Building on a request for comment, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have now proposed specific revisions to U.S. merger policy that significantly redirect the manner in which M&A transactions – even if only for minority positions – will be considered. Although this is only a draft statement, it tracks much of what President Biden laid out in his 2021 executive order on U.S. competition policy and actions since then by the DOJ and the FTC. As a result, the guidelines are more of a roadmap providing clarity than a new approach unless the final version differs substantively in any major way or future Administrations adopt a different policy. Near-term U.S. merger policy makes it considerably more difficult to finalize horizontal, vertical, and even minority holdings, a challenge likely to be particularly acute in U.S. financial services where government agencies believe there is …
U.S. Merger Policy
Building on a request for comment, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have now proposed specific revisions to U.S. merger policy that significantly redirect the manner in which M&A transactions – even if only for minority positions – will be considered. Although this is only a draft statement, it tracks much of what President Biden laid out in his 2021 executive order on U.S. competition policy and actions since then by the DOJ and the FTC. As a result, the guidelines are more of a roadmap providing clarity than a new approach unless the final version differs substantively in any major way or future Administrations adopt a different policy. Near-term U.S. merger policy makes it considerably more difficult to finalize horizontal, vertical, and even minority holdings, a challenge 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. The clarity and specifics of the guidelines will give firms a clearer understanding of obstacles to possible transactions as well as risks to those that have been previously consummated. However, the guidelines are statements of agency policy based on their read of law, not a binding legal action. As a result, merger participants who believe that their transactions were unduly denied and companies ordered to shed certain operations may still seek legal redress in the courts.
Basel Redesigns Global Bank-Supervision Construct
Accommodative CRE Policy Goes Live
Publication in the Federal Register today makes effective a finalized policy statement issued by the banking agencies and NCUA late last week on how financial institutions are to handle troubled commercial real estate (CRE) loans.
Senate Dems Demand CFPB Voice-Cloning Action
Following his letter to large bank CEOs regarding AI fraud, Chairman Brown (D-OH) along with Sens. Menendez (D-NJ), Reed (D-RI), and Smith (D-MN) today sent a letter to Director Chopra urging action against AI-related financial scams.
FSB Turns to GSIB Resolvability
The FSB’s plenary today announced that recent events have spurred it to assess the resolvability of GSIBs and other large banks, providing neither timeline nor focus for this work.
FRB-NY Study Advances Wholesale Digital Currency
Although making clear that it sets no new policy nor endorses any CBDC action, the Federal Reserve Bank of New York’s Innovation Center published a DLT proof-of-concept finding that shared ledgers can effectively support both wholesale domestic interbank and cross-border payments.
ECB Targets Bank Risk to NBFIs
A speech earlier today from the ECB’s top bank supervisor makes it clear that the EU is pressing ahead with FSOC’s proposed limits on bank inter-connections with NBFIs (see FSM Report SYSTEMIC95). Karen Petrou’s memo today also addresses this issue.
New M&A Policy Sets High Bar For Banking-Agency Approval, Increases Odds Of DOJ Rejection
Making M&A a good deal harder to pull off, Assistant Attorney General Jonathan Kanter today redefined U.S. bank-merger policy in light of comments on a recent RFI (see FSM Report MERGER10) and dramatic changes since current policy was set in 1995. The new approach reflects Biden Administration competition policy (see Client Report MERGER6) and will make it considerably more difficult for banks of all sizes to win DOJ approval if the banking agencies approve their proposed transaction after getting a new, likely more dire competitive-factor report from the Department of Justice.
FRB-KC: Community Banks Better Capitalized than GSIBs
The Kansas City Fed today released an analysis of 2022 bank capital, finding that community banks continued to hold higher levels of capital compared to G-SIBS: ten percent to six percent, respectively. The study also found that G-SIB supplementary leverage ratios (SLR) increased thirty basis points to 5.94 percent, the first increase since the beginning of the pandemic, excluding the impact of the Fed’s temporary capital relief.
