The Federal Reserve’s H.8 report released Friday indicated that bank lending declined at the end of March by the largest margin since the central bank began tracking lending data in 1973.
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(Bloomberg) — U.S. bank lending contracted by the most on record in the last two weeks of March, indicating a tightening of credit conditions in the wake of several high-profile bank collapses that risks damaging the economy.
Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973. The more than $45 billion decrease in the latest week was primarily due to a a drop in loans by small banks.
The pullback in total lending in the last half of March was broad and included fewer real estate loans, as well as commercial and industrial loans. Friday’s report also showed commercial bank deposits dropped $64.7 billion in the latest week, marking the 10th-straight decrease that mainly reflected a decline at large firms.
The slide in lending follows the collapse of several firms, including Silicon Valley Bank and Signature Bank.
Economists are closely monitoring the Fed’s so-called H.8 report, which provides an estimated weekly aggregate balance sheet for all commercial banks in the U.S., to gauge credit conditions. The recent bank failures have complicated the central bank’s efforts to reduce inflation without sending the economy into a recession.
On Thursday, the American Bankers Association index of credit conditions fell to the lowest level since the onset of the pandemic, indicating bank economists see credit conditions weakening over the next six months. As a result, banks are likely to become more cautious about extending credit.
The banking crisis has made a recession more likely, according to JPMorgan Chase & Co.’s Jamie Dimon. The bank’s chief executive officer said in an annual letter that the failures have “provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative.”
The Fed’s report showed that by bank size, lending decreased $23.5 billion at the 25 largest domestically chartered banks in the latest two weeks, and plunged $73.6 billion at smaller commercial banks over the same period. Lending by foreign institutions in the US fell $7.5 billion.
The biggest 25 domestic banks account for almost three-fifths of lending, although in some key areas — including commercial real estate — smaller banks are the most important providers of credit.
In a note on the report, the Fed said domestically chartered banks made divestments to nonbank institutions that affected $60 billion in loans in the week ended March 22, meaning those loans are no longer held by commercial lenders.
Meanwhile, so-called “other” deposits, which exclude large time deposits, have fallen $260.8 billion at commercial banks since the week ended March 15. At domestically chartered banks, they declined $236 billion, mostly reflecting a drop at the 25 largest institutions. Deposits at small banks fell $58.1 billion.
Commercial and industrial lending — considered a closely followed gauge of economic activity — fell $68 billion. Commercial real estate loans dropped $35.3 billion. Total assets, which includes vault cash, as well as balances due from depository institutions and the Fed, decreased nearly $220 billion, while total liabilities declined more than $188 billion.
The Federal Reserve’s overnight repo facility has been utilized by money market funds to a large extent, and may be contributing to dramatic outflows of deposits from banks since the failure of Silicon Valley Bank and Signature Bank last month.
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Deposit flows after a pair of high-profile bank failures last month have renewed a debate about the Federal Reserve’s support of money market funds and whether that support harms banks.
Between March 8 and March 22, total commercial bank deposits declined by $300 billion, according to Fed data. During that same period, money market funds ticked up $238 billion.
It is unclear how many of those deposits went directly from banks to money market funds, but some in and around the banking sector worry that the Fed’s Overnight Reverse Repurchase Program has made it easier for funds to move in that direction.
Also known as the ON RRP, the facility allows money market funds and other entities to purchase securities from the Fed and sell them back the next day at a fixed, higher price. Between March 8 and March 22, total ON RRP usage — which includes activity by government-sponsored entities and some banks — only increased by $47 billion. But since March 2021, the facility has swollen from zero to roughly $2.2 trillion per day, and has remained at that level since last June.
Some of the sharpest criticism of the facilities growth has come from the Bank Policy Institute, a bank lobbying organization, which accused the Fed last week of “abetting a draining of deposits from banks.”
Policy experts outside the banking industry also say the Fed’s engagement with money market funds, through both its ON RRP facility and other actions, have given those funds advantages over banks, ones that do not always benefit the broader economy.
“The whole [ON RRP] facility should be unwound,” Karen Petrou, managing partner of Federal Financial Analytics, said. “Similarly, the Fed should stop sitting on trillions in bank deposits. It’s a huge distortion.”
Historically, money market funds have increased the availability of credit by purchasing short term corporate loans — known as commercial paper — and Treasury bills, which are government bonds with maturities of less than one year. Funds still engage in this activity, but their ability to earn interest simply by engaging in these purchase agreements with the Fed diminishes their economic impact, Petrou said.
“The Fed is supporting funds flowing out of the banking system, where they support macroeconomic activities, into the funds sector, then looping them back into the Fed where they support the Fed’s portfolio and government borrowing,” she said. “That’s a really altered state that nobody’s quite focused on.”
Fed officials, including Gov. Christopher Waller, have described increased use of the ON RRP facility — which has primarily been driven by money market funds — as excess liquidity in the financial system. Because of this, he said, the $2 trillion regularly tied up in that facility could be shed from the Fed’s balance sheet with little consequence.
However, some economists worry what the growth of that facility will mean for bank funding, especially if economic conditions worsen. To this, Waller has said it will be up to the banks to attract depositors back from funds by paying higher interest rates.
“At some point, as reserves are draining out, it’ll come out of the banks and then the banks, if they need reserves, it’s sitting over there on this ON RRP being handed over by money market mutual funds,” he said during a public appearance in January. “You’re going to have to go compete to get those funds back.”
But doing so may be easier said than done, given how many bank balance sheets are weighed down by long-duration legacy assets — loans and securities — that are paying low fixed rates. If banks start paying more to depositors, they diminish the net interest margins that support their profitability.
This could be especially problematic for banks that see outflows of current depositors who are being paid minimal interest on their deposits, said Michael Redmond, an economist with Medley Advisors who previously worked at Federal Reserve Bank of Kansas City and the U.S. Treasury.
“There’s a limit on how much banks can adjust their deposit rates higher if their existing deposit base does turnover, and that’s why a lot of economists think there is going to be credit contraction,” Redmond said. “Rather than only adjusting on the liability side of their balance sheet, banks might also try to curtail some of the activity on the asset side of their balance sheets as well.”
Money market funds tend to pay significantly higher interest rates than banks. This happens for a few key reasons.
The fund model is simpler than that of a bank. Funds profit off fees charged to investors who, in turn, are paid using proceeds from the fund’s investments. Banks, meanwhile, largely profit from the difference between the interest they collected from their assets and the amount paid out to depositors, also known as their net interest margin.
Instead of conducting maturity transformation — using short-term deposits to create long-term loans — money market funds use investor money to buy public or private debt. Because these funds invest in short-term instruments, investors are generally able to redeem their deposits at any time.
However, that redemption is not technically guaranteed. Money market funds are less tightly regulated than banks and they do not have to carry insurance for their deposits. This results in lower operating costs for funds relative to banks, but also increases the risk associated with their model. Investors, in theory, are paid a premium for taking on that additional risk.
But whether investments in money market funds are actually at risk is debatable, said Aaron Klein, a senior fellow at the Brookings Institution and a Treasury official during the Obama administration.
“For an institution run by economists, the Fed seems to struggle with the concept that greater return implies greater risk,” Klein said.
Following the collapse of the investment bank Lehman Brothers in 2008 and the onset of the COVID-19 pandemic in 2020, the Fed and the Treasury Department guaranteed money market investors that they would be made whole. The actions were taken under systemic risk declarations by the agencies to prevent a run by depositors.
Klein said these actions have signaled to market participants that money market funds will have the implicit backing of the federal government in times of distress. For uninsured depositors — such as those who fled Silicon Valley Bank last month — that not only made funds a more lucrative option, but also a potentially safer one, he said.
“Ask yourself today what is more implicitly guaranteed by the Federal Reserve: money market mutual funds or uninsured bank deposits? If you can’t find a difference in the level of implicit guarantee, that’s quite telling,” Klein said. “The Federal Reserve’s repeated bailouts of money market mutual funds, which are owned by the wealthy, makes our financial system less stable and, in the long run, our economy more unequal.”
The Fed created the ON RRP facility in 2013. The idea behind it was to create a channel through which the central bank could convey its monetary policy to market participants other than banks. It was conceived as the Fed was preparing to raise interest rates from their lower bound, where they had been since 2008.
Money market funds were not the intended beneficiary of the program, but they have taken advantage of it more than almost any other type of counterparty.
As a tool for implementing monetary policy, the facility has been effective, said Bill English, a finance professor at the Yale School of Management and a former monetary official at the Fed. But the program looks quite a bit different than when it was initially introduced.
Instead of setting the rate for the facility a quarter percentage point below the federal funds rate, the Fed now pays about 10 basis points less for its repurchases, English said. It also lifted the $300 billion cap that the program first featured and now offers unlimited use.
Like others, English says the facility could benefit from some revisions, such as a reducing the rate paid to counterparties. Doing so, he added, could be beneficial to the Fed’s monetary goals by allowing it to shrink its balance sheet more swiftly.
Ultimately, he said, banks should not count on changes to the Fed’s ON RRP facility changing the competitive landscape for deposits.
“Banks may have to get used to the idea that the safe, stable, low-cost funding that they get from their retail deposit franchise is just less than was the case 20 years ago,”English said. “And this interest rate cycle is showing that.”
The Federal Reserve disclosed more details on its decision to deny Custodia Bank’s application for membership.
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The Federal Reserve said Custodia Bank has insufficient management experience, a non-viable business model and an over-reliance on the “speculation and sentiment”-driven crypto sector, and those factors contributed to its decision to deny the digital asset bank’s application to join the Fed system.
