external risk events report - cpg

EXTERNAL RISK EVENTS REPORT

October 2020

TABLE OF CONTENTS

• Introduction

• Overview

• Risk Events by Category

• Significant Management Changes

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E X E R N A L R I S K E V E N T S R E P O R T O C T O B E R 2 0 2 0

P R O P R I E T A R Y

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:

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. Market/Interest Rate Risk – changes or potential changes to rates

2. Liquidity – changes to markets or regulations that could impact an institution’s

ability to fund its assets

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

H I G H P R I O R I T Y

M E D I U M P R I O R I T Y

L O W P R I O R I T Y

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OCTOBER 2020 OVERVIEW

NOTABLE RISK EVENTS (PAGES 7 -22)

Market/Interest Rate Risk (pg. 7):

• Daily COVID-19 cases in the U.S. have been

increasing since mid-September and reached

an all-time high of 88,500 on October 29th.

Infections have risen in almost every state.

• The U.S. Department of Labor Department

reported that the producer price index (PPI)

rose 0.4% in September, which was higher than

what many economists had predicted. It was the

first year-over-year gain in the PPI since March.

Liquidity Risk (pg. 9):

• The Federal Reserve Bank of St. Louis reported

that deposits at U.S. commercial banks rose

19.0% between January and September of this

year, and analysts expect that elevated deposit

growth will continue for the remainder of 2020.

Operational Risk (pg. 11):

• The Small Business Administration (SBA) is

requiring businesses that received Paycheck

Protection Program (PPP) loans of $2.0MM or

more to complete a nine-page questionnaire.

Lenders are required to deliver the

questionnaires back to the agency within 10

days.

• New advertising guidelines issued by Google

prohibit the targeting of digital ads for credit,

and certain other products and services, using

gender, age, parental status, marital status or

zip code.

• JPMorgan Chase & Co. CEO Jamie Dimon said

the bank has reduced bonuses for certain

employees who failed to help the bank in its

diversity efforts.

N O T A B L E L E G I S L A T I V E & R E G U L A T O R Y E V E N T S ( P A G E S 4 - 6 )

• The New York State Department of Financial Service issued guidance for financial institutions to

incorporate climate-related risks into their strategy, risk management and corporate governance.

Regulatory Risk (pg. 14):

• The Office of the Comptroller of the Currency

(OCC) fined USAA Federal Savings Bank, the

banking subsidiary of United Services

Automobile Association, $85.0MM for

deficiencies in the bank’s risk management

program.

Reputational Risk (pg. 16):

• Big banks including JPMorgan Chase & Co.,

HSBC, and Morgan Stanley pledged to adopt

financing commitments aligned with the goals

of the Paris Agreement, which aims to achieve

net-zero emissions by 2050.

Strategic Risk (pg. 17):

• JPMorgan Chase & Co. could roughly double

the adviser ranks in its wealth management

division by hiring as many as 4,000 advisors in

the next five to six years.

• Wells Fargo & Co. announced an exit from the

student lending business and is reportedly

considering divesting its asset-management

unit.

• KeyCorp is exiting indirect automobile lending

and will focus more resources on residential

mortgages and its Laurel Road student loan

refinance business.

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R E G U L A T O R Y E V E N T S

1. The New York State Department of Financial Service issued guidance for financial institutions

to incorporate climate-related risks into their strategy, risk management and corporate

governance. It is the first U.S. banking regulator to issue guidance on climate risks. Among other

recommendations, the department suggested that institutions designate a board member or

committee, as well as a senior management function, to oversee climate risk. The department also

recommended that institutions incorporate climate risk disclosures using the framework developed by

the Task Force for Climate-related Financial Disclosures (TCFD).

2. The Federal Reserve made further revisions to the Main Street Lending Program. The minimum

loan amount under the program was reduced to $100.0K, from $250.0K. Also, for loans below

$250.0K, the Fed will waive the 1.0% fee it collects from lenders, and participating banks may charge

borrowers a 2.0% origination fee.

3. The Consumer Financial Protection Bureau (CFPB) issued a final rule to restate and clarify

prohibitions on harassment and abuse, false or misleading representations, and unfair

practices by debt collectors when collecting consumer debt. The rule focuses on debt collection

communications and gives consumers more control over how often and through what means debt

collectors can communicate with consumer borrowers regarding their debts.

4. Fintech company Social Finance Inc. (SoFi) (San Francisco, CA) received preliminary approval

for a national bank charter from the OCC. The application was filed in July, and if it receives final

approval, it would enable SoFi to directly provide Federal Deposit Insurance Corporation (FDIC)-

insured deposits and make loans without a bank partner.

5. The Securities and Exchange Commission (SEC) is dropping a plan that would have raised the

Form 13F reporting threshold to $3.5B invested in equities, among other holdings, from the

current $100.0MM. The move comes as public companies and others criticized the proposal, arguing

it would have hampered market transparency.

6. The OCC finalized its “true lender” rule. The final rule was largely unchanged from the

proposed version in July. According to the OCC, a national bank is the true lender if “at the time of a

loan’s origination, it is named as the lender in a loan agreement or if the bank funds the loan. That

means the national bank is responsible for ensuring the loan complies with consumer protection laws,

but it also means that state interest rate caps do not apply.”

7. The Federal Reserve and the Financial Crimes Enforcement Network (FinCEN) proposed a rule

change to the record keeping and travel regulations of the Bank Secrecy Act (BSA). The change

would require banks to retain records of international fund transfers of $250 or less from the current

threshold of $3,000 or more.

