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Basel Capital Proposal Update

May 7, 2024

As reported widely late last week, banking agencies appear to be targeting late summer for publication of final bank capital rules.

Why it matters: The proposed capital increases on $100 billion+ banks have come under intense industry and bipartisan scrutiny. Senior regulators have been indicating recently that significant changes to the proposal are likely forthcoming.

According to Bloomberg, the agencies are opting to revise the proposal rather than scrapping and restarting it, with a possible August 2024 finalization:

“In a sign that regulators are advancing in their push to finalize the plan, officials are preparing to release as soon as next week a compilation of data from banks on how the changes could affect aspects of their businesses, according to some of the people. That so-called Quantitative Impact Study, which collected year-end 2023 data from the nation’s eight largest banks, is supposed to help the Fed weigh the relative costs and benefits of each aspect of the proposed rule and the regulation as a whole.”

Both the content of a future rule and the timing of its release have been fodder for considerable debate within the financial sector:

• If changes to a regulatory proposal are sufficiently significant, the agencies may have to re-propose to give the public another opportunity to comment.
• However, the Biden Administration might not want delay issuance of a final rule in the event of a second Trump presidency.
• But further complicating the agencies’ consideration of timing is that, as discussed in last week’s CREFC Policy and Capital Markets Briefing, issuing a final rule so late into Biden’s term could subject it to the Congressional Review Act. (The CRA allows a new Congress to nullify rules issued within the last 60 legislative days of the prior Congress.)

Go deeper: The final rule will need the signoff of the Board of Governors, the OCC, and the FDIC.

• Four of the seven Fed Board Governors are Democrats, with the rest being Republican appointees. Three of the five FDIC Directors are Democrats, and the acting OCC head was appointed by Biden.
• Given the bipartisan pushback in Congress, regulator votes may not break down on traditional party lines.

CREFC submitted comments that generally opposed the proposal and offered specific feedback on key provisions. CREFC also led a joint real estate trade letter opposing the proposal.

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Democrats Move to Decriminalize Cannabis; DOJ Seeks to Reschedule

May 7, 2024

In separate efforts last week, key Senate Democrats reintroduced legislation to federally decriminalize marijuana while the Department of Justice started the process of loosening federal restrictions on the drug.

Why it matters: Federal law prohibits any use of cannabis even though 38 states allow medical use and 24 states have legalized some recreational use. The federal moves are two potential paths to removing the federal and state law mismatch.

Go deeper: The legislation introduced is similar to a 2022 bill that would legalize cannabis at the federal level and set up a system to tax and regulate its production and use. Senate Majority Leader Chuck Schumer (D-NY), Sen. Cory Booker (D-NJ), and Sen. Ron Wyden (D-OR) are the lead sponsors of the bill along with 15 Democratic co-sponsors.

• While Schumer’s support is key, the path to federal legalization will be challenging in an election year and with many key Republican senators still skeptical of full legalization.
• Schumer is still pursuing incremental steps, including the SAFER Banking Act that would create a safe harbor for financial institutions to serve state-authorized cannabis businesses.
• Last week, Politico reported that Schumer hoped to add SAFER Banking to the Federal Aviation Administration reauthorization bill.
• Minority Leader Mitch McConnell (R-KY) remains opposed to the cannabis banking bill, which makes it unlikely it will hitch a ride on the FAA reauthorization.

Yes, but: The post-election lame duck session could be another opportunity to pass cannabis banking along with a variety of year end packages. McConnell is on his way out as GOP Senate Leader and may defer to his successor on those negotiations.

Meanwhile, news outlets reported last week that the Department of Justice began a lengthy process to reduce federal restrictions on cannabis through regulation.

• The move to reclassify or “reschedule” marijuana from the most restrictive Schedule I to Schedule III under the Controlled Substances Act would ease many restrictions on it and possibly pave the way for some broader legal use.
• Even if cannabis is reclassified as Schedule III, the Food and Drug Administration would need to approve cannabis for medical use to receive federal blessing.
• The reclassification alone would not make marijuana legal at the federal level, as discussed in a Congressional Research Services report:

“Moving marijuana from Schedule I to Schedule III, without other legal changes, would not bring the state-legal medical or recreational marijuana industry into compliance with federal controlled substances law.”

The bottom line: Rescheduling cannabis may move the needle toward greater federal acceptance, but Congressional action is needed to provide legal clarity for state-authorized cannabis regimes.

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Global ESG Practitioner Survey Results Published

May 7, 2024

According to the 2024 ESG Practitioner Survey by Workiva, an international consulting firm, over 80% of companies not subject to the EU’s Corporate Sustainability Reporting Directive (CSRD) still intend to comply. The survey polled more than 2,000 people involved in ESG reporting from organizations across North America, Europe, and Asia.

Additional key findings include:

• 87% of respondents find it challenging to adapt reporting processes to comply with new regulations;
• 88% believe that assurance over ESG data increases the likelihood that a company will achieve its goals;
• 98% say they are confident in the accuracy of their ESG data, but 83% also believe that collecting accurate data to fulfill the CSRD requirements will be challenging; and
• 88% of practitioners say that having a strong ESG reporting program will give their organization a competitive advantage.

Why it matters: The survey’s findings also reflect the reality for U.S. companies, since the EU’s recently passed Corporate Sustainability Due Diligence Directive (CSDDD) “will require thousands of companies, both inside and outside of the EU, to integrate human rights concerns and environmental impacts within their governance.”

However, the survey found that 78% of practitioners are concerned with their organization’s ability to collect and share information with other organizations in their value chain.

Finally, according to survey results, organizations that don’t adapt, “will struggle to absorb the additional workload required to comply with the CSRD, CSDDD, SEC climate disclosure rule, or standards established by the International Sustainability Standards Board (ISSB).”

CREFC recently circulated its 2024 Sustainability Survey among membership and is currently analyzing the results. Stay tuned for the report.

Please contact Sairah Burki (sburki@crefc.org) with questions.

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