WASHINGTON — The 2024 election turned on its head this week, as a galvanized former President Donald Trump, bandaged ear from a failed assassination attempt, officially accepted the Republican nomination for the presidency.
President Joe Biden, meanwhile, retreated into his Rehoboth beach, Del., home on Thursday, isolating with a recent Covid diagnosis as political pressure mounted for him to step aside amid concerns from his own party about his mental and physical ability to withstand another four years of political service.
The dramatic events of the week bolstered the Republican ticket, where Trump is now joined by Sen. JD Vance, R-Ohio, giving further answers as to what the policies of the future Republican party will look like, even after Trump. The Democratic party, meanwhile, tried to regain momentum, framing the Trump campaign’s aims as detrimental to most American voters, particularly on economic issues.
Here’s four takeaways from the week and what it bankers should glean from it:
Federal Reserve Gov. Adriana Kugler said private data is playing a bigger role in the central bank’s policy considerations.
Federal Reserve Board of Governors
Private data sources are playing a key role in how the Federal Reserve is tracking housing cost trends and other key economic indicators, according to a top Fed official.
Fed Gov. Adriana Kugler said in a speech Tuesday on data measurement that traditional government surveys can be slow and reliant upon outdated methodologies. She also noted that falling response rates have made findings less accurate.
“While these challenges in traditional data that I have described may take some time to be addressed, I am encouraged by the explosion in data produced by the private sector over the past decade or so that can greatly enhance our understanding of the economy,” Kugler said. “Such data give an opportunity to measure economic developments with greater timeliness, at a higher frequency, and with more granularity.”
Kugler said the Fed highlighted hiring trends and market rents as factors measured more quickly, and potentially more accurately, by private analytics groups than by government entities.
She said that housing services have been a “big reason” why measured inflation has remained above the Fed’s 2% target. But, because trends in this cost category are tracked via a survey of recently signed leases, “the official measures can significantly lag current market conditions” — by months or even years.
“That is why policymakers can also rely on current market rent data, showing what landlords charge new tenants, information that is available from multiple private-sector sources,” she said. “Those data can provide some early signal of where official housing inflation series are likely headed.”
In her remarks, which were delivered at a seminar hosted by the National Association for Business Economics, Kugler noted that some government pricing surveys are in need of updates to better reflect the current economy. She highlighted that while manufacturing and agricultural factors are well represented, more recent developments such as so-called “gig” workers are not.
“I believe the statistical agencies grapple with these issues, and it takes time to lay the groundwork and develop new data series, but this challenge is a real one,” she said. “If reports are built for the past, that may mean they struggle to capture big developments today and in the future, such as the changing nature of where and how people work or the rising use of artificial intelligence technology.”
Kugler also called for innovative solutions to increase response rates for government-conducted surveys to ensure the data is sufficiently representative of market conditions.
She added that forward-looking surveys, many of which are conducted by nongovernmental entities, are also an essential tool for her and other policymakers.
“I pay close attention to these surveys, because they are forward-looking and help inform where behaviors by businesses and households may be trending,” she said.
Even so, Kugler’s overall outlook on governmental data output was positive. She praised innovative efforts by government stat trackers, some of which have incorporated private data into their methodologies. Specifically, she pointed to the Bureau of Economic Analysis, which uses a number of private sector sources in its gross domestic product calculations, as well as the Fed itself, which taps private data for its Industrial Production and Capacity Utilization report, as well as its consumer credit statistics.
Kugler also noted that government agencies are using the data that they collect in new and innovative ways. She singled out a Bureau of Labor Statistics initiative to use housing survey data to create a national tenant rent index to track quarterly changes to lease terms.
“Despite the many challenges, the future of economic measurement is bright,” she said. “The statistical agencies have already proven their ability to innovate and adapt, even under tight resource constraints. And the wealth of private-sector data sources will only expand in the future.”
The Supreme Court’s late June ruling on Loper Bright Enterprises vs. Raimondo reversed a 40-year-old legal doctrine. The new precedent is already being applied to active litigation involving the Federal Reserve.
The decision — Loper Bright Enterprises vs. Raimondo — was cited in two amicus briefs filed in the U.S. Court of Appeals for the 10th Circuit last week regarding Custodia Bank’s lawsuit against the Fed, including one written by the lead attorney for Loper Bright from the precedent-setting case.
Custodia, a Cheyenne, Wyoming-based digital asset bank, was denied a so-called master account with the Federal Reserve Bank of Kansas City last year. It sued the reserve bank and the Fed Board of Governors in Washington, D.C., arguing it was legally entitled to the account, which would have granted it access to the federal payments systems.
The lawsuit largely hinged on whether a provision of the Monetary Control Act of 1980 — which states that “all Federal Reserve bank services covered by the fee schedule shall be available to nonmember depository institutions” — dictates that the Fed must grant these services or that it simply may. The Fed asserted that it was the latter and the court agreed.
The Loper case marked the end of a concept known as Chevron deference. The doctrine — which derives its name from a 1984 Supreme Court ruling in a case involving the energy conglomerate — held that agencies had the ability to interpret ambiguous authorities granted to them by Congress. Such interpretations now must be made by courts.
Judge Scott Skavdahl, the district court judge who ruled on the Custodia case earlier this year, did not cite the Chevron case — Natural Resources Defense Council vs. U.S. EPA — in his ruling. Likewise, it was not referenced by the Fed Board of Governors or the Kansas City Fed in their opposition filings.
Still, in light of the Loper case, some say there is new ground for challenging the Fed’s reading of the law.
Last week, Paul Clement, who represented Loper Bright, wrote an amicus brief in support of Custodia on behalf of two crypto trade groups, the Digital Chamber of Commerce and the Global Blockchain Business Council. In it, he argued that the lower court’s ruling violates two key structures of the Constitution: “the vertical constraint of federalism and the horizontal constraints imposed by separation of powers doctrines.”
Specifically, he said the outcome undermines the dual banking system by giving federally supervised banks an advantage over those supervised only at the state level. The brief added that the district court’s ruling raises questions about the structure of the Federal Reserve system, including the powers granted to the 12 quasi-governmental regional reserve banks, which are technically private entities but still carry out key functions for the central bank — namely, in this instance, the granting of master accounts.
“In short, the district court’s interpretation affords politically unaccountable Federal Reserve Bank presidents unchecked discretion to unilaterally undermine state banking law and deprive state-chartered banks of any ability to engage in meaningful financial operations,” Clement wrote. “That reading is not only contrary to the statutory text, but raises serious concerns on two distinct constitutional dimensions.”
Michael Pepson, regulatory counsel for Americans for Prosperity — a conservative political action committee that frequently writes amicus briefs on cases of interest — also cited the Loper ruling in a brief filed in support of Custodia. He argues that the Fed’s “discretionary assertion”that it has the ability to deny master accounts contradicts previous policy stances put out by the central bank.
“The Federal Reserve’s longstanding practices further underscore that neither it nor the Kansas City Fed have discretion to deny master account applications from eligible depository institutions,” Pepson wrote.
He added that the court should “reject any suggestion by the Board or Kansas City Fed that their decision is outside of the scope of this Court’s purview.”
Three members of Congress — Sens. Cynthia Lummis and Steve Daines along with Rep. Warren Davidson — also submitted an amicus brief in support of Custodia, as did former Sen. Pat Toomey, Wyoming Attorney General Bridget Hill and the Blockchain Association, a crypto trade group.
The Fed declined to comment on the amicus briefs or their assertions.
Caitlin Long, founder and CEO of Custodia, declined to say what role the Loper decision would play in her company’s legal strategy moving forward, but noted that it — along with several other recent decisions — indicates that the Supreme Court is looking at administrative law disputes in a new and more critical light.
“The reaction to this particular Supreme Court term, which just ended, has been a theme of curbing federal regulatory agency authority,” Long said. “And Loper Bright, of course, is one example of that.”
Michael Barr, vice chair for supervision at the Federal Reserve, left, shakes hands with Martin Gruenberg, chair of the Federal Deposit Insurance Corp., following a Senate Banking Committee hearing last May. Regulators are reportedly poised to offer a retooled Basel III endgame rule that significantly scales back some of the more controversial elements of last July’s proposed rule, but whether those changes are enough to quell banks’ opposition is unclear.
Bloomberg News
WASHINGTON — While it’s clear bank regulators plan to make substantive changes to a bank capital overhaul requiring institutions to put up more unborrowed funds to lend to consumers, banking experts vary on how this might be accomplished, and whether even a revised proposal will be enough to preclude legal challenges from the banking industry.
Lawyer Gregory Lyons of Debevoise and Plimpton said he isn’t confident of the timeline just yet, given regulators still appear to be hashing things out internally.
“I think there’s different proposals circling around how to amend it, but honestly, I’m not sure they know,” said Lyons. “We’re pretty close to what’s going on and I just do think there’s a lot of internal — good faith — but internal debates about how this is all going to play out.”
Corporate lawyer Chen Xu, also with Debevoise, says he thinks the heads of the agencies involved in the rulemaking — which is a joint effort between the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. — would like to strike a compromise with their capital skeptic colleagues, some of which are within the same agency.
“Some of the agency principals hope if they make enough concessions, they can get it through by August so this doesn’t get tied up with the election,” he said. “We’ve been hearing that view is gaining traction, but we’ve also heard that there are a number of folks inside the agencies who would rather have a reproposal, and right now it’s hard to see who’s winning.”
But whether those adjustments can be incorporated into a final proposal or must be included in a new proposal — or some mix of both — remains unclear. Under the Administrative Procedure Act, changes made to final rules must be a “logical outgrowth” of what was in the original proposed rule. Many in and around the banking sector argue that the changes needed for the Basel III endgame proposal exceed this standard, and therefore an entirely new rule should be put through its own notice and comment period.
Jaret Seiberg, financial policy analyst at TD Cowen says he expects regulators will at least partially withdraw and re-propose the rule — often dubbed Basel III endgame — given statements from one of the most influential players shaping the pending regulation: Federal Reserve chair Jerome Powell.
“Powell has effectively made this commitment to Congress,” commented Seiberg. “It doesn’t mean there is zero probability for the rule to be finalized, but a re-proposal seems likely.”
While the Fed is the most politically independent of the financial regulators, it is facing pressure from both the financial industry — which wants a re-proposed rule — while some Democrats and consumer advocates want the rule finished largely as is. A new proposal would significantly extend the timeline for finalization. Banking policy expert Ian Katz of Capital Alpha Partners says the Fed could devise a way to allow public comment on certain rule revisions without restarting the process.
“The Fed may put out something that basically looks like a reproposal but is called something else and allows the public to comment without starting the process from scratch,” said Katz. “If the Fed were to do that in the fall — before the elections — it could finalize the Basel endgame rule next year, probably in the first half.”
Banks and their trade group representatives have been vocal in their opposition to the Basel proposal and have availed themselves of novel tactics in elevating the issue with voters and lawmakers. From launching advertising campaigns on Sunday night football to identifying procedural weaknesses they could challenge in court, the industry has made it clear that it will oppose the rule on as many fronts as possible. Bank trade group the Bank Policy Institute, whose members would all be impacted by the rule, has retained corporate litigator Eugene Scalia — son of former Supreme Court Justice Antonin Scalia — to advise a potential legal challenge to the rule.
While the agency trio has yet to formally announce planned revisions to the rule, industry allies within the regulatory state have begun to provide cover for the kinds of changes banks are demanding.
“I think we addressed the challenges that we faced during the earlier financial crisis through the implementation of Dodd Frank, I think those have proven to be successful,” she said. “What led to SVB failing was not the same thing that led to the real estate crisis back then, earlier, a decade ago.”