The Fed released the full 86-page order — albeit with some redactions — on Friday afternoon, explaining why the Cheyenne, Wyo.-based depository presented a safety and soundness risk too great to be permitted into the traditional banking system. It first announced the rejection nearly two months ago.
Among the litany of concerns outlined in the rejection summary were Custodia’s lack of federal deposit insurance, its liquidity risk management practices and its failure — in the eyes of the Fed — to meet necessary standards for implementing anti-money laundering and Bank Secrecy Act requirements.
The Fed expressed skepticism that the resolution requirements under Wyoming’s Special Purpose Depository Institutions were as robust as what is required by the Federal Deposit Insurance Corp. Wyoming is the first — and, so far, only — state with a licensing regime for digital asset banks.
The Fed’s order also detailed its many concerns with the digital asset sector, which it described as being not only volatile and highly interconnected, but also a hotbed for fraud, theft, money laundering and illicit finance. It described cryptocurrencies as being “not anchored to a clear economic use case.”
In a response statement issued on Friday afternoon, Custodia spokesman Nathan Miller pushed back against many of the facts cited in the Fed’s decision. He also suggested that, had Custodia been permitted to serve as a regulated bridge between the crypto space and traditional financial markets, recent turmoil in the banking sector could have been avoided.
“The recently released Fed order is the result of numerous procedural abnormalities, factual inaccuracies that the Fed refused to correct, and general bias against digital assets,” Miller said. “Rather than choosing to work with a bank utilizing a low-risk, fully-reserved business model, the Fed instead demonstrated its shortsightedness and inability to adapt to changing markets. Perhaps more attention to areas of real risk would have prevented the bank closures that Custodia was created to avoid.”
Miller said the bank engaged with its primary regulator, the Wyoming Division of Banking, as well as an independent compliance consultant last fall, both of which gave its risk management practices and controls a clean bill of health.
He also said Custodia would not need deposit insurance because it planned to hold more than a dollar in liquidity for every dollar deposited by a customer. He argued that doing so served as a better protection against deposit runs than insurance.
“Historic bank runs in the last two weeks underscore the dire need for fully solvent banks that are equipped to serve fast-changing industries in an era of rapidly improving technology,” Miller said. “That is the exact model proposed by Custodia Bank – to hold $1.08 in cash to back every dollar deposited by customers.”
One of the stipulations of the Wyoming SPDI charter is that banks cannot make loans using customer deposits. Typically, banks create loans for far greater amounts than they bring in through deposits, a concept known as fractional-reserve banking. Rather than profit off interest charged on loans or returns from investments, Custodia intended for its revenue to be entirely fee-based.
Yet, the Fed took issue with this business model. In its denial, it argued that such a reliance on fees would inextricably link Custodia to the broader health of the crypto ecosystem, which has proven to be volatile and unpredictable.
“The institutional clients and individual customers that Custodia is targeting will only need the bank’s services if crypto-assets are perceived as an attractive investment,” the Fed’s order notes. “Moreover, given the importance of fee income from planned crypto-asset-related activities to Custodia’s overall business plan and the concentration and interconnectedness of the crypto-asset industry, potential run-related risks with respect to assets under custody could impact the viability of Custodia via a significant and sudden reduction in fee-based revenue. For that reason, Custodia’s fortunes are tied directly to those of the crypto-asset markets.”
Custodia’s proposed business model includes providing custody, core banking and payment services to businesses and, eventually, wealthy individuals who use digital assets. In 2020, it sought to become the first bank of its kind to gain access to the Fed’s payments system by applying for a master account with the Federal Reserve Bank of Kansas City.
It later applied to become a state-chartered member bank, which would have made the Fed its primary regulator. Based on guidelines established last year, being federally supervised streamlines the application process for uninsured depositories to obtain master accounts.
Custodia’s bids for a master account and Fed membership were shot down on Jan. 27.
After its twin rejections in January, Custodia withdrew its initial lawsuit, which sought to compel the Fed to make a decision about its applications. It has since amended its complaint, arguing that the Board of Governors and the Kansas City Fed coordinated with other government agencies to block it and other digital asset-focused firms from the banking system.
“It is a shame that Custodia must turn to the courts to vindicate its rights and compel the Fed to comply with the law,” Miller said.
Custodia’s claims are poised to be put on trial later this year, a rarity for Fed-related legal challenges.
WASHINGTON — The top Democratic lawmaker on the House Financial Services Committee Maxine Waters, D-Calif., is floating the idea of guaranteeing all uninsured depositors in the future.
“Are we going to make sure that we take care of the uninsured in the way that we did with this fallout from Silicon Valley Bank?” Waters said in an interview. “I don’t know, but I will have to put it on the table.”
Waters didn’t commit to backing legislation for the idea, but said that she’s looking at different legislative solutions for what she called regulatory failures that allowed Silicon Valley Bank to mismanage its liquidity risk. Waters, like other Democrats, wants to revisit the 2018 clawback of some requirements for mid-sized banks, which would have included banks the size of Silicon Valley Bank, which is based in her home state, and Signature.
Representative Maxine Waters, a Democrat from California and ranking member of the House Financial Services Committee, said that expanded deposit insurance legislation could be coming. Photographer: Andrew Harrer/Bloomberg
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“There are a number of issues to be looked at, everything from the uninsured to stress testing to understanding what rules should be in place for how you determine that your balance sheet assets are not worth today what they could have been some time ago because of inflation and the increase in interest rates,” she said. “I’m sure some of it will need legislation.”
Any losses associated with the resolution of Silicon Valley Bank or Signature Bank after their failure and extraordinary action by regulators to backstop uninsured depositors will come from the Deposit Insurance Fund, and will be recovered by a special assessment on banks.
‘That fund is paid for by the premiums that are paid by the banks,” Waters said when asked about the fee impacting small banks whose balance sheets don’t have the same interest rate exposure, unlike the $209 billion Silicon Valley Bank. “We’ve had no discussion about raising those amounts, it is very safe, it is very secure now with ample assets by which to take care of the uninsured.”
“To the extent that these banks’ failure reflected liquidity weaknesses, the liquidity coverage ratio – the liquidity rule that was eliminated for most bank holding companies with less than $250 billion in assets after S. 2155 – likely would not have prevented either bank’s problems, and might have made them worse,” said the Bank Policy Institute in a statement. “Although the LCR does require banks to hold a large pool of ‘high-quality liquid assets,’ it strongly encourages banks to hold primarily government securities for that purpose – precisely the securities that SVB and Signature held, exposing them to losses when the Fed raised rates.”
Waters said that she and House Financial Services Committee Chairman Patrick McHenry, R-N.C., have agreed to hold a hearing “as early as we possibly can” on Silicon Valley Bank and Signature, making it a bipartisan issue.
“There are those that don’t like regulation and have been involved in the deregulation that has been done,” she said. “And of course there are those of us who really do believe we have to have credible regulation in order to protect the people in this country who trust their money to the banks and expect for it to be there when they want to get it out.”
The Federal Deposit Insurance Corp. will likely have to raise its Deposit Insurance Fund fees in the event that it is reduced due to the failures of Silicon Valley Bank and Signature Bank. Smaller banks are unhappy about paying more fees for what they see as larger banks’ mismanagement.
Andrew Harrer/Bloomberg
Many in the banking industry fear that Sunday’s intervention to shore up Silicon Valley Bank and Signature Bank could compel the Federal Deposit Insurance Corp. to hike assessments on all banks to replenish its Deposit Insurance Fund, and some smaller banks are particularly unhappy about paying to make up for larger banks’ failures.
FDIC’s Deposit insurance guarantees up to $250,000 of depositors funds will be repaid even if the bank fails. Member banks pay deposit insurance premiums, known as assessments, to fund the DIF, which stood at 128.2 billion as of December 31, 2022.
The FDIC has made clear banks — not taxpayers — will pay for the rescue of Silicon Valley Bank and Signature Bank’s uninsured deposits.
“Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law,” the agency wrote in a release detailing their response to the failures.
While there is no doubt that the FDIC will raise fees, how they raise fees and from whom remains to be seen. Arthur Wilmarth, professor emeritus at George Washington University Law School, thinks the increasing regularity of the systemic risk exception should be factored into banks’ future assessments.
“We’ve essentially protected all bank deposits twice — during the financial crisis of 2008-09 and again this time,” Wilmarth wrote in an email. “If we’re going to protect all deposits during a crisis, banks should pay for that privilege on an ongoing basis. I’ve argued that the same should be true for money market funds, which we bailed out in 2008 and 2020.”
Smaller community banks were initially alarmed by regulators’ announcement, which didn’t specify which banks would pay for this special assessment.
To be sure, small community and regional banks stand to benefit greatly from the FDIC’s bailout largely because the system is staving off a run on small banks, but small banks also do not receive the kinds of interventions that Silicon Valley Bank and Signature Bank’s customers benefitted from. Wilmarth thinks lessons from Silvergate’s recent demise reveal which institutions regulators are willing to take extraordinary measures to save. He says community banks dislike the idea of paying for a problem they didn’t cause, and a remedy they will not benefit from.
“As we saw with Silvergate, it is very unlikely that a bank smaller than $25 billion would have received treatment similar to SVB and Signature,” Wilmarth wrote in an email.
Jill Castilla, president and CEO of $345.7 million-asset Citizens Bank of Edmond, said she thinks the FDIC should tailor the special assessment to big banks.
“I’m not necessarily happy to bear that cost,” Castilla said. “But if it’s a price that we have to pay in order to ensure stability in the U.S. banking system, I will, knowing that it’s for the broader good.”
