News

FIBA Goes to Tallahassee: Members Join High-Level Talks on Virtual Currency Regulation

Tue, 25 Sep 2018 16:19:56 GMT

With the recent explosion of cryptocurrencies and related businesses, regulators throughout the world are finding themselves increasingly under pressure to define the landscape. Stakeholders are now demanding appropriate legal frameworks that will provide protections to consumers, clarity to investors, and level the playing field for all financial assets.

In the U.S., the regulation of virtual currency businesses largely falls on the states. Officials in Florida, a state that currently lacks significant legislation pertaining to virtual currency businesses, not only understand the need for regulatory clarity but have taken concrete steps to make it happen.

Seeking to contribute to this process, FIBA has brought to the table its substantial expertise in legal and banking affairs. It has also hosted a number of seminars and panels to brainstorm on virtual currency regulation.

Last month, under the leadership of Daniel Stabile and Andrew Barnard, FIBA’s Innovation Committee co-chairs, as well as Kim Prior, FIBA’s Legal and Regulatory Affairs Committee chair, FIBA representatives attended a closed meeting in Tallahassee with other leading sponsors of this initiative—the Florida Bar Association, the state’s CFO Office and the Florida Office for Financial Regulation (OFR).

“This is a learning process for everyone. It’s important for FIBA to be involved from the early stages, have a voice and help address this ‘wild west’ which is the virtual currency space today,” said Barnard.

This was the first of several steps towards achieving sensible regulation on this important topic. The state of Florida recognizes the opportunity to lead where other states have failed and to pave the legal way to attract a host of virtual currency players.

“FIBA has been involved because it’s in the best interest of the international banking community to establish some clarity and fair parameters for all the players involved in this space,” said Stabile.

According to the FIBA team present at the Tallahassee meeting, there was widespread consensus among the participants to cautiously move forward with legislation or regulation specifically applicable to virtual currency businesses—and FIBA will continue to contribute. Among other things, it plans to help organize a seminar in Tallahassee to educate the other members of this task force on the underlying technology of cryptocurrencies and related concepts such as ICOs.

“This was a good starting point. And it was great to have FIBA’s Innovation and Regulatory Committees working in collaboration with the OFR towards the goal of bringing this important regulation to fruition,” concluded Prior.

Download FIBA's F.A.Q.s on Virtual Currency Business Regulation in Florida →

U.S. Implements President Trump's Cuba Policy

Thu, 9 Nov 2017 22:00:41 GMT

The following alert was issued by a member of FIBA's Legal and Regulatory Affairs Committee regarding the Trump Administration’s Cuba Policy:

On Nov. 8, 2017, the U.S. Government announced new regulations in furtherance of the Trump Administration’s policy regarding Cuba.

As discussed in our prior GT Alert, in June 2017, President Trump published his National Security Presidential Memorandum “Strengthening the Policy of the United States Toward Cuba” (NSPM), which announced modification of U.S. policy with respect to Cuba to target the Cuban military, intelligence, and security agencies. In the NSPM, President Trump emphasized the need to promote the flow of economic benefits to the Cuban people, rather than to its military. The NSPM further directed the Commerce, State, and Treasury Departments to take various actions implementing the new policy.

Accordingly, regulations were released this week by the U.S. Department of State, Department of Treasury’s Office of Foreign Assets Control (OFAC), and Department of Commerce’s Bureau of Industry and Security (BIS) to implement the NSPM, and clarify the limitations imposed on U.S. persons wishing to travel to or do business in Cuba.

Read and download the GT Alert.

The Fed’s Plan to Shrink its Balance Sheet is a Risky Proposition

Tue, 11 Jul 2017 20:28:56 GMT

At its June 2017 FOMC meeting, the Federal Reserve Bank (the Fed), approved a Plan aimed at reducing the size of the Fed, which currently substantially exceeds the value of total assets needed to effectively manage its monetary policy directives of achieving sustainable growth and low inflation (see the text of the Plan in the Appendix at the end of this analysis). Without a welldesigned plan accompanied by an effective execution, the Fed’s ability to manage monetary policy could be compromised and financial markets could be subjected to greater volatility. The Fed will most likely face numerous challenges as it navigates through unchartered waters.

Let’s put the size of the Fed’s balance sheet in perspective. In “normal times,” prior to the 2007 recession, let’s say December 2006, total assets of the Fed were $870 billion, or 6.3% of Gross Domestic Product (GDP), and peaked in December 2014 at $4.5 trillion, or about 26% of GDP! Total bank deposits at the Fed, which includes required and excess reserves, went from $12.7 billion in December 2006, to $2.4 trillion in December 2014. Such huge numbers could be characterized as an “asset bubble,” meaning it represents a high level of risk to the financial system.