Powell has repeatedly stressed the need for this consensus. Bowman called for the agencies’ to pare back what she called redundancies in the capital framework — between the new market and operational risk requirements in the rule and the stress capital buffer which she says burdens banks with redundant costs. She also called to recalibrate the market risk aspect of the rule to mitigate substantial increases in risk-weighted assets, and treat non-interest and fee-based income more reasonably to encourage revenue diversification. She made clear again this week she believes any rule that can proceed — let alone approach finalization — will need broad changes and input from interested parties in the industry and general public.
“While these steps would be a reasonable starting place, they are not a replacement for a data-driven analysis and a careful review of the comments submitted,” she said during a fireside chat following her remarks. “This would result in a better proposal that includes changes to address not only these concerns, but also many other concerns raised by the public.”
Lyons says two of the major issues banks have identified with the rule are the scope of banks — largely those with over $100 billion in assets — roped into the rule’s remit, as well as the market and operational risk portions flagged by Bowman, which he says is one of the key concerns for big banks.
“I think there are issues of relevance both to the larger banks, given the operational and market risk issues,” he said. “And to the smaller banks, in the $100 billion asset class, regarding how much of this will apply to them.”
Regardless of what path regulators take, the banking industry and its allies have questioned the need for capital reforms in the first place, given their view that firms are well-capitalized. But rather than fight tooth-and-nail to prevent any new capital requirements, some think they may accept a slimmed-down version of the proposal in order to achieve regulatory certainty.
“We believe banks would prefer to accept a reasonable final rule than to extend this battle for what could be another five years,” Seiberg remarked. “The timing for finalizing the rule is after the inauguration. It is why there is election risk, though we believe the bulk of the final rule is likely to have bipartisan support at the Federal Reserve.”
Given ongoing talks at the agencies about how to proceed, the industry will likely be eyeing its allies on the inside, who can help shape the rule to their liking. Bowman’s comments on Wednesday suggest the industry may get their way in many regards.
“As Chair Powell has said, that he expects broad and material change to this proposal, and I would hope that a number of the things that I’ve identified in a number of speeches throughout the last year or since the proposal was introduced would be included in some of those changes,” she said. “If the proposal is [put] forward, it has to be voted on by the board and the other regulatory agencies — so we’ll just have to see what happens.”
“[Chevron] raises the question of how much the courts have to defer to the agencies in rulemakings and so forth,” he said. “I think it heightens the stakes — or risks, depending on your point of view — banking agencies or their trade groups may push back in court against rules they perceive to be problematic.”
The Treasury Department’s Financial Crimes Enforcement Network issued a proposed rule overhauling banks’ anti-money laundering and counterterrorism financing programs, requiring financial institutions to step up their existing AML controls and sharpening anti-terrorism programs to ensure they are effective, risk-based, and reasonably designed
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WASHINGTON— The Treasury Department’s Financial Crimes Enforcement Network Friday proposed reforms to the U.S. anti-money laundering regime, requiring financial institutions to step up their existing AML controls and sharpening anti-terrorism programs to ensure they are effective, risk-based, and reasonably designed.
“More than ever, financial institutions are partnering with government to address a range of serious law enforcement and national security issues with illicit financing implications, from fentanyl trafficking to Russia’s illegal invasion of Ukraine,” said Deputy Secretary of the Treasury Wally Adeyemo. “It has been an important priority for Treasury to issue this proposed rule that promotes a more effective and risk-based regulatory and supervisory regime that directs financial institutions to focus their … programs on the highest priority threats.”
The rule proposes amendments pursuant to the Anti-Money Laundering Act of 2020. Under the rule, financial institutions will be required to establish, implement, and maintain anti-money laundering and counterterrorism finance programs — known as AML/CFT — with certain minimum components, including a mandatory risk assessment process. Financial institutions must identify and understand their exposure to money laundering, terrorist financing, and other illicit finance activity risks and develop policies and controls commensurate with those risks. The rule also mandates periodic reviews and updates to the risk assessment process, especially when there are significant changes in the institution’s risk profile.
The rule requires institutions to integrate government-wide AML/CFT priorities — including high risk priorities like combatting Fentanyl trafficking and Russian money laundering — into their programs. The rule also establishes new technical amendments to ensure consistency across different types of financial institutions.
A Fincen fact sheet on the proposed rule notes the amendments were developed in consultation with several key regulatory bodies, including the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration “in order to collectively issue proposed amendments to their respective [Bank Secrecy Act] compliance program rules for the institutions they supervise.”
Fincen officials say the proposal compels firms to develop internal policies, designate a compliance officer, train employees, and conduct independent audits to promote compliance. Furthermore, it seeks to enhance cooperation between financial institutions and government authorities,
“Today’s publication is a significant milestone in Fincen’s efforts to implement the AML Act,” said Fincen Director Andrea Gacki. “The proposed rule is a critical part of our efforts to ensure that the AML/CFT regime is working to protect our financial system from long standing threats like corruption, fraud, and international terrorism, as well as rapidly evolving and acute threats, such as domestic terrorism, and ransomware and other cybercrime.”
Today’s proposed rule is one of many steps the agency has taken in response to the legal overhaul enacted by the 2020 Anti-Money Laundering Act. In addition to higher standards for AML compliance programs, the law compelled Fincen to establish a new beneficial ownership database containing ownership information for entities legally incorporated in the U.S.
Fincen will take written comments on the proposed rule for 60 days after publication in the Federal Register, which is currently scheduled for July 3. That schedule would put the deadline for comment on Sept. 1.
The Thurgood Marshall United States Courthouse in New York. The number of lawsuits filed under the Fair Credit Reporting Act has spiked in recent years, often by defendants representing themselves and encouraged by a growing cottage industry of social media influencers and trial lawyers seeking restitution for supposed errors in their credit reports.
Bloomberg News
Consumers trying to get out of debt are filing lawsuits in droves disputing information on credit reports, encouraged by what critics say is a proliferation of credit repair firms posting videos on TikTok, Instagram and social media.
Banks, auto loan servicers, credit card issuers and debt collectors have long been targets of disputes alleging a failure to investigate inaccuracies on credit reports. While the three credit reporting bureaus — Equifax, Experian and TransUnion — overwhelmingly bear the brunt of consumer complaints and litigation, more financial institutions are being bombarded with disputes alleging violations of the Fair Credit Reporting Act.
“This area has exploded in litigation,” said Ryan DiClemente, an attorney at the law firm Husch Blackwell. “What we’ve seen in the past three to four years is an exponential growth in FCRA lawsuits. What used to be a small piece of the pie — maybe 10-20% — is now north of 50% for national litigation.”
Experts attribute some of the increase to the Consumer Financial Protection Bureau, which has repeatedly called out the credit bureaus and data furnishers for failing to investigate disputes. The CFPB also has questioned whether consumers actually owe their debts and is seeking public comment on a proposed rule that would ban medical debts from credit reports.
Defense and plaintiff’s attorneys also point to the rise of credit repair companies and to consumers being more involved in checking their credit scores on apps like Credit Karma.
“What’s driving this is the sheer number of hits for credit repair companies on YouTube, Instagram and social media,” said Manny Newburger, founding shareholder and vice president at the law firm Barron & Newburger, P.C.
Newburger said he’s also seen a big increase in pro se litigants — plaintiffs who represent themselves in court — who are guided by what he calls “an unseen hand.” He said more people are willing to execute false declarations claiming to be victims of identity theft. Others claim harm to their credit that cannot be substantiated by evidence.
“People get desperate and they don’t want to lose their homes, they don’t want to lose their cars and they go online and get bad legal advice,” Newburger said. “People who are not lawyers are filing lawsuits without the benefit of counsel advising them on whether there is any merit to the suit.”
Two weeks ago, Rep. Bill Huizenga, R-Mich., asked CFPB Director Rohit Chopra at a House Financial Services Committee hearing whether the bureau’s consumer complaint database contains duplicative narratives on credit reporting disputes. For years, credit reporting complaints have accounted for about 70% of the roughly two million consumer complaints received annually by the CFPB.
“It appears that some are using the CFPB’s database to discharge legitimate debt that they owe,” Huizenga said, citing third-party analyses. “There are videos online that promise results if [consumers] follow certain steps, including using your database, that there is going to be debt relief.”
Last year, the U.S. Chamber of Commerce asked the CFPB to conduct more oversight of credit repair companies that file what it called “unsubstantiated disputes.”
“Consumers should be entitled to file legitimate disputes, but the system has increasingly become overwhelmed by illegitimate claims that are primarily advanced by a cottage industry of credit repair organizations,” wrote Bill Hulse, a senior vice president at the Chamber, in a letter responding to the CFPB’s proposed changes to the FCRA. “Credit repair organizations typically bombard credit bureaus with dispute letters in the hope of getting negative marks deleted.”
Data show that 2,744 lawsuits have been filed between January and May of this year, a 23% rise from the same period a year ago, according to WebRecon LLC, which tracks state and federal FCRA lawsuits — including those filed by hundreds of serial or repeat filers. More than 5,500 lawsuits were filed last year.
“Nobody gets sued more than the three credit bureaus,” said Jack Gordon, the CEO of WebRecon. “They are a massive mess of targets for litigation.”
The complexity of credit reporting itself is at the heart of the dispute process.
Data furnishers send information every month on each customer to the credit bureaus and the credit bureaus transform that information into a credit report and a credit score through an automated system called eOscar. Under the FCRA, credit bureaus and furnishers have 30 days to respond to a complaint, a short time frame given the massive amount of data involved.
“What’s really driving a lot of the cases, along with social media, has to do with the complexity of the ecosystem,” said Badri Sridhar, managing director at FTI Consulting, who serves as an expert witness for financial institutions. “Consumers are sending over tens of thousands of disputes every month to the furnisher, who then has to review that information. So there is room for errors, and errors do occur.”
Leonard Bennett, founding partner of Consumer Litigation Associates, said many furnishers outsource the entire FCRA dispute process to third party providers, and he questions whether substantive investigations are happening at all.
“The credit industry has failed to create significant protections against inaccuracies, including identity theft or checking to avoid mistakes in recordkeeping and payment history,” Bennett said. “What they should be doing is investing in their dispute procedures. For the longest time, the banking industry of creditors and furnishers have taken the duty of investigating under the Fair Credit Reporting Act as perfunctory, with minimal requirements, instead of using investigations as a fact-finding component.”
The uptick in litigation is also being spurred by lawyers who seek to profit from more FCRA litigation. Trial lawyers that have jumped into the field are winning substantial verdicts of up to $500,000 for identity theft cases that cause a consumer emotional distress, he said.
Newburger said there is also an uptick in FCRA suits based on fringe legal and political theories, including consumers claiming to be sovereign citizens unobligated to pay their debts or otherwise not be subject to U.S. laws.
The litigation has become so out of control that earlier this month Experian PLC, based in Dublin, sued Stein Saks PLLC, a law firm in Hackensack, New Jersey, alleging that it operates a nationwide racketeering enterprise aimed at extorting settlements through fabricated FCRA lawsuits. Experian claims Stein Saks manufactured fake credit denial letters claiming injury and actual damages on behalf of consumers and then flooded federal courts with sham lawsuits, filing more FCRA cases over the past several years than all but one other law firm, according to the lawsuit. Stein Saks did not respond to a request for comment.
At the same time, meritorious claims are going up in value because more lawyers are willing to force the industry to substantiate whether they have actually investigated a dispute. A few years ago, lawyers representing consumers in FCRA lawsuits typically settled cases for between $8,000 to $12,000 each, but are now driving a much harder bargain, asking for between $45,000 to $50,000 per lawsuit, experts said.