REGULATORY & LEGISLATIVE EVENTS

Regulatory Events continue on the next page.

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R E G U L A T O R Y E V E N T S , C O N T I N U E D

8. Enforcement actions by the CFPB may increase under a Biden administration, according to

some industry watchers. Under the current Director Kathy Kraninger, the CFPB has rescinded some

rules and focused mainly on consumer financial education. Among other changes that may occur

under a new administration, observers speculate that the CFPB will initiate more enforcement actions

pertaining to the concept of disparate impact, or unintentional discrimination.

9. The FDIC, OCC, and the Federal Reserve are expected to finalize a pair of projects aimed at

ensuring the 20 largest banks have enough liquidity while minimizing volatility. The two rules

affect the Net Stable Funding Ratio (NSFR) and the total loss-absorbing capacity (TLAC).

10. The FDIC issued an interim final rule to provide temporary relief to banks that experienced

rapid asset growth due to participation in the PPP. The intent of the rule is to neutralize regulatory

burdens that institutions may incur because of increases in their total assets. Under the rule, banks will

be able to use either consolidated total assets as of December 31, 2019 or consolidated total assets

as of the beginning of 2021 to determine audit and reporting requirements in 2021.

11. The SEC Chairman Jay Clayton told an industry conference that the agency is actively working

on regulations that would one day allow for crypto versions of exchange-traded funds (ETFs).

The SEC is reportedly working with other financial regulators such as the OCC and the Commodity

Futures Trading Commission (CFTC) to determine which agencies have regulatory jurisdiction over

different crypto products.

12. The U.S. Department of the Treasury’s FinCEN issued an advisory to banks related to detecting

and preventing unemployment insurance fraud and other illicit activity related to COVID-19. The

FinCEN alert stated that COVID-19-related unemployment fraud could include fictitious employer-

employee fraud, identity-related fraud, and misrepresentation of income fraud.

13. The SBA in conjunction with the Treasury Department, released a simpler loan forgiveness

application for PPP loans of $50,000 or less.

14. Federal Reserve Vice Chairman of Supervision Randal Quarles stated that the central bank is

not currently considering making permanent changes to the supplementary capital ratio of the

largest banks. In May, the central bank issued an interim rule that allowed systemically important

banks to exclude Treasury securities and deposits at Federal Reserve district banks from the

supplementary leverage ratio.

15. The CFPB modified previous guidance regarding whether marketing services agreements

(MSAs) comply with anti-kickback rules, stating that these agreements do not violate Section 8

of the Real Estate Settlement Procedures Act (RESPA). While the CFPB never declared MSAs to

be illegal, the bureau expressed a degree of antipathy toward MSAs.


Regulatory Events continue on the next page, followed by Legislative Events.

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R E G U L A T O R Y E V E N T S , C O N T I N U E D

16. The U.S. Justice Department (DOJ) announced a new Cryptocurrency Enforcement Framework.

The framework lays out threats and challenges associated with cryptocurrency, along with strategies

the DOJ will use to meet those challenges.

17. While policy experts expect that a Biden administration will take a tougher regulatory approach

to financial firms than the Trump administration, many believe that the focus of a Biden

administration would be on rules that address racial injustice, environmental and inequality

issues.

18. The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and its FinCEN issued

advisory notices stating that businesses and their cybersecurity advisors could be prosecuted if

they make ransomware payments to cybercriminals who are subject to sanctions. The advisory

notices mean that the decision to pay off a hacker is no longer at the sole discretion of a company and

cybersecurity firms may have to register as money services businesses.


L E G I S L A T I V E E V E N T S

1. Senator Elizabeth Warren (D-MA), member of the Senate Banking Committee, sent a letter to

14 large U.S. banks asking them to disclose their performance under a recent confidential

Federal Reserve financial stress test. She additionally asked for copies of the banks internal

planning for potential future downturns, and an analysis on how their capital cushions would be

affected in those situations.

Market/Interest Rate Risk follows on the next page.

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Market/Interest Rate Risk continues on the next page.

10/30 Daily COVID-19 cases in the U.S. have been increasing since mid-September and

reached an all-time high of 88,500 on October 29th. Infections have risen in almost every

state. The number of virus-induced hospitalizations is also at record highs. The

resurgence of COVID-19 infections has led some European countries, such a France and

Germany, to reinstate extensive restrictions on social and economic activity.

10/16 There are indications that inflation is rising. The U.S. Department of Labor Department

reported that the PPI rose 0.4% in September, which was higher than what many

economists had predicted. It was the first year-over-year gain in the PPI since March.

Also, the consumer price index (CPI), which tracks what consumers pay for goods and

services, increased 0.2% in September. It was the fourth straight month that the CPI

increased. The Federal Reserve has stated that inflation must rise above 2.0% annually

before it will consider raising rates.


10/30 U.S. household spending on goods and services increased 1.4% in September,

according to the Department of Commerce. It was the fifth straight month that

consumers increased spending. However, the level of consumer spending remains

below what it was in 2019, especially for services.

10/29 U.S. Gross Domestic Product (GDP) grew by an annualized rate of 33.7% in 3Q20,

according to the Department of Commerce. The economy has recouped 66.5% of the

GDP that had been lost earlier this year.

10/28 Without additional fiscal relief from the federal government, states are confronting an

estimated $434.0B in budget shortfalls over the next two years, according to Moody’s

Analytics.

