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Tag: Consumer banking

  • Americans paid 14% more for financial services last year: Report

    Americans paid 14% more for financial services last year: Report

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    Total fees and interest on credit cards rose 20% from 2021 to $113.1 billion last year, according to a new report from Financial Health Network.

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    Americans paid 14% more for financial services last year, according to new research, driven by rising interest rates on loans, increased borrowing and, to a lesser extent, higher fees on deposit accounts.

    Consumers spent $347 billion on interest and fees in 2022, up from $304 billion the previous year, according to a report from Financial Health Network, a nonprofit organization that focuses on improving Americans’ financial outcomes.

    Spending on credit and loan products — excluding mortgages, which were not covered in the report — rose by 15%.

    “Altogether, this paints a picture of debt that could really start to strain the checkbooks of American families,” said Meghan Greene, senior director of policy and research at Financial Health Network. “Toward the end of 2022, there were a number of signs that defaults were starting to grow, so that gives us a worrisome picture of how much debt people are carrying.”

    The signs of weakening consumer credit have continued into 2023. Delinquencies on credit cards and auto loans have reached or surpassed their pre-pandemic levels in recent months — a sign that Americans are losing the financial cushion they have enjoyed for the past few years. The return to pre-pandemic credit quality also indicates that consumers are paying their debts at a more typical pace, compared with the quick rates they had maintained until recently.

    Starting in 2020 and continuing through much of 2022, consumer credit quality was strong thanks to pandemic-era measures that helped customers keep up with their loan payments, including lenient payment time frames and government stimulus payments.

    But the Financial Health Network report highlights factors that are now stretching consumers’ wallets. Last year, total fees and interest on credit cards rose 20% from 2021 to $113.1 billion, according to the report.

    Higher interest rates drove about one-quarter of the increase, while elevated card balances accounted for the rest, according to estimates by the report’s authors.

    The findings align with other recent data that show consumers loading up their credit cards at the fastest year-over-year pace on record. Credit card balances totaled $1 trillion at the end of March, a 17% increase from a year earlier, according to the Federal Reserve Bank of New York.

    The U.S. personal savings rate, which spiked during the pandemic, fell to historical lows last year and has only slightly increased so far this year.

    The Financial Health Network found that consumers who financed used-car purchases paid about 18% more in interest and fees last year, while those who borrowed to buy new cars saw their overall costs increase by 7%.

    Out of 13 credit and loan products, 11 showed increases in total fees and interest in 2022, according to the report. Spending on unsecured installment loans and pawn loans jumped 25%. 

    The Federal Reserve hiked interest rates seven times in 2022, ending the year between 4.25 and 4.5%. The faster-than-expected increase in rates took businesses and consumers alike by surprise, leading to higher rates on products from credit cards to student loans.

    U.S. consumers also paid 4% more last year on services related to transactions and deposits, according to the Financial Health Network report. The biggest increases came in account maintenance fees, which rose by 16%, and charges for international remittances, which climbed by 10%.

    Spending related to transactions and deposits rose despite a decline in what has historically been one of the industry’s most lucrative fee categories — overdraft-related fees.

    Revenue from overdraft and nonsufficient funds fees fell by 6% to $9.9 billion, down from $10.6 billion in 2021 and an estimated $15.5 billion before the COVID-19 pandemic. Many large banks made their overdraft policies more consumer-friendly last year in the face of regulatory pressure and competition from neobanks.

    But the declines in overdraft revenue weren’t uniform across the industry.

    Banks with at least $1 billion of assets reported a 13% decline in revenue from overdraft and nonsufficient funds fees, according to a Financial Health Network analysis of call reports. Meanwhile, at banks with less than $1 billion of assets, overdraft revenue increased slightly between 2021 and 2022.

    The cost and logistical challenges associated with overhauling the systems that execute overdraft policies are holding many smaller banks back from doing so, said Hank Israel, managing director of behavioral insights at Curinos, a financial services consulting firm. He also pointed to rising interest rates, which have put pressure on banks’ margins, as a factor that may have stopped smaller banks from reducing overdraft fees.

    “They don’t have the same ability to manage pricing on deposits as rates rise, and so they’re kind of a little squeezed in order to try and address this challenge,” Israel said.

    Although overdraft fees may be smaller and charged less frequently, the same share of households reported paying them last year, 17%, as in 2021, according to the report.

    Banks are still tweaking their overdraft policies. Regions Financial, which regulators fined as recently as last year for overdraft violations, said last week that it will give customers an extra day to avoid overdraft charges.

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    Orla McCaffrey

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  • House Democrats release wave of bank reform bills

    House Democrats release wave of bank reform bills

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    WASHINGTON — House Democrats on Wednesday will release a slate of reform bills in response to the recent bank failures that triggered the worst crisis for the sector since 2008.

