EXTERNAL RISK EVENTS REPORT

July 2020

TABLE OF CONTENTS • Introduction • Overview • Risk Events by Category • Significant Management Changes

1233 20th Street NW, Suite 450 For more information contact: Washington, DC 20036 Claude Hanley, Partner Capitalperform.com Tel: 202-337-7875 @CPG_DC [email protected] EXERNAL RISK EVENTS REPORT JULY 2020

EXTERNAL RISK EVENTS REPORT SUMMARY

Capital Performance Group tracks events at financial institutions and financial technology firms across the country which could have risk implications for the industry. This sample report focuses on events at large banks in the United States as well as selected nonbank financial companies, fintechs, and payments companies. Within each risk type, events are sub-divided into three categories based on the relative significance of the event or the size of the fine or penalty levied against the institution in question:

H I G H M E D I U M L O W PRIORITY PRIORITY PRIORITY

The report contains a recap of legislative actions, proposed regulatory rules and enforcement actions among U.S. regulatory agencies involved in financial oversight. External events are organized under eight types of risk for easy review: 1. Liquidity – changes to markets or regulations that could impact an institution’s ability to fund its assets 2. Market/Interest Rate Risk – changes or potential changes to rates 3. Credit – instances of increased charge-offs or nonperforming loans in a particular credit segment 4. Operational – when the failure of a system, process, or person results in a loss or penalty 5. Fiduciary & Suitability – when an institution fails to act in the best interest of either shareholders or clients 6. Regulatory Risk– when an institution is penalized due to noncompliance with a law or regulation 7. Reputational – ongoing lawsuits/investigations and settlements of lawsuits 8. Strategic – changes in the competitive environment of a market that could impact the ability of other institutions to meet their strategic goals

PROPRIETARY 2 EXERNAL RISK EVENTS REPORT JULY 2020

JULY 2020 OVERVIEW

NOTABLE RISK EVENTS (PAGES 8 -21) Liquidity Risk (pg. 8): Credit Risk, cont’d (pg. 11): • According to analysts at JPMorgan Chase & • According to a report by S&P Global Ratings, Co., while liquidity has improved and markets credit provision expense worldwide will are functioning, they are “in an unstable increase by $926.0B during 2020-2021 as a equilibrium and vulnerable to shocks.” result of the economic fallout from the pandemic. Banks in North America are Market/Interest Rate Risk (pg. 8): expected to account for $240.0B, or 25.9%, of • Statistics released by the Department of the increase. Commerce showed that U.S. Gross Domestic Operational Risk (pg. 13): Product (GDP) shrank at a record 32.9% annual rate in 2Q20, and there are indications that the • In light of the recent surge in COVID-19 recovery is losing momentum. infections, JPMorgan Chase & Co. and Bank of America Corp. delayed their plans for bringing • U.S. corporations no longer expect a quick employees back into the office. economic rebound. Instead, they are preparing for a disruption that will last years. • Inc. announced that it intends to limit its office occupancy to 40.0% capacity until • The average rate on a 30-year mortgage fell to there is a COVID-19 vaccine. 2.98%, the lowest level in fifty years. Reputational Risk (pg. 15): • S&P Global Ratings warned of a growing risk of a W-shaped economic recovery, or even a • Institutional investors that manage several double-dip recession, due to the increase in multibillion-dollar pension funds wrote to COVID-19 infections. Federal Reserve Chairman Jerome Powell and other U.S. financial regulators urging them to • Investors are worried that near zero interest integrate climate change into their regulatory rates and aggressive asset purchases by the approach. Federal Reserve are creating asset bubbles. • Morgan Stanley, Citigroup, Inc. and Bank of Credit Risk (pg. 11): America Corp. committed to measuring and • The CEOs of the four largest U.S. banks said disclosing the degree to which their loans and they no longer expect a quick economic investments contribute to climate change. recovery or reduction in unemployment and Strategic Risk (pg. 17): that a more protracted downturn poses risks to businesses across industry sectors. • Signature Bank announced its expansion into the Los Angeles area as part of its California expansion that began two years ago.

NOTABLE LEGISLATIVE & REGULATORY EVENTS (PAGES 4 - 7) • Bank regulators are awarding fewer “Outstanding” ratings for Community Reinvestment Act (CRA) performance, according to a study by QuestSoft. • The Senate unveiled its latest pandemic relief bill entitled the Health, Economic Assistance, Liability Protection and Schools Act (HEALS).

PROPRIETARY 3 EXERNAL RISK EVENTS REPORT JULY 2020

REGULATORY & LEGISLATIVE EVENTS

REGULATORY EVENTS

1. According to a study by QuestSoft, bank regulators are awarding fewer “Outstanding” ratings for CRA performance. The number of “Outstanding” ratings given to the largest U.S. banks in their CRA performance evaluations has dropped 10.4% since 2019. Still, large financial institutions were more much more likely to receive an “Outstanding” rating than smaller institutions. The study reviewed 14,765 CRA performance evaluations from 2010 to 2020.

2. The Federal Reserve extended all of its emergency lending programs through the end of 2020. At the time the programs were announced in March, it was hoped that the economic effects of the pandemic would have abated by the summer and several of the programs were set to expire in September. The extension is another sign that policymakers believe the economy is facing a more prolonged downturn.

3. The Federal Reserve opened the Main Street Lending Program to nonprofit organizations, including educational institutions, hospitals and social service groups with at least 10 employees. Nonprofit organizations will be able to obtain loans of between $250.0K and $300.0MM.

4. Banks and mortgage lenders are urging the Department of Housing and Urban Development (HUD) to reconsider a proposal that would create clearer legal standards under the disparate impact concept in fair housing discrimination cases. Lenders are concerned that the proposed rule is contrary to broader societal goals of reducing structural barriers to home ownership.

