The Vault

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.

18 03, 2024

Karen Petrou: The OCC Blesses a Buccaneer Bank

2024-03-18T09:03:04-04:00March 18th, 2024|The Vault|

In a column last week, Bloomberg’s Matt Levine rightly observed that only a bank can usually buy another bank.  He thus went on to say that a SPAC named Porticoes ambitions to buy a bank are doomed because Porticoes isn’t a bank.  Here, he’s wrong – Porticoes in fact was allowed last December to become a unique form of national bank licensed to engage in what is often, if unkindly, called vulture capitalism.  This is another OCC charter of convenience atop its approvals leading to NYCB’s woes, and thus yet another contradiction between the agency’s stern warnings on risk when it pops up in existing charters versus its insouciance when it comes to new or novel applications.

According to the OCC’s charter approval, the Porticoes bank has no other purpose than serving as a wholly-owned subsidiary of Porticoes Capital LLC, a Delaware limited-liability company formed to be a proxy for a parent holding company. The parent holdco is “expected” to enter into binding commitments for the capital needed to back its wholly-owned bank plans to acquire a failed bank or even banks.  This is essentially a buy-now, pay-later form of bank chartering, a policy even more striking because funding commitments for the holdco then to downstream – should they materialize – are more than likely to come from private-equity investors who may or may not exercise direct or indirect control.

Based on the OCC’s approval, it seems that Porticoes’s new charter can buy another bank without capital, pre-approval from …

12 03, 2024

FedFin on: FHLBs Forced Into an Unflattering Limelight

2024-03-12T16:55:37-04:00March 12th, 2024|The Vault|

The President’s FY25 budget picks up FHFA’s recommendations, calling for statutory change to double the System’s affordable-housing commitment.  That won’t happen anytime soon, but a new CBO report strengthens FHFA’s hand in several areas well within its jurisdiction.

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

5 03, 2024

FedFin on: Consumer-Financial Product Marketing Practices

2024-03-05T16:34:22-05:00March 5th, 2024|The Vault|

The CFPB has issued a circular essentially banning digital and perhaps all other consumer-finance comparison-shopping and lead-generation tools for credit cards and other products not covered by prior orders.  These activities could continue, but only as long as the comparison or lead is completely objective as the Bureau may come to judge it under complex and sometimes conflicting standards.  The circular follows similar CFPB actions outside the Administrative Procedure Act even though the agency clearly intends to enforce its new approach both directly and in concert with other state and federal agencies….

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

4 03, 2024

Karen Petrou: The Madness of a Model and its Unfounded Policy Conclusion

2024-03-04T11:50:02-05:00March 4th, 2024|The Vault|

As the pending U.S. capital rules head into their own end-game, there is finally a good deal of talk about an issue long neglected in both public discourse and banking-agency thinking:  the extent to which higher bank capital rules accelerate credit-market migration.  Simple assertions that more capital means less credit are, as I’ve noted before, simplistic.  One must consider how banks reallocate credit exposures to optimize capital impact and, still more importantly, how the credit obligations banks decide to leave behind take a hike.  Now comes a new paper the Financial Times touts concluding that, thanks to shadow banks, “we can jack up capital requirements more.”  Maybe, but not judging by this study’s design.  Even with considerable charity, it can be given no better than the “very creative” grade which kind primary-school teachers accord nice tries.

The paper in question is by Bank of International Settlements staff.  It looks empirically – or so it says – at what it calls the U.S. banking sector’s share since the 1960s of what it lugubriously calls “informationally-sensitive loans.”  It documents a lot of numbers said to demonstrate lower bank lending share, using a model founded on both erroneous data and wild leaps to conclude in a fit of circular reasoning that more nonbank lending explains why there is less bank lending.  In the study’s words, “intermediaries themselves have adjusted their business models.”  What might have led banks to decades of technological intransigence and strategic indolence is neither clearly explained nor verified.

What …

26 02, 2024

Karen Petrou: The Unintended Consequences of Blocking the Credit-Card Merger

2024-02-26T11:06:42-05:00February 26th, 2024|The Vault|

There is no doubt that the banking agencies have approved all too many dubious merger applications along with charter conversions of convenience.  However, the debate roiling over the Capital One/Discover merger harkens to an earlier age of thousands more prosperous small banks all operating strictly within a perimeter guarded by top-notch consumer, community, and prudential regulators.  Whether this ever existed is at best uncertain.  What is for sure is that all this nostalgia for a halcyon past will hasten a future dominated by GSIBs and systemic-scale nonbanks still operating outside flimsy regulatory guardrails.

The best way to demonstrate this awkward certainty is to run a counter-factual – that is, think about what the world would look like if opponents of the Capital One/Discover deal get their way.  Would we quickly see a return to card competition housed firmly within a tightly-regulated system?  Would the payment system be loosed from Visa and Mastercard’s grip?  Would merchants see the dawn of a new era of itsy-bitsy interchange fees?  Would card rates plummet and rewards stay splendiferous?  I very much doubt it.  Space here does not permit a detailed assessment of the analytics underlying my conclusions, so let’s go straight to each of them.  

