Welcome to The Vault. Every week you’ll find a sample of FedFin opinion and analysis on the most recent issues facing financial services firms. Check back frequently to see what’s new. Click here to contact us.

22 06, 2022

FedFin: Fed Comes Under Heightened Political Pressure

2022-06-22T16:12:06-04:00June 22nd, 2022|The Vault|

As we expected, today’s Senate Banking session with Chairman Powell is a preview of broader national debate ahead of the midterm election.  Democrats generally sought to emphasize their understanding of inflation’s costs without lambasting the Fed and, indirectly, the Biden Administration.   Still, Sens. Ossoff (D-GA) and Warnock (D-GA) pressed Mr. Powell on the Fed’s failure to begin to tighten last summer.  Republicans were strongly united in lambasting….

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

22 06, 2022

FedFin on: Climate Risk Management

2022-06-22T14:40:29-04:00June 22nd, 2022|The Vault|

The Basel Committee has finalized its proposed climate-risk management principles largely unchanged from its proposal, establishing over-arching goals at which both banks and their supervisors are asked to aim.  Much in the final standards echoes proposed OCC risk-management standards proposed in a slightly different form by the FDIC and likely soon to be taken up by the Federal Reserve in inter-agency U.S. goals.  Neither Basel’s standards nor these U.S. principles are…..

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

16 06, 2022

FedFin On: Big-Bank Consumer Service

2022-06-16T12:44:39-04:00June 16th, 2022|The Vault|

Combining some of its outstanding initiatives and adding new ones, the CFPB is seeking information on how well larger banks and credit unions serve consumers and what steps may be needed to make them do better.  The focus of the inquiry is response time, content, and methodology following consumer inquiries based on provisions in the agency’s mandate allowing it to require that banks with assets over $10 billion and their affiliates provide timely responses to consumer requests for information about their accounts.  This was included in the Dodd-Frank Act because of ….

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

14 06, 2022

FedFin On: U.S. Digital-Asset Framework

2022-06-15T09:23:49-04:00June 14th, 2022|The Vault|

After protracted negotiations and much public attention, bipartisan senators have introduced a far-reaching bill designed to encourage digital-asset use without undue risk to consumers, investors, or the financial system.  The bill decides most, if not all, of the outstanding regulatory barriers to digital-asset use in favor of digital assets and their providers.  Provisions in many cases go farther than public discussion has so far noted – for example, the measure not only expands the ability of digital-asset providers to reach retail and wholesale customers, but also gives them access to FDIC resolution without the cost of paying insurance premiums or coming under many of the rules that govern insured depositories…

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

13 06, 2022

Karen Petrou: Why Chopra is Right about Consumer-Data Prohibitions

2022-06-13T10:02:46-04:00June 13th, 2022|The Vault|

As we noted in our assessment last week, CFPB Director Chopra has taken another bold step rewriting consumer finance with a strong stand in favor of stiff new consumer-data protections.  These would abandon the notice-and-consent approach which, as Mr. Chopra rightly says, leaves most of us with little privacy and less protection.  Instead, certain uses to which firms put our data would simply be prohibited. If the CFPB can get this right, then it will strike a blow not only for personal privacy, but also for sound finance with far fewer high-risk conflicts of interest.

The notice-and-consent approach to privacy protection is the epitome of information asymmetry and thus of ineffective consumer protection.  We all know what it is by virtue of the regular process by which our smart phones apprise us of updates often designed more to capture our data than to improve reliability or functionality.  Under pressure, phone providers have recently added a bit more information on what each update does if one can find and then understand it, but failure to agree to an update endangers continued cell-phone service.  This is the equivalent of solitary confinement and so each of us dutifully agrees to each update no matter how much of our privacy we give away.

Financial-privacy disclosures are still largely an analog game by virtue of the privacy notices required under the 1999 Gramm-Leach-Bliley Act. Back then, finance was bereft of digital paraphernalia and banks dominated it.  Thus, these privacy notices were and are essentially …

9 06, 2022

FedFin on: Equitable Endeavors

2022-06-09T14:34:48-04:00June 9th, 2022|The Vault|

When Sandra Thompson earlier this year enunciated a new equitable-finance mission, we forecast that Fannie and Freddie would undertake an array of new activities that significantly expand their footprint along with their equity and equality impact.  As anticipated, the plans announced yesterday by Fannie and Freddie go beyond FHFA’s reiterated mission statement earlier this week, mirroring in some ways the banking agencies’ broad view of CRA as a community-development and racial-equity instrument as well as the boost to LMI housing on which attention long focused.  But, for all the public-good creds these plans engender, several will doubtless promote market angst as the GSEs launch pilots that tread heavily on MI, title-insurer, and servicer toes.