5. An interpretive letter by the Office of the Comptroller of the Currency (OCC) stated that providing custody and safekeeping services for cryptocurrencies should be allowed. This should facilitate expansion into the cryptocurrency business by traditional banks.

6. The year-end 2021 deadline for ending the London Interbank Offered Rate (LIBOR) interest rate benchmark will not be extended because of the pandemic. John Williams, president of the Federal Reserve Bank of , and Andrew Bailey, Bank of England Governor, stated that lenders and borrowers should have transition plans in place.

7. The Federal Deposit Insurance Corporation (FDIC) is looking to make it easier for banks to partner with fintechs. A proposed program would allow third-party providers to voluntarily undertake a FDIC certification process to ensure their models meet regulatory standards, thereby easing some of the risk posed to bank partners from third-party fintech partnerships.

8. The Consumer Financial Protection Bureau (CFPB) announced it will issue an advance notice of proposed rulemaking (ANPR) on financial data sharing between fintechs and banks by the end of 2020. Some banks have ended relationships with fintechs due to data security considerations.

Regulatory Events continue on the next page.

PROPRIETARY 4 EXERNAL RISK EVENTS REPORT JULY 2020

REGULATORY & LEGISLATIVE EVENTS

REGULATORY EVENTS, CONTINUED

9. Acting head of the OCC, Brian Brooks, announced plans to unveil a national payments charter as soon as this fall. The announcement drew strong opposition from industry trade groups who vowed to fight any effort by the OCC to establish a special charter for payments providers such as PayPal Holdings, Inc. ($54.3B; San Jose, CA), Stripe, Inc. (San Francisco, CA), and Square, Inc. ($6.0B; San Francisco, CA).

10. The OCC proposed a rule to eliminate ambiguity in federal banking regulations regarding loans made by national banks. The proposal clarifies when a bank should be considered the “true lender” in the context of a third-party relationship, allowing the assignee of a loan made by a national bank to charge the same interest rate that the bank is legally authorized to charge. The proposed rule is meant to address bank-partnership models, in which a bank partners with a non- bank to facilitate loans to customers.

11. The Small Business Administration (SBA) announced that its Paycheck Protection Program (PPP) Forgiveness Platform will be operational starting August 10th. However, the SBA added that the launch date is subject to change pending new legislative amendments to the forgiveness process.

12. The CFPB saw a 50.0% increase in complaints from March to June compared to the same period last year, according to a report by consumer advocacy organization U.S. PIRG. Student loan complaints declined, but complaints about credit reporting and credit repair services increased 86.0%.

13. Under the U.S. Securities and Exchange Commission’s (SEC) latest proposal, investment managers with less than $3.5B in investment discretion would no longer need to publicly report what stocks they hold at the end of every quarter. The current threshold for filing Form 13F holding reports is $10.0MM.

14. SEC Commissioner Elad Roisman stated that asset managers that market an investment product as “ESG,” “Green,” or “Sustainable” should be required to disclose material information about what environmental, social, and governance (ESG) factors have been integrated in that product. According to Roisman, there is no universal definition for any of those terms, so asset managers must disclose what the terms mean.

15. Tom Pahl reportedly will be named deputy director of the CFPB. As deputy director, Pahl would succeed Brian Johnson as the second most senior official at the CFPB, after Director Kathy Kraninger.

16. The FDIC finalized a rule that allows banks to hire employees with minor criminal backgrounds. Since 1950, banks have been restricted by an act that prohibited financial institutions from hiring anyone convicted of a criminal offense without consent from the FDIC.

Legislative Events follow on the next page.

PROPRIETARY 5 EXERNAL RISK EVENTS REPORT JULY 2020

REGULATORY & LEGISLATIVE EVENTS

LEGISLATIVE EVENTS

1. The Senate unveiled its latest pandemic relief bill entitled the Health, Economic Assistance, Liability Protection and Schools Act (HEALS). The bill encompasses $1.0T in relief assistance, and includes, among other provisions, another $1.2K direct relief payment to qualifying individuals, a weekly economic federal unemployment benefit of $200, and $190.0B for a new round of assistance for qualifying firms through the PPP. The details of the bill must still be hashed-out in the Senate and then must be negotiated with the House of Representatives. The latter has already passed its own pandemic relief measure.

2. The Senate passed a bill that would prevent debt collectors from diverting COVID-19 relief payments to pay off outstanding consumer debt. The bill prevents private collectors from garnishing the recovery rebates provided through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

3. The House of Representatives voted to approve a defense spending bill, entitled the National Defense Authorization Act (NDAA), which includes a measure to reform anti-money- laundering (AML) regulations. The amendment would create a safe and useful ownership registry for legal entities at the Financial Crimes Enforcement Network (FinCEN), and would remove the burden from banks to report their customers’ beneficial owners.

The Senate passed a version of the NDAA bill which did not include an amendment to make reforms to the Bank Secrecy Act (BSA)/AML regime. The final version of the bill must now be negotiated between the House and the Senate.

4. The Senate Banking Committee approved the nominations of Judy Shelton and Christopher J. Waller to the Federal Reserve board of governors. Ms. Shelton was the U.S. director of the European Bank for Reconstruction and Development and Mr. Waller is the current executive vice president and director of research at the Federal Reserve Bank of St. Louis. It is uncertain if the full Senate will approve Ms. Shelton’s nomination.

5. Eighteen Senators published a letter asking the OCC to explain its handling of investigations into discrimination in residential mortgage lending by certain lenders. The letter follows a report by ProPublica alleging that the OCC abandoned investigations of multiple lenders suspected of discriminatory loan practices.