Castilla said she was rethinking the concept of the special assessment on banks after seeing a Twitter post from Sen. Bernie Sanders, I-Vt., who admonished the bailout of venture capitalists. Sanders said in a tweet and press release: “If there is a bailout of Silicon Valley Bank, it must be 100 percent financed by Wall Street and large financial institutions.”
Indeed, bankers that said they have long stuck to prudent asset liability management practices — sometimes at great expense — are voicing opposition to funding depositors of banks that failed due to bad management.
“It will be a travesty if the FDIC fund is used to guarantee deposits in excess of FDIC insurance thresholds,” said Steven M. Gonzalo, president and CEO of $1.2 billion-asset American Commercial Bank & Trust, a 10-branch bank on the outskirts of Chicago that was founded in 1865.
Sticking small banks with the failures of larger ones is nothing new, said Gonzalo. During the financial crisis in 2008, Gonzalo said, the bank’s FDIC premiums jumped 10-fold to $300,000 a year, from $30,000 a year.
“We were forced to prepay three years of premiums to bail out the very banks that created the problem,” he said.
Former FDIC lawyer Todd Phillips thinks small banks shouldn’t be too worried, even if Congress is considering raising total insured deposits, big banks and systemically important institutions will pay for mitigating the risk.
“Unless Congress changes the law around the deposit insurance ceiling, I don’t expect banks to pay higher insurance premiums. The statutory minimum is still the same,” Phillips wrote in an email. “To the extent the FDIC decides to increase the size of the DIF as a result of this weekend, increased premiums will come from the largest institutions, not community banks.”
Many small community bankers said they also were shocked that the failed banks did not maximize FDIC insurance by using tools for reciprocal deposit arrangements.
Both Signature and Silicon Valley Bank were members of IntraFi, a privately-held firm in Arlington, Va., that allows deposit swapping, whereby a customer has a single relationship with a bank but can spread deposits among other FDIC-insured institutions, thus helping to maximize deposit insurance coverage. Intrafi was created more than two decades ago by former regulators at the Federal Reserve, FDIC and Office of the Comptroller of the Currency.
Silicon Valley Bank had just $469 million in reciprocal deposits on its balance sheet at year end; Signature had $228.4 million, according to call report data from the Federal Financial Institutions Examination Council.
Republicans on the Senate Banking Committee are keeping a watchful eye on the Federal Reserve’s ongoing review of bank capital requirements.
Sen. Tim Scott, R-S.C., the ranking member on the committee, sent a letter to Fed Chair Jerome Powell on Friday afternoon, urging him to make sure any changes to capital requirements are tailored to each bank’s specific activities, risks and complexities.
Should the review fail to adequately tailor capital requirements, the letter warns, the Fed’s actions could have a “chilling effect on market making activities and availability of financial services.”
The letter also noted that the committee expected to be kept fully informed with “robust analysis” from the Fed as it conducted its review and adjusted policies accordingly. A Federal Reserve spokesperson said Friday afternoon that the central bank has “received the letter and [plans] to respond.”
Sens. Mike Crapo, R-Idaho, Mike Rounds, R-S.D., Thom Tillis, R-N.C., John Kennedy, R-La., Bill Hagerty, R-Tenn., Cynthia Lummis, R-Wyo., Katie Britt, R-Ala., Kevin Cramer, R-N.D., and Steve Daines, R-Mont., co-signed the letter.
The senators also argued that the banking sector’s ability to withstand the shock of the COVID-19 pandemic and ensuing liquidity crunch in spring of 2020 without widespread failures serves as evidence that they are already sufficiently capitalized.
The missive is in response to the “holistic” capital review being led by Fed Vice Chair for Supervision Michael Barr. The effort is poised to encompass all of the central bank’s various capital standards and assess how they work with one another and independently to address safety and soundness concerns within the banking system.
Among the policies to be considered are the Fed’s supplementary leverage ratio, the stress capital buffer — and the stress testing regime that determines it — and the final implementation of capital requirements related to Basel III, known as the Basel III endgame.
Barr, who has made the holistic capital review his first signature act as the Fed’s top regulatory official, has not taken an official stance on whether capital requirements should be higher or lower. However, in a December speech at the American Enterprise Institute, Barr stated that “current U.S. requirements are toward the low end of the range described in most of the research literature.”
In their letter, the Senate Banking Republicans pointed to the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act’s provisions on tailoring requirements. The law narrowed portions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which established new principles for bank regulation in the wake of the subprime mortgage collapse in 2008.
“As the Vice Chair of Supervision, Mr. Barr should adhere to the letter and spirit of the tailoring provisions as enacted by Congress,” the senators wrote. “Reports of regulators’ efforts to unwind those tailoring reforms are concerning and do not comply with the law.”
The functioning of the U.S. government debt market remains a concern for the Federal Reserve.
In brief remarks delivered at an event hosted by the University of Chicago’s Booth School of Business, FedGov. Michelle Bowman said it was important for the central bank to continue working with other regulators to review Treasuries markets to make sure they are appropriately supervised and resilient.
“Doing so can increase the ability of private markets and institutions to function during times of stress and reduce the likelihood of future market interventions by the central bank,” she said. “In this regard, it is important for the Federal Reserve to engage along with the other agencies in a thoughtful consideration of possible regulatory adjustments and structural reforms to increase the resiliency of the Treasury markets and reduce the likelihood of future market dysfunction.”
Financial regulators in Washington have been studying the impacts of the COVID-19 era actions on Treasury markets. The Interagency Working Group for Treasury Market Surveillance, which consists of the Fed Board of Governors, the Federal Reserve Bank of New York, the Securities and Exchange Commission, the Treasury Department and the Commodity Futures Trading Commission, has issued two reports on the matter during the past two years.
During the Friday afternoon event, Bowman moderated a panel discussion on “Design Issues for Central Bank Facilities in the Future.” In her opening remarks, she detailed how the Fed’s various interventions helped support the U.S. economy in the early stages of the COVID-19 pandemic, including creating lending facilities and buying assets.
The Fed’s actions, she said, were integral to preserving the flow of credit in the financial system. But, she noted, some of the various tools the central bank used saw differing levels of use by market participants.
“Significant asset purchases and take-up of the Fed’s repo operations were required to restore smooth functioning in Treasury markets because of the liquidity needs of a wide swath of investors,” she said. “By comparison, many of the 13(3) lending facilities saw relatively limited take-up, but they helped support market functioning and the supply of credit in the targeted markets by offering a backstop and bolstering investor confidence.”
Bowman said the lending programs proved effective because they offered funding at a penalty rate, because it served as a backstop for banks without expanding the Fed’s footprint too greatly in any particular market.
Bowman said targeted purchasing was an appropriate response for the Treasuries market, given the severe liquidity shortage in the spring of 2020. But, she said, such programs raise issues that must be addressed by central banks, including how to “clearly distinguish asset purchases from the central bank’s monetary policy actions.”
Other considerations include how to minimize the Fed’s footprint in the market and how to “construct and communicate an exit strategy to reduce the enlarged balance sheet over time.”
The Fed stopped purchasing Treasuries and mortgage-backed securities in March 2022 and then began allowing assets to roll off its balance sheet last June.
WASHINGTON — The Consumer Financial Protection Bureau is plowing ahead with a busy enforcement agenda despite a cloud of uncertainty hanging over it from the Supreme Court’s decision to take a case challenging the bureau’s funding.
The CFPB said it was “pleased” that the Supreme Court had decided on Monday to take a case about the constitutionality of its funding mechanism. CFPB Director Rohit Chopra weighed in on the case for the first time, saying a decision could have massive repercussions for financial institutions, the agency and others.
“We don’t want a situation where there are financial institutions all over the country getting sued because of a lack of clarity on the validity of actions,” Chopra said at the Credit Union National Association’s Governmental Affairs Conference in Washington, D.C., on Monday. “I’m hopeful that this is the next step to create that clarity, and we’ll let the process go forward.”
The CFPB had petitioned the high court to review a decision in October by a three-judge panel of the U.S. Court of Appeals for the 5th Circuit. The three judges, all appointees of former President Donald Trump, found that the bureau’s funding through the Federal Reserve Board violates the Constitution’s appropriations clause.
Chopra made clear that the agency is continuing its enforcement. The bureau in 2010 faced a similar period of limbo when the Supreme Court accepted a constitutional challenge to the protections its single director had from being fired by the president; that case threatened to hamper the CFPB, but it went on with its work as before.
“I will be very clear that we are not holding back when it comes to our enforcement program,” Chopra said. “We do know that many repeat offenders [and] bad actors want to use this to escape liability and accountability, and we are not holding back on that front.”
But the CFPB also faces significant litigation risks if the high court finds that the bureau’s funding is unconstitutional. Financial firms that have paid billions in settlements may ask the CFPB to return their money, lawyers said. Even some attorneys that have been highly critical of the CFPB said that situation would be chaotic.
Joe Lynyak, a partner at Dorsey & Whitney LLP, said the Supreme Court will have a hard time finding that the CFPB’s funding is unconstitutional because doing so would automatically mean financial firms that have paid roughly $14.9 billion to the CFPB in past settlements may sue to get their money back.
“If the CFPB is declared to be unconstitutional then all its actions from the past 10 years are void, and from a practical perspective, courts do not favor this result,” Lynyak said. “It would open up a whole new can of worms, including the enforceability of any payments made to injured consumers.”
Isaac Boltansky, managing director and director of policy research at the investment bank BTIG, listed nearly a dozen companies that stand to benefit from a ruling against the CFPB because they currently face enforcement actions or pressure from CFPB regulations.
“From a practical perspective, this means that the cloud of uncertainty will remain over the Bureau’s rulemaking and enforcement actions,” Boltansky wrote in a research note.