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

6 06, 2022

Karen Petrou: The Fed’s Political Peril

2022-06-06T10:11:43-04:00June 6th, 2022|The Vault|

Last Wednesday, the American Banker quoted me on the politics behind President Biden’s contradictory campaign to demand inflation-stifling policies while at the same time championing Fed independence.  The article quoted me accurately, but as I read it, the brevity of my comments made them seem unduly pointed.  As in Renaissance Florence, modern-day Washington is awash with nuance.  To understand what President Biden meant, one has to watch for the equivalent of a carefully-arched eyebrow or a seemingly-offhand remark.  Those I see and hear say that the White House will not hesitate to turn the Fed into the fall guy for inflation and then defenestrate it in political self-defense.

This isn’t to say that President Biden wants to sacrifice the central bank on the midterm’s altar.  Despite entreaties of his more bloody-minded political aides, the President has so far heeded Secretary Yellen and given Jay Powell the equivalent of a royal pass.  Still, the carefully calibrated comments last week show that this pass is increasingly conditional.

It’s not hard to understand why those frightened of a return to what Martin Wolf last week called a U.S. autocracy are willing to push the Fed in front of the firing line. I am less and less alone in thinking that Democrats in 2016 lost it all because they trusted conventional economic thinking far too much.   Still, the Biden Administration has so far made the same mistake.

Starting in 2015, the Fed said that the American economy was a “good place.”  President Obama took …

1 06, 2022

FedFin: AI Adverse-Action Requirements

2022-06-01T16:27:40-04:00June 1st, 2022|The Vault|

Continuing its use of novel rulings that preclude public notice and comment, the CFPB has issued a landmark ruling on artificial intelligence (AI) and other forms of algorithmic underwriting stipulating lender responsibility for sending out the adverse action notices required under the Equal Credit Opportunity Act (ECOA).  The CFPB recently added a broader range of credit decisions on outstanding loans (e.g., granting or reducing lines), to these notice requirements, making the reach of this new policy still broader.  Lenders are responsible for adherence to these requirements even if their underwriting models are provided by third parties or credit decisions are made by third parties such as fintechs or auto dealers.  However, when these nonbanks are the lender, they are then subject to CFPB enforcement even if the Bureau does not have formal supervisory power over them under another recent CFPB ruling…

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

1 06, 2022

FedFin: How Adverse Is This?

2022-06-01T16:25:49-04:00June 1st, 2022|The Vault|

As detailed in our new in-depth report, the CFPB has issued another sweeping rule by way of a seemingly innocuous circular not subject to public notice and comment.  Under it, lenders that use third-party underwriting are responsible for ensuring that borrowers receive thorough adverse action notices even if the lender has no authority over the AI or other complex models determining credit outcome.

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

 …

23 05, 2022

Karen Petrou: The Moral Obligation of Stablecoin Issuers

2022-05-23T09:38:20-04:00May 23rd, 2022|The Vault|

At the height of what proved his fleeting power, the founder of a now-evaporated stablecoin said, “I never debate the poor.”  And, perhaps he doesn’t have to – his was not among tall the fiat-currency wallets emptied in the course of this high-flying venture.  Those were mostly in the virtual pockets of young and often minority households.  Regardless, this statement is stark evidence of the difference between the social-welfare obligations demanded of banks and the get-it-while-you-can ethos embodied by this entrepreneur, Elon Musk, and all their acolytes.  We demand much of banks because they take other people’s money.  The same obligations should bind stablecoins because they also take other people’s money and thus need to be governed not just for safety and soundness, but also for equality and equity.

It might be argued that a community-service rationale isn’t warranted for crypto-currency because stablecoin issuers are not intermediaries – indeed, this was a defense against new rules laid out at a recent hearing and it’s the rationale behind the Toomey draft bill to craft a federal stablecoin construct, which eschews most prudential and any community obligations for nonbank stablecoin issuers.

Leaving aside the competitive inequity of a two-tier regulatory framework for the same business, there are three compelling public-welfare arguments for subjecting stablecoins and many other virtual currencies to critical components of bank regulation even if they don’t emulate every aspect of a full-service bank.

First, taking money from other people and promising that they can get it back …

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