6. In testimony before Congress, U.S. Secretary of the Treasury Steven Mnuchin stated that the federal government should consider forgiving all “small” loans provided under the PPP. Secretary Mnuchin did not provide a definition of what would constitute a small loan, but banking trade groups and others have urged that PPP loans of $150.0K or smaller should be treated as grants.

Legislative Events continue on the next page.

PROPRIETARY 6 EXERNAL RISK EVENTS REPORT JULY 2020

REGULATORY & LEGISLATIVE EVENTS

LEGISLATIVE EVENTS, CONTINUED

7. The New York State Senate and Assembly passed two bills that would require fintech companies and other nonbanks to disclose metrics used in making small business loans. The metrics would include the total cost of capital, the estimated annualized percentage rate, and the total repayment amount including the finance charge. The bill is meant to enable borrowers to more easily compare loan offers.

8. Representatives of the U.S., Mexico and Canada formally signed the U.S.-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA). The agreement takes effect immediately

Liquidity Risk follows on the next page, followed by Market/Interest Rate Risk.

PROPRIETARY 7 EXERNAL RISK EVENTS REPORT JULY 2020

LIQUIDITY RISK

MEDIUM PRIORITY 7/9 According to analysts at JPMorgan Chase & Co ($3.1T; New York, NY), liquidity in the equities and currency markets is still far below the level prior to the onset of the pandemic. While liquidity in the bond and credit markets has almost fully recovered, it is largely due to steps taken by the Federal Reserve. The analysts noted that while liquidity has generally improved and markets are functioning, they are “in an unstable equilibrium and vulnerable to shocks”.

LOW PRIORITY 7/9 McKinsey & Company warned that corporate rating downgrades may lead to an increase in the risk-weighted assets of banks. That could reduce bank capital levels and cause banks to curtail lending. 7/8 The Federal Reserve ended its 10-month intervention in the repo, or short-term borrowing market. Analysts and market participants cited the Fed’s action as a sign that the short-term borrowing market has returned to normalcy. 7/1 Some specialty finance companies that lend to midsize businesses, such as Bain Capital Specialty Finance and Golub Capital BDC, Inc., are facing funding challenges. These specialty finance companies typically rely on credit lines from banks to help fund their loans, but banks are lowering lending limits and increasing the level of required collateral in reaction to a deterioration in the loan books of the specialty lenders.

MARKET/INTEREST RATE RISK

MEDIUM PRIORITY 7/30 Statistics released by the Department of Commerce showed that U.S. GDP shrank at a record 32.9% annual rate in 2Q20, and there are indications that the recovery is losing momentum. According to the Department of Labor, applications for weekly unemployment benefits rose in the week ended July 25th as did the number of people receiving unemployment benefits. The latter totaled 17.0 million in the week ended July 18th. 7/19 U.S. corporations no longer expect a quick economic rebound. Instead, they are preparing for a disruption that will last years. Consequently, companies are revamping their strategies, reducing production due to lower demand, shifting attention from core businesses, and reducing staff.

Market/Interest Rate Risk continues on the next page.

PROPRIETARY 8 EXERNAL RISK EVENTS REPORT JULY 2020

MARKET/INTEREST RATE RISK, CONTINUED

MEDIUM PRIORITY 7/17 The average rate on a 30-year mortgage fell to 2.98%, the lowest level in fifty years. The average rate on the 30-year mortgage stood at 3.72% at the beginning of the year, according to Freddie Mac. Zillow Group, Inc. economist Jeff Tucker said that the latest interest rate milestone indicated that “…we remain in a crisis.” 7/16 S&P Global Ratings warned of a growing risk of a W-shaped economic recovery, or even a double-dip recession. The ratings agency cited the increase in COVID-19 infections, which have increased 60.0% since June, and expressed concern that the prospects of additional infections threaten the economic rebound. 7/13 Investors are worried that near zero interest rates and aggressive asset purchases by the Federal Reserve are creating asset bubbles. They cite that fact that the S&P 500 is trading at an elevated forward price-to-earnings multiple and initial public offerings and debt issuances set records in 2Q20.

LOW PRIORITY 7/31 Ratings agency Fitch maintained its AAA credit rating for the U.S., but cut its outlook to “negative” from “stable”. According to Fitch, “there is a growing risk that U.S. policymakers will not consolidate public finances sufficiently to stabilize public debt after the pandemic shock has passed.” 7/31 The University of Michigan consumer sentiment survey declined to 72.5 from 72.9 over the month of July, as consumers became more concerned about the economic recovery. 7/30 Mastercard Inc. ($30.6B; Purchase, NY) reported a rebound in consumer purchases in July after low spending levels for much of 2Q20. Payments processed on Mastercard’s network climbed 1.0% in the week ended July 21st, up from a 3.0% decline in June. 7/29 The yield on the 10-year Treasury note fell to 0.578% the final week in July, down from 0.682% at the start of July, according to data from Tradeweb. The decline put the yield on the 10-year treasury at its third-lowest close for the year. 7/27 Mortgages on more expensive homes no longer have the lowest interest rates, reversing a trend that existed since mid-2015. Rates on 30-year jumbo mortgages averaged 3.77% in mid-July, according to Bankrate.com, more than 0.4% above the average rate on smaller, conforming loans. The rate difference is partly attributed to the pullback from jumbo loan originations by lenders. 7/22 Sales of existing homes jumped nearly 21.0% in June compared to May, according to the latest data from the National Association of Realtors. It was the largest monthly gain since the association began tracking the data in 1968. 7/20 One in four -based financial and professional-services firms are considering downsizing their presence in the city by at least 20.0%, according to a study by the Partnership for New York City. Additionally, about 16.0% of firms anticipate relocating jobs out of the city. Market/Interest Rate Risk continues on the next page.