He thinks the CFPB faces even more litigation because of the court case. The bureau will likely be sued once it finalizes its proposal to regulate credit card late fees, he said.
“The CFPB will still push to finalize its credit card late-fee rule this year, but that would likely be challenged on its own grounds and could be overshadowed by the funding mechanism review,” Boltansky said.
Roughly a dozen CFPB enforcement cases have been stayed since the 5th Circuit’s ruling in October. Boltansky said that the CFPB may end up partnering with state attorneys general “to provide more legal staying power” to its enforcement actions, Boltansky said.
Richard Hunt, a senior advisor to Boston Consulting Group, said that if the Supreme Court decides that the bureau’s funding is unconstitutional, the core issue will be how the high court “defines a remedy.” Many experts think a Supreme Court decision against the CFPB could require bipartisan legislation by a closely divided Congress just months before a presidential election.
“Fast-forward a year from now, and the Supreme Court could rule in June or July 2024,” said Hunt, a former CEO of the Consumer Bankers Association. “A decision could come out just before an election year that changes the whole bailiwick.”
Hunt said he is concerned about the time period between a high court ruling and when Congress would have to act on the bureau’s funding even as he acknowledged that there are more questions than can be answered about how Congress might respond if the CFPB loses.
“There are probably 20 questions that are unanswerable right now. Is there a remedy for past actions? Will Congress compromise to keep the agency afloat?” he said. “If Jan. 2, 2025, comes around and Congress has not passed any funding for the CFPB, does it exist or not?”
Consumer advocacy groups also are raising a flurry of concerns about what could happen if Congress ties the CFPB’s funding to congressional appropriations.
“If the CFPB has to rely on congressional funding, the banking industry could try to influence members of Congress to withhold funding from regulators unless they do their bidding,” said Mike Litt, consumer campaign director at U.S. PIRG. “Making the CFPB the only banking regulator subject to congressional appropriations would put the most pro-consumer federal agency at risk of being starved of the funding it needs to protect consumers.”
Financial firms also face larger questions about whether they would have to jettison compliance and risk management programs that were created around the CFPB’s rules.
“To unwind the large compliance and risk management structures that companies have already built over many years on reliance of these expectations would be itself a huge undertaking that would ironically detract from the goal of efficient regulation,” said Jenny Lee, a partner at Reed Smith LLP and a former CFPB enforcement attorney. Lee said that any remedy in the Supreme Court could require a congressional solution “which is not an easy lift in today’s environment.”
The Supreme Court has not yet agreed to hear a challenge to the funding structure of the Consumer Financial Protection Bureau, though the high court could still take the case this term or next.
The Supreme Court on Tuesday did not list the case — Community Financial Services Association of America v. CFPB — among the cases it intended to hear in the current session, but the high court may still take the case next week or at any time, experts said. The court regularly releases a list of cases each Monday. But the court also may issue individual “miscellaneous” orders at any time. The CFPB case is being closely watched for its impact on not only its own funding structure but those of other regulatory agencies as well. The case also threatens to undo all of the bureau’s past actions and rules, depending on how sweeping the Supreme Court’s decision on the case ultimately is.
In November, the CFPB petitioned the high court to review an appellate decision that the bureau’s funding through the Federal Reserve Board violates the appropriations clause. A three-judge panel of the U.S. Court of Appeals for the Fifth Circuit had ruled in October that the CFPB’s funding contravenes the Constitution’s separation of powers. The three judges, all appointees of President Donald J. Trump, found that Congress had ceded its own “power of the purse” by funding the CFPB outside congressional appropriations, even if the funding was authorized by statute.
The CFPB was created by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, which structured the bureau as an independent agency within the Federal Reserve. The CFPB’s budget is drawn from the Federal Reserve and capped at up to 12% of the central bank’s operating expenses. In 2022, the agency’s maximum budget was $734 million.
Few experts think the high court will abolish the CFPB outright. But the Fifth Circuit’s ruling opened the door for the bureau’s 12-year history of rules and enforcement actions to be challenged. Many experts think any Supreme Court decision will lead to a fight in Congress over the CFPB’s future funding. Though some banks and financial institutions want the CFPB to be abolished outright, many others are hoping for a ruling that would force Democratic lawmakers to bow to reforms, including funding the agency through congressional appropriations and adopting a commission structure.
The CFPB argued in its petition that many agencies including the Post Office and National Mint are funded from sources other than annual appropriations. Prudential regulators — including the Office of Comptroller of the Currency and Federal Deposit Insurance Corp. — are funded through fees or assessments imposed on financial firms, while the Federal Reserve Board is funded through its own open market operations. When the Dodd Frank Act was being written, financial firms objected to the CFPB being funded through fees or assessments, experts said.
“No other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending,” the CFPB said in its petition. The bureau is being represented by U.S. Solicitor General Elizabeth B. Prelogar. The CFPB also said a ruling against it “threatens to inflict immense legal and practical harms on the CFPB, consumers and the nation’s financial sector.”
The Supreme Court already ruled on the CFPB’s constitutionality once. In a split 5-4 decision written by Chief Justice John Roberts, the high court in 2020 ruled that the CFPB’s single director could not be shielded from being fired by the president and could be fired without cause. The practical effect of that ruling was limited. The court simply struck down the words “for cause” removal in a provision of the Dodd-Frank Act and the bureau continued to operate as it had before.
The implications of the current case are less clear, experts say. The Supreme Court has become highly skeptical of administrative agencies and increasingly has sought to assert its power over the other two branches of government, research shows.
Republican lawmakers have long pushed for the bureau to be reconstituted as a commission. Republicans have proposed more than 70 bills in the past decade — all without success — seeking to limit the CFPB’s authority. The bureau has become so politicized that it is unclear if Democrats would support a commission structure or if Republicans would provide funding through appropriations, experts said, potentially leaving the agency in limbo.
The Fifth Circuit’s ruling last year struck down the CFPB’s 2017 payday lending rule, which many experts think will never go into effect. Two payday trade groups had sued the CFPB in 2018 claiming various arguments including that the CFPB”s funding violated the appropriations clause.
The CFPB continues to face legal challenges citing its funding as unconstitutional. Last year, bank trade groups and the U.S. Chamber of Commerce filed a 116-page lawsuit challenging the bureau’s authority to adopt a policy that for the first time claimed discrimination on the basis of age, race or sex — regardless of intent — violates the federal prohibition on “unfair, deceptive or abusive acts or practices,” or UDAAP.
“The CFPB relies on this unconstitutional funding scheme to carry out its overly expansive UDAAP authority to Plaintiffs’ detriment,” the groups said.
Leaders of the Congressional Asian Pacific American Caucus have decried a move by Republicans to ask the FBI to investigate East West Chairman and CEO Dominic Ng for alleged communist ties as racial profiling.
The Republicans, led by Rep. Lance Gooden, R-Texas, wrote to FBI Director Christopher Wray in a letter dated Wednesday, claiming that Ng had violated the Espionage Act.
The Biden administration named Ng to the Asia-Pacific Economic Cooperation’s Business Advisory Council, a regional economic forum designed to promote economic integration and shared prosperity across 21 nations that border the Pacific Ocean, in November. At the time, he said that one of the council’s priorities would be climate change.
“The way we are living is not sustainable; we have to change,” Ng told American Banker at the time. “We don’t want to build the economy by damaging the environment further … the U.S. and China need to be the leaders.”
The leaders of CAPAC, which includes Democratic lawmakers Reps. Judy Chu of California, Ted Lieu of California, Grace Meng of New York, and Mark Takano of California, said that the accusations from Republicans are “beneath us all, particularly those entrusted with public office.”
“As with every presidential appointee, Dominic Ng, who is Chinese American, has undergone an extensive vetting process and sworn an oath to support and defend the Constitution and serve the American public,” the lawmakers said. “He has had a distinguished career as president and CEO of East West Bank for 32 years. We are extremely disturbed and outraged—but not surprised—that some of our Republican colleagues in Congress would undermine his candidacy and even question his loyalty to the United States based entirely on loose claims of association trafficked on extreme-right outlets with extensive histories of spreading misinformation.”
In a statement, East West Bank struck a similar chord.
“Baseless claims, discrimination, and conspiracy theories are fueling the sharp increase in anti-Asian violence in the United States, and recent conspiracy theories have inappropriately targeted Mr. Ng,” the bank said.
The Republican letter, which which, along with Gooden, was signed by Rep. Tom Tiffany of Wisconsin, Lauren Boebert of Colorado, Ben Cline of Virginia, Doug LaMalfa of California, and Keith Self of Texas and Gooden, alleges that Ng has worked for two Chinese intelligence operations front groups.
“China has proved themselves as our greatest adversary and foreign competitor, and yet our leaders continuously jeopardize U.S. national security by allowing the People’s Republic of China (PRC) to infiltrate our third-party sector and federal government,” the Republicans said in the letter. “This lack of scrutiny should be promptly evaluated, and the
Biden Administration should take immediate steps to ensure blunders like this will not happen again.”
The accusation appears based on a report from The Daily Caller, a news and opinion website founded by now-Fox News host Tucker Carlson and political pundit Neil Patel. The article claims to have matched Ng’s name to archived, translated records, and allege that the two groups are fronts for Chinese intelligence.
East West Bank said that Ng was invited to become an executive-director level member of one of the groups, the China Overseas Exchange Association, as an honorary position, and that he never attended any meetings, nor paid membership dues. The invitation was due to his work as then-cChairman of the Committee of 100, a group designed to provide a forum for Americans of Asian descent. He withdrew his name from COEA, citing non-participating, in 2014. The bank said that Ng has had no connection to the other group, China Overseas Friendship Association, and never agreed to serve as its executive director.