The Fed’s balance sheet became that large when it sought to steer the economy through the rough 2007 – 2009 recession by providing massive liquidity support, mainly by purchasing U.S. Treasury securities, to help bring down interest rates; and, for the first time in its history, by purchasing about $1.7 trillion in mortgage-backed securities (MBS) to help the housing market get back on its feet again. The Fed thus became both a Central Bank and a commercial bank.

Interestingly, total assets of the Fed have not budged from the $4.5 trillion mark since December 2014 – about two-and-a-half years. It looked like their initial plan was to let the massive amount of liquidity just sit tight for the next five to ten years hoping that by then the size of the economy, as measured by the US$ value of GDP, would be substantially larger, and so $4.5 trillion could be spread over many more goods and services without igniting inflation. This has been done before, with mixed results, in other countries with similar problems.

The Fed’s recently released Policy Normalization Plan is thus a more aggressive strategy to shrink the size of its balance sheet, although it may be resting on the hope that it can drain a substantial amount of liquidity from the financial system without disrupting interest rates. However, the Fed could once again face market turbulence if there is a recession before the Plan has had time to achieve its goals, and the Fed has to once again pump a sizeable amount of liquidity into the financial system, which would then heighten the risk of an inflationary spiral. The current Plan, as described in the Fed’s website, may need to be more flexible to avoid disrupting the financial markets. Historically, the Fed’s track record has been to move the Fed Funds interest rate – now the Fed Funds band, in small predictable steps, and in bigger steps on some occasions. Likewise, its asset deflation should proceed in moderate steps. Based on recent media reports of senior Fed officials’ comments that a target would be to deflate the balance sheet down to $2.5 trillion, this would mean making a roughly $2.0 trillion reduction from the current $4.5 trillion in total assets. According to the Fed, the deflation is targeted to commence “once normalization of the level of the federal funds rate is well under way,” which should occur sometime in the not too distant future. The driver of the Fed’s Plan will be the monthly payments of principal by the U.S. Treasury and by the mortgage-backed securities which it holds on its balance sheet. The Plan establishes certain limits – called caps, on the amount of the monthly reductions, or paydowns of the Fed’s total assets. The caps on maturing Treasury securities will eventually reach $30 billion per month; and for the MBS, $20 billion. If the caps are applied without any exceptions, then it would take almost four years to reduce the size of the balance sheet down to $2.5 trillion, assuming that at that level total assets would not be considered as still too large for the Fed.

The Plan is thus based on a monthly depletion of $50 billion, once the monthly cap is reached, and on the assumption that this will result “in a declining supply of reserve balances.” My calculation also assumes that current maturities of MBS securities will reach at least $20 billion per month. This shrinkage of assets as designed in the Plan could also result in an increasing duration of the Fed’s balance sheet. The latter means that the assets of the Fed will be concentrated on the long-end of the maturity spectrum which could complicate the management of its own liquidity, not to mention interest rate risk. While a start date has not yet been announced, some Fed officials have commented that it could happen before the end of this year. Nevertheless, I think that an aggressive deflation of assets can disrupt financial markets, risk higher inflation, and also compromise the Fed’s ability to act decisively in the face of financial system liquidity problems as could occur during a recession.

The Plan is also based on the assumption that banks’ excess-reserves deposits at the Fed would fall in tandem with the maturing U.S. Treasury and MBS securities held by the Fed. For example, as U.S. Treasury securities mature, and the Fed is paid cash by the Treasury, someone else has to “refinance” the Federal Government’s debt, i.e. the banks that have cash deposited at the Fed, since our government is not expected to reduce the size of its debt in the foreseeable future. If there are not enough investors such as banks or individual investors willing to purchase Treasury securities then their yield would increase and thus the interest rates that consumers and businesses pay on their loans. In that case the Fed would probably have to repurchase more Treasury securities, thus backtracking on its asset deflation operation.

At the same time, the very large banks may not want to draw down their reserve deposits at the Fed due to the new liquidity requirements instituted by the Dodd-Frank Act, whereby deposits at the Fed are considered High Quality Liquid Assets that the banks are required to hold to cover their liquidity needs. My previous experience with mostly emerging-market countries that have gone through similar situations involving bloated central bank balance sheets is that their shrinkage rates were much more moderate, but also had greater inflationary consequences. The Fed may thus have to make some difficult trade-offs when it begins to implement the Plan either by paring down its shrinkage rate – with risks to inflation, or by pushing interest rates higher, with more painful outcomes for the economy. The bottom line is that there will be a price to pay for getting our Central Bank’s balance sheet closer to “normal.”

Appendix

The following is the Fed’s Plan as posted on https://www.federalreserve.gov/monetarypolicy/policy-normalization.htm

At the June 2017 FOMC meeting, all participants agreed to further augment the Committee's Policy Normalization Principles and Plans by providing the following additional details regarding the approach the FOMC intends to use to reduce the Federal Reserve's holdings of Treasury and agency securities once normalization of the level of the federal funds rate is well under way.