10/28 Capital One Financial Corp. ($421.3B; McLean, VA), Discover Financial Services

($113.8B; Riverwoods, IL), and Synchrony Financial ($96.5B; Stamford, CT) reported that

purchase volumes among card holders in September exceeded the level in the same

period last year. While retail spending was higher, outstanding balances were lower than

2019 levels, as were late payment and default rates. American Express Co. ($188.6B;

New York, NY) also showed an increase over the last year in online consumer retail

spending, but had an overall decline in cardholder spending due to a 69.0% drop in

travel and entertainment-related expenditures compared to 3Q19.

10/27 Consumer confidence fell in October as Americans became more concerned about the

prospects for employment and the economic outlook. The Conference Board’s index

decreased to 100.9 from 101.3 in September. The October index was below the median

estimate of 102 in a Bloomberg survey of economists.

10/27 Most consumers expect that their spending will remain the same in the coming months,

as concerns about the COVID-19 crisis, the economy and job market persist, according

to a survey by 451 Research.


MARKET/INTEREST RATE RISK, CONTINUED

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10/27 Millions of renters face the possibility of eviction, as moratoriums on evictions expire at the

end of this year. In September, 8.5% of renters, or 2.82 million households missed or

partially paid rent payments, according to an analysis released by the Mortgage Bankers

Association’s Research Institute for Housing America. In addition, a number of renters are

carrying rent payments on their credit cards. Moody’s Analytics estimates that outstanding

rent debt could reach nearly $70.0B by year-end, absent additional federal pandemic

relief.

10/22 Initial claims for unemployment fell to the lowest level since March, according to the U.S.

Department of Labor. For the week ended October 17th, new applications for

unemployment benefits fell to the lowest levels since the onset of the pandemic. As of

October 10th, the number of people collecting regular state unemployment benefits also

fell to its lowest level since March.

10/22 Democratic presidential candidate Joe Biden’s plan to raise corporate taxes would have a

modest impact on profits of big U.S. banks and probably would not have an impact before

2022, analysts said. Other aspects of Biden’s plan, including tax credits for low- and

moderate-income households and government spending on infrastructure, could lead to

fewer loan losses and more lending revenue.

10/21 According to the Federal Reserve’s latest Beige Book report, a collection of anecdotes

from business contacts around the country, manufacturing, residential housing, and the

banking industry reported steady growth, while consumer spending and commercial real

estate remained weak.

10/21 The yield on the 10-year U.S. treasury note reached its highest level since June. Investors

and analysts attributed the rise in yield partly to data indicating strong economic growth,

as well as improved prospects for enactment of another federal stimulus measure.

10/19 According to a report from the FDIC, the percentage of unbanked households has

declined. In 2019, 7.1 million U.S. households did not have a bank or credit union account.

This represents 5.4% of the population, which was 1.1% less than the percentage who

were unbanked in 2017.

10/13 Apartment rents in suburbia have been increasing and rents in central business districts

have been declining due to the migration of people from the cities to the suburbs that has

occurred as a result of the pandemic. According to CoStar, rents have declined in San

Francisco by 17.0% since March, by 9.2% in Boston, and between 5.0% and 6.0% in New

York, Los Angeles and Philadelphia. Rents in central-business-districts of major cities are

declining by approximately 1.0% a month, according to CoStar. Many believe that the

migration to the suburbs will continue.

10/8 A survey of economists by the Wall Street Journal found that more than half do not

anticipate a full recovery in employment until 2023 or later, while 34.7% of respondents

expect job recovery in 2022. The majority of economists expected a more rapid recovery

in economic growth.


Liquidity Risk follows on the next page, followed by Credit Risk.

MARKET/INTEREST RATE RISK, CONTINUED

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LIQUIDITY RISK

10/23 The U.S. Treasury market still faces the risk of illiquidity, similar to that which occurred in

early spring of this year, warned Lorie Logan, an executive vice president in the Markets

Group of the Federal Reserve Bank of New York and a member of the Federal Reserve

Bank of New York’s Market Committee. Logan cited the fact that primary dealers

currently hold even more Treasury debt than they did at the onset of the pandemic and it

could be difficult for them to absorb all the Treasury supply should another round of

forced-selling occur.

10/9 Cash, Treasuries and other securities guaranteed by the federal government now make

up more than 35.0% of the combined balance sheets of the 25 biggest U.S. banks,

according to data compiled by the Federal Reserve. That is the largest share on record

dating back to 1985, and is 5.5% higher than the five-year average.


Credit Risk continues on the next page.

10/29 In contrast to Bank of America Corp.’s ($2.7T; Charlotte, NC) optimistic view on the

financial health of the U.S. consumer, Fiona Greig, director of consumer research at the

JPMorgan Chase & Co. Institute of JPMorgan Chase & Co. ($3.2T; New York, NY),

foresees the likelihood of a wave of consumer debt defaults because unemployment

remains high and no sign of additional federal aid in the near term. “I fear jobless workers

are going to have to make tough choices,” she stated.

10/27 A report by S&P Global Ratings states that global debt-to-GDP is expected to jump

14.0% to 265.0% by year-end. However, the report states that a debt crisis in the next

two years is unlikely because of “the expected economic recovery, a vaccine by mid-

2021, favorable financing conditions, and sovereign, corporate and household spending

and borrowing behaviors.”


CREDIT RISK

10/5 Elevated deposit balances at banks will likely remain into 2021. According to the Federal

Reserve Bank of St. Louis, deposits at U.S. commercial banks rose 19.0%, between

January 1st and September 23rd of this year. Many bankers and analysts expect that

elevated deposit growth will likely continue for the remainder of 2020 and balances may

spike even higher if Congress passes another relief measure.