PROPRIETARY 9 EXERNAL RISK EVENTS REPORT JULY 2020

MARKET/INTEREST RATE RISK, CONTINUED

LOW PRIORITY 7/18 JPMorgan Chase & Co. has become increasingly more pessimistic about the economic recovery. The unemployment rate in the bank’s “base” scenario forecast will reach nearly 11.0% by the end of this year. This is 4.3% higher compared to the bank’s forecast in April. Under its worst-case scenario, where the virus surges again in the fall, the bank estimates that unemployment could spike to 23.0%. 7/8 St. Louis Federal Reserve President James Bullard expressed optimism about the speed of the economic recovery. Bullard stated that the unemployment rate could decline to 8.0% or 7.0% by the end of the year. The unemployment rate was 11.1% as of June. Bullard also stated that he expects Congress to pass another pandemic economic relief measure. Bullard’s comments stand in contrast to the views expressed by Cleveland Federal Reserve President Loretta Mester and Atlanta Federal Reserve President Raphael Bostic, who foresee a much slower pace to the economic recovery. 7/8 Mitsuhiro Furusawa, deputy managing director of the International Monetary Fund (IMF), warned that developed and emerging economies must implement fiscal reform as soon as the COVID-19 pandemic ends. According to Furusawa, once the health crisis subsides, public debt will exceed 100.0% of global GDP. 7/7 The American Banker conducted a survey of employers to gauge their return-to-work plans. One of the key findings of the survey was that 73.0% of employers of all sizes will likely permit employees to permanently work from home, if their position allows it. That percentage roughly aligned with the response among employers in financial services (70.0%), and among professional services firms (80.0%). The survey encompassed 430 executives across an array of industry sectors and was fielded during June 12-22, 2020. 7/2 Bank analysts expect that the limit on dividend payments imposed on the largest banks by the Federal Reserve will effectively be extended to smaller regional and large community banks. Even if the is no explicit regulatory mandate, anticipated declines in profitability will force more banks to reduce dividend payouts. 7/2 The Congressional Budget Office (CBO) lowered its estimate of the year-end 2020 unemployment rate to 10.5%, versus its earlier forecast of 11.5%. The CBO estimates that unemployment will average 6.1% a year through 2030. Economic growth will jump to 4.8% in 2021, but the overall economy will not return to its pre-pandemic size until mid- 2022. 7/1 Despite earlier statements by members of the Federal Reserve’s Federal Open Market Committee, Federal Reserve officials have not reached a consensus about when or whether to implement a yield-curve control program on short-term U.S. Treasuries. Officials are still debating the most appropriate way to provide interest rate guidance. An alternative approach being considered is to link interest rates to the rate of inflation. The Fed’s approach to interest rate guidance may be announced as early as September.

Market/Interest Rate Risk continues on the next page, followed by Credit Risk.

PROPRIETARY 10 EXERNAL RISK EVENTS REPORT JULY 2020

MARKET/INTEREST RATE RISK, CONTINUED

LOW PRIORITY 7/1 S&P Global Ratings revised its global GDP projections downward. The rating agency now estimates that the global economy will contract 3.8% in 2020, compared to its April estimate of a 2.4% contraction. The rating agency projects global GDP will rebound in 2021 with growth of 5.3%, lower than the 5.9% growth rate that it projected previously. 7/1 The manufacturing sector grew in June, according to the Institute for Supply Management’s manufacturing index. The index climbed to 52.6%, up from 43.1% in May. A reading above 50.0% indicates growth. While manufacturing production has increased, employers remain wary of rehiring too many workers.

CREDIT RISK

MEDIUM PRIORITY 7/20 The CEOs of the four largest U.S. banks said they no longer expect a quick economic recovery or reduction in unemployment and that a more protracted downturn poses risks to businesses across industry sectors. Consequently, the four biggest U.S. Banks, JPMorgan Chase & Co., Bank of America Corp. ($2.6T; Charlotte, NC), Citigroup, Inc. ($2.3T; New York, NY), and & Co. ($2.0T; San Francisco, CA), nearly doubled their provision for loan losses related to corporate loans in 2Q20 versus 1Q20. 7/9 According to a report by S&P Global Ratings, credit provision expense worldwide will increase by $926.0B during 2020-2021 as a result of the economic fallout from the pandemic. Banks in North America are expected to account for $240.0B, or 25.9%, of the increase. Analysts at S&P Global Ratings estimate that provision expense at the top 200 rated banks will equate to 75.0% of pre-provision earnings in 2020 and 40.0% in 2021

LOW PRIORITY

7/27 According to a study by Accenture, credit problems at U.S. banks will be more than twice that of their European peers. Accenture estimates that loan loss charges for 58 U.S. banks over a three-year period will equate to approximately 10.2% of their estimated 2020 loan books, compared to a 4.6% loan loss charges at 50 European banks. 7/22 The 30-day delinquency rate on residential mortgages declined in June, according to Black Knight Inc. It was the first decline since the onset of the pandemic. The company reported that 7.6% of mortgages were at least 30 days delinquent in June, down from 7.8% in May. However, delinquencies of 90 days or more increased by 1.2 million loans, putting the figure at 1.9 million loans, the highest level since 2011. Credit Risk continues on the next page.

