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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.

5 11, 2024

FedFin Assessment: Election Uncertainty and Financial Policy

2024-11-05T14:44:46-05:00November 5th, 2024|The Vault|

FedFin will continue our practice of providing in-depth analyses in this tumultuous election once key races are decided.  However, clients have asked for an interim report on the outlook if election uncertainty persists and, worse, if it is accompanied by civil unrest.  As detailed in this report, we see no near-term implications for what might be considered course-of-business financial policy decisions even though many of these are, like the capital rules, drivers of significant strategic import.  Of more immediate concern are …

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

 …

30 10, 2024

FedFin on: Consumer Data Rights/Open Banking

2024-10-30T14:39:48-04:00October 30th, 2024|The Vault|

The CFPB has finalized in largely unchanged form its very controversial proposal requiring banks, fintechs, and certain other parties holding retail-customer personal data to share that data with third parties such as data aggregators following a consumer’s request.  The new rule will make it easier for consumers to obtain personal financial data from incumbent providers to assess alternative products and new providers or value-added services such as financial planning or other, higher-risk offerings (e.g., debt “reduction”).  The rule may well also standardize APIs accessing bank data and essentially outlaw screen-scraping, simplifying data access and heightening both privacy and security if the Bureau’s intended constraints function as anticipated in these still largely-unregulated markets. The rule seeks to accomplish its objectives not only by these requirements, but also by….

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

 …

28 10, 2024

Karen Petrou: Why Open Banking Could Close a Door to Economic Opportunity

2024-10-28T09:24:14-04:00October 28th, 2024|The Vault|

In the new and often just fervor to increase competition, trust-busters such as CFPB Director Chopra sometimes forget that too much competition can lead to the Hunger Games, not to the “fair” and “inclusive” sectors they seek.  Defending the new open-banking rule, Mr. Chopra said that he was willing to accept even a good deal more fraud risk for consumers because his rule humbles incumbent financial-services companies.  This is like saying that one is fine with a few more dangerous drugs since that’s what it takes to loosen Big Pharma’s strangle-hold.  Yes, the U.S. drug market is rife with abuses in how pharmaceuticals are priced and distributed and the FDA is problematic, but it seems irrefutable that drugs must be demonstrably safe and effective before we take them.  Do you want to fly on any airline a group of speculators concocts even if it opens up pricing at your congested hub?  Of course not, but that’s what antitrust zealots propose to do to banking even though we’ve learned the hard, hard way that footloose companies taking other people’s money often don’t give it back.

One of the humorless ironies of this election is the alignment between radical populists and progressives that squeezes out moderate, temperate, and – yes – imperfect policies that do the best they can for the most they can with the fewest possible side-effects.  Populists want “free” markets and progressives such as Mr. Chopra want tightly-regulated ones, but the goal in each case is to cut powerful …

21 10, 2024

Karen Petrou: Competitiveness in a Cold, Cruel World

2024-10-21T12:04:19-04:00October 21st, 2024|The Vault|

When I gave a talk last week about bank-merger policy, I was asked an important question:  if I’m right about the franchise-value challenges facing most U.S. banks, then why is banking here doing so much better than in other advanced, market-oriented nations?  The answer in part is that, in a pond full of ugly ducklings, a scrawny mallard with just a few more feathers looks a lot better.  But, it’s more complicated than that.  The reasons why make it clear that, if bank-merger policy remains implacably set against economies of scale and scope, then only a very few, very big birds and more than a few nonbirds will own the waters.

As in any comparative analysis, the first step to judging U.S. banks versus those in other nations is to define which banks are being compared.  Most other nations have very few, very big banks often considered national-champion charters dedicated as much to supporting their sovereign governments as to placating shareholders. As our recent merger-policy paper details, national champions are insulated from market discipline because they are almost always expressly too big to fail.  Credit Suisse was an exception to this rule, but only because it failed so fast and Switzerland was so unready for resolution that it could do nothing more than fold one national champion into another, UBS.

For all the talk of TBTF banks in the U.S. and the benefits the very biggest enjoy during flight-to-safety situations, none are yet a national champion, and a good thing …

16 10, 2024

FedFin Assessment: TD Orders Set New Enforcement Paradigm

2024-10-16T12:11:56-04:00October 16th, 2024|The Vault|

In this report, we build on our initial assessment of the ground-breaking AML enforcement action finalized last Thursday with TD Bank by the OCC, FRB, and FinCEN.  While the banking agencies did not use their nuclear option – requiring TD to close its U.S. operations – the scope of the violations persuaded the agencies along with FinCEN and the Department of Justice to impose huge fines and so sharply constrain U.S. activities as likely to cause both the bank and others to question the viability of continuing U.S. operations for at least the near term.  New branches, products, and services appear barred without a non-objection for the foreseeable future and considerable management turn-over, especially in the U.S., is also likely.  The OCC’s decision to impose the asset-growth cap discussed below implements the Acting Comptroller’s plan to ….

