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Ever since at least the 1970s, Congress hasn’t modernized the banking system – regulators did. Congress did ratify change long after it occurred – think interstate branching or electronic-funds transfer, grandfathered controversial charters – unitary thrifts, nonbank banks, and made retroactive repairs – FIRREA, FDICIA, and of course Dodd-Frank. But, for real change, look to the regulators and for what’s coming next, check out Acting Comptroller Brooks.

As we noted, Mr. Brooks opened with a bang. Acting on what he calls Silicon-Valley – not DC – time, his beginning was followed in awesomely short order by two ground-breaking proposals. As detailed in our in-depth analyses, the first of these is a concrete proposal to rewrite the national bank and federal savings association (FSA) charters in ways big and small. The second, advance proposal is an open-end invitation for all comers to lay out all of the ways the OCC could use the powers increased in the first proposal to craft a new, digital future for federally-chartered companies and their counterparties, partners, and customers across the spectrum of retail and wholesale finance.

At one fell swoop, these proposals could lead banking to gain ground on fintech and bigtech innovators. With COVID’s hard experience and all their advantages – access to the payment system, FDIC insurance, and so much more, national banks and FSAs could even overtake some of the most powerful companies that seemed just a few months ago to be taking over from regulated banking.

But, which national …

In conjunction with a wide-open request for views on ways to increase the innovativeness of national banks and federal savings associations (FSAs), the OCC has proposed a significant rewrite of the more traditional powers and activities these institutions may conduct.  Although much of the lengthy proposal updates national-bank activities and codifies interpretations and market developments, several proposals open existing activities to more flexible standards, provide more generous interpretation of exposures and risks, and represent an overarching effort to increase the ability of national banks and FSAs to offer new products and services regardless of the delivery channel – analog or digital – through which the product is delivered.

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During a largely congenial Senate Small Business Committee hearing today with Treasury Secretary Mnuchin and SBA Administrator Carranza, it became clear that there is bipartisan interest in providing a more targeted PPP in the next COVID-package.  Secretary Mnuchin stressed that the package should provide support for the hardest-hit industries (e.g., travel, leisure, restaurants) and continue to encourage firms to rehire employees.  Reflecting legislation he introduced today, Ranking Member Cardin (D-MD) pressed for targeting the PPP to the smallest businesses; Administrator Carranza was open to this.  Sens. Collins (R-ME) and Romney (R-UT) support extending the PPP for the smallest and most-affected businesses.  Sen. Kennedy (R-LA) also wants PPP support for riot-affected businesses; Mr. Mnuchin was also open to this and, as a result, this change may occur via rule or in subsequent legislation.  However, the hearing turned heated during questioning from Sen. Hawley (R-MO) on PPP loans to Planned Parenthood affiliates, causing the ranking member to insist that the program be implemented without an “ideological” test for affiliates.  Bipartisan support for a PPP extension will evaporate if Sen. Hawley and other Republicans force provisions that directly target Planned Parenthood.

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FHFA Director Calabria and HUD Secretary Carson today reviewed post-COVID policy before a Senate Banking Committee highlighted by growing partisan divides.  During the often heated hearing, Chairman Crapo (R-ID) applauded FHFA’s capital proposal as “thorough” and “thoughtful,” making it clear that legislation to block it will not advance.  While Ranking Member Brown (D-OH) targeted much of his ire at Secretary Carson’s fair-housing policies, he also said that Director Calabria’s housing reform plan would disproportionately hurt communities of color without providing specific concerns.  Sen. Warner (D-VA) opposes the U.S. government walking away from its senior preferred stock in the GSEs without compensation; Mr. Calabria agreed that the government should be reimbursed “fairly,” but stressed that this is up to Treasury.  Although a question or two was posed on servicer stability, Mr. Calabria asserted that it is resilient and Senate calls for a new liquidity facility were not revisited today.  Mr. Calabria also promised renewed legislative recommendations next week to provide FHFA with authority similar to that of other independent federal financial regulators.

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Reflecting his “passion” for innovation, Acting Comptroller Brooks led his agency after just a few days in office to release an advance notice of proposed rulemaking seeking views on general questions across the range of fintech, crypto, and digital ledger technology (DLT) products, services, and constructs. Questions are also posed on regtech – i.e., the use of artificial intelligence (AI), machine learning (ML), and other technologies to enhance compliance efficiency and effectiveness.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

In this analysis, we wrap up our series of strategy-focused assessments of FHFA’s capital proposal with an analysis of whether it could as intended free the GSEs from conservatorship’s yoke in the relatively short near-term.  As we have shown, the NPR is complex, model-driven, and laced with questions on alternatives that, if adopted, would lead to widely-different outcomes.  And, as we’ve also noted, externalities – most immediately COVID’s macroeconomic impact and eventually the election – affect GSE capitalization and thus the trajectory for structural change.

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Although macroeconomic data made it clear from COVID’s start that the pandemic would be very, very painful, riots across the country expressed visceral rage not only about George Floyd’s murder, but also the unequal distribution of economic pain to people of color.  Inequity along with inequality is nothing new for African-Americans – as our EconomicEquality blog post earlier this week showed, African-Americans are not only now frozen out of American prosperity, but now is even worse than before the civil-rights movement of the 1960s raised up so much hope.  During the riots, banks in the District of Columbia were defaced with “eat the rich” signs, showing that at least some of the rioters had specific targets for poison-pen political messages.  Better voices are again dominating the social-justice debate, but it’s still clear that an institutional response to banking-service inequality is needed now more than ever.  A powerful one still won’t reverse all the causes of economic inequality and inequity – how could it given their historical depth and breadth? — but Equality Banks are both relatively easy to build and immediately visible.  As a result, they would make both a substantive and political difference, each of which is urgently needed.

The basic outline of the Equality-Bank charter is outlined in my 2018 op-ed.  In short, Equality Banks would be consortia of willing banking companies using the longstanding “bankers’ bank” charter and the regulatory latitude it affords to rewrite the profit equation to serve low- and moderate-income (LMI) households.  The …

Today’s Senate Banking hearing on Hong Kong makes it clear that legislation will soon advance secondary sanctions on banks doing business with entities that contribute to violations of Hong Kong’s Basic Law.  As detailed in this report, Chairman Crapo (R-ID) indicated that the committee will advance the legislation despite Ranking Member Brown’s (D-OH) opposition to unilateral U.S. sanctions on large foreign banks.   When the chairman does so, it seems likely that the bill will be changed in several respects to reduce its scope and, despite Sen. Brown’s concerns, the measure will have bipartisan support above and beyond Sen. Van Hollen (D-MD), who joined Sen. Toomey (R-PA) in introducing S. 3798.  Sen. Cortez Masto (D-NV) singled out HSBC for supporting China’s new national security law, suggesting that Congress should not hesitate to take action against companies that give in to Chinese pressure.  At this hearing, Sen. Reed (D-RI) renewed calls for beneficial ownership legislation (see FSM Report LAUNDER129), now pushing the SEC also to require public companies to disclose the beneficial owners of their shares.

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So far, we’ve assessed an array of strategic and market-structure issues raised by FHFA’s capital proposal.  Before turning to the most critical question of all – could this capital framework really bring the GSEs out of conservatorship – we turn to another that determines whether Congress will let FHFA do so:  how this capital framework affects affordable housing.  In general, we see the rules as a mild boost to higher-risk single-family mortgages due to the rule’s uncertain risk sensitivity, but the NPR is complex and so many other factors determine asset allocation that we are loathe to opine.

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…