“We’re seeing a trend where plaintiff’s counsel are willing to take their shots with a jury,” DiClemente said.
There’s also been an uptick in regulatory oversight by the CFPB, which has been conducting specific supervisory exams on credit reporting based on the number of complaints it receives from consumers.
“It’s clearly one of the core areas the CFPB is focused on as they’re trying to build out and expand their supervisory authority,” said Mike Silver, senior counsel at Husch Blackwell and a former CFPB senior counsel.
CFPB Director Chopra is seeking to rein in harmful practices of data brokers under a proposal that would expand the number of financial institutions that are considered to be credit reporting agencies, which could lead to more litigation, experts say. Last September, the CFPB outlined broad changes to the FCRA that would require any company that collects and sells consumer data to be covered by the 1970 law.
“When you have the CFPB saying credit reports are inaccurate, then of course you’re going to have people suing,” said Joann Needleman, leader of the financial services regulatory and compliance practice at the law firm Clark Hill. “It used to be that you could settle on the cheap, but now the demands have gone up. Like everything else, it costs more, and it’s a business.”
The Federal Reserve Tuesday issued an enforcement action against Evansville, Ind.-based United Fidelity Bank and its parent companies over board management issues. The bank told local news that regulators have expressed concern about the bank’s rapid growth over the past decade.
Bloomberg News
The Federal Reserve Board of Governors issued a cease and desist order against a fast-growing community bank in Indiana.
The Fed announced its enforcement action against United Fidelity Bank — a $6.4 billion bank based in Evansville, Ind. — on Tuesday morning, citing bank management and other concerns.
The order comes after the Office of the Comptroller of the Currency — the bank’s primary regulator — issued a similar citation last October. Following that action, a vice president with the bank told a local newspaper that the issue stemmed from the bank growing faster than regulators were comfortable with.
“The bank was highly successful in its affordable housing finance activities and as a result, the bank grew very quickly,” Angie Peters, United Fidelity vice president of marketing, told Current Publishing. “Over the past two years, the bank has generated approximately $200 million in profits — well in excess of our peer banks. Despite the financial performance, our regulator, the Office of the Comptroller of the Currency, was concerned about the pace of that growth.”
The failures of Silicon Valley Bank and Signature Bank in 2023 — and more recent upheaval at New York Community Bank, which acquired Signature, earlier this year — have increased regulatory scrutiny of banks that are growing quickly. In those cases, the pace of the bank’s growth often exceeded their ability to keep up with regulatory requirements that are expected of larger banks.
Pedcor, a real estate construction and finance firm affiliated with United Fidelity’s parent company, Pedcor Financial, did not immediately respond to a request for comment on Tuesday.
United Fidelity’s rapid growth in recent years is not due to its affordable housing business alone: The bank has also acquired eight banks during the past decade, including Community Banks of Shelby County in Cowden, Ill., in 2022, City Bank Federal Savings Bank in Long Beach, Calif., in 2021, and First City Bank of Florida in Fort Walton Beach, Fla., in 2020.
Five of its acquisitions have been government-assisted mergers of banks failed by the Federal Deposit Insurance Corp., accounting for more than $278 million of deposits.
Pedcor Financial, a savings and loan holding company, is the upper tier holding company for United Fidelity. It owns Pedcor Financial Bancorp, a registered savings and loan, which owns Fidelity Federal Bancorp, which owns United Fidelity.
On its website, Pedcor highlights United Fidelity’s “regulator knowledge, oversight and approval” as a point of distinction in its business model. It notes that the bank works with financial institutions across the country to expand its investments into affordable housing as well as “traditional community banking activities.”
As is customary in enforcement actions, the Fed did not disclose specific issues at the bank. Instead, the agency outlined several criteria that the bank must meet for the cease and desist order to be lifted. The order called for the bank to make changes to its board oversight policies, including those related to risk management and adherence to applicable laws and regulations.
The bank must put together a strategic plan and budget for meeting these obligations within the next 60 days and is prohibited from making dividend payments and other capital distributions until further notice.
Federal Reserve Chair Jerome Powell said during a Federal Open Market Committee press conference that the central bank must control inflation to keep the housing market from becoming even tighter, but experts say there are things the agency could do besides cutting interest rates that might lower housing costs.
Bloomberg News
The Federal Reserve’s tough love approach for the housing market has fueled a long simmering debate about the central bank’s role in the country’s ongoing affordability crisis.
After this week’s Federal Open Market Committee meeting, Chair Jerome Powell said the best thing the Fed can do for the housing sector is keep interest rates high until inflation is fully under control.
“The housing situation is a complicated one, and you can see that’s a place where rates are really having a significant effect,” Powell said during his post FOMC meeting press conference. “Ultimately, the best thing we can do for the housing market is to bring inflation down so that we can bring rates down, so that the housing market can continue to normalize. There will still be a national housing shortage, as there was before the pandemic.”
When the Fed raises interest rates, its goal is to curb demand in the market by increasing borrowing and financing costs. For the housing sector, the thinking goes, as mortgages become more expensive, fewer people want to buy homes and prices stabilize.
But some economists say reality is not so simple. Mark Zandi, chief economist at Moody’s Analytics, said the elevated rates are not only curbing demand for new mortgages, they are also weighing on the supply side of the housing market in various ways, making it more costly to acquire land and develop both rental and for sale homes.
Zandi added that many existing homeowners feel “locked in” to their current, ultra-low mortgage rates, “thus limiting the supply of existing homes for sale, and reducing demand for homeownership and thus increasing rental demand and rents.” This is especially significant given that rents — and rental equivalents for owned homes — are how shelter costs are measured in inflation indexes.
“Given the unusual circumstances in the nation’s housing market, the higher rates are weighing on housing supply, pushing up rents and housing inflation as measured by the CPI and PCE deflator,” Zandi said.
Meanwhile, other economists and policy experts support the Fed’s approach. Diane Swonk, chief economist at the financial services firm KPMG, said cutting rates would induce greater demand in an already supply-constrained market, thereby increasing prices further without addressing the key factor holding back new supply: local zoning and land use laws.
“Washington can point at the Fed and say fix [the housing market], but the Fed doesn’t really have the tools to fix it,” Swonk said. “The tool they do have, if they were to wield it right now, the fear is that they would just stoke a more pernicious bout of inflation rather than defeat it.”
But others say the Fed has another tool to address housing affordability in a more meaningful way than by cutting interest rates alone: its balance sheet.
At the onset of the pandemic, the Fed purchased mortgage-backed securities en masse as part of a quantitative easing effort aimed at keeping financial markets functional. Its MBS holdings more than doubled during the next two years, peaking at $2.7 trillion before the Fed began allowing the assets to roll off their books. It still holds more than $2.3 trillion of mortgages today.
“The Fed bought way too many mortgages for way too long in the name of COVID relief and is now, somehow, perplexed that home prices continue to appreciate,” said Aaron Klein, a senior fellow in economic studies at the Brookings Institution. “Part of the problem was caused by the Fed’s balance sheet purchases. The solution may also lie on the balance sheet.”
The Fed’s mortgage holdings — which include securities backed by the government-sponsored entities Fannie Mae, Freddie Mac and Ginnie Mae — make up a significant portion of the overall market for outstanding agency MBS, which totals more than $9 trillion.
The Fed’s purchases provided liquidity to the mortgage market, driving down yields and driving up asset prices. To reverse this, Klein said, the Fed could sell its MBS assets into the market, though he noted that such a move would not be welcomed by existing homeowners.
“Having propped up home prices, the Fed is now loath to lower home prices,” he said. “It’s very politically unpopular to lower somebody’s home price.”
Mark Calabria, the former director of the Federal Housing Finance Agency, notes that the Fed’s preference for continued higher rates does not preclude it from driving down its MBS holdings more aggressively.
Calabria agrees that it would be premature to cut interest rates, noting that inflation also factors into mortgage costs.
“Ultimately, expected inflation enters mortgage rates,” he said. “The current rates are not simply a reflection of Fed tightening but also reflect inflation expectations.’
At the same time, Calabria said the housing market would benefit from the Fed shrinking its mortgage holdings more quickly.
“The Fed should never have purchased so much MBS in the first place,” he said. “The best move now would be to sell off more of its MBS.”
Some Fed officials have said the Fed should seek to exit the mortgage market entirely. Fed Gov. Christopher Waller has said he’d like the Fed’s MBS holdings to fall to zero, though he has not endorsed actively selling assets.
As part of its quantitative tightening campaign, which began in June 2022, the central bank is allowing up to $35 billion of mortgage securities to mature monthly without replacing them. During its May meeting, the FOMC voted to maintain the cap on MBS runoff while lowering its limit on Treasury securities maturation from $60 billion to $25 billion. It has also begun reinvesting the MBS principal payments that exceed the cap into Treasuries, accelerating the shift away from mortgages.
To this point, mortgages have rolled off the Fed’s balance sheet more slowly than Treasuries. Since the Fed began this round of quantitative tightening, its MBS holdings have declined roughly 13%, compared to 22% for Treasuries. This is in part because of the higher cap on Treasuries, but also because mortgages typically have longer durations. Higher interest rates have led to fewer refinancings, thus limiting the number of mortgages being paid off early, too.
The debate about whether higher rates do more to help or hurt the housing market has centered, in recent months, on the outsize role shelter costs have played on the overall inflation picture.
The Bureau of Labor Statistics’ Consumer Price Index, or CPI, report for May, which was released this week, showed shelter costs are up 5.4% over the previous 12 months, compared to an overall inflation reading of 3.3%, or 3.4% when factoring out food and energy costs.
During his post FOMC press conference, Powell said the stickiness of housing inflation readings is partially the result of how that category of price growth is measured. U.S. inflation indexes focus on rental costs — along with estimates of owner’s equivalent rent for owner-occupied properties — which rose sharply after the COVID crisis subsided. Because these changes are only recorded when new leases are signed, Powell said it has taken longer than expected for data to reflect recent slower price growth.
“What we’ve found is that there are big lags,” he said. “There’s sort of a bulge of high past increases in market rents that has to be worked off, and that may take several years.”
Mike Frantantoni, chief economist for the Mortgage Bankers Association, noted that the Fed’s preferred measure of inflation — the core personal consumption expenditures, or PCE, price index — applies a smaller weight to shelter costs. This is why this inflation reading, which came in at 2.8% in April, is even closer to the Fed’s 2% target than CPI.
While some say this reading is close enough to begin relaxing monetary policy — with the hope that a more normalized housing market could help carry it the rest of the way — Frantantoni said this is a gamble that carries more risk than reward for the housing sector.
Frantantoni said lower rates would lead to more construction activity and alleviate lock-in effects, but noted that those changes would take a long time to play out and, ultimately, provide benefits to the market. He would rather see the Fed wait until price growth has stabilized across the board before trimming its policy rate.
“Changing their monetary policy framework to ignore shelter prices now, at the onset of a rate cutting cycle, would not be a good tactical move,” he said.
The House of Representatives is teeing up a cryptocurrency bill developed by the House Financial Services and Agriculture Committees that would delineate whether the Securities and Exchange Commission or Commodity Futures Trading Commission would oversee different crypto tokens, as well as barring SEC from issuing rules on crypto custody.
Bloomberg News
WASHINGTON — The House will vote on one of its signature crypto bills on Wednesday, a significant step forward after months of effort from House Financial Services Committee Republicans who have hoped to make a crypto regulatory structure a hallmark of their time leading the committee.
The bill’s text, which has been hashed out between the House Financial Services Committee and the House Agriculture Committee, is largely concerned with delineating authorities between the Securities and Exchange Commission and the Commodity Futures Trading Commission, and establishes a criteria by which the agencies can determine which of them would oversee various digital assets.