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10/26 Corporate bond defaults have slowed in recent months, leading analysts to hope that the

default rate will be much lower than was initially feared. According to Moody’s Investors

Service, for the twelve-month period ended September 30th, the default rate on U.S.

speculative-grade bonds and loans was 8.5%, which was below the April forecasted rate

of 11.2%. While there is still a high degree of economic uncertainty, and corporate

defaults could still rise significantly, debt investors are optimistic. Fewer corporate

defaults would likely mean fewer job losses and faster growth.

10/22 In general, 3Q20 earnings reports by regional banks showed an improved outlook on

credit quality. The percentage of loans in forbearance programs continued to decline and

charge-offs were generally stable. While most banks made additional provision for loan

loss in 3Q20, the level was well below that of the first two quarters. Executives at many

banks expressed confidence that their reserve levels were adequate to cover anticipated

losses. A few regional banks, including Umpqua Holdings Corp. ($29.4B; Portland OR),

and Fifth Third Bancorp ($202.0B; Cincinnati, OH), released reserves in the third quarter.

However, bank executives and analysts concede that further credit deterioration will

occur in the quarters ahead, and the level of deterioration hinges on the path of the

economic recovery.

10/18 According to a Wall Street Journal report, Americans’ average FICO credit score hit a

record high in July at 711 and has held steady at that level through mid-October. In part,

that is due to financial assistance provided by the government and lenders, as well as

widespread payment holidays on mortgages, auto loans and student loans. The rise in

credit scores is making it difficult for lenders to evaluate applicants’ creditworthiness.

10/17 In September, approximately 26.0 million borrowers missed their student loan payment

and 40.0% of student loan borrowers missed a monthly payment; 22.7% of borrowers

had missed four or more payments. Total missed student loan payments were estimated

to be as much as $29.5B for 3Q20. Student debt borrowers receiving unemployment

rose from 3.0% in early April to 8.0% by the end of September. The Trump

administration has suspended student loan payments, halted collections and waived

interest on federally held student loans until December 31st.

10/15 Credit quality in the leverage loan market has held up better than many had expected

when the economic contraction first took hold. According to S&P Global, the default rate

on leveraged loans reached 4.0% in July, which was higher than the 1.0% rate in 2019,

but well below the double digits some had predicted. Low interest rates, liquidity

provided by Federal Reserve lending facilities, and tighter underwriting standards are

factors which have supported credit quality in the leverage loan market.


CREDIT RISK, CONTINUED

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

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Operational Risk continues on the next page.

CREDIT RISK, CONTINUED

10/14 Bank of America Corp. CEO Brian Moynihan expressed optimism about the economic

health of consumer households. Moynihan cited the fact that consumer spending for the

first nine months of 2020 exceeded that of 2019, that the bank’s consumer loan deferrals

have declined by 77.0% since May, and that consumer loan demand has stabilized. As a

consequence, Bank of America released $269.0MM its loan loss reserves for consumer

loan losses. In contrast to Moynihan’s optimism, JPMorgan Chase & Co. CEO Jamie

Dimon stated that the economic outlook remains very unsettled.

10/13 JPMorgan Chase & Co. cut its reserve for credit losses by $569.0MM, after adding

$20.0B to the allowance in the first half of 2020, as charge-offs of bad loans declined

from a year earlier. JPMorgan also raised its outlook for the economy, but expressed

uncertainty about long-term credit quality.

10/9 Fears of a wave of bankruptcy filings in the wake of the economic contraction have not

materialized. After consolidating the separate filings of affiliated companies, Chapter 11

filings from March 1st through September 30th were 28.0% lower compared with the

same period last year, according to a consultant with the American Bankruptcy Institute.

10/5 Industry observers are concerned that an anticipated fall-off next year in the demand for

residential mortgages will lead to a loosening in credit terms. Projections by the

Mortgage Bankers Association (MBA) indicate that growth in residential mortgage

volume will be 4.2% in 2021, or roughly half of the estimated 8.3% growth this year. As

loan demand declines, there are concerns that lenders may be tempted to relax

underwriting standards in an effort to prop-up origination volumes.


OPERATIONAL RISK

10/30 The SBA is requiring businesses that received PPP loans of $2.0MM or more to

complete a nine-page questionnaire. Lenders are required to deliver the questionnaires

back to the agency within 10 days. The Loan Necessity Questionnaire seeks details on

quarterly revenue, capital expenditures, dividend payments and whether any employees

earned more than $250.0K. The questionnaire states that the SBA needs the information

to validate the good-faith certification that borrowers made on their PPP application.

Lenders would be responsible for entering borrowers’ responses into the SBA system,

creating potential risks for data entry errors or misunderstanding the information

supplied by borrowers.


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Operational Risk continues on the next page.

OPERATIONAL RISK, CONTINUED

10/30 Some banks are adding risk scenarios that include climate change, pandemics and

cyberattacks in preparation for their Comprehensive Capital Analysis and Review. “We

are thinking about both the likelihood and the increased risk, particularly outside the

bank, in the infrastructures we deal with,” said one panelist at an operational risk

conference.

10/30 The number of customer accounts of Robinhood Markets, Inc. (Menlo Park, CA)

allegedly for sale on the dark web outnumbered those for other brokerages by about 5-

to-1, according to an analysis by Bloomberg. There were more than 10,000 email login

credentials purportedly tied to Robinhood accounts available for sale on the dark web.

Bloomberg states that Robinhood customers have complained for months that their

accounts have been hacked and the response by the company has been inadequate.