The Federal Reserve’s top regulator wants to “eradicate discrimination” from the financial services sector and he’s ready to use all the tools at his disposal to do so.
Fed Vice Chair for Supervision Michael Barr delivered a speech on financial inclusion Tuesday afternoon at Jackson State University, a historically black research university in Mississippi. In it, he said the central bank would incorporate screening for discriminatory practices into all of its supervision practices, including evaluating applications for mergers and acquisitions.
“Congress provided regulators with supervisory and enforcement tools to help ensure that supervised firms resolve consumer protection weaknesses as well as the more pervasive risk management issues that often lead to those weaknesses,” Barr said. “We have a close working relationship with the Consumer Financial Protection Bureau and other regulators and integrate other regulators’ consumer-focused reviews—such as examinations for unfair, deceptive, or abusive acts or practices, as well as fair lending—into our assessments of bank holding companies, including in the context of applications for mergers and acquisitions.”
Michael Barr, vice chair for supervision at the Federal Reserve, said Tuesday that the central bank and other regulators are working to further bridge the racial wealth gap and “eradicate” discrimination in lending.
Bloomberg News
During his prepared remarks, Barr highlighted racial wealth gaps, the difficulties Black-owned small businesses have in obtaining credit and the fact that Black households are nearly six times as likely to be unbanked as their white counterparts. He said many of these issues are part of the “long shadow” of past discriminatory practices at banks and policies set by the U.S. government.
“For most of our country’s history, the United States government and many state and local governments, as well as many private individuals, corporations, and organizations, did not merely fail to protect minorities from discrimination, they actively reinforced segregation, entrenched inequality, and enforced unequal policies,” he said, “including through brutal violence.”
Barr pointed to auto and small business lending as areas of top concern for bank regulators, noting the Black borrowers have faced higher interest rates and more restricted access to these products than their white peers.
He also expressed concerns around mortgage lending, singling out residential appraisals as an area of keen focus for the Fed and other regulators, picking up on a subject that has been a top priority for the Biden administration in its effort to root out systemic racial inequity.
Barr nodded to the Fed’s participation in a hearing on appraisal bias held by the Federal Financial Institutions Examination Council’s Appraisal Subcommittee last month, saying: “I look forward to working with my fellow regulators to help ensure that individuals are treated equally in the appraisal process regardless of race or the racial composition of neighborhoods.”
The central bank sits on the council alongside other bank and housing regulatory agencies, including the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Federal Housing Finance Agency and the Department of Housing and Urban Development.
Barr said the Fed will lean on enhanced data collection to identify discriminatory practices by banks and craft policies accordingly. He noted that under section 1071 of the Dodd-Frank Act, banks should be reporting more data on small business lending. Once this provision is fully implemented, he said, the Fed will have “tangible insights into the availability and pricing of credit” being extended to Black-owned businesses.
At the same, Barr also encouraged banks to be proactive in identifying discriminatory practices, suggesting that they use “mystery shoppers” tests to evaluate their employee practices. This involves two people who have identical profiles except for a different protected class, such as race, both applying for similar loans. The idea is to test whether individuals receive different credit offerings based solely on their race, gender or personal attributes.
Another focal point for the Fed and other regulators, Barr said, will be the use of artificial intelligence or computer algorithms for determining credit scores or otherwise evaluating loan applications.
“[Banks] should review the underlying models, such as their credit scoring and underwriting systems, as well as their marketing and loan servicing activities, just as they should for more traditional models,” he said.
Barr said ongoing efforts to update the Fed’s supervision and regulation policies on bank mergers and the Community Reinvestment Act will both prioritize access to financial services for low and moderate income communities.
He added that it is also important for regulators to encourage innovations that help banks extend services to traditionally underserved areas, especially as it relates to community development financial institutions and minority deposit institutions, which he said provide services in which traditional banks cannot.
“One thing we do is make sure that our examiners understand the CDFI space and the MDI space and the role that CDFIs and MDIs play, and the particular kinds of circumstances that MDIs and CDFIs face such as being able to do small consumer loans and to do character lending and to lend to people without a credit score,” Barr said during a question and answer session following his speech. “Our examiner’s need to know and understand what the offsetting risk mitigation measures that CDFIs and MDIs are using, including knowing the family. It makes a difference.”
Barr also said the Fed is doing its part to help facilitate better services for low-income and underserved customers, noting specifically its instant payments network, FedNow, which is due to roll out this summer. He said FedNow will enable faster services at lower costs to consumers.
“We can also make a difference by updating our rules on check clearance, so that consumers and small businesses still receiving checks have access to their funds in a timelier manner,” Barr said. “And of course, we need strong consumer protections in place so that consumers don’t have to worry about making payments in a safe way.”
WASHINGTON — Cratered support among the Republican base, new priorities in the banking industry and simple pragmatism have significantly weakened the relationship between banks and the GOP, and opened up room for modest but increasing partnerships with Congressional Democrats, in a role reversal that would have been unthinkable just a decade ago.
According to a study late last year by Pew Research, while likely Democratic voters’ views on banks and big corporations have remained relatively stable, Republican attitudes toward banks have rapidly soured over the past four years.
“About four-in-ten Republicans and Republican-leaning independents (38%) and Democrats and Democratic leaners (41%) now say banks and other financial institutions have a positive effect on the way things are going in the country” Pew Research wrote in a piece on the study.
Senate Banking Committee chair Sherrod Brown, D-Ohio, introduced a bill in the last Congress that would rein in Industrial Loan Companies — a move that banks largely favor. Declining approval for banks by Republican voters and a focus on curbing diversity and ESG policies by Republican lawmakers is compelling banks to increasingly align withy Democrats on their policy priorities.
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This represents a steep decline, since as recently as 2019, 63% of Republican voters thought banks had a positive effect on the country, as opposed to 37% of Democrats. Experts say that while banks have long faced bipartisan criticism, the GOP’s culture war has worsened banks’ already-dwindling favor among the GOP base, and fractured the party’s historically finance-friendly reputation.
In the midst of this decoupling, and with the GOP engaged in an unpredictable culture war, Democrats and banks appear to be increasingly siding with the devil they know, at least in certain areas where their policy priorities align.
Ian Katz, managing director at Capital Alpha Partners, agrees that populist sentiment in the Republican Party has been growing for some time now. In the era of increasing politicization of social and cultural issues, Republicans see anti-wokeness as a political strategy that resonates with their base.
“Republicans in Congress have become less like the pro-business, free-trade Republicans of a decade or more ago,” Katz said. “They are more populist now. They were moving in that direction, but Trump accelerated it. So now Republicans in Congress aren’t the reliable defenders of banks that they used to be. I think in the past year or two the trend has accelerated even more because of Republican suspicions that banks are adopting the Democrats’ views on issues such as ESG and inclusion.”
Democrats and big bankshave been some of the loudest critics of cryptocurrency, borne of a mutual distrust of unregulated market actors and fears of consumer exploitation. Democrats and banks have also found themselves aligned in their skepticism of fintechs and alternative banking charters — such as Industrial Loan Companies.
Those concerns have been strengthened in the wake of crypto scandals like the precipitous decline of crypto exchange FTX and recent indictment of the owner of Hong Kong-based Bitzlato on money laundering charges. Both banks and Democrats have expressed unified support — albeit with disparate motives — for proposals like Senate Banking Committee Chair Sherrod Brown’s Close the Shadow Banking Loophole Act, which was introduced late in the 117th Congress. Though both are concerned with the risks of dark finance like consumer abuses and fraud, banks have an interest in making sure non-bank charters don’t get all the benefits of banking without playing by the same set of rules.
By contrast, many GOP lawmakers worry more about the dangers of regulatory overreach than the dangers of under-regulated financial firms. Biden-appointed bank regulators and Republicans have repeatedly clashed over the issue, and it will continue to feature prominently given that House Financial Services Committee chair Patrick McHenry, R-N.C. created a new subcommittee specifically to address digital assets.
The increasing trend for banks to employ values-based investment practices, which consider an environmental, social and corporate governance framework known as ESG, has also caused friction with Republicans. The GOP has lashed out at ESG efforts, along with bank diversity, equity and inclusion initiatives as part of what thea “woke” agenda, and Republican State officials have gone so far as to retaliateagainst bankswho pursue climate-conscious ESG policies.
Republican staff of the Senate Banking Committee released a report recently floating the idea of punishing the big three accounting firms that adopt ESG or DEI measures by classifying them as bank holding companies because of the way their political stances influence banks, threatening to punish any semblance of liberal capitulation with onerous regulatory burdens.
Consumer advocates like Carter Dougherty of Americans for Financial Reform think the wedge between the GOP and banks has been growing for some time, suggesting ESG outrage is merely a symptom of broader disenchantment that Americans feel toward financial services writ large.
“The change here is that there is more bipartisan criticism of Wall Street in Congress.” Carter said in an email. “For over a decade, the country as a whole, across both parties, has been bank-critical, and supportive of efforts by Congress to be tough on Wall Street. The 2008 crisis and the Great Recession left deep scars on this country.”
But other observers think growing Republican hostility may drive banks towards working increasingly with the left. Former FDIC lawyer and independent consultant Todd Phillips believes that banks have a real interest in currying favor with an increasingly liberal public, and that the profit incentive behind being perceived as socially conscious outweighs any threats the right can lob at them.
“I think it’s almost a perfect storm that is helping the banks gain ground with Democrats,” Phillips said. “Banks are really just trying to do what they think is in their own economic interest. It’s just really strange that we have the party of free markets that is trying to tell banks what to do, and I think that’s fracturing the bond between banks and Republicans that’s been building for about a decade now.”
