Fed chair remarks on climate
On Jan. 10, 2023, at the Symposium on Central Bank Independence in Stockholm, Sweden, Federal Reserve (Fed) Chair Jerome Powell remarked on central bank independence and transparency as well as the importance of taking action consistent with statutory mandates. In Powell’s view, the Fed should “‘stick to our knitting’ and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities.” While the Fed has important supervisory responsibilities to ensure banks appropriately manage climate-related financial risk, he concluded his remarks with an observation that the Fed is not and will not be a “climate policymaker.”
Banking regulators issue warning on crypto asset risks
On Jan. 3, 2023, the federal banking regulators issued a joint statement highlighting several key risks posed by crypto assets that banks should consider if they wish to offer related services. The Fed, Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC) cited risks including the possibility of fraud and scams, legal uncertainties related to custody practices and ownership rights, and the lack of maturity in risk management practices within the crypto asset sector.
The agencies specifically noted, “issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices. Further, the agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.”
Regulators continue to assess whether or how current and proposed activities can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules.
Basel Committee issues standard for banks’ crypto asset exposure
The Basel Committee on Banking Supervision (BCBS) on Dec. 16, 2022, finalized a standard intended to help banks monitor and mitigate crypto asset exposure, including tokenized traditional assets, stablecoins, and unbacked crypto assets. The final standard incorporates feedback received in comment letters to a proposed version the committee issued in June 2022.
The standard, which would need to be adopted by federal banking regulators before it applies to U.S. banks, provides a “robust and prudent global regulatory framework for internationally active banks’ exposures to [crypto assets] that promotes responsible innovation while preserving financial stability.”
Under the standard, banks would be required to classify crypto assets on an ongoing basis into two groups. The first group includes crypto assets that meet a full set of classification conditions and covers tokenized traditional assets and crypto assets with effective stabilization mechanisms. The second group includes unbacked crypto assets and crypto assets that fail to meet any of the classification conditions and pose additional and higher risks compared with the first group.
The BCBS has requested that national regulators implement the standard in their respective jurisdictions by Jan. 1, 2025.
Fed adopts final rule implementing LIBOR Act
The Fed on Dec. 16, 2022, adopted a final rule that implements the Adjustable Interest Rate (LIBOR) Act and provides benchmark rates based on the Secured Overnight Financing Rate (SOFR), which will replace the London Interbank Offered Rate (LIBOR) in certain financial contracts after June 30, 2023. The final rule ensures that LIBOR contracts adopting a benchmark rate selected by the Fed will not be interrupted or terminated following LIBOR’s replacement.
As required by the law, the final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR in contracts subject to the act. The contracts include U.S. contracts that do not mature before publication of LIBOR ends (on June 30, 2023) and that lack adequate fallback provisions that would replace LIBOR with a practicable replacement benchmark rate.
In response to comments received on the proposed rule, the final rule restates safe harbor protections contained in the LIBOR Act for selection or use of the replacement benchmark rate selected by the Fed. It also clarifies who would be considered a “determining person” able to choose to use the replacement benchmark rate selected by the Fed for use for certain LIBOR contracts.
The rule will be effective 30 days after publication in the Federal Register.
FinCEN proposes beneficial ownership rule
The Financial Crimes Enforcement Network (FinCEN) on Dec. 15, 2022, issued a notice of proposed rulemaking that would implement provisions of the Corporate Transparency Act (CTA) that govern the access to and protection of beneficial ownership information. The proposed regulations would govern the circumstances under which such information must be protected and how it is disclosed to federal agencies; state, local, tribal, and foreign governments; and financial institutions. This is the second piece of FinCEN’s three-part rulemaking effort to implement the CTA.
Under the proposal, financial institutions would not be permitted to run “broad or open-ended queries” in the beneficial ownership database. “Rather, FinCEN anticipates that a [financial institution,] with a reporting company’s consent, would submit to the system identifying information specific to that reporting company, and receive in return an electronic transcript with that entity’s [beneficial ownership information (BOI)].”
The proposed rule also outlines how government officials would be permitted to access BOI in order to support law enforcement, national security, and intelligence activities as well as how regulators could use the database when conducting supervisory activities.
Written comments on the proposed rule are due Feb. 14, 2023.
New York State DFS issues virtual currency guidance
The New York State Department of Financial Services (DFS) issued guidance on Dec. 15, 2022, to remind banking organizations regulated by New York of the requirement to seek approval before engaging in activities related to virtual currencies, including when engaging with a third party to perform such activities. The guidance outlines six broad categories of information that the DFS will consider in assessing an institution’s proposed activities: business plan, risk management, corporate governance and oversight, consumer protection, financials, and legal and regulatory analysis.
An institution should notify the DFS of its intention a minimum of 90 days prior to commencing the activity, and the department will work with the institution to identify the materials needed to conduct its review. To help institutions prepare a written submission, the guidance also includes a supplemental checklist of materials that might be relevant in evaluating a proposed virtual currency-related activity.
The department noted that institutions already engaged in virtual currency-related activities should promptly notify it. The guidance is final, but the DFS invites comments that it will consider as it continues to supplement and refine the supervisory framework related to virtual currencies.