10/29 Bank of America Corp. is ending its semi-monthly $200 pandemic pay supplement for

branch employees. The bank will continue other supplemental employee benefit

programs that were instituted in response to the pandemic, including the $100 per diem

in assistance for child care and elder care.

10/29 In an effort to decrease the risk of service outages, JPMorgan Chase & Co. and Goldman

Sachs Group, Inc. ($1.1B; New York, NY) will pause software updates to their retail and

investment banking systems around the final days of the U.S. presidential election in

anticipation of elevated market volatility.

10/28 The SBA’s inspector general warned that more than $78.0B in aid approved for

businesses under the agency’s Economic Injury Disaster Loan (EIDL) program — about

37.0% of the total amount — might have been fraudulently obtained or directed to

ineligible businesses. SBA Administrator Jovita Carranza said the inspector general’s

findings “rest on hasty, incomplete conclusions.”


10/19 New advertising guidelines issued by Google prohibit the targeting of digital ads for

credit, and certain other products and services, using gender, age, parental status,

marital status or zip code. In addition to credit, the prohibitions apply to ads for products

and services related to housing and employment. Google’s action follows a similar

change in advertising policy adopted by Facebook last year.

10/9 JPMorgan Chase & Co. CEO Jamie Dimon said the bank has reduced bonuses for

certain employees who failed to help the bank in its diversity efforts. JPMorgan has

launched a new accountability framework that ties diverse hiring and retention efforts to

year-end performance and compensation decisions.


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10/21 Banks are preparing for what could be years of regulatory scrutiny related to their

participation in the PPP. Four banks, including Bank of America, have warned investors

in shareholder filings about PPP regulatory and legal risk. Among the possible risks

facing banks are potential violations of the program’s first-come, first-serve application

rules, failing to help minority-owned and women-owned businesses; maintaining

adequate documentation, and adhering to know your customer rules.

10/21 Procedures for applying for PPP loan forgiveness varies among banks. Some lenders are

reaching out to borrowers and encouraging them to file their applications now, while

others are delaying opening the process in order to make technology upgrades and to

allocate and train staff. Also, borrowers are seeking more clarity on how to qualify for

loan forgiveness, as well as on the tax consequences of doing so.

10/20 Two senior commodities executives are leaving Morgan Stanley’s ($975.4B; New York,

NY) after compliance breaches linked to the use of communications tools such as

WhatsApp. The departing executives include the bank’s global head of commodities and

head of commodities trading. The bank did not uncover any wrongdoing within the

messages, but the use of those communication channels violated bank policy.

10/19 Morgan Stanley CEO James Gorman said between 10.0% and 12.0% of the bank’s

employees in the U.S. are now working from their offices.

10/14 Wells Fargo & Co. ($2.0T; San Francisco, CA) reportedly fired over 100 employees after

an internal investigation found the employees fraudulently applied for and received

COVID-19 relief funding from the SBA’s EIDL program, according to Bloomberg.

10/9 Financial services companies like Visa Inc. ($77.9B; San Francisco, CA) and JPMorgan

Chase & Co. are preparing to fight against potential quantum-computing cyberattacks by

exploring solutions to help prevent such an attack, closely monitoring the development of

new encryption standards, and developing new processes.

10/8 The pandemic has caused 75.0% of financial firms to reconsider office-space business

models, according to a survey from PwC and business lobby CBI. “Almost half of

financial-services firms stated that most of their staff can feasibly work remotely,” the

survey noted. Most of the reviews are motivated by a desire to cut office space or

reconfigure existing space.

10/6 JPMorgan Chase & Co. could have up to 30.0% of its staff working from home

permanently. JPMorgan’s possible plans include having some employees work remotely

entirely, some may work on a rotational basis, and some employees may go to the office

two or three times a week, according to CEO Jamie Dimon.


Operational Risk continues on the next page, followed by Fiduciary & Suitability Risk and Regulatory Risk.

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Regulatory Risk continues on the next page.

REGULATORY RISK

10/14 The OCC fined USAA Federal Savings Bank, the banking subsidiary of United Services

Automobile Association ($189.9B; San Antonio, TX), $85.0MM for deficiencies in the

bank’s risk management program as well as for compliance infractions related to laws

protecting members of the armed services. The OCC found that USAA’s risk

management program had deficiencies in all three lines of defense. Earlier in the month,

the OCC disclosed that it had assigned a “needs to improve” rating regarding the bank’s

performance under the Community Reinvestment Act (CRA).



10/6 Banks are moving toward rapid application development platforms that don’t

require users to know coding languages. One expert says the reduction in the

need for coders will lead to demand for developers with problem-solving skills.

10/6 There has been a sharp escalation in the number of phishing and ransomware

attacks targeting financial services companies this year, based on a report by

security company Arctic Wolf. The study found that the banking sector

experienced a 520.0% increase in attacks between March and June of this year.

Experts say that ransomware has replaced malware as the preferred method of

attack by cybercriminals.


FIDUCIARY & SUITABILITY RISK

10/30 The Department of Labor issued a final rule that stipulates retirement plan fiduciaries

must place financial value ahead of environmental, social and governance (ESG)

considerations in order for a fund to be included in a retirement portfolio. The rule does

not prohibit ESG investing, but requires fiduciaries to detail how the strategy benefits the

core risk-and-return objective of a 401(k) plan. The rule could curb ESG investing in

401(k)s.


15



10/27 The DOJ is investigating Visa Inc.’s planned purchase of fintech Plaid, which provides the

back-end processes for financial apps to connect to customer accounts at financial

institutions. The DOJ is weighing whether to sue to block the proposed transaction on

anti-trust grounds.

