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. • Citigroup 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 New York, 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.