and nonbank fintech firms coming under the CFPB’s supervision. The rule would address the ability of aggregators and other fintechs to obtain consumers' bank account data through screen scraping and application programming interfaces.

Separately, Chopra has taken an expansive view of the bureau’s role in regulating the largest technology companies. He made waves in October by demanding that six large tech firms — Amazon, Apple, Alphabet’s Google, Facebook, PayPal and Square — turn over extensive information about their payments products and practices.

Congress has been pushing for years to rein in the power of Big Tech giants. A half dozen antitrust bills have been proposed to prevent tech platforms from favoring their own products or services, among other issues, but it is unclear given the current political climate if any bills will pass before the midterm elections.

Some lawmakers have lamented the fragmented regulatory framework when it comes to consumer privacy and data protection. Several existing laws already address consumer privacy but technology has moved faster than regulators can keep up.

In the meantime, the CFPB is widely expected to team up with the Federal Trade Commission and other regulators to address what it deems to be anti-competitive practices of Big Tech companies that harvest, track and monetize data about consumers’ spending habits. The CFPB also is looking at how data is used as a surveillance tool to target consumers through advertising.

Chopra’s view of Big Tech stems from his former role as an FTC member, where he routinely criticized the business practices of Facebook, Amazon and others. He is widely expected to issue enforcement actions and use his bully pulpit to call attention to unfair or anticompetitive practices of Big Tech.