10/23 Goldman Sachs Group Inc. admitted to breaking U.S. corruption laws, and agreed to pay

global financial regulators $2.9B and recoup $174.0MM from executives in the bank’s

involvement in the 1MDB scandal. Following this, the bank announced broad measures

promising greater scrutiny of executives following the bank’s $2.9B settlement with

authorities in the U.S. and globally.

10/15 The Federal Reserve fined M&T Bank Corp. ($139.5; Buffalo, NY) $546.0K for violating

requirements of the National Flood Insurance Program. The proceeds will be passed on

to the Federal Emergency Management Agency (FEMA).

10/8 The OCC assessed a $60.0MM civil money penalty against Morgan Stanley subsidiaries

Morgan Stanley Bank NA and Morgan Stanley Private Bank NA for unsafe or unsound

practices regarding the 2016 decommissioning of two wealth management business data

centers in the U.S. Among the unsound practices by Morgan Stanley cited by the OCC

were failure to properly assess or address risks of decommissioning hardware;

inadequately assessing the risk of subcontracting the decommissioning work, including

conducting proper due diligence in vendor selection and monitoring; and failure to

maintain appropriate inventory of customer data stored on the decommissioned

hardware devices.

10/7 The OCC fined Citigroup Inc. ($2.2T; New York, NY) $400.0MM for failing to correct

difficulties with its risk and control systems, and ordered the bank to upgrade its

processes and its technology. This action follows on the heels of Citi’s blunder of

mistakenly paying $900.0MM to creditors of Revlon, which prompted the Federal

Reserve to order the bank to submit a remediation plan within four months.


REGULATORY RISK, CONTINUED

Reputational Risk follows on the next page.

16



10/30 American Express Co. announced a $1.0B plan to advance diversity, inclusion and equity

priorities for its colleagues, customers and communities. Amex said it intends to double

its spending with diverse and minority-owned suppliers in the U.S. to $750.0MM annually

by the end of 2024. The amount includes increased spending with African-American-

owned suppliers to at least $100.0MM annually.

10/28 PayPal Holdings, Inc. ($63.2B; San Jose, CA) announced an investment of more than

$50.0MM towards eight African-American and Latino-led venture capital firms. In June,

the company pledged $530.0MM towards supporting minority-owned businesses and

communities in the U.S.

10/21 Huntington Bancshares Inc. ($118.4B; Columbus, OH) launched a $25.0MM small-

business lending program focused on servicing minority, women, and veteran-owned

businesses. Through the program, called the Huntington Lift Local Business, businesses

can secure SBA loans from $1.0K-$150.0K.

10/17 Assets in sustainable investments, such as ESG funds, are on pace to outnumber

conventional funds in Europe over the next five years.

10/16 According to an oversight report, the U.S. Department of the Treasury privately

encouraged lenders to prioritize existing customers when issuing loans through the PPP.

10/15 Morgan Stanley is piloting a program called the Morgan Stanley Experienced

Professional Program aimed at hiring African-American talent in its fixed income and

business resource management divisions.

10/14 TD Bank, parent of TD Group US Holdings LLC ($475.6B; Wilmington, DE), sued fintech

Plaid Inc. for alleged trademark infringement and false advertising. The suit claims that

Plaid has patterned a user interface after TD’s login page to trick clients into providing

sensitive information, and accuses Plaid of mining information that can be sold to third

parties. Plaid denied the allegations.


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

REPUTATIONAL RISK

10/9 Big banks including JPMorgan Chase & Co., HSBC, parent of HSBC North America

Holdings Inc. ($283.5B; New York, NY), and Morgan Stanley pledged to adopt financing

commitments aligned with the goals of the Paris Agreement, which aims to achieve net-

zero emissions by 2050. JPMorgan announced it is adopting a financing commitment to

establish intermediate emission targets for 2030 for its financing portfolio, focusing on

the oil and gas, electric power and automotive manufacturing sectors. Both Morgan

Stanley and HSBC pledged to achieve a net-zero emissions goal in their lending

portfolios by 2050 at the latest. HSBC will also provide between $750.0B and $1.0T in

financing to help clients make the transition, according to Chief Executive Noel Quinn.


17



Strategic Risk continues on the next page.

STRATEGIC RISK

10/26 JPMorgan Chase & Co. could roughly double the adviser ranks in its wealth management

division by hiring as many as 4,000 advisors in the next five to six years, according to the

bank’s U.S. wealth management unit CEO, Kristin Lemkau. Lemkau noted that JPMorgan

has not been able to match its competitors in wealth management.

10/23 Wells Fargo & Co. announced an exit from the student lending business and is reportedly

considering divesting its asset-management unit. The bank will continue to accept

applications from its current customers for student lending through January.

10/21 KeyCorp ($172.0B; Cleveland, OH) is exiting indirect automobile lending and will focus

more resources to mortgages and its Laurel Road student loan refinance business.

KeyCorp, which has 1,057 branches over a wide footprint, is also planning a significant

restructuring of its network. KeyCorp’s chairman and CEO Chris Gorman stated that the

changes reflect a need to invest in relationship-driven businesses at a time when people

are flocking to digital channels, adding that indirect auto doesn’t fit the model.


10/8 JPMorgan Chase & Co. announced it would commit $30.0B to address racial inequality

over the next five years. The initiative seeks to provide $8.0B in new mortgages for

African-American and Latino borrowers, $14.0B in loans for affording housing projects,

$2.0B in small business loans, and $2.0B in philanthropy. JPMorgan followed significant

commitments made by big banks like Bank of America Corp. and Citigroup Inc., who

made similar pledges totaling about $1.0B each.