Fed Study Validates Bank/Shadow-Bank Interconnections, Systemic Risk
A new study by staff from the Federal Reserve Banks of Boston and New York evaluates the banking-sector impact of fire sales across multiple NBFI segments, finding numerous bank vulnerabilities to nonbanks not only through direct exposures, but also through complex, indirect channels.
McHenry Protests U.S. Outbound-Investment Constraints
HFSC Chairman McHenry (R-NC) sent a letter to Secretary Yellen late Friday demanding information about a potential executive order that would enable CFIUS to prohibit or require notification of outbound investments into China, stating that the Administration’s interest in capital controls necessitates Congressional oversight.
IMF Article Calls SVB Resolution “Riskless Capitalism”
An article in the IMF’s forthcoming Finance and Development magazine issue argues that SVB’s uninsured depositors enjoyed “riskless capitalism,” concluding that high moral hazard-risks will persist without incentives for depositor due diligence.
FTC Demands Greater Debit-Card Data Access
The FTC today finalized a consent order requiring Mastercard to provide competing card networks with the customer account information necessary to process debit payments, alleging that the company illegally withheld that information to prevent merchants from using its competitors or Mastercard-branded debit cards saved in e-wallets outside of traditional networks.
FRB-NY Finds NBFIs a Source of Systemic Risk Over the Centuries
Reflecting renewed interest in “narrow banks,” the Federal Reserve Bank of New York blog posted evidence of systemic risk from nonbanks in the absence of any banks at all.
Stablecoin Compromise Faces Steep Challenges
As noted yesterday, HFSC’s Digital Asset Subcommittee is set for a Wednesday hearing clearly intended to lay the groundwork for near-term action on Chairman McHenry’s (R-NC) longstanding goal of enacting stablecoin legislation.
Despite Failures, DIF Restoration Ahead Of Schedule
At the FDIC Board’s meeting today, FDIC staff said that – while the timing for restoring the DIF to its 1.35% statutory minimum remains uncertain – the DIF could reach its statutory minimum ahead of time and by 2024.
Bowman Remains Staunch CBDC Skeptic
Reiterating that any U.S. CBDC requires Congressional approval, Gov. Bowman today also reiterated her longstanding skepticism to any such instrument.
CFPB Plans Timing Study to Buttress Junk-Fee Regs
The Federal Register today includes a CFPB comment request on its “Junk Fees Timing Study,” which would be part of a series of online lab experiments testing differences in consumer choices across different information presentations.
Warren, Reed Demand OFR Use Subpoenas To Obtain Systemic Data
Sens. Warren (D-MA) and Reed (D-RI) today urged OFR Acting Director Martin to fill data gaps around financial stability risks posed by climate change, cryptocurrencies, and repo markets.
House Republicans Launch Attack On New Small-Business Reporting Rule
House Republicans including Reps. Williams (R-TX), Barr (R-KY), and Ogles (R-TN) today introduced a resolution to overturn the CFPB’s small business data collection final rule via the Congressional Review Act.
Bipartisan Leaders Demand End to AML “Escape Hatch”
Accelerating the odds for a significant FinCEN rewrite, HFSC Chairman McHenry (R-NC), Senate Banking Chairman Brown (D-OH), Ranking Member Waters (D-CA) and a group of bipartisan lawmakers today sent a letter to Secretary Yellen and FinCEN Acting Director Das emphatically stating that FinCEN’s latest beneficial ownership proposal undermines the intent of the Corporate Transparency Act (see FSM Report AML133) by allowing an “escape hatch” through which firms can continue to do business with a customer even if they are unable to collect beneficial-ownership information.
IMF Says NBFIs Should Have Central-Bank Backing
The IMF’s financial-stability report includes a new chapter on NBFIs. Largely echoing all the concerns and policy recommendations in continuing FSB calls for NBFI standards, the Fund goes on to advocate also for NBFI access to central-bank backstops.
Global Regulators Like Look Of Systemic Insurance Standards, U.S. Implementation
IAIS today published a report assessing the implementation of its holistic supervisory framework across national jurisdictions, concluding that results demonstrate a “very positive outcome.” This is reflected in strong implementation of the holistic framework standards and good levels of observance across many of the standards, including by U.S. states.