Specifically, the bill would barr the SEC from requiring or taking any supervisory action that would cause a bank to record a crypto asset held in custody on the institution’s balance sheet “except that cash held for a third party by such institution that is commingled with the general assets of such institution.” It would also prevent the SEC from requiring that banks hold additional regulatory capital against assets in custody or safekeeping.
Zachary Zweihorn, a partner with law firm Davis Polk, said the bill will likely be supported by the banking industry because it could create much-needed legislative certainty around at least some aspects of the cryptocurrency market and would give them a clear basis for becoming service providers to that industry.
“As a supervisory matter, banking regulators have been hesitant about banks engaging in digital asset activities given the regulatory uncertainties and risks inherent in the market,” Zweihorn said. “Passage of a comprehensive federal regulatory regime for digital asset activities could reduce the risks that supervisors see as presented by the industry, eventually making them more comfortable with the asset class.”
Rep. French Hill, R-Ark., one of the lead sponsors of the legislation, said in an interview that banking regulators sought clarity in the legislation after the SEC didn’t consult them before releasing the accounting bulletin.
“The Staff Accounting Bulletin 121 on custody which was not reviewed with the bank regulators, was not reviewed with Treasury and was not consulted with anybody and actually took custody completely in the wrong direction,” Hill said. “Not consistent with custody rules that have been longstanding.
“The bank regulators have sought clarity here for custody,” he added.
The legislation is getting a last-minute boost from a surprisingly amenable Democratic contingent. While Democratic leaders on the House Financial Services Committee — including Reps. Maxine Waters of California and Stephen Lynch of Massachusetts — are opposing the legislation for applying too light a touch to the crypto industry, Democratic leadership isn’t whipping against the legislation.
That means that party leadership isn’t pressuring Democrats to vote along party lines, and there could be significant numbers that choose to back the Republicans’ bills.
Most Democrats voted against the measure in the Senate, but the vote still previews growing willingness among Democratic lawmakers, especially ahead of elections, to consider crypto bills, even those that are more permissive.
A senior committee staff member involved in the drafting of the bill told reporters that the bill’s authors, who include Reps. Patrick McHenry, R-N.C., the chairman of the House Financial Services Committee, and French Hill, the chairman of the subcommittee on digital assets and financial technology and potential future top Republican on the full panel, hope that the Senate sees Democratic votes in the House votes, and that it prompts them to negotiate on the legislation.
With renewed possibility that a crypto structure bill passes along bipartisan basis, a group of critics, including consumer groups and prominent bank law professors, have released a statement that outlines deeper financial stability concerns with the bill.
Specifically in regards to banks, the coalition, which includes progressive groups like the Americans for Financial Reform, the National Consumer Law Center, National Community Reinvestment Coalition and Public Citizen, said that the bill could allow institutions like banks to bypass regulation.
“Not only could the decentralization framework named above allow crypto firms to largely continue with dangerous business practices as usual; it could also enable traditional financial firms to evade more robust regulatory oversight by claiming their products and platforms meet this decentralization rubric and thus are exempt from conventional regulatory requirements for securities issuers and actors,” the coalition said in their letter to House leadership. “This would create huge potential risks for consumers, investors, and markets due to less rigorous oversight than they would otherwise see with traditional regulatory approaches.”
Dave Fishwick, founder of Burnley Savings and Loans in the UK and subject of the hit Netflix movie “Bank of Dave,” at an Independent Community Bankers of America conference in Washington, D.C. Fishwick spoke with American Banker about his experience opening only the second community bank in the UK in 150 years and the importance of community banks all over the world.
Chris Williams
Dave Fishwick, the real-life British banker behind the hit Netflix movie “Bank of Dave” catapulted to stardom after a documentary series chronicled his Herculean efforts to open a local community bank, Burnley Savings and Loans in Britain.
Fishwick was already a self-made millionaire and minibus dealer when he began lending to local businesses in 2011. “Bank of Dave” chronicles the uphill battle Fishwick faced getting regulators to grant his bank a license — only the second banking license granted in Britain in 150 years.
Fishwick hopes the sequel — which is slated for release in 2025 — will shine a light on the practices of his new nemesis: The payday lending industry.
“I dislike them with a passion,” Fishwick said in an interview. “I feel they prey on the poor and the vulnerable.”
The sequel, “Bank of Dave II: The Loan Ranger,” just wrapped up filming and features actor Rory Kinnear playing Fishwick and searching for payday lenders and the CEOs — including a jaunt to the U.S. and its thriving payday industry.
Earlier this month, Fishwick spoke to bankers in Washington D.C. at the Independent Community Bankers of America’s Capitol Summit, where he was made an honorary member. He has become an ambassador for community banks, speaking worldwide about the need for more support of local banks due to branch closings and for more targeted regulations.
The following interview was edited for length and clarity:
American Banker: Bankers and banks are often vilified in the movies. But many have called “Bank of Dave” a modern-day version of “It’s a Wonderful Life.” Tell us about it.
Dave Fishwick: What happened in England is there was a documentary series called Bank of Dave that was made about me and the team, myself and partner David Henshaw, who is a very key part of the story of the bank, a very old-fashioned bank manager, and he’s the most honest, ethical man on the planet.
We went up against the big banks right at the beginning. We wanted to open a community bank, the Bank of Dave, to help people get the best rate of interest on the High Street. We then wanted to lend that money out to people in businesses who couldn’t borrow from the High Street banks, through no fault of their own, and the profit we wanted to give to charity. We thought, how difficult can it be? And it was just a nightmare. So difficult.
Bankers are important people and they’re the people that are needed. We do need some bankers and banks. We need honest, ethical, moral people who are doing it for the right reasons and doing it not because they need the wages. They’re doing it because they believe in what they’re doing. I’ve got some bankers working for me who are career bankers, and they are really good people.
AB: Why is it so hard to get a bank license?
Fishwick: We’ve now lent over $50 million to thousands of people and businesses all over the UK. There’s a huge need for what we do in our community. And the licenses we’ve got, it’s like a mixture of licenses at the moment. We’ve got a bunch of licenses that all fit together to allow us to do the things we want to do. They allow us to do mortgages, to do personal loans, to hold money, and an anti-money laundering license, to name just a few. And they all fit together.
What we want is a check-clearing license, which is the one that we’re going for now, but I think that’s probably another year to 18 months away. But we’ve got the licenses to do what I want to do at the moment. Each time we get a little bit nearer, we move a little bit further forward. Unfortunately here in Britain, we haven’t got something like the ICBA. Unfortunately here in Britain, there’s just me, David Henshaw and my team and the lawyers and everybody that works with me. Each challenge is met by a huge barrage of problems from the regulators and the big banks because they do not want me to exist. And what makes me very cross about that is [that] in 2008, the banks crashed like they did in the USA and they were bailed out by the taxpayer.
Royal Bank of Scotland here was run by a guy that we called Fred the Shred, who lost billions of pounds of the taxpayers money and he was given a knighthood. And here I am helping people to get the best rate of interest, I’m lending to businesses who can’t borrow from the High Street banks, and I’m a terrible person here in the UK. But in America, I win awards.
AB: The movie ‘Bank of Dave’ did really well in the U.S. Why do you think it resonated?
Fishwick: The movie was released December 18th, and within three days it was there in the top 10 alongside Tom Cruise’s Mission Impossible. Netflix has been really, really helpful and they are massively supportive of what we do and it’s been a real breath of fresh air to work with Netflix, who really believe in community banking. I’ve met the big bosses, and they came to the premiere and we got the fastest commissioned sequel in Netflix’s history.
The ‘Bank of Dave’ is the most successful independent British film on Netflix ever made. Normally they spend hundreds of millions getting to No. 1 around the world and they didn’t spend that. Now, the second one is much bigger. There are fantastic, huge American stars. You’ll see lots of actors from America in this one that you’ll recognize. America is where a lot of the payday loan company bosses are.
AB: The sequel, ‘Bank of Dave II,’ is coming out early next year. Tell us about the movie and this new passion of yours going after the payday lending industry.
Fishwick: I do feel the payday loans — they’re loan sharks, they’re terrible people. In just the last few weeks, I’ve just done a program for ITV, Good Morning Britain, here in the UK. And it’s the biggest and fastest growing news story of this year for ITV News.
In the documentary series, ‘The Lone Ranger,’ we take them on and we come up with a better way for more community lending, or being able to dig these poor people out of the payday loan debt and get them into an affordable loan that eventually they’re going to pay off. But in the documentary series, as in the movie, you will see that it’s much more difficult than it looks to be able to find these people to pay them.
I think sometimes in life you’ve got to think how to break something, to be able to learn how you can fix it and make sure you don’t go near there again. People don’t have access in the community to funds and they need money from somewhere.
AB: What do you want to tell bankers that you’ve learned about banking?
Fishwick: What is clear that I’ve learned over the last 12 years is the basic legislation around banking, in effect precludes the formation and operation of small community banks, not just here in the UK, but in America and Australia. I went to Australia and I met an awful lot of people in Australia that have exactly the same problem as we have in the USA and the UK.
There seems to be a one-size-fits-all model which simply is not proportionate to the operation of a small, local deposit-taking institution and credit facilities. And I don’t mean credit unions. I feel credit unions are actually getting in the way of the community banks. They don’t pay taxes, they don’t contribute to society, and they are probably getting in the way of the American community banks.
I feel that we’ve been very badly served by the big banks and we need change. One of my real bugbears is that the big banks just are not interested in customers anymore, they’re only interested in taking money in or giving people very little interest and then sending that money into the stock markets and investments ini the credit default swaps and things that I call ‘financial weapons of mass destruction.’ And if it goes well the banker makes a fortune in bonuses, and if it goes badly the taxpayer bails them out. They’ve got a no-lose situation.
AB: You’re advocating for local community banks that in your words “challenge the system,” yet Burnley Savings and Loans has fewer than 20 employees. How can small banks emulate what you’re doing?
Fishwick: What we do is very old-fashioned, but we do it better than the big banks. David Henshaw has taught my team to manually underwrite and that’s a skill that has been lost in the world today and he has brought it back. Most of my staff has been with me over a decade. We have about 14 full-time employees and another five or six and a few other volunteers. We’re a very small operation making a big noise all over the world. We’ve proved that you can have a community financial institution in every town or village across the UK or America that is run by people like us.
We are 100% capitalized. We only lend out money that comes in. And my money guarantees everybody’s money. I call it Granny’s money, because I think of it in my head as Granny’s money and then nobody could ever lose it. So there is no chance of us crashing.
We’re very much asset-based. If somebody wants a wagon, or a truck for their business, or a piece of machinery, we like lending on that sort of asset. We also do lots with cars and we’ve just started doing mortgages. I own six businesses. We’ve been incredibly successful and very lucky in lots of ways and I put that behind Burnley Savings and Loan so I give a personal guarantee for every single penny. And it could be rolled out all over the world with that model. There’s lots of people who love the place they live and they could become the entrepreneur behind it and that’s what you need.
KB: Why do you think that regulators and big banks are making it so difficult for small banks?
Fishwick: Regulations and computer systems need to be proportionate to the size of the community bank that you are opening. This is one of the problems that America’s got. The regulators and the powers that be, I think sometimes are governed by the big banks behind the scenes, and are trying to make it so difficult for a community bank to open. And they’re doing that for a reason. They’re making it so you can’t be a problem to their future earnings by keeping you to a very small size. Here in the UK, you need to have $50 million or $60 million worth of computer systems to even think about opening a standard bank. Why would you want $50 million of equipment to let in less than $50 million out?
