16 08, 2022

DAILY081622

2022-08-16T17:17:09-04:00August 16th, 2022|2- Daily Briefing|

FRB-Cleveland Study: Banks are Better Small-Business Lenders Than Fintechs

Using data from the 2021 Small Business Credit Survey, a new Federal Reserve Bank of Cleveland study concludes that small businesses that made use of online lenders were less satisfied with their experiences and more likely to report high rates and unfavorable repayment options than those that used banks.  The study also found that online lenders were less likely than banks to approve the full extent of financing, noting that this was not the case prior to the pandemic.

Fed Gives Guarded Guidance re Crypto Activities

The Federal Reserve Board today released a supervisory letter requiring state member banks to obtain prior approval before commencing cryptoasset-related activities and to ensure that appropriate internal controls are in place in order to do so.  This letter comes a day after the board announced its new payment-system access policy and is likely intended to make it clear that activities in or out of FDIC-insured banks related to cryptoassets will not get the free pass some fear.  We will shortly provide clients with in-depth analysis of this new policy as well as the payment-access standards.

Toomey Presses for FDIC-Authorized Crypto Activity

Sen. Toomey (R-PA) sent a letter today to acting Chairman Gruenberg alleging that the FDIC has instructed FDIC regional offices to send letters to multiple banks requesting that they refrain from expanding relationships with crypto firms without any legal basis, citing multiple whistleblower complaints.  He asks that Mr. Gruenberg provide any communications that the …

15 08, 2022

DAILY081522

2022-08-15T17:19:17-04:00August 15th, 2022|2- Daily Briefing|

FDIC Study Finds Changing Assessment Rates Had Procyclical Effects During the Financial Crisis

A new FDIC staff study tackles an immediate concern in the wake of the FDIC’s proposal to raise DIF premiums (see FSM Report DEPOSITINSURANCE114): procyclicality.  In what its authors describe as one of the first studies to provide large-scale empirical evidence on deposit insurance’s procyclical effects, this model-driven study looks at the effect of changing deposit insurance assessment rates during the period between 2009 and 2011.  Using credit unions as a control group, it finds a 1.6 percent decrease in bank lending after a 7 bp increase in the assessment rate and a 0.3 increase after a 5-10 bp rate decrease.

Fed Tries to Sooth Payment-Access Critics with New Policy

Doubtless reflecting all the political pressure it’s under regarding payment-system access, the FRB today not only finalized its payment-system access rules, but also made sure to use an e-mail subject line containing the release that these rules are “transparent, risk-based, and consistent.”  The board also states that the final standards are consistent with both its 2021 proposal (see FSM Report PAYMENT22) and the 2022 “supplemental” proposal (see FSM Report PAYMENT24) even though the supplemental was considerably more detailed than the initial attempt to give the Reserve Banks broad discretion without the appearance of inconsistent or even insider decision-making.

Daily081522.pdf

15 08, 2022

M081522

2022-08-15T16:47:09-04:00August 15th, 2022|6- Client Memo|

Karen Petrou: The Sobering Lesson of Subprime Mortgages for Digital-Asset Regulation

Last week, the American Banker had a synopsis of views filed on Treasury’s request for comments on digital-finance regulation.  Its quote from the ABA’s comment letter is striking, indicating that this letter pointed to the increasingly-absurd reality of no rules for nonbanks and no digital assets for banks given all their rules.  Progressive advocates pushed back, arguing that it’s right to keep banks quashed because of all the systemic hazards they pose.

m081522.pdf

15 08, 2022

FINTECH30

2022-08-15T16:42:43-04:00August 15th, 2022|1- Financial Services Management|

Digital Marketing

Continuing its practice of setting sweeping policy by administrative action without prior notice or comment, the CFPB has issued an interpretive rule sharply curtailing the extent to which digital advertising and market strategies are exempted from the legal and compliance obligations associated with most parties directly providing consumer financial products or services and those acting as servicers to these entities.  The most immediate legal and reputational risk posed by this new policy is to technology-platform companies that use behavioral data to determine the products or services offered to consumers or those to whom consumers are directed.

FINTECH30.pdf

15 08, 2022

Karen Petrou: The Sobering Lesson of Subprime Mortgages for Digital-Asset Regulation

2022-08-15T16:37:43-04:00August 15th, 2022|The Vault|

Last week, the American Banker had a synopsis of views filed on Treasury’s request for comments on digital-finance regulation.  Its quote from the ABA’s comment letter is striking, indicating that this letter pointed to the increasingly-absurd reality of no rules for nonbanks and no digital assets for banks given all their rules.  Progressive advocates pushed back, arguing that it’s right to keep banks quashed because of all the systemic hazards they pose.  To my thinking, both sides are right, with recent history not just showing why, but also how urgent it is for regulators finally to act on both overarching crypto rules and those governing bank exposures in this volatile sector.