The Federal Reserve Bank of Kansas City has denied Custodia Bank’s application for a master account, according to a U.S. district court filing.
The reserve bank disclosed the rejection in a motion to dismiss filed with the U.S. District Court of Wyoming on Friday afternoon. Custodia is suing both the Kansas City Fed and the Fed Board of Governors over its long-delayed application for a master account, which grants access to the Fed’s various financial services, including its payment system.
In its filing, the Kansas City Fed and the Board of Governors argue that the ruling should render Custodia’s lawsuit moot. The bank had sought to pressure the Fed to make a decision about its two-year-old application, arguing that it had been subject to an unreasonable delay.
The Federal Reserve Bank of Kansas City rejected Custodia’s application for a master account Friday afternoon, just hours after the Fed Board of Governors denies the bank’s application to become a state member bank. The moves have dealt a blow to the digital asset bank’s efforts to join the Fed system, though the bank is expected to continue to pursue its case in court.
Bloomberg News
The Kansas City Fed’s denial of Custodia’s master account application came just hours after the Board of Governors rejected the Wyoming-based digital asset bank’s bid to become a state member bank. The designation would have made the Fed Custodia’s primary supervisor and — according to the central bank’s recently enacted application review framework — made it easier for the bank to receive a master account.
Nathan Miller, a spokesman for Custodia, said the bank plans to continue its litigation against the Fed, noting that the bank intends to challenge whether the bank has congressional authority to pick and choose which institutions can have master accounts. Custodia and others argue that any state chartered depository is entitled to master account access.
In a written statement, Miller accused the Board and the Kansas City Fed of taking “coordinate action against” the bank and said the rationale for the rejections was “misguided and wrong.”
“It will not protect American consumers, will discourage responsible innovation, and will provide even greater advantages to incumbent banks,” Miller said in a written statement. “Custodia Bank offered a safe, federally regulated, solvent alternative to the reckless speculators and grifters that the Fed has allowed to penetrate the U.S. banking system, with disastrous results for some banks. Custodia actively sought federal regulation, going above and beyond all requirements that apply to traditional banks.”
The Kansas City Fed’s court filing did not disclose a reason for the denial. The reserve bank declined to comment on the decision Friday afternoon.
For its rejection decision, the Board of Governors cited safety and soundness concerns related to Custodia’s “untested” business model, which involves providing custody services for crypto assets and calls for the eventual creation of a stablecoin.
Custodia filed its lawsuit against the Fed in June, claiming that not only had the Kansas City Fed taken too long to review the matter, but that the Board of Governors had intervened, violating the Fed’s stated policy that regional reserve banks have sole authority over granting master accounts.
Both the Board and the Kansas City Fed have made multiple attempts to have the case against them dismissed, but the matter has survived to move to trial — a rarity for legal challenges involving the central bank.
Following a pretrial hearing earlier this month, the parties have begun the discovery process, which involves requesting and disclosing information of material importance to the suit. Disclosures were set to be made this summer, with a tentative trial date set for Nov 6.
Along with decisions from both the Kansas City Fed and Board of Governors, the Fed also issued a policy statement on Friday, requiring federally supervised state banks without federal deposit insurance to be subject to the same rules around crypto activity as those that are both insured and regulated at the federal level. The move was designed to align the supervision regimes for the Fed and the Office of the Comptroller of the Currency.
The White House also announced a “roadmap” to mitigating cryptocurrency risks, in which it directs regulatory agencies to “ramp up enforcement” and issue guidance around best practices in dealing with digital assets. It also called on Congress to empower regulators to have greater oversight of the crypto space without greenlighting greater engagement with the sector by mainstream institutions.
USAA Federal Savings Bank is once again in hot water with regulators over discriminatory practices in its auto lending unit.
The San Antonio-based bank is now the first with more than $100 billion of assets to receive low marks on consecutive Community Reinvestment Act performance exams. And, according to the report from the Office of the Comptroller of the Currency — USAA’s primary regulator — things appear to be heading in the wrong direction.
In 2019, the OCC downgraded USAA’s CRA rating from “satisfactory” to “needs to improve, ” the second-lowest grade in the system, after identifying 600 violations of laws aimed at protecting military members. In the 2022 report, the OCC noted 6,477 violations of a different statute and again issued a “needs to improve” rating.
San Antonio-based USAA Federal Savings Bank has drawn criticism from the Office of the Comptroller of the Currency in its 2022 Community Reinvestment Act examination over Unfair, Deceptive and Abusive Practices in its auto lending unit.
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“There are only 34 banks with over $100 billion [of assets], we expect all of them to be outstanding,” Kenneth H. Thomas, president of Miami-based consulting group Community Development Fund Advisors LLC, said. Outstanding is the highest grade achievable on the exam. “Satisfactory we’ll accept … but they almost never go below that. Only four banks have done that and each of those times, they’ve upgraded themselves in the next round.”
The other four large banks that have been given “needs to improve” ratings are Centennial, Colo.-based Countrywide Bank in 2008, Sioux Falls, S.D.-based Wells Fargo National Bank Association in 2012, Cincinnati-based Fifth Third Bank and Birmingham, Ala.-based Regents Bank, both in 2014, according to a digital database maintained by the Federal Financial Institutions Examination Council.
No bank that size has ever received the CRA exam’s lowest rating, substantially noncompliant, but Thomas said that might have been warranted for USAA.
“If you have the same bad results, you’ll get the same low rating, but they actually got worse. They were 10 times worse. They went from 600 violations to 6,000,” he said. “I don’t know why they did not get substantial noncompliance. That’s the absolute lowest grade and we only get a handful of those each year.”
USAA declined to comment about its CRA exam results. But in a written statement, a company spokesperson said the bank considers its latest result an improvement over its previous examination — despite its rating remaining unchanged — because it received a “high satisfactory” rating on the lending portion of the performance test, up from “low satisfactory” in 2019.
“USAA FSB received an overall CRA rating of satisfactory based on CRA performance, consistent with our commitment to the financial security of all members, including those in low-to-moderate income communities,” the spokesperson wrote. “Our overall rating was lowered due to regulatory concerns that have been addressed and were related to a product that USAA discontinued in 2020.”
The USAA spokesman declined to disclose the name of the since-discontinued product line where the violations originated, citing concerns about disclosing confidential supervisory information.
In Feb. 2020, USAA announced that it was ending its digital car buying business and severing its relationship with the online auto pricing website TrueCar, Inc.
Enacted in 1977, the CRA was designed to encourage bank investment in underserved communities. OCC-regulated banks are subject to CRA exams roughly every three years. During these reviews, the agency inspects the lending activity, investment activity and services provided by a bank to ensure they are meeting performance standards in each category.
USAA received passing grades in each of the three performance categories in the 2022 exam but still received the “needs to improve” rating because of its illegal lending practices, the OCC report notes.
Fair lending and consumer protection advocates see the unprecedented second failing grade as a sign of both the severity of USAA’s malpractice and a growing willingness for regulators to be tougher on banks.
“What is encouraging about all this is that we’ve called for the OCC and all the bank regulators to pay more attention when there are consumer protection violations,” said Adam Rust, senior policy advisor at advocacy group National Community Reinvestment Coalition. “Typically that would be the work of other agencies, but for them to consult one another is good.”
Those in and around the banking sector view the action more skeptically.
Alan Wingfield, a partner with the law firm Troutman Pepper who defends banks in consumer protection disputes, said the specific law the OCC accused USAA of violating — Section 5 of the Federal Trade Commission Act, which relates to Unfair and Deceptive Acts and Practices, or UDAAP — is open to broad interpretation.
During the Biden administration, Wingfield said, the Consumer Financial Protection Bureau has used UDAAP provision of the Dodd-Frank Act to expand its reach beyond previously assumed statutory bounds. He sees the OCC and other regulators following suit.
In USAA’s 2019 CRA report, 546 of the violations cited by the OCC were under the Servicemembers Civil Relief Act, which bars military members from being sued while on active duty overseas, and the rest were under the Military Lending Act, which establishes financial protections for servicemembers. For the 2022 report, all the violations were under UDAAP.
Wingfield said it was hard to tell how squarely the latest violations fell under UDAAP, because of the limited details disclosed in the CRA report. But he said it was something the industry is on high alert for.
“The regulators are reaching for that UDAAP power as their magic wand to be able to do whatever they want to do,” he said. “That has definitely been viewed quite negatively in the industry.”
Still, others see the issuance of a second failing grade to USAA as a sign of the statutory limitations of the CRA.
“It shows that one of the big problems with CRA is that unless a bank is trying to merge, the CRA doesn’t really have teeth,” said Todd Phillips, an independent consultant and former Federal Depository Insurance Corp. lawyer. “Going from 600 or so violations to more than 6,000 is really, really bad. But unless USAA is trying to buy another bank or open a new branch at a time when most banks are closing branches, it doesn’t really have a lot of impact on the bank’s operations.”
California’s Attorney General Rob Bonta is defending the state’s newly enacted small-business disclosure law that requires merchant cash advance lenders, factoring firms and some fintechs to divulge annual percentage rates to borrowers.
Bonta sent a letter last week to Rohit Chopra, the director of the Consumer Financial Protection Bureau, supporting the agency’s view that California’s law — which went into effect on Dec. 9 — is not preempted by the federal Truth in Lending Act.
The California law mandates that nonbanks disclose the APR, total interest and fees on financings of $500,000 or less.
Rob Bonta, California’s attorney general, is defending the state’s lending disclosure law for commercial loans in court.