    Members of the House Financial Services Committee, led by ranking member Rep. Maxine Waters, D-Calif., are seeking an expansion to federal regulatory authorities and more oversight for bank executives, including clawbacks on compensation, fines and the closure of loopholes that allowed some banks to escape standards established under the 2010 Dodd-Frank Act.

    The committee has closely scrutinized the actions of the Treasury Department, the Federal Deposit Insurance Corporation, or FDIC, and other federal regulators along with executives of Silicon Valley Bank and Signature Bank leading up to and in the aftermath of the banks’ collapse.

    Waters urged committee Republicans to follow the lead of the Senate Banking Committee and work with Democrats to advance bipartisan legislation to protect the economy from future harm.

    “The failures of Silicon Valley Bank, Signature Bank, and First Republic Bank make clear that it is past time for legislation aimed at strengthening the safety and soundness of our banking system and enhancing bank executive accountability,” she said.

    Here are the bills to be considered:

    Failed Bank Executives Accountability and Consequences Act: This bill would expand regulatory authority on compensation clawbacks, fines and banning executives who contribute to a bank’s failure from future work in the industry. President Joe Biden called for these actions shortly after the FDIC took over SVB and Signature Bank in March. The bill is cosponsored by Waters and fellow Democratic Reps. Nydia Velazquez, of New York; Brad Sherman and Juan Vargas, both of California; David Scott, of Georgia; Al Green and Sylvia Garcia of Texas; Emanuel Cleaver, of Missouri; Joyce Beatty and Steven Horsford, both of Ohio; and Rashida Tlaib, of Michigan. Some Republicans have expressed support for this act, which is similar to the bipartisan bill the Senate Banking Committee is considering.

    Incentivizing Safe and Sound Banking Act: This measure would expand regulators’ authority to prohibit stock sales for executives when banks are issued cease-and-desist orders for violating the law. It would also automatically restrict stock sales by senior executives of banks that receive poor exam ratings or are out of compliance with supervisory citations. The bill would have prevented SVB bank executives from cashing out after repeated warnings by regulators, according to Democrats. It is cosponsored by Waters, Velazquez, Sherman, Green, Cleaver, Beatty, Horsford and Tlaib.

    Closing the Enhanced Prudential Standards Loophole Act: This will aim to close loopholes surrounding the Dodd-Frank Act’s enhanced prudential standards for banks that do not have a bank holding company. Neither Signature Bank nor SVB had a bank holding company before they collapsed. The bill would ensure that large banks with a size, complexity and risk equal to that of big banks with holding companies will be subject to similar enhanced capital, liquidity, stress testing, resolution planning and other related requirements. It is cosponsored by Waters, Velazquez, Sherman, Green, Cleaver, Beatty, Vargas, Garcia and Tlaib.

    H.R. 4204, Shielding Community Banks from Systemic Risk Assessments Act: This measure would permanently exempt banks with less than $5 billion in total assets from special assessments the FDIC collects when a systemic risk exception is triggered, which was done to protect depositors at Silicon Valley Bank and Signature Bank. The FDIC would be allowed to set a higher threshold while requiring a minimal impact on banks with between $5 billion and $50 billion in total assets. It is sponsored by Green.

    H.R. 4062, Chief Risk Officer Enforcement and Accountability Act: This measure would have federal regulators require large banks to have a chief risk officer. Banks would also have to notify federal and state regulators of a CRO vacancy within 24 hours and provide a hiring plan within seven days. After 60 days, if the CRO position remains vacant, the bank must notify the public and be subject to an automatic cap on asset growth until the job is filled. The bill is cosponsored by Sherman, Green, and fellow Democratic Reps. Sean Casten, of Illinois; Josh Gottheimer, of New Jersey; Ritchie Torres, of New York; and Wiley Nickel, of North Carolina.

    H.R. 3914, Failing Bank Acquisition Fairness Act: This bill would have the FDIC only consider bids from megabanks with more than 10% of total deposits if no other institutions meet the least-cost test. This would ensure smaller banks have a chance to purchase failed banks, according to Democrats. It is sponsored by Rep. Stephen Lynch, D-Mass.

    H.R. 3992, Effective Bank Regulation Act: This legislation would require regulators to expand stress testing requirements. Instead of two stress test scenarios, the bill would require five. It would also ensure that the Federal Reserve does stress tests for situations when interest rates are rising or falling. It is sponsored by Sherman.

    H.R. 4116, Systemic Risk Authority Transparency Act: This bill would require regulators and the watchdog Government Accountability Office, or GAO, to produce the same kind of post-failure reports that the Federal Reserve, FDIC and GAO did after Silicon Valley Bank’s and Signature Bank’s failure. Initial reports would be required within 60 days and comprehensive reports within 180 days. It would be applicable to any use of the systemic risk exception of the FDIC’s least cost resolution test. The bill is sponsored by Green.

    H.R. 4200, Fostering Accountability in Remuneration Fund Act of 2023, or FAIR Fund Act: The legislation would require big financial institutions to cover fines incurred after a failure and/or executive conduct through a deferred compensation pool that would be funded with a portion of senior executive compensation. The pool would get paid out between two and eight years, depending on the size of the institution. The bill is sponsored by Tlaib.