If I can use my brand and movies to help community banks get a fairer go, a fairer crack, and maybe get some of the regulators and some of the powers that be to have a listen. Community banks work for the community to benefit that community and they are the way forward all over the world. If we can build as many community banks in as many communities as possible, then that stops the big banks having a monopoly. If the big banks are too big to fail then they’re too big to exist, and that’s the problem with some of the really big banks.
AB: You got into banking after growing several businesses. How does the industry attract more people?
Fishwick: Unfortunately, banking isn’t an interesting subject. It isn’t like Formula One. It feels a little bit boring. A lot of people don’t want to write about it. What I try to do is I try to make it a little bit fun, I try to make it interesting. I try to get people to understand and tell people in layman’s terms exactly how things work, because that’s how I had to understand it. And I really understand the whole banking industry. And then I stand at the front and then I get the media interested in things with television and programs and movies and radio and podcasts and newspapers and magazines. And then I’ll let career bankers, like the team you have at the ICBA, who really understand, put their point forward.
We’ve got to get young people using community banks. We’ve got to get them to understand. Young people love green technology, and they probably don’t want to work with a faceless bank.
Burnley Savings and Loans has the ability for all our customers to be in the cloud. But we also have all transactions written down on a pad and that goes into the safe every night. If we burned down this afternoon, we have the backup for everything. I think there’s an argument to have a community bank app but also to have a community bank for people like my mom who wants to be able to come in and talk about fraud, deception, deceit, if they get a bad phone call about somebody trying to steal money out of their account.
AB: You speak very highly about bankers.
Fishwick: Bankers are important people and they’re the people that are needed. I’ve got some bankers working for me who are career bankers, and they are honest, ethical and moral people who believe in what they’re doing.
I think it’s important for young people to understand the benefits of having a community bank. The problem is you either use them or lose them. There are 54 branches closing every month in the UK. Banks need to concentrate on lending more money and give hard work and serve us a better interest rate. I think banks have forgotten why they were put there in the first place and I think that we need to concentrate on helping the public and speaking about the positives of community banks.
An independent report released Tuesday detailed a pervasive culture of sexual harassment and workplace discrimination at the Federal Deposit Insurance Corp. FDIC chair Martin Gruenberg said he will “will spare no effort to create a workplace where every employee feels safe, valued, and respected.”
Bloomberg News
WASHINGTON — An independent examination of Federal Deposit Insurance Corp. workplace culture released Tuesday painted a picture of an agency with rampant instances of sexual harassment, discrimination, and various other forms of misconduct spanning several years.
The report, commissioned by the FDIC and performed by law firm Cleary Gottlieb, portrayed a culture characterized by patriarchy and insularity, with reports of discrimination and harassment, particularly from female employees and individuals belonging to marginalized groups.
“Far too many FDIC employees — substantially more than those who have previously reported internally — have suffered from sexual harassment, discrimination, and other forms of interpersonal misconduct for far too long,” the report noted. “We find that aspects of the FDIC’s culture and structure — including a lack of accountability, fear of retaliation, a patriarchal, hierarchic, insular and risk-averse culture, power imbalances, insufficiently clear guidance and reporting channels, inadequate recordkeeping, and an investigative process that lacks credibility internally — have contributed as root causes to the conditions that have allowed for this type of workplace misconduct to occur.”
Over a span of five months, investigators took testimony from more than 500 individuals, primarily current FDIC employees. The firm also conducted interviews with another 167 individuals and meticulously reviewed thousands of related documents uncovering hundreds of instances of misconduct, some occurring as recently as weeks before the report’s publication on Tuesday.
The misconduct detailed in the review ranged from inappropriate and racially discriminatory comments towards minorities to instances of sexual harassment, stalking and unwelcome advances — mostly towards women — at the agency. These incidents occurred across various levels of the organization, from field offices to agency headquarters. The misconduct, according to the report, often went unaddressed, with wrongdoers being moved to different positions rather than facing official sanction. Employees also reported a fear of retaliation within the FDIC, which they said discouraged them from reporting instances, while those who did make reports faced job loss or reprisal.
In one instance, one employee stalked and sent unwelcome sexualized text messages to a female employee, which the female employee said instilled her with fear for her physical safety despite her complaints to superiors. In other instances female employees endured routine sexual objectification by their supervisors, who made inappropriate comments about their bodies. Another supervisor reportedly mocked an employee with a disability by calling them offensive nicknames. Employees of color reported receiving remarks from colleagues speculating that they had only been hired to fill diversity quotas, and black employees in particular cited instances of disparate interpersonal treatment as well as being passed over for promotions in favor of their white colleagues. Homophobic remarks were also reported, with a supervisor referring to gay men as “little girls.”
Chairman Martin Gruenberg’s conduct and reputed temper — previously reported in a Wall Street Journal article — was also highlighted. In one notable incident at a meeting intended to cover corporate governance-related regulation, Gruenberg went off topic and reportedly berated a specific individual for about 45 minutes. This behavior, according to Cleary’s report, was corroborated by Microsoft Teams message exchanges and reportedly left participants feeling uncomfortable and disrespected. Other instances of Gruenberg’s temper were mentioned by both current and former FDIC employees, though some also noted positive experiences with him.
While Gruenberg’s conduct was not cited as a root cause of the pervasive misconduct at the agency, the report acknowledges challenges posed by his leadership style and emphasizes the need for a genuine commitment to cultural transformation, including a candid acknowledgment of past shortcomings.
“We do find that — as a number of people we spoke to in our review have noted — ‘tone at the top’ is important and that positive workplace culture needs to be modeled and reinforced from the top down,” the report noted. “As the FDIC faces a crisis relating to its workplace culture, Chairman Gruenberg’s reputation raises questions about the credibility of the leadership’s response to the crisis and the ‘moral authority’ to lead a cultural transformation.”
Gruenberg acknowledged the seriousness of the findings, expressing regret and assuming responsibility for the agency’s failings.
“To anyone who experienced sexual harassment or other misconduct at the FDIC, I again want to express how very sorry I am,” he said. “As Chairman, I am ultimately responsible for everything that happens at our agency, including our workplace culture.”
The report made seven recommendations to help improve workplace culture, and prevent further harassment, discrimination, and misconduct within the FDIC.
It suggests the agency support victims of misconduct through enhanced mental health resources, appointing a Culture and Structure Transformation Monitor to oversee necessary changes, holding leadership accountable through improved performance evaluations, developing and communicating additional policies such as Anti-Fraternization and Anti-Retaliation Policies, implementing comprehensive training programs for all employees, restructuring oversight and investigation processes for better efficiency and reliability and fostering greater transparency through improved communication about investigations and annual surveys.
The report’s release will bring renewed skepticism towards Gruenberg, who faced Congressional calls for resignation after allegations were first unveiled.
Outgoing House Financial Services Chairman Rep. Patrick McHenry, R-N.C., swiftly called for Gruenberg’s resignation following the report’s release.
“It’s time for Chair Gruenberg to step aside. The independent report released today details his inexcusable behavior and makes clear new leadership is needed at the FDIC,” said McHenry. “This report confirms the toxic workplace culture at the FDIC — which starts at the top — has led to entrenched and widespread misconduct at the agency.”
Rep. Bill Huizenga, chairman of the House Financial Services Subcommittee on Oversight and Investigations, which has been conducting its own investigation into the allegations of workplace misconduct at the FDIC, also told American Banker that Gruenberg should resign.
“Today’s independent report by Cleary Gottlieb makes it clear that Chair Gruenberg is not the right person to lead a much needed cultural overhaul at the FDIC,” he said. “Chairman Gruenberg should resign immediately to allow the healing and reform process to begin. I urge all of my colleagues to join me in demanding the same.”
At least one Democrat, Rep. Bill Foster, D-Ill., also called for Gruenberg’s resignation.
“I am appalled and deeply disturbed by the details of widespread sexual harassment and discrimination at the FDIC outlined in the report released today, and I commend the brave individuals who came forward to shed light on these abuses,” Foster said. “Sweeping changes must be made to mend the toxic work environment that has run rampant for far too long, and that starts with a change of leadership. It is time for Chair Gruenberg to resign.”
The White House fell short of calling for Gruenberg’s resignation, but a spokesman declined to say if President Biden still had confidence in the agency’s leadership.
“It’s an independent agency, as you know, the president of course expects the administration to reflect the values of decency and integrity and to protect the rights and dignity of employees,” said White House spokesperson Karine Jean-Pierre in a briefing on Tuesday. “My understanding is the FDIC chairman spoke to this, he apologized and has committed to the recommendations provided by the independent report and going to further fix the longstanding issues that are in the report. But I don’t have any thing beyond that. But he apologized, I would refer you to that.”
Many industry experts have long voiced skepticism that the Gruenberg would resign, both because of the political ramifications and because the workplace misconduct occurred only partially under his leadership. A change in leadership would likely slow down the Biden administration’s financial regulatory agenda, particularly regarding pending proposals on bank capital requirements. Were Gruenberg to step down, Republican appointee and FDIC Vice Chair Travis Hill would assume leadership until another chair is confirmed.
Gruenberg said in a statement that he is up to the challenge of reforming the FDIC’s workplace culture.
“We will spare no effort to create a workplace where every employee feels safe, valued, and respected,” said Gruenberg. “Making meaningful and sustained change to our workplace culture will not be easy … [but] I believe that we can and we will rise to this challenge, as we have so many others over the past 90 years.”
Custodia Bank will appeal the district court ruling against it in its lawsuit against the Federal Reserve.
Nedrofly – stock.adobe.com
Custodia Bank will appeal the district court decision handed down last month in its lawsuit against the Federal Reserve.
The Cheyenne-based digital asset bank submitted a notice to the 10th Circuit Court of Appeals on Friday that it would challenge the decision reached by Judge Scott Skavdahl of the U.S. District Court in Wyoming on March 29.
Custodia unsuccessfully sued the Federal Reserve Bank of Kansas City and the Federal Reserve Board of Governors, claiming that the entities wrongfully denied it an account with the central bank.
Skavdahl ruled that, contrary to Custodia’s argument, the reserve bank had discretion to deny the bank a so-called master account, which would have provided the state-chartered special purpose depository access to the federal payments system.
He also dismissed a complaint that the Federal Reserve Board of Governors violated the Administrative Procedure Act through its involvement in the decision making process.
Custodia was one of three firms challenging the Fed’s master account granting practices, along with PayServices Inc., a digital bank in Idaho that unsuccessfully sued the Federal Reserve Bank of San Francisco, and Banco San Juan Internacional, a Puerto Rican international banking entity that is suing the New York Fed.
Custodia’s notice of appeal is the first step in a formal appeal, which many legal analysts have expected since Skavdahl’s decision was released.
This will be the second time the 10th Circuit has been asked to weigh in on a master account dispute, with the first coming in 2017 from Fourth Corner Credit Union, a Colorado-based firm that sought to provide banking services to the state’s legal marijuana industry. In that case, the court rendered a split decision overturning the lower court’s decision to dismiss Fourth Corner’s lawsuit against Kansas City Fed, effectively giving the credit union another chance to re-apply and potentially relitigate.
The Fourth Corner case has been cited by Custodia and others in lawsuits against the Fed regarding master account access, because one judge on the panel wrote in his opinion that the Fed was obligated to grant accounts to nonmember banks. But the decision was not controlling, meaning it does not set an official precedent in the circuit.
Custodia also filed a motion with the District Court in Wyoming objecting to the Kansas City Fed’s effort to recoup more than $25,000 in costs from the bank related to the lawsuit.
The reserve bank submitted an itemized bill of costs to the court, requesting that Custodia reimburse it for expenses related to deposition transcription.