10/7 Wells Fargo & Co. reportedly received a letter from the Labor Department’s Office of

Federal Contract Compliance Programs questioning the bank’s efforts to boost the

diversity of management throughout the company. The agency is investigating to see if

any efforts violate civil rights laws that limit the consideration of race in hiring employees.

10/4 BlackRock, Inc. ($157.3B; New York, NY) has come under criticism by activists for

reducing its support for environmental votes proposed by shareholders from 8.0% last

year to 6.0% in 2020.

10/2 United Services Automobile Association filed a lawsuit against PNC Financial Services

Group, Inc. ($459.0B; Pittsburgh, PA) alleging patent infringement related to mobile

deposit capture technology. Previously, USAA successfully sued Wells Fargo & Co. over

the same issue. Wells Fargo and PNC utilize the mobile check deposit software of Mitek.


REPUTATIONAL RISK, CONTINUED

18



10/29 Goldman Sachs Group, Inc. released software that allows any company to offer “banking as a service” or “transaction banking” to its customers. Since the preliminary release of the service in June, Goldman has generated $28.0B in deposits from more than 200 clients.

10/29 TD Bank, parent of TD Group US Holdings LLC, is paying all nonexecutive employees a

$500 bonus as a reward for their efforts during the ongoing pandemic. The award will go

to about 90,000 nonexecutive employees around the world.

10/28 Despite major card servicers reporting an increase in customer spending, Mastercard

Inc. ($32.1B; Purchase, NY) and Visa Inc. announced double digit declines in revenue

from 2019 to 2020, largely due to effects of border restrictions and social distancing

measures halting international spending and travel spending. The CFO of Mastercard

predicted that personal travel will begin to come back much sooner than business travel,

and it will all be tied to the success of a COVID-19 vaccine.

10/27 HSBC, parent company of HSBC North America Holdings Inc., rolled out new cash-flow

forecasting tools for U.S. businesses of all sizes. This comes at an appropriate time as a

recent survey conducted by the Association for Financial Professionals found that in

response to COVID-19, treasurers are very focused on cash forecasting and expanding

the time horizon for cash forecasts.

10/27 JPMorgan Chase & Co. has formed Onyx, a new unit composed of over 100 workers for

its blockchain and digital currency efforts. The creation of Onyx coincided with the initial

use of the bank’s digital currency, JPM Coin, by an international technology client.

10/27 Citigroup Inc. plans to deepen its corporate banking presence in developing countries.

Citi has overhauled its businesses in eastern Europe, the Middle East and Africa to focus

on emerging economies.

10/26 JPMorgan Chase & Co. and Italian energy company Enel entered into a cross-currency

basis swap that incorporates both firms’ sustainability goals and charges penalties if they

are not met. “We think this swap could very much be a template for other transactions to

follow, not just in the swap market, but also in other markets for FX and rates,” said

JPMorgan’s Johannes Banner.

10/26 Charles Schwab Corp. ($400.5B; San Francisco, CA) announced layoffs of 1,000

employees due to a reduction of overlapping or redundant roles identified as part of its

integration of TD Ameritrade.

10/23 Morgan Stanley will curtail hiring for its financial advisor training program through the

end of 2020, as the remote work environment has made training difficult. Morgan Stanley

also expects the number of financial advisers in its ranks to stay relatively static over the

12 to 18 months.


STRATEGIC RISK, CONTINUED


19



10/22 Umpqua Holdings Corp. announced that it plans to close about 30 to 50 branches over

the next two years, part of a broader effort to trim its physical footprint and cut expenses.

The bank’s larger goal is to have 180 to 200 branches by the start of 2023, with closures

that would save an estimated $12.0MM to $20.0MM.

10/21 Morgan Stanley CEO James Gorman said that investments focused on ESG criteria are

becoming possibly the most important element of clients’ portfolios. He also noted that

the rise in demand for such products “isn’t a fad” and “isn’t going away.”

10/21 JPMorgan Chase & Co. launched a new, same day funding feature for its merchant

services clients. The service, using a card reader called QuickAccept, enables small

businesses to process card payments quickly through a mobile app or a contactless card

reader. Businesses will receive a credit on their Chase business checking accounts

the same day. The same day funding is free of charge. The bank intends to migrate its

existing merchant services customers to the new service.

10/21 PayPal will soon support cryptocurrency payments at online checkout, after the New

York State Department of Financial Services granted PayPal a conditional “Bitlicense”,

which permits it to trade and hold cryptocurrencies. PayPal plans to offer U.S. customers

the ability to buy, sell, and hold cryptocurrencies in partnership with fintech Paxos. In

addition, PayPal is reportedly considering acquiring a cryptocurrency firm to further

expanding its capabilities in cryptocurrency.

10/19 Citigroup Inc. announced the implementation of Mastercard True Name, which allows

customers to use their preferred name, rather than their legal name, on credit and debit

cards. The cards were designed for transgender and nonbinary people. Citi is the third

and largest financial institution to offer this program.

10/19 Social Finance Inc. launched new social trading and investing features within SoFi Invest.

The latest capabilities, now available to all SoFi Active Investing members, allows friends,

family and other SoFi members to follow a member’s investment journey. The feature

also allows members to share investment portfolios, and discover and follow holdings,

watchlists and activity of members who have opted into the feature.