PROPRIETARY 11 EXERNAL RISK EVENTS REPORT JULY 2020

CREDIT RISK, CONTINUED

LOW PRIORITY 7/22 Capital One Financial Corp. ($396.9B; McLean, VA), an active multifamily lender in the New York metro area, said that multifamily loan delinquencies have been rising since the start of the pandemic and could increase even more unless more government stimulus is extended to renters and landlords. The bank’s ratio of nonperforming commercial and multifamily loans to total loans climbed to 0.54% in 2Q20, compared to 0.22% in 1Q20. 7/17 A survey by Goldman Sachs Group, Inc. ($1.1T; New York, NY) of business owners who received PPP funds found that 84.0% of respondents expect to run out of funds by the first week of August and only 37.0% of respondents believed that their business could survive another wave of shutdowns without further assistance. 7/17 While the number of personal bankruptcies declined from April through June, experts expect the trend will reverse and personal bankruptcy filings will climb as federal jobless benefits and stimulus efforts wind-down. 7/15 Consumer loan modification requests declined at several of the largest banks, based on 2Q20 earnings disclosures. Loan deferral requests at PNC Financial Services Group, Inc. ($445.6B; Pittsburgh, PA) declined by 97.0% since mid-April. JPMorgan Chase revealed that requests for payment deferrals declined by about 95.0% from their April peak. Despite the decline, bankers acknowledge that consumers’ finances have been helped by loan forbearances and government relief efforts and that many loans could become delinquent or default if virus cases continue to surge and economic activity is once again halted. 7/6 Loan defaults in the leverage loan market totaled $23.1B in 2Q20, according to S&P Global Market Intelligence. That equated to a default rate of 3.23%, which was the highest in five years. The default rate in 1Q20 was 1.84%. 7/6 Based on an analysis by S&P Global Market Intelligence, losses on loan deferrals could reach $128.0B, or approximately 7.5% of the banking industry’s tangible common equity at 1Q20. The analysis assumed that 30.0% of loan deferrals will migrate to nonperforming status and would incur a loss given default of 55.0%. 7/1 PNC Financial Services Group, Inc. CEO William Demchak warned of the possibility of a wave of small businesses defaults in the wake of reduced consumer spending, an uneven economic recovery, and the expiration of loan forbearances.

Operational Risk follows on the next page.

PROPRIETARY 12 EXERNAL RISK EVENTS REPORT JULY 2020

OPERATIONAL RISK

MEDIUM PRIORITY 7/9 In light of the recent surge in COVID-19 infections, JPMorgan Chase & Co. postponed indefinitely its plans to require employees to return to their offices in Columbus, Ohio. Columbus was to be the second U.S. market, after , where the bank had planned to return some workers to their offices. Subsequently, the bank decided to allow up to half of its Manhattan-based sales and trading division to work out of the office. The bank is reportedly planning on bringing employees back in more states starting in the middle of August. 7/8 Due to the increase in COVID-19 infections, Bank of America Corp. delayed its plan to bring back to the office 180,000 employees who are currently working remotely. The bank will reportedly wait until after Labor Day to bring those employees back to the office. 7/3 Despite a desire to have employees return to their offices as soon as possible, Citigroup Inc. announced that it will not risk bringing employees back to the office prematurely. The bank announced a goal of limiting office space to 40.0% capacity until there is a COVID-19 vaccine.

LOW PRIORITY

7/28 The SBA’s Inspector General’s office said it found “strong indicators of widespread potential fraud” in the Economic Injury Disaster Loan and Advance grant programs. The Inspector General’s office said it received complaints on over 5,000 cases of suspected fraud from financial institutions that received economic injury loan deposits. 7/22 Morgan Stanley ($947.8B; New York, NY) blocked remote access for its China-based interns over concerns surrounding cybersecurity rules and practices. The bank is also reportedly concerned about the vulnerability of its technology systems in China. Among the six largest banks, Morgan Stanley is the only one to deny remote access to its interns in China. 7/22 Payment processing companies, including Visa Inc. ($72.8B; San Francisco, CA), Mastercard Inc. and American Express Co. ($186.1B; New York, NY), are among financial firms that are being duped into processing payments for drugs and other illegal goods by fake online businesses. Financial regulators are particularly looking at the role of middlemen, which include fintech companies like PayPal Holdings Inc., Square Inc. and Stripe Inc., that connect merchants to the banks and facilitate such transactions. Such schemes are often referred to as credit-card laundering or transaction laundering.

Operational Risk continues on the next page, followed by Fiduciary Risk.

PROPRIETARY 13 EXERNAL RISK EVENTS REPORT JULY 2020

OPERATIONAL RISK, CONTINUED

LOW PRIORITY

7/17 Wells Fargo & Co. is extending its restrictions on insider trading to a larger portion of its workforce. Employees and family members subject to the policy are required to get pre- clearance before trading stocks, bonds, and options, as well as asset-backed securities. The bank cited increased regulatory scrutiny as the reason for the change in its approach. 7/13 JPMorgan Chase & Co. placed its head of U.S. Treasuries trading on leave pending an examination by the bank of his electronic messages to determine if he breached company policy. His suspension comes after the bank took similar actions against a group of traders earlier this year. 7/13 Morgan Stanley revealed that personal data of some of its wealth management clients may have been breached. The company notice stated that the potential compromise stems from two data centers, which closed in 2016. As a consequence, Morgan Stanley is facing a class-action lawsuit by former and current customers alleging negligence and invasion of privacy. 7/7 Some firms listed in recently released PPP data say that they never received funds, while others say they did not even apply for loans. This raises a broader question about the overall management of the program. 7/2 Information security experts are warning that remote working has made it more difficult for financial companies to monitor cyber access; therefore, the information technology infrastructure of financial firms has become more susceptible to penetration by unauthorized parties.

FIDUCIARY RISK

LOW PRIORITY 7/13 New Hampshire’s Bureau of Securities Regulation is investigating Bank of America subsidiary, Merrill Lynch Pierce Fenner & Smith Inc., and a former broker over complaints of alleged churning of customer accounts to generate millions of dollars in excess commissions and that resulted in customers incurring significant losses.

Regulatory Risk follows on the next page.

