The Vault

A new staff paper from the Federal Reserve Bank of New York assesses the tender topic of bank mortgage lending to minority borrowers. Going beyond the usual statistics showing significant racial disparities, the paper dives into a bank-by-bank analysis of why this might be, finding significantly different and persistent fair-lending records at different banks. Controversially, it comes up with what might be called a ….

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It’s not news to observe that things that change at the GSEs then change a lot of other things.  Still, the scope of the GSEs’ influence across financial markets is startling as measured by a new Federal Reserve Bank of Philadelphia study of the spillover effect of the 2020 revisions to the PSPA.  The paper looks specifically at PSPA provisions restricting GSE purchase of what the paper calls speculative mortgages (i.e., seconds and investment properties).  Push here for GSE spec loans, pull there is observed for spec loans in the private sector, all other conforming loans, jumbos, and – surprisingly – bank small-business loans.

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As required by law, the U.S. Treasury is working to set policy enhancing financial inclusion.  While it seeks recommendations for new policies in areas ranging from predatory lending to technological innovation and new federal programs, it is unclear how actionable its findings will prove and if federal policymakers then implement those possible under current law.  However, Treasury policy will clearly not provide an overall endorsement for new technology as advocates may hope; the conclusions on which policy will be based point to technology’s potential benefits, but also numerous risks to vulnerable households and communities.

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The banking agencies have proposed significant changes to call-reporting data illuminating how banking organizations are inter-connected with nonbank financial intermediaries and to implement pending requirements for long-term debt (LTD) issuance.  New NBFI transparency is likely to result in additional supervisory scrutiny and market discipline.

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In the wake of increasing instances in which customers are confused and even misled about the extent to which fintech and cryptoasset holdings are insured deposits, the FDIC has finalized its proposal setting disclosure standards as well as modernizing IDI representations of their own FDIC-insured offerings in branches and through the fast-changing array of retail banking delivery channels. All IDIs will now have to ensure that branches, other physical locations admitting customers, ATMs, and digital/electronic-delivery channels comply with new signage and disclosure requirements….

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Bipartisan Senate legislation has been introduced to press FSOC to do more than highlight artificial intelligence (AI) as a potential threat to financial stability.  The measure instead requires the Council to undertake a rapid study of AI’s financial stability risk and report to Congress on conclusions that must then be advanced through FSOC designation and federal-agency action.  The bill also gives the SEC more authority to address at least some of the risks its chairman has identified that may be posed by predictive analytics, including AI.  New AI-related stress testing would also be likely.

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Shortly before the new year, the banking agencies proposed new call-report requirements that would force banks with over $10 billion in assets to report new data on nonbank mortgage intermediaries and structured GSE-guaranteed positions.  Don’t be fooled – just because these proposals are only about reporting doesn’t mean that they lack substantive impact.

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Building on a request for comment and a formal draft, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have finalized specific revisions to U.S. merger policy that significantly redesign the manner in which M&A transactions will be considered.  With this final, formal policy, M&A review may be more predictable, but also still more difficult for mergers and even minority holdings.  A range of new analytics will need to be considered to assess transaction feasibility including new factors such as labor-market and employee implications, information power, network effects, and second or even third-order effects on rival firms. These revisions are challenges likely to be particularly acute in U.S. financial services where government agencies believe there is undue concentration in banking, payment, private-equity, and other sectors.

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This year’s FSOC report trods much old ground with two exceptions.  The first pertains to a new focus on artificial intelligence, machine learning, and new, generative technologies.  That said, the report does little beyond highlight this risk and include it among all the others federal agencies are told to monitor.  Private credit now also alarms FSOC, with insurance company investment in this sector of particular systemic concern in concert with the sectors’ CRE and junk-bond exposures, offshore reinsurance, and PE ownership.  As detailed in this report, banks are found to be…

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