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Federal Banking agencies have differed ever since the OCC in 2013 imposed strict limits on the extent to which federally-chartered institutions could offer short-term, small-dollar loans and then again in 2018 when the OCC reversed itself to encourage more of the loans some castigate as predatory payday products that others believe are essential to lower-income households.  Acknowledging in the early stages of the COVID crisis that job losses and other stresses have placed many families at unprecedented risk, the banking agencies initially issued a statement urging “responsible” lending in this sector. 

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In this report, we expand our initial analysis of the CRA rule finalized by the OCC shortly before Comptroller Otting’s departure.  This report is in lieu of an in-depth analysis in our Financial Services Management format because we do not think the rule as finalized will be practically implemented by most national banks due to delayed timelines, many outstanding questions set for future OCC guidance that may or may not come, legal challenge, and overarching political uncertainty.

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One reason banks stay in the mortgage business is that it’s an easy way to book LMI loans for CRA credit and then move them on to Ginnie or the GSEs to reduce most of the risk.  The OCC’s proposal to rewrite Community Reinvestment Act rules contemplates providing CRA credit only for portfolio loans.  If this occurred – and it won’t happen fast, if at all – bank mortgage activity would drop still farther and faster.

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As promised last week, we are following through with in-depth analyses of FHFA’s GSE post-conservatorship capital paradigm, starting here with big-picture conclusions about structural transformation.  Most importantly, we confirm our earlier conclusion that the new construct lays the groundwork for an end to the conservatorships just as soon as FHFA thinks the macroeconomy permits.  We will also build out Karen Petrou’s comments today in the American Banker that the new capital construct – while a leap – is not a bound too far for investors.  The overall construct of the new capital framework and the manner in which it will be implemented create better, but not fully-, recapitalized GSEs likely also under Fed systemic regulation.

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The Fed’s most recent financial-stability report recants – as well it should — the confident view of systemic resilience touted just late last year.  Now, the Fed sees trouble ahead – little wonder.  Even so, it is stoutly confident that its power to print dollars and some regulatory touch-ups will set the system a humming in short order.  Would that it will, but almost surely it won’t.  Once the Fed withdraws all its trillions in rescue dollars – assuming it ever can – the financial system will be as fragile as it was late last year because the U.S. economy will be as unequal.  Indeed, since we’re now still more unequal and sure to stay that way for the foreseeable future, finance will be still more fragile.  An economy in which the top one percent has more wealth than the entire bottom ninety percent – i.e., the U.S. – is a house of cards no matter its fortress banks.

The Fed thought finance in 2019 was fine and that finance in 2020 is readily fixable because all of its analyses focus only on finance.  This led the Fed then and now to miss extraordinary risk.  For example, both the November and May reports state that U.S. household debt is at a “moderate” level to income.  As is all too often the case, the Fed reaches this conclusion by relying on aggregate data that do not take distributional realities into account. 

As we noted in a recent EconmicEquality blog post…

We have only cracked the surface of the new FHFA proposal and will turn shortly to its strategic and competitive implication.  However, we draw one overarching conclusion from our first cut of the complex proposal:  FHFA knows what it wants the post-conservatorship model to look like and what it would look like is what the Fed thought U.S. GSIBs should be until the Fed recanted on key Obama-era demands of the biggest U.S. banks.  Further, the Fed and other federal agencies are now neutralizing key capital rules on the fly.  This is theoretically a temporary rewrite, but we think much in it will stick.

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After much internal consternation, the FDIC and OCC have agreed with the Fed and provided temporary relief from the supplementary leverage ratio (SLR) for reserves held at the Fed and direct Treasury obligations.  Although relief is conditional on possible application of capital-distribution restrictions, we expect virtually all state-member and national banks to get pain-free relief.  This will expand leverage capacity by as much as $1.6 trillion – about 10% – but we do not expect it to lead to more mortgage-credit availability.

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