PROPRIETARY 14 EXERNAL RISK EVENTS REPORT JULY 2020

REGULATORY RISK

LOW PRIORITY

7/24 Bank of America Corp. agreed to pay $300.0K to settle allegations that it denied mortgages and home equity lines of credit to adults with guardians. Under the terms of the agreement reached with the U.S. attorney for the Eastern District of New York, Bank of America agreed to pay 75 applicants $4.0K each. Bank of America ended the policy in 2016, prior to the start of the federal investigation. The bank expressly denied any wrongdoing or noncompliance with the Fair Housing Act. 7/21 UBS Financial Services Inc., parent of UBS Bank USA ($75.6B; Salt Lake City, UT), will pay more than $10.0MM to settle charges by the SEC that UBS circumvented the priority given to retail investors in certain municipal bond offerings. The SEC found that UBS diverted bonds meant for retail customers to parties who were not eligible for retail priority, who resold the bonds to other broker/dealers at a profit. 7/9 The Financial Industry Regulatory Authority (FINRA) imposed a $875.0K fine on Morgan Stanley Smith Barney LLC for allegedly submitting inaccurate trade data, known as blue sheets, to the SEC and FINRA, and misreporting information on at least 156,678 options transactions from February 2014 through April 2017. 7/8 The New York State Department of Financial Services fined Deutsche Bank, parent of DB USA Corp. ($117.6B; New York, NY), $150.0MM for failing to adequately monitor suspicious activity in the accounts of Jeffrey Epstein, whom the bank designated as a high-risk client. The suit claims that the bank failed to act on indications of suspicious activity, which resulted in the bank processing large numbers of suspicious transactions.

REPUTATIONAL RISK

MEDIUM PRIORITY 7/21 Institutional investors that manage $1.0T in assets wrote to Federal Reserve Chairman Jerome Powell and other U.S. financial regulators urging them to treat climate change as a systemic financial risk. Letters sent by several multibillion-dollar pension funds called on regulatory authorities to integrate climate change into their regulatory approach. 7/20 Morgan Stanley will begin to measure and disclose its “lending portfolio greenhouse gas emissions,” making it the first major U.S. bank to publicly disclose how much its loans and investments contribute to climate change. Citigroup Inc. and Bank of America Corp. followed soon after in committing to disclose similar information. Additionally, the banks joined the global steering committee of the Partnership for Carbon Accounting Financials (PCAF), a financial institution collaboration attempting to standardize carbon accounting in financial services. Reputational Risk continues on the next page.

PROPRIETARY 15 EXERNAL RISK EVENTS REPORT JULY 2020

REPUTATIONAL RISK, CONTINUED

LOW PRIORITY

7/29 U.S. Bancorp ($542.9B; Minneapolis, MN) elevated its chief diversity officer to the role of senior executive vice president. The position will now report directly to Chairman and CEO Andy Cecere. The position is tasked with leading the bank’s effort to build a more racially diverse workforce. 7/27 The U.S. Circuit Court of Appeals in Philadelphia ruled that the state of Pennsylvania could bring a lawsuit against Navient Corp. ($93.2B; Wilmington, DE) similar to the one filed by the CFPB. Navient has been accused of predatory lending in state and federal lawsuits. 7/27 The U.S. Virgin Islands Attorney General has issued subpoenas to a number of banks, including Wells Fargo & Co., Citigroup Inc., Charles Schwab Corp. ($370.8B; San Francisco, CA), Northern Trust Corp. ($161.7B; Chicago, IL) subsidiary Northern Trust International Banking Corp. and SVB Financial Group ($75.0B; Santa Clara, CA) in relation to financial dealings of Jeffery Epstein or associated entities. 7/25 The U.K.’s Financial Conduct Authority (FCA) is investigating Northern Trust Corp. to determine its involvement in the collapse of LF Woodford Equity Income Fund. The FCA is looking into whether Northern Trust allowed illiquid holdings in the Equity Income Fund to surpass the 10.0% limit, leading to the fund’s suspension in 2019. 7/24 Wells Fargo & Co. announced that it misinterpreted some customer requests when it paused mortgage payments for some accounts. The admission came after it was reported that some Wells Fargo customers in bankruptcy were placed in a CARES Act program without their consent. The bank is working directly with those customers to ensure they receive the correct assistance. The exact number of customers who were impacted was not disclosed. 7/24 Goldman Sachs Group, Inc. agreed to pay $3.9B to settle a criminal probe over the bank’s involvement in the 1MDB scandal. The deal includes a cash payout and a guarantee to return proceeds linked to the 1Malaysia Development Bhd fund. 7/10 Rocky Mountain Institute launched the Center for Climate-Aligned Finance (CCAF) in collaboration with Wells Fargo & Co., Goldman Sachs Group Inc., Bank of America Corp. and JPMorgan Chase & Co. Rocky Mountain Institute will independently administer the CCFA. The mission of the center is to work with financial companies to develop solutions for reducing carbon emissions in carbon-intensive industry sectors.

Reputational Risk continues on the next page, followed by Strategic Risk.

PROPRIETARY 16 EXERNAL RISK EVENTS REPORT JULY 2020

REPUTATIONAL RISK, CONTINUED

LOW PRIORITY

7/7 The banking industry may earn between $14.3B and $24.6B in loan origination fees from the PPP program, according to an estimate by Edwin Hu, at New York University School of Law’s Institute for Corporate Governance & Finance, and Colleen Honigsberg of Stanford Law School. JPMorgan Chase & Co., Bank of America Corp., Truist Financial Corp. ($506.2B; Charlotte, NC), PNC Financial Services Group, Inc. and Wells Fargo & Co. were the top five PPP lenders by volume. JPMorgan, Bank of America and Wells Fargo have pledged to donate their fees. 7/7 PNC Financial Services Group, Inc. diversified the racial composition of its executive committee with the promotion of two African-American bankers. It is the first time that the bank’s executive committee includes African-Americans. 7/7 Details released on PPP loan recipients led to criticism that a disproportionate amount of the program’s funding went to affluent companies with connections to senior politicians and elite institutions. More than 4.0 million companies received PPP loans, but 15.0% of recipients received 75.0% of the funds.