10/16 JPMorgan Chase & Co. launched Everyday 401(k), which will give small-business owners

the ability to set up a 401(k) plan by selecting JPMorgan Asset Management’s already

established solutions or by customizing their own plan. Small-business owners can set

up a plan and enroll their employees online at Chase.com. Plans start at $75 per month,

and $5 per participant per month. SS&C Technologies Holdings Inc. will act as the

underlying recordkeeper for Everyday 401(k).

10/16 Stripe, Inc. (San Francisco, CA) said it will acquire Nigerian startup Paystack Payments

Ltd. to boost online commerce across Africa. Stripe did not disclose financial details of

the transaction, but a person familiar with the terms said that the company would pay

$200.0MM for the acquisition. The deal is subject to regulatory approvals and other

closing conditions.




20



10/15 Bank of America Corp. is pursuing a number of initiatives to enhance its service

offerings to corporate clients, including artificial intelligence to help improve cash

forecasting of corporate clients as well as to automate cross-border wire

payments; improving the integration between the bank’s online corporate banking

platform and the technology systems of corporate customers; and adapting the

bank’s consumer-facing virtual assistant Erica to commercial banking.10/15 BBVA USA Bancshares, Inc. ($102.3B; Houston, TX) announced that it would offer a

0.75% rate discount on secured term loans for fuel-efficient commercial vehicles. It is the

second product initiative the bank has launched to support environmental sustainability.

Last month, it, announced a discount of up to $10.0K on commercial real estate loans

related to the purchase or construction of energy-efficient buildings.

10/14 Goldman Sachs Group Inc. CEO David Solomon announced the bank would not back

down from its ambitious financial goals, outlined at the start of the year. Targets include a

ROE of above 13.0%, ROTE of above 14.0%, and an efficiency ratio of 60.0%.

10/14 U.S. Bancorp ($546.7B; Minneapolis, MN) announced that it will close 400 more

branches by early 2021, after already closing about 300 branches in the last year.

10/13 JPMorgan Chase & Co. launched a new bank account for kids as young as 6 years old,

named Chase First Banking, providing an account for children that gives parents control

over the experience. The checking account is managed through the Chase mobile app,

where it’s split into three components: Spend, Save and Earn. Kids also get their own

debit cards that can only be used in accordance with the spending limits their parents

set.

10/10 Morgan Stanley has brought back hundreds of jobs in its fixed-income division, a

business it had previously cut as a part of a restructuring initiative in 2015. CEO James

Gorman said that the bank saw opportunities in the business as other competitors

retreated from the space.

10/8 Morgan Stanley agreed to pay $7.0B in cash and shares to buy investment management

firm Eaton Vance. The deal will add $500.0B of assets under management to Morgan

Stanley’s investment management division, as well as offer new products in fixed

income.

10/8 Bank of America Corp. will offer a new low-cost, small dollar loan product for checking

customers. The product, called Balance Assist, will be launched in January and will

enable customers to borrow up to $500 for a flat $5 fee, and repay the amount over a

three-month period. Customers need to have a checking account with the bank for at

least one year to be eligible for the loan.




21



10/8 Square ($7.8B; San Francisco, CA) invested 1.0% of its assets in bitcoin, signaling a

commitment to cryptocurrency. The company announced that “cryptocurrency is an

instrument of economic empowerment and provides a way for the world to participate in

a global monetary system”.

10/7 Venmo, the payments app owned by PayPal Holdings Inc., introduced its first physical

credit card. The card is uniquely stamped with a QR code across the front. The card will

be issued by Synchrony Financial, and will be available starting in October.

10/5 Bank of America Corp. launched a digital financial planning tool, Life Plan, on the bank’s

website and app. Life Plan allows customers to set multiple goals and relies on artificial

intelligence linked to customers’ bank accounts to make recommendations.

10/1 Goldman Sachs Group, Inc. finalized terms to acquire General Motors’ credit card

business for $2.5B. The deal will bring Goldman over 1.0MM cardholders and roughly

$8.5B in annual spending. The move is another step in the bank’s continued expansion

into credit cards. Goldman Sachs partnered with Apple to launch the Apple Card in

2019.



Significant Management Changes follow on the next page.

22



SIGNIFICANT MANAGEMENT CHANGES

D A T E B A N K M A N A G E M E N T C H A N G E

10/28 Citizens Financial

Group Inc.

Appointed Ryan Parker head of wealth management, effective

November 2nd. Parker will succeed John Bahnken, who is retiring

from the company.

10/28 Citizens Financial

Group Inc.

Hired Donald Felix, a JPMorgan Chase & Co. executive with a

background in personal finance management, as head of national

banking. Felix will join the bank in January 2021 and help to lead

the expansion of the company’s digital offerings.

10/26 Fifth Third

Bancorp

Appointed Tim Spence president, effective immediately. Spence

was previously executive vice president and head of consumer

banking, payments and strategy.

10/26 Citigroup Inc. Announced that global head of private banking Peter Charrington

stepped down from his position.

10/9 Santander Bank

NA

Appointed Jennifer Mathissen chief marketing officer. She will

assume the position November 2nd. She previously led enterprise

insights at CVS Health Corp.

23



NOTE ON THIS REPORT

T H E RE P 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.

O UR S O URC E S

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:

PUB L IC ATION S

▪ American Banker

▪ New York Times

▪ Wall Street Journal

▪ Financial Times

▪ Economist

RE G UL ATORY PRE S S RE L E AS E S

▪ Consumer Financial Protection Bureau

▪ Department of Justice

▪ Federal Deposit Insurance Corporation

▪ Federal Reserve

▪ 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

24



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