As promised, this report provides an in-depth analysis of Treasury’s report and resulting recommendations to the President’s Competition Council on the impact of new nonbank consumer-finance entrants from a competition, consumer-protection, and financial-stability perspective. Although the report calls for reconsideration of bank-merger policy with an eye to the growing role of fintechs and bigtechs, its overall view of market power fails in our view to capture the actual landscape in which…
Treasury Plumbs the Depth of Nonbank Finance, Seeks New Merger Policy, Rules
As promised, this report provides an in-depth analysis of Treasury’s report and resulting recommendations to the President’s Competition Council on the impact of new nonbank consumer-finance entrants from a competition, consumer-protection, and financial-stability perspective. Although the report calls for reconsideration of bank-merger policy with an eye to the growing role of fintechs and bigtechs, its overall view of market power fails in our view to capture the actual landscape in which these important new entrants compete with banks. For example, its focus on deposit-market concentration compares banks principally to neobanks, failing to consider deposit-like products such as prime MMFs and in many cases also credit-union deposits. As a result, erroneous conclusions are drawn about market power that exists when all competitors – not just bigtechs or fintechs – are considered.
Treasury Calls for Tough Fintech and Bank-Partnership Protection, Prudential Standards
Treasury has completed a long-pending study of the extent to which nonbank fintechs compete with banks and how this affects financial stability and consumer protection. We will shortly provide clients with an in-depth analysis of this report, for which Karen Petrou was extensively interviewed as now noted publicly in the appendix. The report was ordered by the Secretary in compliance with President Biden’s competition order (see Client Report MERGER6), finding that nonbank fintechs directly compete with banks and thus may reduce current concentration levels, sure to influence the inter-agency bank-merger policy that remains to be finalized.
Williams Presses for NBFI Standards
In remarks today, FRB-NY President John Williams said that the central bank should not adjust monetary policy to address the price-stability challenges of volatile Treasury markets and that financial-stability questions have generally been well-addressed as evident in the sound U.S. banking system. Noting recent findings in the latest staff report (see Client Report TMARKET3), Mr. Williams also called for structural changes to NBFIs along lines also laid out by the FSB (see Client Report NBFI2), arguing that MMFs and other NBFIs must be a market source of strength, not of vulnerability requiring rescue beyond the Fed’s new standing facility.
G20 Blesses FSB, Basel Work Plans
HFSC Session Brings Crypto Action to Fore, “Holistic” Capital Under Scrutiny
HFSC today largely focused bank regulators on the same range of questions posed at yesterday’s Senate Banking session (see Client Report REFORM214). However, Chairwoman Waters (D-CA) emphasized the importance of federal legislation in sharp contrast to Chairman Brown (D-OH), also announcing a hearing in December on FTX. Ranking Member McHenry (R-NC), who will become HFSC chairman in the next Congress, concurred with the chairwoman’s views on the need for digital-finance statutory reform. However, he took strong issue with inter-agency policy with regard to new capital rules, merger restrictions, and third-party relationship constraints. Republican members also targeted Vice Chairman Barr’s holistic capital review, arguing that banks are currently well capitalized and that additional standards would hamper lending. Mr. Barr indicated that an SLR rewrite is part of the holistic review but not immediately necessary to quell Treasury-market volatility or illiquidity. As discussed in more detail below, regulators promised banking-sector crypto rules at least as stringent as Basel’s proposal.
Crypto, Deposit Rates, Capital Top Senate Discussion
At today’s Senate Banking oversight hearing with the banking agencies, Chairman Brown (D-OH) generally applauded the work of regulators, emphasizing the need for tough standards, like-kind rules for bigtech companies, and an inquiry into why depositor interest rates lag Fed rate hikes along lines posed earlier by Sen. Reed (D-RI). FDIC Acting Chairman Gruenberg concurred, criticizing banks for sluggish rates. Ranking Member Toomey (R-PA) reiterated his longstanding complaints about regulators straying outside their mission in areas such as climate change. He also called for SLR relief to reduce Treasury-market risk and opposed pending large-bank resolution guidance (see FSM Report LIVINGWILL19) on grounds that it is unnecessary.
FSB Slow-Walks Global Crypto Action
As promised, the FSB today released preliminary recommendations for global cryptoasset regulation and questions for consultation.
FSB Demurs on Crypto Systemic Risk
Hsu Hunts for Reasons to Tolerate Crypto
In two speeches today, Acting Comptroller Hsu has again reiterated his concerns that cryptoassets pose an array of risks, a view of course echoing the FSOC’s findings (see Client Report CRYPTO33) and those in recent Treasury reports (see Client Report CBDC14 and Client Report CRYPTO32).
FRB KC: Better Data, Research Needed to Guide Payment Inclusion
A new research briefing from the Federal Reserve Bank of Kansas City calls for more research and data collection on underserved populations excluded from the payment system as well as more systematic research into public and private payment inclusion initiatives.
HFSC Republicans Press Hsu on Bank-Fintech Partnerships
HFSC Ranking Member McHenry (R-NC) and four other House Republicans today sent a letter to Acting Comptroller Hsu demanding clarification on the OCC’s treatment of bank-fintech partnerships.
OSTP Establishes AI User Rights, Privacy Protections
The White House Office of Science and Technology Policy (OSTP) has released a little-noticed AI “Bill of Rights” that establishes AI user rights and data privacy principles. Although nonbinding, this framework now sets policy that individual agencies are likely to follow even if they are nominally independent, as is the case with the FRB, OCC, and FDIC. The CFPB is no longer independent and is in any case already committed to like-kind principles; the banking agencies so far have only issued an RFI (see FSM Report AI).
OCC Tightens Fintech, Payment, Crypto Supervisory Screws
The OCC today released its Bank Supervision Operating Plan for FY2023, highlighting the Office’s supervisory issues based in part on policy considerations. The agency is prioritizing cybersecurity; third-party service providers with a particular focus on fintechs; consumer-protection and AML compliance; new product risk, such as payment systems technology and digital assets; and climate risks.
BIS Research Finds in Favor of Fintech Small-Business Finance
In sharp contrast to much earlier U.S. research, a new BIS study strongly supports alternative small business-lending fintech credit-scoring processes and market depth, concluding that fintechs expanded credit access to underserved small business owners. The study compares U.S. proprietary loan-level data from two fintech SBL platforms with Federal Reserve data between 2016 and 2019, finding that fintechs better predicted loan performance than banks. Fintechs served borrowers less likely to receive credit from banks, lending more in zip codes with higher unemployment rates and higher business bankruptcy filings.