In its filing, Custodia referred to its case against the Fed as a “David versus Goliath lawsuit,” arguing that if the court forces it to cover the reserve bank’s costs, it would “risk chilling future legitimate lawsuits challenging the administrative actions of governmental and quasi-governmental entities.”
Through the first quarter of the year, actions against fintech partner banks have accounted for 35% of publicized enforcement measures from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller, according to the consultancy Klaros Group. This is an uptick from 26% during the previous quarter, and 10% from the first quarter of 2023.
The jump in enforcement actions against firms engaging in so-called banking-as-a-service, or BaaS, business models corresponds with the adoption of a new joint guidance from the Fed, FDIC and OCC for evaluating third-party risks, which was codified last June. The following quarter, the share of fintech partner bank enforcement actions doubled from 9% to 18%, according to Klaros. The uptick in BaaS-related enforcement comes amid a doubling of total enforcement actions against banks over the same period.
“It’s undeniable that there’s more enforcement activity happening related to BaaS,” said David Sewell, a partner with the law firm Freshfields Bruckhaus Deringer. “You are seeing the fruits of the enhanced supervisory posture towards that space.”
The question moving forward is whether this recent string of activity is a momentary adjustment as agencies ensure their expectations are taken into account, or a permanent shift in regulators’ attitude toward BaaS models.
Along with crafting new expectations for fintech partnerships, Washington regulators are also putting together specialized supervision teams to explore these activities more comprehensively. Last year, the OCC launched an Office of Financial Technology to “adapt to a rapidly changing banking landscape,” and the Fed established a similar group called the Novel Activities Supervision Program, which tracks fintech partnerships, engagement with crypto assets and other emerging strategies in banking.
These fintech-specific developments come at a time when the agencies are changing their approach to supervision across the board with an eye toward escalating issues identified in banks more quickly and more forcefully. The effort is being undertaken in response to last year’s failure of Silicon Valley Bank, which had numerous unaddressed citations — known as matters requiring attention — at the time of its collapse.
The FDIC has already amended its procedures and now directs its supervisors to elevate issues if they are unresolved for more than one examination cycle. A Government Accountability Office report issued last month called for the Fed to adopt a similar approach.
Gregory Lyons, a partner at the law firm Debevoise & Plimpton, said the confluence of these various developments will result in significant supervisory pressure on fintech partner banks, most of which are small community banks leaning on the arrangements to offset declines in other business opportunities.
“You have a general concern from regulators about fintechs, you have these new divisions within agencies focused solely on fintech activities and risks, and then more generally you have an exam environment in which things are going to get elevated quickly,” Lyons said. “This is a fairly volatile mix for banks relying heavily on fintech partnerships.”
Measuring supervisory activity and determining its root causes are both fraught exercises, said Jonah Crane, partner with Klaros. Public actions make up just a fraction of the overall enforcement landscape, which is itself a small portion of the correspondence between banks and their supervisors. Public enforcement actions are also intentionally vague in their description of violations, as a way of safeguarding confidential supervisory information.
Still, Crane said recent disclosures exemplify the areas of greatest concern for regulators: money laundering and general third-party risk management. He noted that the main threat supervisors seem to be guarding against is banks outsourcing their risk management and compliance obligations to lightly regulated tech companies.
“For every banking product in the marketplace, there’s a long check list of laws and regulations that need to be followed,” Crane said. “Those need to be clearly spelled out, and they still need to be done to bank standards when banks rely on third parties to handle those roles and responsibilities. That seems to be the crux of the issue.”
In official policy documents and speeches from officials, the agencies have described their approach to fintech oversight as risk-sensitive and principles-based. They emphasize the importance of banks knowing the types of activities in which their fintech partners engage as well as the mechanisms in place within them to manage risks.
“The OCC expects banks to appropriately manage their risks and regularly describes its supervisory expectations,” an OCC spokesperson said. “The OCC has been transparent with its regulated institutions and published joint guidance last June to help banking organizations manage risks associated with third-party relationships, including relationships with financial technology companies.”
The Fed declined to comment and the FDIC did not provide a comment before publication.
Some policy specialists say the expectation that buck stops with the bank when it comes to risk management and compliance should not come as a surprise to anyone in BaaS space, pointing to both last year’s guidance and long-running practices by supervisors. The Fed, FDIC and OCC outlined many of their areas of concern in 2021 through jointly proposed guidelines for managing third-party risks.
James Kim, a partner with the law firm Troutman Pepper, likens the recent surge in activity to supervisors clearing out low hanging fruit. He notes that the rapid expansion of BaaS arrangements in recent years — aided by intermediary groups that pair fintechs with banks, typically of the smaller community variety — has brought with it many groups that were not well suited for dealing with its regulatory requirements.
“Several years ago, there were real barriers for fintechs to partner with banks because of the cost, time and energy it took to negotiate agreements and pass the onboarding due diligence,” Kim said. “Some of the enforcement activity we’re seeing today is likely the consequence of certain banks, fintechs and intermediaries jumping into the space without fully understanding and addressing the compliance obligations that come with it.”
Others say the standards set last year are too broad to be applied uniformly across all BaaS business models, which can vary significantly from one arrangement to another.
Jess Cheng, a partner with the law firm Wilson Sonsini who represents many fintech groups, said regulators need to provide more detailed expectations for how banks can engage in the space safely.
“In light of these enforcement actions, there seems to be a real time lag between what has been going on in terms of ramped up supervisory scrutiny and the issuing of tools to help smaller banks comply with and understand how they can meet those expectations,” Cheng said. “That is badly needed.”
In a statement to American Banker, Michael Emancipator, senior vice president and senior regulatory counsel for the Independent Community Bankers of America, a trade group that represents small banks, called the recent uptick in enforcement actions has been concerning, “especially in the absence of any new regulation, policy, or guidance that explains this heightened scrutiny.”
Emancipator acknowledged the guidance that was finalized last year, but noted that the framework was largely unchanged from the 2021 proposal and gave no indication that substantial supervisory activity was warranted.
“If there has been a shift in agency policy that is now manifesting through enforcement actions, ICBA encourages the banking agencies to issue a notice of proposed rulemaking, which more explicitly explains the policy shift and how banks can appropriately operate under the new policy,” he said. “Absent that additional guidance and an opportunity to comment, we’re seeing a new breed of ‘regulation through enforcement,’ which is obviously suboptimal.”
Among specialists in the space, there is optimism that the Fed’s Novel Activities Supervision Program will be able to address some of these outstanding questions and provide the guidance banks need to operate in the space safely and effectively.
“I expect more clarity going forward both in the enforcement action context but also if they adopt exam manuals and a whole exam process,” Crane said. “I remain glass half-full about how the novel activities programs are going to impact the space. It’s a pretty strong signal that agencies aren’t just trying to kill this activity. They wouldn’t establish whole new supervisory programs and teams if that’s what you’re trying to accomplish.”
The program will operate alongside existing supervision teams, with the Washington-based specialist group accompanying local examiners to explore specific issues related to emerging business practices. Crane said until more formal exam policies are laid out, the scope of the enhanced supervision conducted by these specialists remains to be seen.
“In theory, that enhanced supervision should apply only to novel activity,” he said. “There is an open question as to whether, in practice, the whole bank will be held to something of a higher standard.”
Lyons said the layering on of supervision from a Washington-based entity, such as the Novel Activities Supervision Program, eats into the discretion of local examiners. It also inevitably leads to the identification of favored practices.
“When these types of groups get involved in supervision, it tends to lead to more comparisons of how one bank approaches issues versus another,” Lyons said. “It’s not formally a horizontal review, but it’s that type of principle, in which the supervisors identify certain practices they like more than others.”
Lyons added that escalation policies, such as the one implemented by the FDIC, also take away examiner discretion and could create a situation where one type of deficiency — such as third-party risk management — can quickly transform into a different one with more significant consequences.
“If issues run over more than one exam cycle, they can go from purely being a third-party risk management issue, to also being a management issue for not monitoring a pressing risk well enough,” he said. “Management is typically considered the most significant of the six components of CAMELS for purposes of determining the composite rating, for example.”
Senator Tim Scott, R-S.C., who serves as ranking member of the Senate Banking Committee, introduced a Congressional Review Act resolution Monday that would undo the Consumer Financial Protection Bureau’s credit card late fee rule, which is also being challenged in court.
Bloomberg News
WASHINGTON – Sen. Tim Scott, R-S.C., ranking member of the Senate Banking Committee, introduced a long shot measure that would overturn the Consumer Financial Protection Bureau’s late fee rule, though the measure is unlikely to pass both houses of Congress and receive President Biden’s signature.
Scott introduced the Congressional Review Act resolution on Monday, the first day lawmakers are back in Washington from their spring recess.
It received support from a number of other Senate Banking Republicans, as well as other high-profile lawmakers. Republican Sens. John Thune of South Dakota, John Barrasso of Wyoming, Jerry Moran of Kansas, John Boozman of Arkansas, Steve Daines of Montana, Mike Rounds of South Dakota, Thom Tillis of North Carolina, Marsha Blackburn of Tennessee, Kevin Cramer of North Dakota, Mike Braun of Indiana, Bill Hagerty of Tennessee and Katie Britt of Alabama joined Scott’s resolution.
Banking industry trade groups supported the resolution. It has the backing of the Consumer Bankers Association, America’s Credit Unions, Independent Community Bankers of America, Bank Policy Institute, American Bankers Association, Americans for Tax Reform, Competitive Enterprise Institute and the U.S. Chamber of Commerce, Scott’s office said.
The CFPB’s late fee rule, which would in many cases cap credit card late penalties at $8, has already faced heavy pushback from many of those trade groups. A number of banking industry trade groups sued the agency over the rule in a case that’s drawn attention for so-called judge shopping.
The banking groups filed their complaint in Texas in a bid to have the case heard by a court that’s become a favorite venue for those seeking to challenge Biden administration regulations. Just on Friday, a federal judge sent the case back to Texas after a judge in that state said that it should be heard in a Washington, D.C. court — a procedural win for the industry interests that have complained about the rule.
The pushback against the CFPB credit card late fee rule is emblematic of the increasing scrutiny that regulators are facing from outside interests, including banking lobbyists and Congress. A challenge against another CFPB rule, the small-business data-collection rule, passed in both the House and Senate with some Democratic support, before being ultimately vetoed by President Joe Biden.
A Texas Judge dealt a blow to the credit card industry by moving litigation challenging the Consumer Financial Protection Bureau’s $8 credit card late fee rule to the District of Columbia.
In a blow to banks and credit card issuers, a Texas judge has agreed to move a lawsuit challenging the Consumer Financial Protection Bureau’s $8 credit card late fee rule to the District of Columbia.
The ruling on Thursday by Judge Mark T. Pittman is a blow to the U.S. Chamber of Commerce and five other trade groups that sued the CFPB in early March to stop the late fee rule from going into effect on May 14. Pittman sided with the CFPB, which claimed the trade groups had engaged in “forum shopping” by filing the case in Texas in order to get a judge sympathetic to the industry.
“Venue is not a continental breakfast; you cannot pick and choose on a Plaintiffs’ whim where and how a lawsuit is filed,” Pittman wrote. “Federal courts have consistently cautioned against such behavior.”
The rule could potentially wipe out $10 billion a year in late fee revenue, a massive hit to the industry which currently collects $14 billion a year in late fees. The rule would cut credit card late fees to $8 from $32.
Pittman said there was “a strong interest” in having the dispute resolved in the District of Columbia and not Texas.
“A review of the record shows there are ten attorneys spanning five different firms or organizations representing the various Parties in this case. Of the ten, eight list their offices in the District of Columbia,” he wrote. “This means that any proceeding this Court conducts … will require all of Defendants’ counsel and two-thirds of Plaintiffs’ counsel to travel to Fort Worth—a task that will be charged to their clients or to the government. This would mean that taxpayers, including residents of Fort Worth, would foot an expensive bill for this litigation.”
