The Vault

At the height of what proved his fleeting power, the founder of a now-evaporated stablecoin said, “I never debate the poor.”  And, perhaps he doesn’t have to – his was not among tall the fiat-currency wallets emptied in the course of this high-flying venture.  Those were mostly in the virtual pockets of young and often minority households.  Regardless, this statement is stark evidence of the difference between the social-welfare obligations demanded of banks and the get-it-while-you-can ethos embodied by this entrepreneur, Elon Musk, and all their acolytes.  We demand much of banks because they take other people’s money.  The same obligations should bind stablecoins because they also take other people’s money and thus need to be governed not just for safety and soundness, but also for equality and equity.

It might be argued that a community-service rationale isn’t warranted for crypto-currency because stablecoin issuers are not intermediaries – indeed, this was a defense against new rules laid out at a recent hearing and it’s the rationale behind the Toomey draft bill to craft a federal stablecoin construct, which eschews most prudential and any community obligations for nonbank stablecoin issuers.

Leaving aside the competitive inequity of a two-tier regulatory framework for the same business, there are three compelling public-welfare arguments for subjecting stablecoins and many other virtual currencies to critical components of bank regulation even if they don’t emulate every aspect of a full-service bank.

First, taking money from other people and promising that they can get it back is deposit-taking even if the promise isn’t accompanied by a promise also to pay interest on the funds taken in hand or to make loans.  As the FDIC made clear last week, consumers no longer understand the difference between deposits with FDIC insurance and funds put at limitless risk.  How […]

Following much talk about the need to update Community Reinvestment Act (CRA) rules since this was last done in 1995, federal banking agencies have finally agreed on a proposed redesign of standards essential to banks that wish to expand or acquire as well as those seeking strong community ties and the policy and political benefit these afford.  Much of the complexity in the NPR results from the agencies’ decision to allow only partial credit for activities (e.g., mortgages) largely assumed in the past…

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

As we noted last week, the federal banking agencies sighed a mighty sigh and heaved up a massive inter-agency proposal rewriting decades-old standards detailing which activities earn the Community Reinvestment Act (CRA) points essential for any bank’s strategic objectives and national reputation.  As discussed below, the new proposal is lengthy, complex, and in some cases analytically daunting or flat-out confusing.  Still one critical conclusion is clear…

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

On Thursday, the Washington Post included an article on all the ways in which inflation hurts middle-income families, the acute shortage of baby formula, and the cooking-oil shortage’s cost impact in places ranging from a D.C. shop selling doughnuts to sub-Saharan Africa.  Other articles chronicled stablecoins’ instability even as stock markets wobbled precariously above going so deeply into correction that investors are not just chastened, but also cudgeled.  The same day, Chairman Powell won his second term by a wide margin even as he told Marketplace that he couldn’t promise a soft landing, didn’t mean to commit the FOMC to only fifty basis-point hikes, and knows how hard inflation hits for most households while being unsure that the Fed can do much about it.  What markets make of this muddle remains to be seen by those not too faint of heart to look.  What I know it means is that a White House under acute political pressure will ultimately do its best to transfer blame from 1600 Pennsylvania Avenue to 20^th and Constitution at considerable cost to coherent policy.

One might discount my prediction of a political reckoning for the Fed by pointing to President Biden’s stout defense of his central bank last week when he tried to show the nation how much he was doing to quell inflation.  But a careful read of Mr. Biden’s statements shows a focus more on the Fed’s independence than on its skill.  So far, Secretary Yellen has persuaded White House political aides to go easy on her favorite central bank.  Closer to the midterms, political aides will do what they always do – look for any way to win – and the Fed’s head will be on the chopping block.  Even if the White House is restrained, Congress […]

In this report, we assess the new Federal Reserve financial-stability report. Secretary Yellen is also testifying now about systemic risk and sure to get questions on the Fed’s conclusions. We will shortly send you an in-depth report on this hearing, but key to the Fed’s report is a more cautious, but still sanguine outlook. For example, banks are found to be resilient and well-capitalized despite growing Fed concern about indirect risk channels such as asset-market volatility, sanctions-related disruptions to payment…

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

Was the new CRA proposal worth waiting for?  Advocates on all sides of this question are burrowing into the 678 pages delivered unto them by the FDIC last Thursday.  We’re doing the same for an in-depth analysis we’ll make as objective as possible as quickly as possible.  At first glance, there’s a lot in the proposal for all sides to like a lot.  However, the haste with which the agencies are gathering comment suggests that they hear Republican hoofbeats that may well pick up speed and strength as the industry’s deep read concludes.

The fact sheet released on the proposal laid out the both-sides benefits.  Banks would bet certainty combined with points for investing in much of what they now do or want to do in areas such as social welfare, environmental resilience, and deposit-taking.  Consumer and community advocates were cheered by the proposal’s tougher metrics focus on demographic data designed to demand racial equity, and higher barriers to exemplary CRA ratings.

However, each side carefully hedged its bet.  Bank trade associations applauded the proposal’s provisions in broad terms, celebrating an inter-agency action along with provisions bringing CRA into the 21^st century.  However, none blessed the proposal in substance, doubtless because the new demographic-reporting requirements and tougher grading system already give the industry heartburn.

Conversely, community groups warned that the proposal had better not go soft on banks, especially big ones. Anticipating these concerns, CFPB Director Chopra made it clear that, while he likes a lot in the proposal, he won’t tolerate anything that softens it and, indeed, he wants some of it toughened up.

It will take a while to parse all these pros and cons in so complex a proposal.  But, even pending judgment on the proposal itself, I know one think about it:  the banking agencies […]