GOP Revs Up Fight Vs. Big-Bank Capital Hikes
Firing a fusillade ahead of capital rewrites expected late this month, Senate Banking Republicans late Friday sent FRB Chairman Powell a letter arguing strongly against capital increases and laying out a strong view that the agencies are required by law to tailor key standards.
BIS Project Finds Retail-CBDC Cross-Border Benefits
In a project boosting retail CBDC, the BIS Innovation Hub today announced the results of Project Icebreaker, a cross-border retail CBDC pilot between Sweden, Norway, and Israel.
GOP Will Deploy IGs To Demand Fed, CFPB, SEC Reform
Dems Beg Gensler Not to Scrap Scope 3 Climate Disclosures
Responding to intense GOP opposition to the SEC’s climate disclosure proposal, fifty Congressional Democrats led by Sen. Warren (D-MA) sent a letter to SEC Chairman Gensler today urging him not to scale the proposal back, especially its Scope 3 provisions.
Treasury Wants Fast NBFI, OEF, Crypto Standards
Treasury International Affairs Under-Secretary Jay Shambaugh today outlined U.S. priorities, emphasizing not only the importance of containing Russia and countering new threats, but also quickly advancing numerous global initiatives.
Hsu Pushes To Start The End Game
Acting Comptroller Hsu today reiterated his determination to act as quickly as possible on Basel’s end-game rules, noting the interagency statement last year that this would soon be done without providing …
Nonbank Corporate Finance Stokes Systemic, Macro Risk
A new BIS paper supports bank assertions that nonbank corporate finance is considerably more procyclical in terms of its threat to financial stability and macroeconomic growth than that conducted by regulated companies. This risk-arbitrage question is germane not only to the ongoing debate about NBFI regulation, but also efforts to ensure that U.S. “end-game” capital rules sharply reduce the RWA for lower-risk corporate obligations.
FSB Fears Systemic Risk from Bank, CCP Commodity Risk
A new FSB report today assesses systemic risk posed by the oil, gas, and wheat commodity markets given its highly-leveraged and illiquid nature and its deep interconnections into the global banking system. Global regulators conclude that bank exposures in general are “manageable,” but some banks and CCPs have significant sector exposure and thus risk. Commodity firms have recently reduced liquidity risk, but they also hiked credit and market risk at a time of tightening that exacerbates them, leading the FSB to describe emerging risks and detail the data gaps that make it challenging to draw clear conclusions.
FSB Prioritizes Crypto, NBFIs
The FSB head’s letter to the G20 yesterday reiterates priorities outlined in his November letter, stating that global regulators will deliver a joint paper with the IMF later this year synthesizing policy findings and regulatory issues around cryptoassets. The FSB will also continue to prioritize NBFI supervision (see Client Report NBFI2), re-emphasizing the importance of studying hidden leverage and addressing liquidity mismatches in open-end funds.
Although the always-inscrutable FSOC’s read-out of its last meeting was clear only with respect to approval of prior meeting minutes, the brief mention of ongoing U.S. work to address nonbank financial intermediation (NBFI) was so tantalizing that we ventured down darkened corners of key agencies to get a read-out of our own. Two conclusions came to light: the U.S. will take tough action on limiting bank/NBFI interconnections in its pending bank capital rewrite and FSOC is fine with the SEC’s recent MMF and open-end fund proposals even if pretty much no one else is.
First to the capital rewrites and how costly they could be. In its most recent NBFI review, the FSB took sharp issue with the extent to which the U.S. has taken sufficient steps to curb the inter-connected risks to NBFIs evident even before the 2020 market collapse. We expect the banking agencies not only to issue the end-game rules discussed in my last memo, but also to make good on the U.S. promise to Basel well before the game nominally ended with the 2017 revisions.
This means new capital standards costing banks big when it comes to bank equity investments in funds and higher risk weightings for exposures to unregulated financial institutions. It also means new capital requirements absorbing “step-in” risk – i.e., the extent to which reputational risk forces banks to stand by their off-balance sheet funds, SIVs, or other instrumentalities. Two banks in fact supported affiliated funds in MMFs during the 2020 …