Earlier this week, Pittman wrote a blistering critique denying the trade groups’ emergency request to stop the CFPB’s rule from going into effect on May 14.
The CFPB had asked the court for a change of venue by claiming that the Fort Worth Chamber of Commerce lacked standing to file in Texas. The bureau alleged that Synchrony Bank — a $106 billion-asset bank based in Stamford, Connecticut, and chartered in Utah — had only recently become a member of the Fort Worth chamber in order to file the lawsuit in the Northern District of Texas.
“The fact that there are customers of businesses in the Northern District of Texas that will potentially feel the effects of the Rule does not create a particularized injury in the Northern District of Texas, nor does it represent a substantial part of the events giving rise to the claim,” the judge wrote in the order. “Plaintiffs could find any Chamber of Commerce in any city of America and add them to this lawsuit in order to establish venue where they desire.”
The trade groups filed the suit against the CFPB largely because the Fifth Circuit Court of Appeals ruled in 2022 that the CFPB is unconstitutional due to its funding structure. That case is being challenged before the Supreme Court, which is expected to rule on the CFPB’s funding by June.
Analysts said the Texas lawsuit has been a surprise from the get-go.
Isaac Boltansky, managing director and director of policy research at BTIG, said he viewed the case as “an execution failure mixed with bad luck rather than a strategic failure.”
“There was an undeniable logic in filing this litigation in Texas given its ideological bent,” Boltansky wrote in a research note. But he added that “Judge Pittman’s denial order is the cheekiest order we have ever seen from the bench and our sense is that he is primarily motivated by a frustration with what he views as court shopping by the industry.”
The CFPB’s late fee rule ended an automatic inflation adjustment for late fees and lowered the safe harbor amount to $8, from $32 for the first late fee and $41 for subsequent late fees. The rule only impacts the 30 to 35 largest credit card issuers including JPMorgan Chase, Citibank, Capital One, Bank of America and Discover.
“The credit card late fee lawsuit has been a rollercoaster, and it is not even one month old,” wrote Ed Groshans, senior research and policy analyst at Compass Point Research & Trading, in a research note.
The lawsuit was filed by the U.S. Chamber of Commerce, American Bankers Association, Consumer Bankers Association and three Texas trade groups: the Fort Worth Chamber of Commerce, Longview Chamber of Commerce and Texas Association of Business.
The Federal Deposit Insurance Corp.’s Office of the Inspector General says that Sac City, Iowa-based Citizens Bank failed last year due to poor risk management and an overreliance on lending to trucking firms.
Bloomberg News
WASHINGTON — The Federal Deposit Insurance Corp.’s Office of Inspector General found lax lending and poor risk management led to the downfall of Citizens Bank in Sac City, Iowa, in November 2023 and its $14.8 million hit to the Deposit Insurance Fund.
As early as 2014, the report says the $65 million-asset bank — 100%-owned by the family of Thomas Lange, the bank’s chairman and president — made ill-informed commercial loans to trucking companies without adequate risk mitigation, board oversight or business expertise. Those loans were heavily strained as supply-chain snags during the pandemic imposed increased fuel, insurance and repair costs, making it increasingly hard for borrowers to repay.
“Citizens Bank compounded these issues by advancing additional funds to problem borrowers through overdrafts, often in excess of the state’s lending limit, and without first obtaining current financial information or conducting proper collateral analysis,” the OIG wrote. “The significant deterioration in the bank’s loan portfolio and operating losses led to a serious depletion of the bank’s capital and stressed its liquidity, ultimately resulting in its failure.”
According to the OIG, regulators caught wind of trouble at Citizens around the same time as the supply-chain issues began to emerge. At that time, management of the bank ramped up trucking loans outside of its primary trade area, and its corresponding poor credit underwriting and administrative weaknesses raised red flags for FDIC examiners.
From 2020 onward, the FDIC took a string of regulatory actions, including filing a “matters requiring board attention” report in a March 2020 examination. Both the FDIC and the Iowa state bank regulator identified credit administration and loan underwriting deficiencies in their respective April 2021 and July 2022 examination reports. The regulators also found the bank had violated Iowa’s ban on state banks’ granting loans and extensions of credit that exceed 15% of the firm’s aggregate capital to a single borrower.
In May 2023, a joint review by the FDIC and Iowa Division of Banking revealed serious issues at Citizens, leading to a downgrade in its supervisory rating. Despite a consent order issued in August 2023, the bank’s financial condition deteriorated further by October. Consequently, the FDIC declared Citizens “critically undercapitalized” and took over as receiver on Nov. 3, 2023.
The report said Citizens’ impact on the Deposit Insurance Fund was average relative to losses over the last five years, and thus not sufficient to warrant a more comprehensive review by the agency’s watchdog.
The FDIC OIG is mandated by law to conduct a preliminary investigation of a state bank regulator’s stated cause for a failure when the DIF suffers a loss of less than $50 million and to decide whether further review is needed. Losses above that threshold automatically receive a full investigation.
The OIG, however, said Thomas Lange had a multitude of conflicts of interest in loans administered by the bank, which it says have been communicated to the appropriate authorities. These conflicts were determined not to be contributing factors to the bank’s failure, which was the main concern of the report.
The OIG also found that the FDIC’s supervision itself did not contribute to the failure. In fact, the agency repeatedly pinpointed the problems, issued notices and took steps to address the concerns.
“Ultimately,” the OIG wrote, “the bank’s inaction to address these supervisory recommendations resulted in its failure.”
Michael Barr, Federal Reserve vice chair for supervision, said he is working with other Fed officials to reach consensus on the best path forward for their proposed capital reforms.
During a Friday afternoon speaking engagement at the University of Michigan, Fed Vice Chair for Supervision Michael Barr discussed the so-called Basel III endgame, which he said had sparked “lots of controversy” in the banking sector.
Barr said the Board of Governors has seen the 400-plus comments — most of which are critical of the framework’s calibration — and is in the process of making corresponding changes.
“We’re working very hard to see what that will look like,” Barr said. “I’m working very closely with Chair [Jerome] Powell and other members of the board of governors to reach a consensus.”
Earlier this month, during testimony in front of the House Financial Services Committee, Powell told lawmakers that “broad and material” changes were coming to the proposed rule, noting that he was open to issuing an entirely new proposal, should significant modifications be needed. Powell has also emphasized the importance of building consensus through the rulemaking process.
Barr said the board has “some ideas” about how it will amend the proposal, but said it would need more time to settle on a course of action.
During the Michigan event, Barr discussed a wide range of topics, including bank liquidity, distress in the commercial real estate sector and the Fed’s independence.
Liquidity
Officials from the Fed and other regulatory agencies have promised to introduce changes to liquidity requirements at some point this year. On Friday, Barr said one area of focus is how to treat assets on a bank’s balance sheet that have not been designated as available for sale.
“We’re looking at what are the right kinds of assumptions banks should have about taking held-to-maturity securities and converting them into cash,” Barr said.
He also noted that the Fed is continuing to encourage banks to make sure they are ready to borrow from the central bank’s emergency lending facility, the discount window.
“The message we want to convey is that it is okay to use the discount window,” Barr said. “We want to get rid of that stigma because if banks feel that stigma they might be less likely to use the discount window when they need it.”
Since last year’s bank failures, Barr said the Fed has seen nearly $1 trillion of new assets pledged to the discount window, bringing the total amount of ready collateral at the facility to roughly $3 trillion.
Commercial real estate risks
Barr called the distress in the commercial real estate sector an “old school risk,” one that is significant but manageable.
Barr warned observers not to view the commercial real estate lending space as a monolith, noting that while offices in some major cities are under stress — due to plummeting post-pandemic occupancy levels and rising interest rates — other types of commercial property are continuing to perform well. He cited hotels, apartments and senior living facilities as subsectors of strength.
“When people talk about commercial real estate risk, it’s really important to think about the heterogeneity of those risks and their distribution throughout the banking system,” he said.
Central bank independence
Barr defended the Fed’s position as an independent agency, one that is overseen by Congress but able to set its own agenda and craft its own policies, which he said has served the institution and the nation well.
“We don’t talk about politics, we don’t make decisions based on politics, that’s really important for our credibility,” he said. “That’s true of monetary policy, it’s true of supervision of regulation, and it’s true of our oversight of the payments system.”
Treasury Secretary and Financial Stability Oversight Council Chair Janet Yellen speaks with Federal Reserve Vice Chair for Supervision Michael Barr and Securities and Exchange Commission Chair Gary Gensler following an FSOC meeting in December 2022. Even without big moves by FSOC to rein in nonbank activities, regulators have made more incremental moves to level the regulatory landscape between bank and nonbank financial firms.
Bloomberg News
WASHINGTON — The 2008 financial crisis amply illustrated the potential for nonbank financial firms to pose a risk to the broader financial system. But the increasing growth and interconnectedness of those firms is compelling regulators to rely on the limited tools they have to check that risk.
Ian Katz of Capital Alpha Partners says regulators are keeping a watchful eye on the expanding connections between banks and the alternative asset management sector.
“I think this has been building gradually for a long time,” said Katz. “More financial activity has moved outside the banking sector in recent years, and a lot of that activity isn’t under direct federal oversight.”
Evidence from a Financial Stability Board publication in 2023 showed nonbanks’ market share has grown since 2008. FSB estimated that nonbanks collectively have more than $200 trillion in total assets and account for about half of the global financing activities — a higher level than during the financial crisis. Katz noted that while bank regulators cannot directly oversee other sectors, they can engineer solutions that protect the banking sector from nonbank exposure.
“[Regulators] believe that non-banks don’t operate under the same tough regulations they face, and it’s a fair point that banks are regulated more strictly than non-bank financials,” Katz wrote. “At the very least, the bank regulators want to keep the riskiest and sketchiest stuff away from the banks they oversee.”
Regulators’ strongest tool to rein in risks from nonbanks is housed with the Financial Stability Oversight Council, an interagency commission created by Dodd-Frank tasked with identifying and curtailing risks to the broader financial system.
While its power to designate nonbanks systemically risky — thereby subjecting such firms to enhanced prudential standards similar to those big banks face — was weakened through litigation and by regulation during the Trump administration, FSOC reclaimed its designation power last year. But David Portilla, a lawyer at Davis Polk and former FSOC staffer argues that may not reduce the risks posed by nonbanks overnight.
“There doesn’t seem to be an indication that the FSOC is working on entity designations in regards to the asset management industry,” said Portilla.
While entity-level designations don’t appear imminent, Katz notes that regulators still can exercise some limited indirect power to hedge risks from nonbanks.
“What they can do is have some influence indirectly,” Katz wrote in an email, “by increasing scrutiny or tightening rules around who banks can do business with [or] what they can have on their balance sheets.”
Indeed, federal regulators have been floating a variety of new policies related to nonbanks over the past year. Federal Reserve Vice Chair for Supervision Michael Barr called for banks to exercise greater diligence toward counterparty risks and said banks should maintain appropriate margins to pad against a hedge fund collapse like that of Archegos in 2021. The agency also incorporated a counterparty risk scenario into this year’s stress tests to gauge banks’ resilience to the collapse of a major nonbank counterparty.
Another top regulator, acting Comptroller of the Currency Michael Hsu, recently called for FSOC to establish a “tripwire approach” to consider designating certain systemically important nonbanks — like hedge funds — which meet certain metrics.
Additionally, Federal Deposit Insurance Corp. Chairman Gruenberg called for FSOC to apply tailored enhanced prudential standards and reporting requirements to particular nonbanks like open-ended mutual funds, hedge funds and other nonbank lenders.