Bloomberg News
Bonta submitted the letter in response to a preliminary determination by the CFPB last month that small- business disclosure laws in four states — California, New York, Utah and Virginia — do not run afoul of TILA, the seminal consumer protection law that created the current consumer disclosure regime. But TILA only governs consumer disclosures; there currently are no federal disclosure requirements for commercial loans.
State disclosure laws that protect small businesses are a relatively new concept and only California and New York require that lenders calculate and disclose key terms. The issue is further complicated by the proliferation of short-term, high-cost financing options online, made primarily by nonbanks to small-business borrowers with bad credit. As states have become more proactive in seeking to regulate small-business lending, the lenders have filed lawsuits and floated novel legal theories to gut the state laws.
Bonta wrote in the comment letter to the CFPB that California’s disclosure law “was enacted in 2018 to help small businesses navigate a complicated commercial financing market by mandating uniform disclosures of certain credit terms in a manner similar to TILA’s requirements, but for commercial transactions that are unregulated by TILA.”
He noted that the law went through four years of public notice-and-comment with extensive input from industry. Nevertheless, last month a trade group group of merchant cash advance firms sued California’s Department of Financial Protection and Innovation in what many see as a Hail Mary pass to gut the new law. The Small Business Finance Association, based in New York, sued California’s DFPI Commissioner Clothilde Hewlett alleging that the disclosure law violates nonbank lenders’ free speech rights by forcing them to describe their products to borrowers “in ways that are false and misleading,” according to the lawsuit.
“The reason for the lawsuit is there are a lot of reasons why APR disclosure doesn’t work for commercial finance products,” said Steve Denis, CEO and executive director of the Small Business Finance Association. “What’s confusing to customers is they don’t understand what APR is and with products with shorter terms it skews the calculation.”
Asset-based lenders and factoring firms allege that calculating an APR is challenging for businesses that pledge receivables for working capital. They also allege that the state disclosure laws will raise the cost of credit for short-term financing particularly one- or two-week bridge loans for commercial borrowers. Some experts also contend the state are mandating yet another disclosure regime with reams and reams of fine print that borrowers never read.
Bonta is urging the CFPB to further articulate that state laws that require more disclosures than federal law are not preempted. He also said state law should be preempted only where there is an actual conflict with federal law.
“It is vital that businesses and entrepreneurs have the information they need to understand the risks and benefits of borrowing and to have the tools available to find the solution that best meets their needs,” Bonta said in a press release.
California’s DFPI said it tailored the regulations to cover a wide range of financing, from closed-end loans to open-end credit plans, merchant cash advances, asset-based lending, lease financing and factoring transactions. When an offer of commercial financing is made, the funder must disclose the total dollar cost of the financing, and the total cost of the financing expressed as an annualized rate, which means lenders must disclose any finance charge, or estimated finance charge, the annual percentage rate, or estimated APR, depending on the specific commercial financing arrangement.
Lenders allege the regulations will require that they provide information that does not accurately describe the costs of financing. They also claim that the new law prevents lenders from giving prospective customers additional information without the risk of fines, penalties and further liability.
“The disclosures required under the Regulations, far from providing accurate information that would allow businesses to compare the terms and costs of different financing options, actually require providers to give inaccurate disclosures,” the lawsuit states.
Credit card late fees could drop dramatically under a proposal expected to be released soon by the Consumer Financial Protection Bureau. Some analysts are predicting that late fees could be cut in half to as low as $15, while consumer advocates want the CFPB to reduce late fees to as low as $9 or make them proportional to the debt owed by a cardholder.
CFPB Director Rohit Chopra launched a broad assault last year on so-called “junk fees,” and has said he specifically wants to slash the $12 billion a year in late fees charged by credit card companies. The CFPB is expected to publish a notice of proposed rulemaking this month on late fees but analysts expect the proposal will be released in February.
“Our expectation is that the CFPB will lower credit card late fees through the rulemaking process to between $15 to $25, though there are some advocates that want fees to go as low as $9,” said Ed Groshans, senior policy and research analyst at Compass Point Research & Trading.
The Consumer Financial Protection Bureau may seek to reduce the amount that banks can charge for credit card late fees. The move is the most recent effort by the bureau to set new rules on what CFPB director Rohit Chopra has called “junk fees.”
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Banks and credit card companies argue that a reduction in late fees would harm subprime and low-income consumers the most. Any reduction in late fees would force credit card issuers to increase fees on other products, reduce credit, raise annual percentage rates on all cardholders, and potentially even slash rewards and cash-back cards, bank trade groups argue.
Robert Maddox, a partner at the law firm Bradley Arant Boult Cummings, noted that most large banks cut or eliminated overdraft fees last year under pressure from the CFPB and other regulators.
“The fact that banks cut overdraft fees opened up just about every fee that is consumer-related as a possible target,” Maddox said.
Currently, banks and credit card issuers can charge $29 for the first late credit card payment and $40 for subsequent late payments within six billing cycles. Some credit card executives have said they are not worried about changes made by the CFPB because nearly all late fees currently are in compliance with the maximum amounts set by the Credit Card Accountability Responsibility and Disclosure Act, known as the CARD Act.
In its upcoming proposal, the CFPB is expected to re-examine whether Regulation Z — the implementing regulation for the CARD Act and the Truth in Lending Act — should continue to have a safe harbor provision that was created by the Federal Reserve Board in 2010. The safe harbor allows credit card companies to raise late fees annually in line with inflation. It also allows for higher late fees for second violations to deter consumers from paying late.
Chopra also has signaled that changes are coming.
“The Fed created a set of immunity provisions that has been going up [due to] inflation every year,” Chopra said at a conference last year. “We are going to be reviewing whether that number makes sense or whether there needs to be a new framework on it.”
Credit card companies are coming off three years of abnormally low levels of delinquencies and charge-off rates. Even with a recession looming, credit card delinquencies are expected to rise to 2.6% at the end of this year, up from 2.1% last year, according to a forecast released this week from the credit bureau TransUnion. The number of new credit cards opened is at its highest point in 10 years, TransUnion found.
“As we face headwinds with a potential recession, and more and more people have a significant amount of debt on their credit cards, the consumer advocates have been pushing for late fees to go down,” Maddox said.
Banks and credit card issuers say that late fees must be set at a level to cover costs, and that a penalty fee is not a hidden cost but rather is necessary to reduce the frequency of a consumer making late payments. Dan Smith, executive vice president and head of regulatory affairs at the Consumer Bankers Association, said efforts to reduce credit card late fees are misguided and would harm the very consumers with subprime credit scores that the bureau is trying to help.
“Late fees are intended to encourage responsible spending behavior and empower consumers to avoid negative impacts on their credit scores that may arise from defaults and delinquencies,” Smith said. “Eliminating or dramatically reducing the safe harbor threshold will undoubtedly affect consumers’ access to these valued products as credit card issuers would be forced to drastically alter their business models to mitigate the risks associated with increasing instances of missed payments.”
The CFPB is considering changes to the CARD Act including the safe harbor for penalty fees. Currently, credit card companies cannot impose a late payment penalty unless they have determined that the dollar amount of the fee represents “a reasonable proportion of the total costs,” incurred by the financial institution, the CFPB said in an advance notice of proposed rulemaking in June.
Groshans at Compass Point said he thinks the bureau may decide to change the language of the safe harbor to favor consumers rather than financial institutions.
“The entire industry has been operating under that safe harbor for over a decade, so don’t think the safe harbor is going away,” Groshans said. “But the risk is that the CFPB tries to change the basis of the safe harbor.
“Right now the basis [of the safe harbor] is if the fee is reasonable … relative to the cost incurred by the financial institution,” he said. “Do they try to change that to whether the fee is reasonable and proportional to the harm to the consumer? That’s a very different safe harbor and it seems like that could be feasible.”
Consumer advocates say credit card late fees disproportionately impact subprime borrowers and serve as a back-end profit center for banks and credit card companies. Advocates want late fees tailored to the amount of the debt owed by a cardholder and suggest that the CFPB include a mandatory waiting period of several days before a late fee can be assessed.
“The late fees imposed by card issuers exceed the amounts they incur in costs, especially for accounts with smaller balances and for delinquencies of short periods of time,” said Chi Chi Wu, a staff attorney at the National Consumer Law Center.
Seven consumer advocacy groups asked a federal court to dismiss a lawsuit filed by the U.S. Chamber of Commerce against the Consumer Financial Protection Bureau, arguing that discrimination in consumer financial products is pervasive.
The seven consumer groups filed an amicus brief Friday with the U.S. District Court for the Eastern District of Texas asking the court to dismiss the suit, Chamber v. CFPB. The U.S. Chamber and three bank trade groups sued the CFPB in September alleging the bureau violated the Administrative Procedure Act when it adopted a policy in March that, for the first time, claimed discrimination on the basis of age, race or sex — regardless of intent — violates the federal prohibition on “unfair, deceptive or abusive acts or practices,” known as UDAAP. The business trade groups said the change amounted to a power grab that was “arbitrary” and “capricious,” in violation of the APA.
The six advocates claim that financial institutions have a long history of preventing people of color and other marginalized populations from participating fully and fairly in the mainstream financial economy.
A coalition of consumer advocacy groups have filed an amicus brief on behalf of the Consumer Financial Protection Bureau in their legal battle against the U.S. Chamber of Commerce and bank trade groups over the bureau’s unfair, deceptive and abusive acts guidance.
Bloomberg News
“Ample evidence shows that discrimination in the financial services industry persists and may be ‘unfair’ in every sense of the word — including, most importantly, the explicit statutory test Congress established to guide the CFPB in determining whether a practice is ‘unfair,’” the consumer groups stated. “The text of the Dodd-Frank Act and commonsense understanding of the word ‘unfair’ reaffirm this truth.”