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

15 10, 2024

Karen Petrou: Why Didn’t Supervisors Stop TD Before Trillions Escaped AML Surveillance?

2024-10-15T09:08:17-04:00October 15th, 2024|The Vault|

The enforcement actions last week against TD Bank’s manifold and manifest money-laundering violations bristle with righteous anger.  This is understandable – the bank’s AML lapses are jaw-droppingly dangerous.  But what’s missing from the recounting of TD’s sins is any accountability for why banking-agency supervisors failed to catch violations dating back to 2012 that transgress every compliance, risk-management, and governance norm.  Yes, throw the book at TD, but let’s also call the banking agencies on the carpet for why TD was allowed to grow so big even though it was clearly also so bad.

The enforcement orders from the Fed and OCC are replete with new mandates making it clear that neither agency trusts TD here or back home in Canada to do anything right re AML without two guns at its respective heads.  It falls to FinCEN and the Department of Justice to provide the recounting of what was actually going wrong at TD and how supervisors should have caught enough of them to stop at least some of the trillions of dollars of payments that went without AML scrutiny and enabled billions, if not more, of human and drug trafficking, organized crime, and so much else that victimized all too many people and nations.

Time, not to mention stomach, does not permit listing all of TD’s glaring AML violations starting in 2012 that went uncorrected and indeed materially worsened after a 2013 FinCEN warning.  But even a few examples tell a dismal tale.

For one, TD’s AML compliance team …

3 10, 2024

FedFin on: FHLB Advance Availability

2024-10-03T14:41:22-04:00October 3rd, 2024|The Vault|

The FHFA has issued an advisory bulletin (AB) building on its 2023 over-arching plan for FHLB reform and bank-regulatory efforts to clarify and constrain FHLB lending to troubled IDIs which received considerable “lender-of-second-resort” FHLB funding during the 2023 crisis. FHFA says that this bulletin does nothing more than “memorialize” longstanding FHFA standards; in fact, it makes significant changes and is likely to require at least some Home Loan Banks to improve member-related credit-risk management by no longer solely counting on collateral and contacting an IDI’s primary regulator, the FDIC, or a Reserve Bank to confirm that ….

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

30 09, 2024

FedFin on: Deposit Record-Keeping

2024-10-01T10:11:45-04:00September 30th, 2024|The Vault|

Stunned by the impact of a recent fintech failure (Synapse) and growing risks in this arena, the FDIC is seeking comment on a proposal requiring IDIs doing business with third parties related to transaction-empowered deposit accounts to keep timely and daily reports of each deposit and its beneficial owner.  The FDIC believes that this would prevent harm to third-party customers who believe funds given to the third party are FDIC-insured when these funds are in fact aggregated into a single account for which the third party is the beneficial owner and the arrangement is not covered by FDIC pass-through insurance….

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

30 09, 2024

Karen Petrou: How DOJ’s Case Against Visa Could Make Debit-Card Markets Still More Concentrated

2024-09-30T11:29:16-04:00September 30th, 2024|The Vault|

In our recent paper on bank-merger policy, we noted that over-stringent merger policy is likely to lead to unintended and perverse consequences.  This emphatically is not to say that all bank mergers are good mergers, but rather to emphasize that blocking all mergers based on arbitrary criteria may well backfire and lead to still-greater concentration in a market defined as much by regulatory-arbitrage opportunities as competitiveness.  Case in point:  Justice may rightly want to bring Visa to heel, but its bank-merger policy could simultaneously block the kinds of bank consortia that would otherwise be able to continue market-critical card processing and also bring it under the regulatory umbrella.  If DOJ successfully sues Visa, its bank-merger policy is likely to replace one disgraced omnipotent network-effect competitor with another omnipotent network-effect competitor rather than one or more regulated networks comprised of regulated, competing banks.

One of the often-overlooked – but very important – aspects of new merger policy from the Department of Justice is its dark view of financial networks and platforms.  These are of course most pertinent in the payment system where, as one payment executive recently put it, “payment is a matter of volumes.  If you don’t have volumes, you don’t have the capacity to be competitive.”  Put another way, payment systems are network-effect entities and, unless Justice understands this, the only bank payment-system providers will be one or more of the very biggest banks that don’t need third-party networks to generate scale.  Existing bank consortia of different-sized …

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