STRATEGIC RISK

MEDIUM PRIORITY

7/8 Signature Bank ($53.1B; New York, NY) will expand into the Los Angeles area as part of its California expansion that began two years ago. The bank will open four offices in Southern California, including Woodland Hills, Newport Beach, Beverly Hills and Ontario, to complement its presence in San Francisco. Since the beginning of this year, Signature has added 15 private banking teams in California, bringing the total to 19. Sixty-one bankers are assigned to the Los Angeles and San Francisco markets.

LOW PRIORITY

7/30 M&T Bank Corp. ($124.6B; Buffalo, NY) will migrate its retail brokerage and advisory business to the platform of LPL Financial Holdings Inc. The bank’s retail brokerage and advisory businesses consists of $20.0B in assets under management and 170 advisers. It is expected to operate under a new brand name. 7/30 PayPal Holdings Co. has seen a surge in user activity as consumer spending shifts from cash and in-store purchases to online. Total payment volume for PayPal grew 30.0% year-over-year in 2Q20. Strategic Risk continues on the next page.

PROPRIETARY 17 EXERNAL RISK EVENTS REPORT JULY 2020

STRATEGIC RISK, CONTINUED

LOW PRIORITY

7/28 Wells Fargo & Co. filed a request with the SEC to offer proprietary Exchange Traded Funds (ETFs). Wells Fargo is currently one of the last remaining large asset managers to not offer ETFs. 7/28 JPMorgan Chase & Co.’s commercial credit cards team is partnering with fintech start- up Marqeta to launch digital-only credit cards. The digital cards will allow JPMorgan corporate cards to work in mobile wallets such as Apple Pay or Samsung Pay and customers do not have to wait to receive a physical card. 7/27 Visa Inc. announced its support and development of blockchain and digital currencies. The company stated that its would pursue a broad array of technologies and partnerships in the future. 7/23 U.S. Bank announced it will launch a virtual assistant, called Smart Assistant, by the beginning of August. The assistant will be built into the bank’s mobile app and will enable customers to transact by speaking or texting requests. 7/22 U.S. financial institutions continue to sever ties with the gun industry. Electronic payment companies, including PayPal Holdings, Inc., Square and Apple Pay, have banned firearms sales and transactions through their systems in recent years. 7/21 Bank of the West ($101.4B; San Francisco, CA) launched a checking account that donates 1.0% of net revenue from the account to 1.0% for the Planet, an environmental organization. The account comes with a compostable debit card. Account holders receive an estimate of their carbon footprint from every purchase made on the debit card, via a carbon tracking tool which appears in the Bank of the West mobile app. 7/21 Robinhood Markets, Inc. (Menlo Park, CA) postponed indefinitely the launch of its stock- trading app in the U.K. Instead, Robinhood stated it will focus on strengthening its U.S. business. 7/20 PNC Financial Services Group, Inc. CEO William Demchak said the bank may close more branches in light of the recent acceleration in digital adoption. Demchak said the likely implication of that trend is that the bank will need fewer physical facilities in order to serve clients. 7/17 Bank of America Corp. unit Merrill Lynch Wealth Management has begun hiring for its adviser training program after temporarily halting it in April. Training for 650 adviser trainees reassigned in other business areas has also resumed. Hiring was stopped initially due to uncertainty about whether “training and remote on-boarding” would be effective.

Strategic Risk continues on the next page.

PROPRIETARY 18 EXERNAL RISK EVENTS REPORT JULY 2020

STRATEGIC RISK, CONTINUED

LOW PRIORITY

7/16 Truist Financial Corp. announced it will be conducting a close review of its personnel and branch footprint in effort to reduce expenses. In 2Q20, the company’s average full-time equivalent employee count declined 735 from 1Q20, and the bank closed 42 branches in nonoverlapping markets. 7/16 According to Bank of America Corp. CFO Paul Donofrio, the bank does not anticipate that its participation in the PPP program will produce “much, if any” profit. The bank originated approximately 334,000 PPP loans with total balances of about $25.0B. The loans generated about $100.0MM in net interest income in 2Q20, but Donofrio said revenues will likely be mostly offset by the costs of the program. 7/15 Many financial institutions are reconsidering their technology spending given the current challenging operating environment. Some banks have delayed implementation of new customer-facing and internal technologies even as demand for these services have increased during the pandemic. 7/14 American Express Co. launched American Express One AP, the company’s first proprietary automated accounts payable (AP) solution. According to the company, the American Express One AP offers complete end-to-end payment processing that supports multiple payment methods, including virtual card payments, checks, and ACH payments. 7/10 Wells Fargo & Co. eased the eligibility criteria for bank customers who are seeking to refinance a nonconforming mortgage. However, the bank simultaneously tightened guidelines for noncustomers seeking a nonconforming mortgage loan from the bank. 7/9 Fintech company Social Finance Inc. (San Francisco, CA), applied for a national bank charter with the OCC. The company previously filed for an industrial bank charter in 2017, but it subsequently withdrew the application. 7/9 Coinbase, Inc. (San Francisco, CA) is expected to become a publicly-traded company sometime this year. If it receives regulatory approval, Coinbase would be the first major U.S. cryptocurrency exchange to go public. 7/7 The pandemic has led to a significant increase in activity at bank drive-thru lanes at a time when many banks are looking simultaneously to reduce their brick-and-mortar locations. Service calls for drive-thru equipment increased 42.0% in April and May over last year, according to Convergint Technologies.

