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Discontinuation of LIBOR, U.S. presidential election and cybersecurity among key issues insurers face

Key issues to watch

Financial, Executive and Professional Risks (FINEX)
N/A

By Alison MacLaren | February 3, 2021

Key concerns and recommendations for the banking industry.

Discontinuation of LIBOR

Observation

Despite the disruption of COVID-19, the FCA continues to plan for LIBOR to cease Q4 2021. The transition has been described by the NY Federal Reserve as “a DEFCON 1 litigation event.” Regulators have identified SOFR as the U.S. replacement for LIBOR in the U.S.

Concern

A key issue is how banks and lenders handle “legacy” contracts which reference LIBOR, which according to the ABA includes $300 trillion of existing mortgages, loans, bonds and derivatives. However, on November 30, 2020, LIBOR’s administrator announced that many U.S. LIBOR rates will remain in publication through June 30, 2023, which would allow most legacy contracts to mature.

Institutions must now begin issuing non-LIBOR products to ensure working and compliant models in advance of cessation. Inconsistent guidance from regulators and market participants adds complexity and may lead to lack of borrower understanding. Risk to reputation and litigation may also result where counterparties perceive changes to the terms of contracts disadvantage them relative to the bank.

Considerations

Cessation presents both D&O and BPL exposures. Insureds should expect an uptick in carrier interest through the 2021 renewal cycle.


U.S. Presidential Election

Observation

Joe Biden’s election as U.S. president suggests a change in regulatory policy away from some of the Trump-era banking policies which softened post-financial crisis regulations. This is likely to impact larger institutions, as there has been bipartisan support for easing regulations for smaller banks.

The Biden win may mean near-immediate change at the CFPB due to the Supreme Court’s June 2020 decision permitting the president to remove the director at will, and which may extend to other agencies, including the FHFA. The CFPB had been largely quiet during Trump’s tenure and is likely to revive aggressive supervision and enforcement actions under new leadership.

A change in administration is also likely to focus attention on finding a consistent regulatory approach to the Community Reinvestment Act. Regulatory restrictions over marijuana banking may also be lifted.

Concern

Biden’s administration may lead to increased regulation, thereby increasing risk of compliance.

Considerations

Banks must have robust processes in place to monitor and adhere to shifts in regulatory policy. The scope of regulatory coverage under policies remains a key priority to address any potential lapses or oversights.


Cybersecurity & Digital Banking

Observation

The FDIC and OCC issued a Joint Statement on Heightened Cybersecurity Risk on January 16, 2020. Its intent is to remind supervised banks of cyber risk management principles available in interagency resources.

The 2020 S&P Global Market Intelligence U.S. Mobile Banking Report detailed COVID-19’s role in banks — “emphasis on innovation in their digital delivery, including their mobile apps, while announcing branch optimization plans aimed at cutting costs.” According to the report, YOY branch visits were down up to 42% in some regions.

Concern

COVID-19 work-from-home network vulnerability and new malware present increased risk. Rise in digital banking and use of biometrics in fraud prevention and AML requires tailored cyber solutions.

Considerations

The adequacy of cyber cover should be reviewed on a regular basis, including the scope and limitations of such coverage and how the policy interacts with other insurance programs. Explore stand-alone options or potential cyber extensions to the D&O/E&O policy.


Environmental, Social and Governance (ESG)

Observation

ESG continues to remain a hot button topic for all financial institutions, including banks, as Board of Directors grapple with how to manage their risks. On January 14, 2021, the OCC released the final version of its controversial “Fair Access” rule, which requires fair access to financial services, capital and credit based on an individual customer’s risk rather than permitting the use of broad category-based decisions. The rule impacts banks with >$100B in assets and is effective April 1, 2021.

Concern

The rule’s intent is to discourage banks from withholding credit from so-called “dirty industries.” It has been criticized by the American Bankers Association, which described it as “arbitrary and capricious,” inconsistent with accepted risk management, and imposing significant compliance costs, and by Democratic legislators.

Recent litigation against banks for participating in allegedly anti-ESG municipal bond financing, after which city residents were exposed to tainted water sources.

Considerations

Underwriters will expect banks to be focused on ESG, and banks should be prepared to identify ESG strategy and risk assessments. Litigation and public appetite to hold banks accountable will result in increased defense (if not indemnity) costs.


Volcker Rule Changes

Observation

Effective October 1, 2020, the Volcker rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds (“covered funds”) was modified to remove regulations and thus minimized compliance burdens.

This change presents banks with increased ability to participate in VC and private debt funds and offers new oppertunites primarily to large banks.

Concern

Multiple potential Biden-appointees opposed the revisions, leaving it vulnerable to reversal during his term. Critics of the revisions believe the rollback may leave banks overexposed to risky derivatives and potential fallout may echo the 2008 financial crisis. The changes also portend increased fintech investment by large banks.

Considerations

The 2020 Volcker rule amendments continue the trend of relaxing the regulatory standards put in place post-2008. Investors have viewed these changes positively, evidenced by the price of industry share prices increasing on the day the modifications were announced. Underwriters are likely to view the deregulatory trend in a similarly positive manner, however, with a careful eye toward the risks identified by opponents.


Cryptocurrency

Observation

Cryptocurrency continues to move toward the mainstream as evidenced by the January 2021 approval by the OCC of the first federally chartered crypto bank. The approved bank does not offer lending or deposit taking but rather focuses on digital asset custody services on behalf of investors and other banks who cannot offer these services to their customers.

Earlier in January 2021, the OCC issued an interpretive letter permitting banks to use stablecoins to facilitate payment transactions for customers. In December 2020, FinCEN issued a proposal which would subject banks and crypto trading platforms to AML/KYC regulations.

Concern

Crypto banks had previously been operating solely with the state charter system; a federal charter will allow an institution’s offerings to be expanded nationally. By seeking a federal charter and the accompanying regulatory scrutiny, crypto banks are showing a willingness to enter a level playing field on par with other national banks. Despite this, crypto remains a volatile and relatively untested market participant.

Considerations

Market appetite is likely to be exceedingly limited for cryptocurrency and its emerging risks.

Disclaimer

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.

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Banking Industry Leader, Willis Towers Watson

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