The recent history I have in mind is the chilling precedent of subprime mortgages starting in around 2003.  I well remember a meeting at the OCC in which my late husband detailed both the borrower and market risks of new mortgage products such as those with “silent seconds” extended to borrowers with no demonstrable ability to repay even a first line from resources other than the ever-appreciating house prices investors somehow believed were a force of nature that always blew balmy winds their way.

The OCC official with whom we spoke was even more worried than we about emerging market trends, but she was over-ruled from on high.  This was first because national banks weren’t sounding the alarm, second because no other banking agency seemed worried, and finally because anything that adversely affected national banks might have undermined …

12 08, 2022

Al081522

2022-08-12T16:44:11-04:00August 12th, 2022|3- This Week|

Quiet But ….

With passage last Friday of the Administration’s Inflation Reduction Act, political focus will be still more monomaniacally fixed on what the economy actually does between now and November.  The White House is reveling in lower gas prices, Republicans are pointing to higher prices for pretty much everything else, and markets have turned from their obsession with each Powell pronouncement to what we think is a rather unhealthy fixation on the mountain mutterings throughout Jackson Hole later this month.  Still, there’s some business as sort-of usual.

Al081522.pdf

12 08, 2022

DAILY081222

2022-08-12T16:26:59-04:00August 12th, 2022|2- Daily Briefing|

CFPB Plans Inquiry into Credit-Card Rates, Rewards, Competition

blog post today from the CFPB examining credit-card interest rates concludes that these are set in ways that provide “outsized profits.”  As a result, the Bureau plans to add this issue to the assault currently under way against late fees (see FSM Report CREDITCARD35) by evaluating whether trends like increasing rewards and high switching costs explain high interest rates and if anti-competitive practices are also at work putting profits above cardholders’ best interests.  The study finds that credit-card pricing appears to be less responsive to macroeconomic trends such as changes in the cost of funds and that mismatches between card interest rates and lending risk may drive undue profitability.

Daily081222.pdf

12 08, 2022

GSE-081222

2022-08-12T10:51:06-04:00August 12th, 2022|4- GSE Activity Report|

Testing for What, Why?

FHFA, Fannie, and Freddie yesterday released the results of FHFA’s latest stress test, focusing on the severely-adverse scenario in order – or so FHFA says – to push the GSEs to the limit.  This the test does insofar as the GSEs’ combined CET1 capital shortfall is as much as $159 billion.  However, aspects of FHFA’s test – e.g., falling inflation over 2022 and 2023 and rising house prices – are likely to be more than a bit off.  The conservatorship of course insulates the GSEs from any of the consequences that would befall a big bank with even a fraction of these capital shortfalls, but it does cast doubt on when these conservatorships could end without a large line of Treasury credit still in place to back them up.

GSE-081222.pdf

11 08, 2022

DAILY081122

2022-08-11T17:29:26-04:00August 11th, 2022|2- Daily Briefing|

CFPB Calls Data-Safeguard Shortfalls UDAAP, Urging Enforcement

Using a circular to set a new standard, the CFPB today announced that failure properly to safeguard consumer data even if no loss or intrusion occurs violates consumer-protection requirements and should be addressed via state enforcement actions along with its own.  We will shortly provide clients with an in-depth analysis of the new circular, which sets specific standards in areas such as multi-factor authentication and software updates for data protection the agency believes necessary to govern fintech and other nonbank companies not subject to express data-protection standards such as those applicable to banking organizations.

Warren Joins GOP in at Least One Thing: Demand for Fed Transparency

Although Sen. Warren’s (D-MA) complaint today is different in terms of specifics, it is the same fundamental problem voiced yesterday by Senate Banking Republicans:  the Fed’s unwillingness to answer questions or supply information on disputed events.  Sen. Warren’s letter reiterates her longstanding complaint about Fed insider trading and what she views as the unsatisfactory response from the Board’s inspector-general.  The letter builds on a prior one from Senate Banking Chairman Brown (D-OH) and other Democrats complaining about Fed trading practices and new protocols.

Daily081122.pdf

11 08, 2022

INTERCHANGE10

2022-08-11T10:43:26-04:00August 11th, 2022|1- Financial Services Management|

Credit-Card Networks

Two senators have reopened questions about the manner in which card-related payments are handled, tackling those applicable to credit cards with a bill mandating that merchants must be given a network choice that is not either Visa or Mastercard in order to, the sponsors argue, increase competition and lower credit-card transaction costs.  Although the multi-network requirement would apply only to banks with assets over $100 billion, it would likely have the effect of lowering swipe fees across the sector because exempt banks would be compelled by market forces to find lower-cost networks.  The extent to which these lower-cost networks are also sound and resilient under stress is uncertain as no safety-and-soundness or operational requirements directly apply to card-processing networks.

INTERCHANGE10.pdf

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