• The Committee intends to gradually reduce the Federal Reserve's securities holdings by decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps.
o For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
o For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.
o The Committee also anticipates that the caps will remain in place once they reach their respective maximums so that the Federal Reserve's securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.

• Gradually reducing the Federal Reserve's securities holdings will result in a declining supply of reserve balances. The Committee currently anticipates reducing the quantity of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis; the level will reflect the banking system's demand for reserve balances and the Committee's decisions about how to implement monetary policy most efficiently and effectively in the future. The Committee expects to learn more about the underlying demand for reserves during the process of balance sheet normalization.

• The Committee affirms that changing the target range for the federal funds rate is its primary means of adjusting the stance of monetary policy. However, the Committee would be prepared to resume reinvestment of principal payments received on securities held by the Federal Reserve if a material deterioration in the economic outlook were to warrant a sizable reduction in the Committee's target for the federal funds rate. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.

U.S. banks should weigh growing laundering risks posed by Venezuela experts

Mon, 1 May 2017 21:08:50 GMT

Thomson Reuters Accelus
Brett Wolf, Regulatory Intelligence

As Venezuela descends into chaos with protesters and security forces violently clashing in the streets of Caracas, antimony laundering compliance officers in Miami and elsewhere in the United States must heighten their vigilance for corruption proceeds and other dirty money flowing out of the troubled South American nation, experts say. The key is conducting thorough customer due diligence, but that may in some cases be easier said than done.

Corruption has long been rampant in Venezuela and a humanitarian crisis caused by food and medicine shortages as well as the Supreme Court's recent short lived decision to take over the powers of the country's opposition controlled Congress have added to the mammoth financial crime risks. At least one U.S. banking giant, Citigroup Inc, found the risks to be beyond its tolerance in July of last year, before the situation reached the crisis point of today.

The situation is anything but ordinary. In February, the U.S. Treasury Department blacklisted Vice President Tareck Zaidan El Aissami Maddah, designating him a drug kingpin and linking him to an alleged "frontman," Venezuelan national Samark Jose Lopez Bello.

Page 190 of the annual U.S. State Department International Narcotics Control Strategy Report released last month states that thanks to "weak AML supervision and enforcement" and a litany of other problems "conditions in Venezuela allow ample opportunities for financial abuses."

"What would an AML compliance officer not consider high risk in Venezuela given everything that's going on?" Sven Stumbauer, director of financial crimes compliance Latin America for consulting firm AlixPartners, told Thomson Reuters Regulatory Intelligence. "You've got unrest, you've got widespread corruption, and on top of that you've got a vice president who made it onto the OFAC list as a drug kingpin."

Venezuela is "a great concern" for antimoney laundering (AML) compliance officers due to the abovementioned issues as well as currency restrictions that fuel an active parallel currency market where drug trafficking proceeds, corruption funds, and even legitimate business proceeds mingle into a potentially toxic brew for foreign banks, said Daniel Gutierrez, chair for the AML compliance committee for the Florida International Bankers Association.

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International banks in Miami grow loans, deposits – database

Fri, 16 Dec 2016 21:27:03 GMT

International bank branches in Miami increased loans by $790.8 million, or 12.86 percent, in 2014. That’s a $338 million increase over the loan growth seen in 2013, despite ever increasing compliance and regulatory requirements. Miami is seen as a hub of international finance and banking, said John Harriman, COO of the Miami-based Florida International Bankers Association (FIBA). But while the regulatory and compliance environment remains what it is today, it’s unlikely that there will be new international bank branches entering the market. Federal Reserve data shows that nine of the 16 branches of international banks in Miami grew loans in 2014, while the other seven saw loans drop.

Meanwhile, deposit growth at the 16 banks slowed in 2014 with only a 6.28 percent increase in the year compared to the 7.7 percent increase in deposits in 2013. The deposits at these international bank branches are largely from foreign customers who may live part of the year in the region or do business here, although these institutions can grant loans to domestic clients. Click here to see a database for the full statistics on assets, loans, deposits and noncurrent loans at Miami’s international branches. The Spanish Banco Sabadell saw the greatest increase in loans, jumping from $1.39 billion at the close of 2013 to $2.2 billion at the end of 2014. That reflects nearly 52 percent loan growth, the highest amongst all 16 bank branches.

French BNP Paribas’ numbers show an opposite story. Loans decreased from $335.9 million at the close of 2013 to 0 at the end of 2014, and deposits shrunk from $703.7 million to $6.98 million in the same time period. That’s because BNP Paribas is exiting the market, Harriman said. “I don’t foresee a growth of foreign banks coming into Miami in the next year, not in the existing regulatory environment,” Harriman said. “It will be a while before we see any foreign banks coming this way,” he said. The 16 international bank branches on this list give only a glimpse of what the international banking environment is like in Miami, and while foreign banks may be waiting to enter the market, wealth management is a sector that is growing.

See full article at http://www.bizjournals.com/