First, banning the CapOne/Discover deal would not ensure robust card competition under strict bank regulation.  JPMorgan’s and American Express’ formidable stakes could grow because credit-card lending is a business dependent on economies of scale and scope vital to capital-efficiency through the secondary market.  However, large banks will

20 02, 2024

Karen Petrou: How the OCC Made a Bad Bank Both Bigger and Badder

2024-02-20T09:01:31-05:00February 20th, 2024|The Vault|

As I noted last week, the OCC’s proposed bank-merger policy fails to reckon with the strong supervisory and regulatory powers federal banking agencies already have to quash problematic consolidations and concentrations.  Here, I turn to one reason why the OCC may not trust these rules:  it doesn’t trust itself.  A bit of recent history shows all too well why this self-doubt is warranted even though it’s also inexcusable.

I owe my historical recall to the authoritative Bank Reg Blog, which last week looked at the latest on NYCB.  This included a troubling reminder of the troubled bank’s merger with Flagstar before it thought it snapped up another great deal from the FDIC via acquiring what was left of Signature Bank.

NYCB first sought approval for the Flagstar acquisition in 2021 when its primary federal regulator was the FDIC.  As is often the case with merger applications, this one appeared to go into a dark hole.  Unlike many other acquisitions, the banking companies had a go-to Plan B: charter conversion.

NYCB went to the OCC and got rapid approval not just for converting its charter to a national bank, but also then for acquiring Flagstar via a reverse flip that also involved a Flagstar conversion to a national charter.  The OCC then readily approved the merger in 2022, just in time for some of the super-rapid growth via the Signature deal both the OCC and FDIC approved even though they should have been well aware that rapid-fire mergers almost always …

16 02, 2024

FedFin Daily Alert: CFPB Report Continues Credit Card Attack

2024-02-20T12:08:07-05:00February 16th, 2024|The Vault|

Buttressing its controversial credit-card late-fee proposal (see FSM Report CREDITCARD36), the CFPB today issued a report finding that the 25 largest credit card issuers charged interest rates eight to ten percentage points higher than small-and-medium-sized banks and credit unions. The report states that higher rates among large issuers persist across credit scores, with large issuers also more likely to charge annual fees.  The report also identifies by name fifteen issuers who reported cards with interest rates above thirty percent.  The data come from the first set of results from the updated Terms of Credit Card Plans survey.  In a statement alongside the report, Director Chopra stated that the CFPB will be “accelerating its efforts to ensure that consumers can access better rates that can save families billions of dollars per year.”  No specific initiatives are named.

 …

12 02, 2024

Karen Petrou: How to Have Sound Bank-Merger Policy Reflecting Unique Bank Regulation

2024-02-12T09:19:42-05:00February 12th, 2024|The Vault|

Chair Powell said a week ago that, thanks to commercial real estate risk, some banks will need to be “closed” or “merged out of existence,” hopefully adding that these will be “smaller banks for the most part.”  That this may befall the banking system sooner than Mr. Powell suggested is all too apparent from NYCB’s travails. The OCC’s new merger proposal flies in the face of this hard reality, dooming mergers of size or maybe even small ones until it’s too late. A surprising source – a super-progressive analysis of bank merger policy – makes it clear why the OCC’s approach is not only high-risk, but also ill-conceived.

The paper comes from Saule T. Omarova, President Biden’s nominee to be Comptroller who was forced to withdraw, and the Administration’s most recent Assistant Secretary for Financial Institutions, Graham Steele.  As befits their longstanding views, the paper presses for stringent bank-merger policy to combat what Justice Brandeis first called the “money trusts.” Ms. Omarova and Mr. Steele say that banks of all sizes are still “money trusts” despite the role of omnipotent private-equity and asset-management firms, but so goes much of their analysis.  What’s more interesting in their report and a new petition filed by a like-minded academic is their ground-breaking, hard look at how much of bank regulation is actually intended to curtail undue market power.  Taking this into account could lead to sound merger policy without the adverse consequences evident in the OCC’s drop-dead proposal.

There are in fact …

5 02, 2024

FedFin on: Bank-Merger Policy

2024-02-06T11:24:26-05:00February 5th, 2024|The Vault|

Although all of the banking agencies have for years promised a new bank-merger policy, none has proposed one until this OCC rulemaking.  It is intended to add certainty and transparency to the manner in which the OCC reviews merger applications or others for charter combinations from national banks and federal savings associations resulting in a federally-chartered depository, but the OCC retains discretion to do as it chooses in this arena given the flexibility built into all the attributes now laid out that may augur OCC  disapproval and/or expedited processing.  The policy also appears to apply to…

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

5 02, 2024

Karen Petrou: Why Lower Rates Won’t Lead to More Affordable Housing

2024-02-05T09:10:11-05:00February 5th, 2024|The Vault|

As Politico rightly pointed out last week, the inability of anyone who doesn’t already own a home to get one is turning into a significant political problem for incumbents of all persuasions.  It might also come to be one for the Federal Reserve based on a call I got from a senior senator a couple of weeks ago.  This is not exactly what the Fed needs given how hot a political potato it’s already become.

Having read my economic-inequality book, the senator called to ask if I thought the Fed had any responsibility for the acute shortage of affordable housing.  As in all too many other states, his has seen a migration of teachers, first responders, and the middle class as a whole from cities and resort areas, with these vital workers forced to live hours from their jobs and thus in a state of perpetual commuting which they fear puts their children at risk.

This isn’t news, but it’s worse than ever and thus not just a daily grind for many Americans, but also a serious political threat to this moderate Democrat.  His state is deep purple and he believes it’s getting redder by the minute thanks to Donald Trump’s ability to mobilize voter anger on day-to-day economic challenges such as the critical one facing those who cannot find affordable, desirable housing within reasonable distance of their jobs.

As might be expected, the senator wasn’t calling to ask an academic question; he wanted to know not …

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