Treasury’s Financial Crimes Enforcement Network also recently proposed a rule subjecting investment advisors to AML/CFT reporting requirements.
Harry Stahl, director of business and solutions strategy at FIS — a leading regulatory technology provider to the nonbank industry — notes the nonbank sector has noticed the spotlight shining on their industry and reacted accordingly.
“There’s a lot more sense of thinking about who are the players in the ecosystem and making sure that everybody is well organized, buttoned down and complying with the critical regulatory concerns,” said Stahl. “It’s not surprising that this would be happening now when we look at what’s going on in the market.”
Bryan Corbett, president and CEO of the Managed Funds Association — a trade association that represents asset management firms like hedge funds — argued that nonbanks are less systemically risky and already sufficiently regulated. Unlike banks, he said, their funding is not subject to the same kinds of run risk, and the capital such nonbank firms manage comes from institutional investors and is locked away for some time.
“FSOC’s SIFI designation and other attempts to apply banklike regulation to private funds is misguided and will harm U.S. capital markets,” Corbett said. “There is already a robust regulatory regime in place for alternative asset managers that grants regulators insight into the activities and health of funds and the tools to ensure the market is well regulated.”
Banks have appeared to seize on uneasiness about growing influence of nonbanks to argue against the Basel endgame capital reforms proposed last fall. They argue if regulators force banks to fund certain activities with greater levels of equity — as is the key thrust of the proposal — that will drive such activities into the hands of the nonbank sector. Katz notes this is one rare instance where the regulators may see eye to eye with the industry.
“The regulators trying to get their arms around nonbank activity does respond to the criticism that the Basel endgame pushes activity outside the regulated banking sector,” he wrote. “I think that’s one of the criticisms of Basel that the regulators view as valid.”
Dennis Kelleher, CEO of consumer watchdog Better Markets, said he is equally concerned with less-regulated nonbanks increasing financial services intermediation. However, he argues the solution is not to ease up on banks, but regulate banks and nonbanks alike to prevent regulatory arbitrage.
“If the nonbank sector is not regulated, that’s no reason to also not regulate the banking sector,” Kelleher said. “That would be doubling down on disaster and guaranteeing a catastrophic financial crash like or worse than 2008. Strengthening the banking sector is only half the battle of preventing financial crashes, contagion and bailouts, as proved in 2008, 2020 and 2023.”
Yet one entity that came under scrutiny for lending billions to failed banks last year also reaped billions in profits from the regional bank crisis, a dichotomy that has critics up in arms.
The Federal Home Loan Bank System earned $6.7 billion at year-end, a 111% jump from a year earlier. The system also paid out a record $3.4 billion in dividends to its members, more than double the $1.4 billion paid in 2022.
Critics are pointing to the system’s combined operating highlights, released last month, to raise fresh concerns about whether the Home Loan banks are providing a public benefit that is commensurate with the profits paid to members.
“Numbers don’t lie,” said Sharon Cornelissen, director of housing for the Consumer Federation of America, who chairs the nonprofit Coalition for FHLB Reform, a group of academics, housing advocates, regulators and Home Loan bank alumni seeking to reform the 91-year-old system. “The numbers show that the Home Loan banks continue to prioritize the profitability of their members over their mission of promoting affordable housing.”
Each of the 11 regional Home Loan banks is required by statute to give 10% of earnings to affordable housing, an assessment that comes to $752 million for 2024. The banks expect to contribute roughly $1 billion toward its Affordable Housing Program and voluntary programs in 2024, a spokesman said. The amount paid to affordable housing rises and falls based on the system’s profitability.
“Dividends are reflective not only of the extent to which members rely on the liquidity we provide, which expands and contracts based on member needs; they represent a return on investment that our members pour back into housing finance and other financial services for their local communities,” Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, said in a statement.
The collapses of Silicon Valley Bank, Signature Bank, First Republic Bank and Silvergate Bank called into question the dual role of the Home Loan banks in providing liquidity to their members while also supporting housing. The Federal Housing Finance Agency, the system’s regulator, was already conducting a 100-year review of the system when the deposit run on Silicon Valley Bank sparked a liquidity crisis that spread last March across the entire banking system.
Many experts are waiting for the FHFA to make its next move toward reforms by releasing an expected rule that would define the system’s mission, which has become the subject of much debate.
In November, the FHFA released a report with 50 recommendations for reform. FHFA Director Sandra Thompson has said that maintaining the status quo “is not acceptable.”
Dividends have received renewed focus after the Yale School of Management’s Program on Financial Stability released a report in January that recommended redirecting the system’s dividends toward housing and away from what its researchers called “subsidized borrowing” for banks.
Steven Kelly, an associate director of research at Yale’s Program on Financial Stability, said the Home Loan banks’ dividend practices should be better aligned with the system’s housing goals.
The Home Loan banks have a unique structure of both membership and activity-based stock. Members are required to hold nominal amounts of stock but when a bank member taps the system for advances, the loan is used to purchase additional stock, typically 4% to 5% of the loan amount.
“The dividends reward process would be an easy prong to refocus on affordable housing,” Kelly said.
In the past year, the Federal Home Loan Bank of New York raised its dividend to 9.75%, the highest among the 11 banks, followed by Federal Home Loan Bank of Topeka at 9.5%. The Topeka bank garnered attention recently after lending $21 million to Heartland Tri-State Bank, in Elkhart, Kansas, whose former CEO Shan Hanes was indicted for allegedly embezzling funds last year to buy cryptocurrency. Heartland, which failed in July 2023, provides yet another example of troubled banks tapping the system prior to collapsing.
“Most [Home Loan banks] pay a much higher dividend on activity stock because they want to encourage members to borrow more,” said Peter Knight, a former director of government relations for nearly 20 years at the Federal Home Loan Bank of Pittsburgh, who is also a member of the Coalition for FHLB Reform.
There is little public data on the interest rates the Home Loan banks charge and whether the rates on advances are comparable to — or cheaper than — borrowing from the Federal Reserve’s discount window, which has become an issue in the larger debate about reforming the system.
Knight noted that in February, the Federal Home Loan Bank of Chicago touted its higher dividends for helping its members lower their borrowing costs.
“The net benefit of the higher dividend received on Class B1 activity stock has the effect of lowering your borrowing costs from us,” the Chicago bank said in a press release. “This benefit is estimated to be a 14.9 bps interest rate reduction.”
The Home Loan banks are a government-sponsored enterprise whose debt receives an implicit government guarantee. Some critics say that more of the system’s profits should go toward its housing mission because the banks receive cheap funding from the implied guarantee that the government would step in in the event of a default.
“The FHLBs are getting this advantage by being able to issue debt that is treated as government debt, and then go out and do risky things with it,” said Kelly. “To transform something that’s risky, namely lending to banks on the asset side, into something that’s risk-free, namely government-backed liabilities on the liability side, is a significant advantage.”
The system says that any effort to change dividends would have an impact on the ability of community banks to tap the system’s low-cost funding to make payroll, smooth out earnings and stay in business.
“Without these dividends — which is the only return on the capital paid in by our members — many local community lenders would not be able to provide mortgages and small-business loans in thousands of communities across the country,” Donovan said.
“The CFPB will be accelerating its efforts to ensure that consumers can access better rates that can save families billions of dollars per year,” Rohit Chopra, the agency’s director, says in response to its findings that the largest credit card issuers charge much larger APRs than smaller issuers.
Al Drago/Bloomberg
The largest credit card issuers charge significantly higher annual percentage rates than smaller issuers, resulting in some cardholders’ paying as much as $400 to $500 a year extra and the big companies’ earning billions of dollars in additional interest income, the Consumer Financial Protection Bureau said.
The CFPB on Friday released a survey of 84 banks and 72 credit unionsthat found large credit card issuers offered the highest interest rates across all credit scores. The survey comes as the CFPB is expected to finalize a rule soon that would slash credit card late fees to $8, potentially wiping out up to $9 billion a year in profits for banks and credit card issuers.
The survey results also coincide with the CFPB’s narrative under Director Rohit Chopra that the largest banks are charging consumers so-called junk fees primarily to pad their bottom lines. The survey found that small banks and credit unions offer lower interest rates on average across all credit-score tiers than the largest 25 credit card companies.
The median interest rate charged by large credit card companies was 28.2% compared with 18.15% charged by small issuers, to consumers with good credit — typically credit scores between 620 and 719, the CFPB said.
“Our analysis found that the largest credit card companies are charging substantially higher interest rates than smaller banks and credit unions,” Chopra said in a press release.“With over $1 trillion in credit card debt outstanding, the CFPB will be accelerating its efforts to ensure that consumers can access better rates that can save families billions of dollars per year.”
The CFPB found that the APR spread between the top 25 issuers and the smallest ones was between 8 to 10 percentage points, with only a slight variation based on consumers’ credit scores. The survey was based on data collected in the first half of 2023 including data on so-called purchase APRs, which captures the interest rate credit card issuers charge on purchases when a consumer carries a balance.
The CFPB has said that credit card companies’ margins are increasing as they price APRs further above the prime rate, which the bureau has said signals a lack of price competition. Credit card companies are offering more generous rewards and sign-up bonuses to win new accounts, which largely benefits consumers with higher credit scores who pay their balances in full each month.
The CFPB has long sought to explore ways to promote transparency and comparison shopping on purchase APRs — a major cost of credit cards that is often unknown to consumers prior to card issuance.
Lindsey Johnson, president and CEO of the Consumer Bankers Association, issued a strongly worded rebuttal of the CFPB’s statistics and statements, homing in on the bureau’s assertions that the credit card market is not competitive.
“The CFPB’s own data simply does not support their assertions about competition in the credit card marketplace,” said Johnson, noting that nearly 4,000 banks issue more than 640 individual credit card products. “This may be the only time that anyone has pointed to a market with vastly different prices as an indication of competition problems.”
CBA, which represents most large credit card companies and banks, took issue with the CFPB’s description that the credit card market is highly concentrated and “anti-competitive.” She said how interest rates are calculated and whether fees are assessed varies greatly and can depend on product features such as rewards such as cash-back benefits.
“In a world where only one price is offered, consumers lose — even if it’s the ‘lowest-price’ option,” she said. “Rather than bolstering this already highly competitive and well-regulated market, the CFPB seems to be driving consumers to a one-size-fits-all world focused on specific criteria that the CFPB chooses, as opposed to the preferences of the people we should all be working to serve.”
The CFPB’s research found that the top 30 credit card companies represent about 95% of credit card debt, while the top 10 companies dominate the marketplace. The CFPB also listed 15 issuers—including nine of the largest ones in the country — that reported at least one product with a maximum purchase APR over 30%. Many of the high-cost cards are co-branded cards offered through retail partnerships.
The top issuers include JPMorgan Chase, American Express, Citigroup, Capital One Financial, Bank of America, Discover Financial, U.S. Bancorp, Wells Fargo, Barclays and Synchrony Financial.
A few consumer groups and nonprofits aligned glommed on to the CFPB’s report to blast large banks.
“The CFPB’s report is a clear indictment of how big banks, emboldened by unchecked mergers and consolidation, exploit their market dominance to lock consumers in so they can levy exorbitant fees and interest rates,” said Morgan Harper, director of policy and advocacy at the American Economic Liberties Project, a progressive nonprofit group.
The CFPB said it has taken a number of steps to address what it claims are problems in the market including promoting switching through open banking, scrutinizing bait-and-switch tactics on credit card rewards, closing loopholes that allow credit card issuers to extract junk fees, and promoting credit card comparison shopping.
The agency recently updated its credit card data webpage and said it continues to expand its reporting on credit card data.