Under the new policy, the CFPB sought to look for discrimination in a wide range of noncredit financial products including deposit and checking accounts, payments, prepaid cards, remittances and debt collection practices. The amicus brief was filed by Democracy Forward, a nonprofit group, on behalf of the California Reinvestment Coalition, National Community Reinvestment Coalition, National Association for Latino Community Asset Builders, Center for Responsible Lending, Texas Appleseed, and National Consumer Law Center
The consumer advocates argue in the brief that the CFPB is empowered under Dodd-Frank to prevent unfair practices. The groups cite statistical, survey and anecdotal evidence of discrimination. Higher loan denial rates, higher interest rates, costs, and fees, and the use of racial profiling and racially-biased algorithms are among the evidence the consumer groups present that discrimination persists.
“Discrimination is unfair, and it doesn’t take a law degree to recognize that,” Rachel Fried, senior counsel at Democracy Forward, said in a press release. “As the consumer advocates’ brief makes clear, the CFPB was right to clarify that discriminatory practices can fall within Congress’ definition of an unfair practice.”
But it remains unclear whether the consumer groups’ arguments will prevail. The brief alleges that the CFPB has met its burden of proof by citing the three prints of the so-called “unfairness” test laid out in Dodd-Frank. Dodd-Frank states that a practice is unfair if it “causes or is likely to cause substantial injury to consumers;” if an injury cannot be “reasonably avoidable by consumers;” and if the practice is “not outweighed by countervailing benefits to consumers or to competition.”
Banks and financial firms reject the view that the CFPB can examine entities for alleged discriminatory conduct under UDAAP. They argued in their lawsuit that Congress declined to give the CFPB authority to enforce anti-discrimination principles except in specific circumstances. Notably, the Equal Credit Opportunity Act states that financial firms cannot discriminate against credit applicants. Moreover, industry argues that the CFPB made the change to its discrimination policies by updating its examination manual instead of going through the normal public notice-and-comment process.
When the Senate voted to confirm Martin Gruenberg to his second term as official Chairman of the Federal Deposit Insurance Corporation’s Board of Directors Monday, it was an unmitigated victory for the administration and firmed its grip on the bank regulatory apparatus.
Todd Phillips, principal at Phillips Policy Consulting and a former FDIC attorney, said Gruenberg’s appointment is an important milestone for the administration and that his tenure would settle leadership questions at the agency for years to come.
“Marty is a very smart, thoughtful regulator,” Phillips said. “It’s great that he’s going to be at the helm of the agency again for at least another five years.”
Martin Gruenberg, newly confirmed chair of the Federal Deposit Insurance Corp., will have a freer hand to pursue his policy goals, but will also be subject to the same majority-rule dynamics on the agency board that preceded former chair Jelena McWilliams’ departure in February 2022.
Bloomberg News
Partisan scuffles left Gruenberg — who has served on the FDIC board in various capacities since 2005 — serving as acting chair since February, and vacancies have left the board operating with the bare minimum number of members for that time. Gruenberg’s predecessor, Trump-appointed board Chairman Jelena Mcwilliams, resigned from the agency after Democratic board members Gruenberg, CFPB Director Rohit Chopra and acting Comptroller of the Currency Michael Hsu launched a review of bank merger policy against her wishes. Gruenberg was elevated to acting Chairman upon her resignation.
But without an official Senate appointment, Gruenberg’s place at the helm of the board was tenuous. At the same time as Gruenberg’s nomination was confirmed, the upper chamber also confirmed Republicans Jonathan McKernan and Travis Hill to fill the remaining vacancies on the board.
Under FDIC board rules, the party with control of the Senate could select their board member nominee to replace an acting chairman. Some Democrats worry future election power shifts could complicate regulatory efforts. Todd Philips also addressed the board’s lingering partisan precarity saying, “if Democrats lose in 2024, we would potentially end up with a situation where Marty is a Democratic Chair with a Republican board, and we may see a similar fight [like with that of former Chairman Mcwilliams].”
Jaret Seiberg, policy analyst for Cowen Washington Research Group agreed, saying that future elections would more explicitly dictate the direction of the agency going forward.
“[Democratic] control is likely only as long as there is a Democrat in the White House,” Sieberg said. “The CFPB director is a voting member of the FDIC. A Republican would put a new director in charge of the agency. That would then create a three-vote GOP majority. Under the precedent that Democrats set last year, the Republicans would control the agency’s agenda.”
Others see Gruenberg’s appointment as good for the FDIC, with the Chairman now able to focus less on the risk of replacement, and more on regulation itself.
Carl Tobias, Williams professor of Law at the University of Richmond, said Gruenberg’s confirmation gives him a freer hand to pursue his and the administration’s agenda.
“It’s one thing to be acting, and another thing to be the head for a pretty long time,” Tobias said. “This time he has the authority to move, and he has the majority, so it might be a good time to be in charge.”
The newly appointed chairman’s goals for the next few years remain to be seen, but given his statements and the collapse of crypto firm FTX, digital assets are sure to be targeted for more explicit regulation. In a Senate Banking Committee hearing with fellow regulators last month, Gruenberg indicated he would work closely with his fellow regulators to prevent the kind of mass market disruptions seen this year.
“Crypto-assets bring with them novel and complex risks that, like the risks associated with the innovative products in the early 2000s, are difficult to fully assess,” Gruenberg said. “As [the regulators] develop a better collective understanding of the risks associated with these activities, we expect to provide broader industry guidance on an interagency basis.”
Gruenberg also made clear his crypto concerns extend to stablecoins, a particular type of digital asset often claimed to be pegged to real-world assets like currencies, U.S. Treasury securities, or commercial paper. The chairman has noted, however, that some of the technology used for digital speculation could have utility in a more formal and regulated setting.
“The distributed ledger technology upon which [stablecoins] are built may prove to have meaningful applications and public utility within the payments system,” Gruenberg said at November’s Senate Banking hearing on regulatory oversight. “This raises a host of important policy questions that will be the subject of careful attention by all of the federal financial regulators.”
In addition to addressing cryptocurrencies, some familiar with the agencies predicted Gruenberg would pursue a stronger focus on bank merger reform and revising bankruptcy protocols.
“We believe that means the agency will tighten bank merger standards with a broader focus on how to measure competition,” Sieberg said. “This should mostly impact smaller banks, which are the bulk of whom the FDIC oversees.”
Sieberg also said that the FDIC could compel top-tier holding companies of regional banks to take greater responsibility for restructuring company debt and equity in the event of a bankruptcy.
“We continue to expect the Fed and FDIC will impose at least a version of single-point-of-entry on regional banks,” Sieberg said. “That could result in higher regional bank capital requirements.”
With Gruenberg confirmed by an enduring Democratic Senate majority, concerns about partisan struggles may be deferred for now. Democrats will control the Senate and White House for the time being, but if this year’s close election is any indication, the bank regulatory apparatus may be increasingly susceptible to political pendulum swings.
And with all five FDIC Board members seated for the first time in many years, the only acting principal at a federal banking regulator is acting Comptroller Michael Hsu. Some have speculated that Gruenberg’s confirmation could provide momentum for making Hsu’s seat official. However, the unique nature of the position makes acting comptrollers less dependent on congressional majorities.
Daniel Meade of Cadwalader, Wickersham & Taft LLP says that while President Biden has a freer hand in the next Congress to appoint a permanent head at the Office of the Comptroller of the Currency, the law also lets him make that decision more or less at the time of his choosing. ,
“While President Biden may very well nominate someone (possibly including Mr. Hsu) to be confirmed as Comptroller, the National Bank Act permits an acting Comptroller to stay at the pleasure of the Secretary of the Treasury,” Meade said.
WASHINGTON — Sens. Debbie Stabenow (D-Mich.), chairman of the Senate Agriculture Committee, and John Boozman, R-Ark., the panel’s ranking member, have scheduled a hearing on the collapse of FTX.
The hearing, set for Dec. 1, is the third announced by Congress following the unwinding of the crypto exchange. The Senate Banking Committee and House Financial Services Committee have both said they will host hearings on the issue, scheduled for an undetermined date in December.
The Senate Agriculture Committee will host Commodity Futures Trading Commission Chairman Rostin Behnam.
Sen. Debbie Stabenow, D-Mich., who chairs the Senate Agriculture Committee, announced that the committee will hold an inquiry into the demise of cryptocurrency exchange FTX next month.
Bloomberg News
The hearings come after the collapse of trading platform FTX and the dramatic downfall of its CEO Sam Bankman-Fried, a major player in Washington D.C. conversations about crypto given his large donation portfolio, especially among Democrats.
Stabenow and Boozman are also trying to salvage their bill to regulate crypto, which was backed by Bankman-Fried. It would have given the CFTC more responsibility for policing the two largest cryptocurrencies, bitcoin and ethereum.
The legislation has not been withdrawn, but the senators are looking to revisit it because of the FTX collapse.
“In light of these developments, we are taking a top-down look to ensure it establishes the necessary safeguards the digital commodities market desperately needs,” Boozman previously said in a written statement.
The Stabenow-Boozman bill represents one of several factions when it comes to regulating cryptocurrency. After the downfall of FTX, these competing groups have doubled down on their visions of what oversight into digital assets should look like.
Bankman-Fried made two appearances before the Senate Agriculture Committee earlier this year. The Agriculture Committee oversees the Commodity Futures Trading Commission, which monitors crypto exchanges. FTX is registered and licensed with the CFTC and, until last Friday, it was seeking to register its subsidiary, LedgerX, as a derivatives clearing organization.
