Karen Petrou: The OCC Blesses a Buccaneer Bank
In a column last week, Bloomberg’s Matt Levine rightly observed that only a bank can usually buy another bank. He thus went on to say that a SPAC named Porticoes ambitions to buy a bank are doomed because Porticoes isn’t a bank. Here, he’s wrong – Porticoes in fact was allowed last December to become a unique form of national bank licensed to engage in what is often, if unkindly, called vulture capitalism. This is another OCC charter of convenience atop its approvals leading to NYCB’s woes, and thus yet another contradiction between the agency’s stern warnings on risk when it pops up in existing charters versus its insouciance when it comes to new or novel applications.
According to the OCC’s charter approval, the Porticoes bank has no other purpose than serving as a wholly-owned subsidiary of Porticoes Capital LLC, a Delaware limited-liability company formed to be a proxy for a parent holding company. The parent holdco is “expected” to enter into binding commitments for the capital needed to back its wholly-owned bank plans to acquire a failed bank or even banks. This is essentially a buy-now, pay-later form of bank chartering, a policy even more striking because funding commitments for the holdco then to downstream – should they materialize – are more than likely to come from private-equity investors who may or may not exercise direct or indirect control.
Based on the OCC’s approval, it seems that Porticoes’s new charter can buy another bank without capital, pre-approval from the FRB for member status, and FDIC insurance. If this charter is plausible, then the FDIC takes the risk of selling a failed bank to Porticoes even though the deal could go bad because Porticoes is a bank in name only without a holding company standing as a source of […]
FedFin on: FHLBs Forced Into an Unflattering Limelight
The President’s FY25 budget picks up FHFA’s recommendations, calling for statutory change to double the System’s affordable-housing commitment. That won’t happen anytime soon, but a new CBO report strengthens FHFA’s hand in several areas well within its jurisdiction.
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FedFin on: Consumer-Financial Product Marketing Practices
The CFPB has issued a circular essentially banning digital and perhaps all other consumer-finance comparison-shopping and lead-generation tools for credit cards and other products not covered by prior orders. These activities could continue, but only as long as the comparison or lead is completely objective as the Bureau may come to judge it under complex and sometimes conflicting standards. The circular follows similar CFPB actions outside the Administrative Procedure Act even though the agency clearly intends to enforce its new approach both directly and in concert with other state and federal agencies….
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Karen Petrou: The Madness of a Model and its Unfounded Policy Conclusion
As the pending U.S. capital rules head into their own end-game, there is finally a good deal of talk about an issue long neglected in both public discourse and banking-agency thinking: the extent to which higher bank capital rules accelerate credit-market migration. Simple assertions that more capital means less credit are, as I’ve noted before, simplistic. One must consider how banks reallocate credit exposures to optimize capital impact and, still more importantly, how the credit obligations banks decide to leave behind take a hike. Now comes a new paper the Financial Times touts concluding that, thanks to shadow banks, “we can jack up capital requirements more.” Maybe, but not judging by this study’s design. Even with considerable charity, it can be given no better than the “very creative” grade which kind primary-school teachers accord nice tries.
The paper in question is by Bank of International Settlements staff. It looks empirically – or so it says – at what it calls the U.S. banking sector’s share since the 1960s of what it lugubriously calls “informationally-sensitive loans.” It documents a lot of numbers said to demonstrate lower bank lending share, using a model founded on both erroneous data and wild leaps to conclude in a fit of circular reasoning that more nonbank lending explains why there is less bank lending. In the study’s words, “intermediaries themselves have adjusted their business models.” What might have led banks to decades of technological intransigence and strategic indolence is neither clearly explained nor verified.
What else is wrong? For starters, the paper’s definition of banks – more than a bit fundamental to conclusions about banks – is at best perplexing. U.S. banks are defined to include credit unions – which of course operate under wildly-different capital rules – and foreign-bank “offices” even though branches […]
Karen Petrou: The Unintended Consequences of Blocking the Credit-Card Merger
There is no doubt that the banking agencies have approved all too many dubious merger applications along with charter conversions of convenience. However, the debate roiling over the Capital One/Discover merger harkens to an earlier age of thousands more prosperous small banks all operating strictly within a perimeter guarded by top-notch consumer, community, and prudential regulators. Whether this ever existed is at best uncertain. What is for sure is that all this nostalgia for a halcyon past will hasten a future dominated by GSIBs and systemic-scale nonbanks still operating outside flimsy regulatory guardrails.
The best way to demonstrate this awkward certainty is to run a counter-factual – that is, think about what the world would look like if opponents of the Capital One/Discover deal get their way. Would we quickly see a return to card competition housed firmly within a tightly-regulated system? Would the payment system be loosed from Visa and Mastercard’s grip? Would merchants see the dawn of a new era of itsy-bitsy interchange fees? Would card rates plummet and rewards stay splendiferous? I very much doubt it. Space here does not permit a detailed assessment of the analytics underlying my conclusions, so let’s go straight to each of them.
First, banning the CapOne/Discover deal would not ensure robust card competition under strict bank regulation. JPMorgan’s and American Express’ formidable stakes could grow because credit-card lending is a business dependent on economies of scale and scope vital to capital-efficiency through the secondary market. However, large banks will have a lot more trouble finding these and, even if the rules are modified, overall regulatory costs will make each of them less competitive.
Nonbanks have many ways to enter the regulated banking […]
Karen Petrou: How the OCC Made a Bad Bank Both Bigger and Badder
As I noted last week, the OCC’s proposed bank-merger policy fails to reckon with the strong supervisory and regulatory powers federal banking agencies already have to quash problematic consolidations and concentrations. Here, I turn to one reason why the OCC may not trust these rules: it doesn’t trust itself. A bit of recent history shows all too well why this self-doubt is warranted even though it’s also inexcusable.
I owe my historical recall to the authoritative Bank Reg Blog, which last week looked at the latest on NYCB. This included a troubling reminder of the troubled bank’s merger with Flagstar before it thought it snapped up another great deal from the FDIC via acquiring what was left of Signature Bank.
NYCB first sought approval for the Flagstar acquisition in 2021 when its primary federal regulator was the FDIC. As is often the case with merger applications, this one appeared to go into a dark hole. Unlike many other acquisitions, the banking companies had a go-to Plan B: charter conversion.
NYCB went to the OCC and got rapid approval not just for converting its charter to a national bank, but also then for acquiring Flagstar via a reverse flip that also involved a Flagstar conversion to a national charter. The OCC then readily approved the merger in 2022, just in time for some of the super-rapid growth via the Signature deal both the OCC and FDIC approved even though they should have been well aware that rapid-fire mergers almost always lead to the serious integration problems now all too evident at NYCB along with its fundamental unreadiness to grow so big so fast and dangerous CRE concentrations.
Charter conversions have a very bad record of leading to lowest-common-denominator supervision. This the OCC knew well in 2012 when it emphatically declared that it […]