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Fed proposes its CRA overhaul; SARs leak may lead to tougher AML laws

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The Fed’s take on CRA

“Following an earlier split between banking regulators,” Federal Reserve governors voted 5-0 Monday “to seek public comment on a broad overhaul to its rules for the Community Reinvestment Act, ” the Wall Street Journal reported. Fed Chair Jerome Powell “said the Fed’s framework would provide greater consistency and clarity in how banks are tested on lending to poorer neighborhoods and would be tailored ‘to local market conditions, including demand and needs, and adjust to structural economic and business cycle changes.’”

“Fed officials suggested their approach would also offer more credit than the [Comptroller of the Currency’s] framework for the number of loans banks provide to retail customers and smaller businesses. Banks wouldn’t get more credit for providing a small number of large loans, they said. Fed officials said they hoped to avoid having multiple sets of rules becoming permanent and that their proposal created an opportunity for a unified standard.”

“The move comes as the Fed is under urgent pressure to craft policies that lift all Americans, and in particular, reduce the long-standing racial gaps that are only widening in the current recession,” the Washington Post said. “Apart from setting monetary policy, the Fed could go further in building a more fair economy through its supervision of banks, which includes the Community Reinvestment Act, economists and lawmakers say.”

The Fed proposal “distances the central bank even further from a CRA rule finalized by the Office of the Comptroller of the Currency in May,” American Banker reports.

Wake up call

Sunday’s “leak of U.S. Treasury Department records on red-flagged financial transactions underscores a message that national security officials, banks and regulators have been sending for more than a decade: Anti-money-laundering rules need to be updated to better disrupt illicit cash flows,” the Journal reports.

“The FinCEN files illustrate the alarming truth that an enormous amount of illicit money is sloshing around our financial system, and that U.S. banks play host and facilitator to rogues and criminals that represent some of America’s most insidious national security threats,” said Elizabeth Rosenberg, a former Treasury sanctions official.

“The leak of more than 2,000 suspicious activity reports relating to more than $2 trillion of transactions has laid bare the extent to which banks are flagging questionable money flows around the world,” the Financial Times said. “The vast majority of the leaked [suspicious activity reports] relate to previously reported scandals and regulatory issues, such as Deutsche Bank’s mirror trading scheme, which laundered $10 billion out of Russia from 2011 until 2015.”

Indeed, “European bank investors shrugged off revelations of possible money laundering,” the Journal said. “The revelations might shock the public, but investors seem more sanguine. Shares in the European banks did drop on Monday morning, some to recent lows. They were only down about as much as their domestically-focused rivals, though.”

“The market’s calm reaction looks reasonable since regulators already knew what the reports said, making it unlikely officials will hit the banks with new penalties or fines for the revelations. That is a crucial difference from other revelations that did surprise officials, such as the 2018 allegations against Danske Bank.”

The leaks show that “banks, for their part, are too slow if not outright negligent in submitting SARs,” a Bloomberg columnist argues. “Having a bigger legal stick with which to whack errant bankers and other enablers would help.”

Financial Times

Doom loop 2.0?

European banks now own about €1.6 trillion of their own governments’ bonds, “a move that could reawaken fears about the sector’s growing stockpiles of risky sovereign debt.” The banks increased their purchases of home country bonds by more than €200 billion, or 15%, since the end of February, or “seven times faster than in the same period in 2019.”

“The figures are likely to revive concerns about the effect that wild swings in the price of government bonds could have on banks’ balance sheets. During the eurozone crisis, sell-offs in sovereign debt repeatedly dragged down profits and share prices in the banking sector, in turn raising the prospect of a further hit to the economy — a dynamic labelled the ‘doom loop.’”


“The CRA is a seminal statute that remains as important as ever as the nation confronts challenges associated with racial equity and the covid-19 pandemic. We must ensure that CRA is a strong and effective tool to address ongoing systemic inequities in access to credit and financial services for low- and moderate-income and minority individuals and communities.” — Fed Governor Lael Brainard, the Fed’s point person on overhauling the Community Reinvestment Act.

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