Karen Petrou: Why More Deposit Insurance is a Very Bad Idea
As we recently noted, bipartisan senators are readying an amendment authorizing almost-unlimited FDIC coverage for noninterest-bearing transaction accounts as long as the bank accepting them is smaller than $250 billion. Pressing for this, Sen. Warren said the new FDIC backing should only be available to smaller IDIs because, “The giant banks don’t need another subsidy.” Maybe, but this still leaves open a critical question: why should larger banks pay the premiums that back FDIC-insurance subsidies for their competitors? If this makes sense for FDIC insurance, then why stop here? Let’s have the biggest banks also pick up the tab for small-bank modernization, branch expansion, and maybe nicer signs.
If big banks need to nurse small ones along, then the small-bank business model needs a reboot, not de facto nationalization for smaller banks that can’t find their way. Many do. In fact, smaller banks with marketing acumen have long been able to attract deposits by paying a bit more for them. Further, it’s not as if smaller banks can’t get added coverage if they want more deposits. All that’s different is that smaller banks must pay for this themselves instead of sending the tab over to the rest of the industry and, down the road, to depositors and taxpayers.
As a recent note from the Federal Reserve Bank of Dallas pointed out, reciprocal deposits meet the needs of banks that want more FDIC coverage. All it takes is paying a fee for this privilege, and the $500-$600 million total annual cost the study estimates for user banks is clearly sustainable. It’s also far less than the $15 billion or so in added premiums the Dallas study guesses it would otherwise cost everyone else.
There are also brokered deposits for IDIs in halfway decent shape. Again, the IDI pays for this, not anyone else. Does […]
FedFin on: Merchant-Banking Powers
Senate Banking GOP leadership has introduced legislation grandfathering existing merchant-banking holdings into a new, fifteen-year maximum tenor. Merchant-banking activities have not been widely discussed in many years, but are likely to gain renewed interest now that nonbanks may gain expanded banking powers under pending cryptoasset legislation. Banks have also long suffered under real-estate development and other activity limits they may seek to remove if this legislation advances….
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
Karen Petrou: Bureaucracy, Thy Name is Bank
About 8 weeks ago, FedFin found that a four-figure check had gone astray like so many others have for other people. We thank the USPS inspector who brought to our attention that the name of the depositor wasn’t even close to that of the payee, something one likes to think banks notice, even though none did. Given this initial goof, perhaps I shouldn’t have been surprised by how hard it is not only to remedy the loss but also to strengthen our firm’s payment practices. We agreed with the bank that they needed modernization, but three weeks after gaining the audience necessary to file the claim and ask for help, our administrators are still mired in paperwork, not enjoying the enhanced protection for which we agreed to pay for on the spot. And our lost money? Don’t even ask.
At a time of soaring fraud at ever-higher cost to banks, one might have thought ours would have been eager to facilitate our update. After all, we lose use of stolen funds, but the bank is obliged to repay us and take the loss. Which bank is on the hook is of course a battle between banks, but the payer-facing bank is the one that needs to keep the customer. I am sure the bank at every managerial level knows this, but bank culture is often so immutably mired in rigid processes and procedures that critical jobs never get done. Why is it so hard not just to get fraud remediation – yes, I know this means the bank must send us money – but even to get effective fraud-prevention software as quickly as possible?
Which brings me to the policy topic of the day: the imminent arrival of super-empowered nonbank competitors at every step of the banking value chain. This is a […]
FedFin Assessment: Administration Mandates Massive Banking-Regulatory Crypto Rewrite
Pursuant to the President’s executive order, the President’s Working Group on Digital Asset Markets (PWG) yesterday released a detailed report outlining specific policies the Administration will now follow or pursue. As we noted yesterday, the report is unreservedly pro‑crypto, emphasizing the benefits of these assets to the United States while also reaffirming the Administration’s strong opposition to a CBDC. The recommendations for banking agencies are most specific when it comes to new capital standards, with the report detailing how it believes cryptoassets should be treated in new standards the agencies are to issue as quickly as possible…
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
FedFin Assessment: Crypto-Clarity Bills Recraft Bank Powers, Ownership
In this report, we assess provisions in the House-passed CLARITY Act, the Senate discussion draft, and a new Senate Banking GOP request for information on provisions in these measures affecting financial-industry structure and banking activities. The measures are focused on recrafting the regulatory framework governing digital assets to promote rapid innovation, as well as to redefine SEC and CFTC authority. However, the bills also alter provisions affecting what banking organizations may do and who may own them, with the Senate Gop’s draft bill suggesting still greater restructuring might advance in that chamber’s legislation. This report focuses on these provisions, which could radically reshape which types of companies are allowed to own IDIs and what IDI parent companies may do….
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
Karen Petrou: The High Cost to Competitiveness of the Bankers’ Quest for Certainty
FedFin reports since at least 2011 have identified the comparative advantage nonbanks enjoy thanks to lots of costly bank-only standards. However, we missed one big nonbank advantage sure to prove even more decisive in the stablecoin wars: bankers crave regulatory certainty even as their competitors aggressively exploit the battlefield advantage that uncertainty gives to those who dare.
Bankers aren’t dare-devils because they’re not supposed to be. Indeed, anyone who takes someone else’s money should be very, very careful. Decades of accepting deposits under strict rules without meaningful competition meant that most bankers rightly asked a lot of questions before doing anything even a little bit novel. To be sure, high-flying bankers abused taxpayer benefits thanks to negligent or even captive supervisors and rules weren’t always right. Still, rules and the supervisors who enforced them generally kept bankers in their lane since there wasn’t any faster traffic.
This comfy balance between caution and competitiveness was fiercely challenged for the first time when money-market funds dawned in the late 1970s, luring bank deposits at a time when anachronistic rules barred banks from offering competitive interest rates. High-flying bankers then sought to evade these constraints by making high-risk loans, thus bringing about the 1980s S&L crisis and the banking debacle that followed in the early 1990s. Both of these were systemic in terms of taxpayer cost, but neither had macroeconomic or financial-stability impact.
Newer, better rules succeeded these crises, but they were outflanked as “nonbank banks” became the first commercial firms to exploit chartering loopholes in the mid-1980s, building novel charters Congress largely ignored or grandfathered. More and more “shadow banks” have lurked ever since, and bankers took more and more risks to compete followed by more and more rules governing only banks in hopes of curtailing high-risk activities. Banks thus fell farther and farther behind […]