Strategic Risk continues on the next page.

PROPRIETARY 19 EXERNAL RISK EVENTS REPORT JULY 2020

STRATEGIC RISK, CONTINUED

LOW PRIORITY

7/6 Square, Inc. has benefited from increased consumer reliance on electronic payments, even as the use of its credit card reader for small merchants has declined. The company’s Cash App, a peer-to-peer payments tool that lets users transmit and spend funds, invest in stocks, and to receive direct deposits, has grown rapidly. Other companies in the payments realm have also benefited from the increase in electronic payments. 7/3 Wells Fargo & Co. will reduce its student lending activity as higher education is suffering from the ongoing surge in COVID-19 infections. Wells Fargo had $10.56B in student loans outstanding at the end of 1Q20. 7/2 A survey conducted by JPMorgan Chase & Co. of investors from 50 global institutions representing $12.9T in assets under management found that 71.0% said that events like the COVID-19 outbreak would likely increase efforts to address issues like climate change. 7/1 Bank of America Corp.’s virtual assistant Erica added 1.0 million users per month from March through May, bringing its user count to 14.0 million. Erica, which debuted in May 2018, supports a variety of banking functions.

Significant Management Changes follow on the next page.

PROPRIETARY 20 EXERNAL RISK EVENTS REPORT JULY 2020

SIGNIFICANT MANAGEMENT CHANGES

DATE BANK MANAGEMENT CHANGE 7/31 M&T Bank Corp. Named Francesco Lagutaine senior vice president, chief marketing and communications officer, effective August 17th.

7/29 U.S. Bancorp Announced that Elcio Barcelos will be joining the company as its new senior executive vice president and chief human resources officer.

U.S. Bancorp also announced that Dominic Venturo will be promoted to senior executive vice president and chief digital officer. 7/23 HSBC Holdings Promoted Christine Lowthian to chief compliance officer of HSBC Bank USA.

7/21 Wells Fargo & Co. Appointed Mike Santomassimo as chief financial officer. He is replacing John Shrewsberry, who is retiring this fall.

7/20 Wells Fargo & Co. Hired former Bank of America Corp. executive Ather Williams III as head of strategy, digital, and innovation.

7/9 Wells Fargo & Co. Hired Kristy Fercho to lead the bank’s Home Lending group. Fercho comes to Wells Fargo from Flagstar Bank, where she was president of housing finance. 7/8 Signature Bank Named Judi Prejean as executive director, overseeing the bank’s West Coast operations. Prior to joining Signature, Prejean was senior vice president and business banking group manager at Bank of the West. 7/7 Citigroup Inc. Appointed Titi Cole to head of global operations and fraud prevention, effective August 17th. Cole comes to the bank from Wells Fargo where she served as EVP and head of operations for Consumer and Small Business Banking. 7/6 City National Bank Named Richard Raffetto as president, effective August 31st.

PROPRIETARY 21 EXERNAL RISK EVENTS REPORT JULY 2020

NOTE ON THIS REPORT

T HE REP O RT

This report is designed to provide information on events impacting a certain group of banks and financial technology companies. It is not meant to be a comprehensive view of every fine or penalty levied against any financial institution operating in the United States. Events involving insurance or investment banking are not included in this report. This report is based on publicly available information and there may be details related to mergers and acquisitions, fines or penalties, and the settlement of lawsuits that are not publicly disclosed. CPG has tried to capture as much detail available to the public as possible in our summaries of events.

OUR SOURCES

All information related to bank asset sizes and location comes from S&P Global Market Intelligence. S&P Global Market Intelligence is also the source for many of the news stories contained in this document. In addition, we leverage a variety of sources in our work to track risk, legislative, regulatory, and international events, including the following:

PUBLICATIONS REGULATORY PRESS RELEASES ▪ American Banker ▪ Consumer Financial Protection Bureau ▪ New York Times ▪ Department of Justice ▪ Wall Street Journal ▪ Federal Deposit Insurance Corporation ▪ Financial Times ▪ Federal Reserve ▪ Economist ▪ Financial Crimes Enforcement Network ▪ Financial Fraud Enforcement Taskforce ▪ Financial Industry Regulatory Authority ▪ Office of the Comptroller of the Currency ▪ Office of Foreign Assets Control ▪ Securities & Exchange Commission

PROPRIETARY 22 EXERNAL RISK EVENTS REPORT JULY 2020

CAPITAL PERFORMANCE GROUP IS HELPING BANKERS IDENTIFY NEW STRATEGIC OPPORTUNITIES AND TRANSFORM BUSINESS MODELS.

STRATEGIC MARKETING DELIVERY CHANNEL CREDIT RISK PLANNING AND SALES TRANSFORMATION MANAGEMENT & ENHANCEMENT FINANCE

Loan Portfolio Reporting & Strategic Planning Marketing Transformation Branch Network Policy Review Optimization Balanced Scorecards & Organizational Design Customer and Benchmarking Market Analytics ATM Network and Alternative Delivery Design Implementation Assistance Cost Reduction Programs for Profitability & Financial Acquisition Marketing and Planning Systems Lead Generation Digital Channel Strategy Credit Process Assessment Process Reengineering & Redesign Customer Retention and Sales and Relationship Enterprise Risk Reporting: Customer Experience Deepening Programs Management Program External Risk Events Improvement Design Monitoring Sales and Marketing Finance Department Workflow Alignment Market-Level Investment M&A Support Services Process Assessment and Optimization Modeling Redesign

Contact Claude Hanley, Partner: [email protected]/703-861-8623 www.capitalperform.com @CPG_DC

PROPRIETARY 23