    Stopping Bonuses for Unsafe and Unsound Banking Act: This measure would freeze bonuses for executives of any large bank that doesn’t submit an acceptable remediation plan for what’s known as a Matter Requiring Immediate Attention, or MRIA, or a similar citation from bank supervisors by a regulator-set deadline. It is sponsored by Brittany Pettersen, D-Colo.

    Bank Safety Act: Large banks would be prevented from opting out of the requirement to recognize Accumulated Other Comprehensive Income, or AOCI, in regulatory capital under this bill. AOCI reflects the kind of unrealized losses in SVB’s securities portfolio. It is sponsored by Sherman.

    Correction: This story was updated to reflect that the bills are being released Wednesday.

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  • Is the NCUA really about to loosen credit union membership rules again?

    Is the NCUA really about to loosen credit union membership rules again?

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    Without strong ties between members, how are modern credit unions any different than banks — aside from not paying taxes? Congress ought to take up that question, writes Robert Flock.

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    In the decades-long march toward nationwide field of membership, the National Credit Union Administration – the regulator and deposit insurer for federal credit unions – has championed numerous policies relaxing membership regulations, making it easier for people to join credit unions. Time and again, the NCUA has advanced seemingly minor changes to these foundational rules in the name of modernization. Taken together, these modifications have accelerated the credit union industry’s rapid expansion.

    Credit unions are tax-exempt financial institutions, chartered by Congress to serve low- and moderate-income (LMI) individuals in otherwise underserved local communities. Defined fields of membership, which limit who can join a credit union to those who are meaningfully connected via some common bond, exist to ensure that credit unions remain focused on serving underserved communities.

    But as a result of the NCUA’s incremental adjustments, membership criteria has become so diluted that anyone can join a credit union, with the industry now comprising more than 136 million members across the country. One of the nation’s largest credit unions openly dismisses any idea of a membership limit by advertising “great rates for everyone.” 

    And the NCUA is at it again. 

    At first glance, the NCUA’s most recent proposed rule on chartering and field of membership appears technical and straightforward: increasing access to financial services in LMI communities by “streamlining application requirements and clarifying procedures.” However, the board extended the typical 60-day comment period to 90 days given the intricacies of the proposed changes, a glaring sign there’s more to it than meets the eye. 

    Comment letters from credit union groups spelled out their goal of eliminating field of membership entirely. One trade association noted “we consistently urge Congress to relax or eliminate these restrictions” while another “strongly encourage[d] the NCUA to embrace its principles-based philosophy and avoid unnecessarily limiting any person’s access to credit union services.” 

    Expanding access to financial services in underserved areas is laudable. Indeed, credit unions were created — and receive preferential tax and regulatory treatment — to provide services to individuals in those communities. The NCUA’s proposal, however, includes several amendments that would ultimately dilute credit union service to the local communities they are meant to serve.

    For example, the proposed rule would allow credit unions chartered to serve a specific local community to add remote workers for companies headquartered in that community to its field of membership. That might seem reasonable on its face, but in practice it means that a tax-exempt credit union chartered to meet unmet financial services needs in the city of Seattle can now focus instead on meeting the needs of Starbucks employees worldwide.

    Similarly, the proposed rule would allow credit unions to add noncontiguous rural districts to their fields of membership. Practically speaking, this new policy would enable a credit union in New Mexico to add an underserved rural district in Louisiana to its field of membership, flying in the face of the Federal Credit Union Act, which requires credit unions to maintain a “local” presence. 

    Furthermore, for credit unions seeking to enter underserved markets, this proposed rule would simplify the statement of unmet needs (SUN statement) that must be submitted. This one-page narrative describes the unmet need for financial services in the identified area supported by third-party data. In eliminating the one-page and third-party evidence requirements, the NCUA further waters down this already simple but crucial requirement to provide thoughtful analysis of the needs of the communities they seek to serve. 

    As it relates to business and marketing plans for new community charter and community charter conversion or expansion applications, the NCUA’s proposal would remove requirements that applicants outline community access to the credit union vis-à-vis parking availability, public transportation availability and a host of other elements. While these adjustments are billed as minor technical adjustments, the omission of information regarding branch structure might adversely impact disabled and elderly populations as well as those with mobility limitations. 

    The NCUA’s proposed rule on chartering and field of membership follows five other rules relaxing membership standards throughout the last several years. While each imparts only subtle changes to the overarching field of membership architecture on its own, the cumulative effect of these rules is undeniably a weakening of the standard for credit union membership and community service. The common bond used to be a central component of the credit union movement. Without strong ties between members, how are modern credit unions any different than banks — aside from not paying taxes? Congress ought to take up that question.

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    Robert Flock

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  • Banking news roundup

    Banking news roundup

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    Christopher Boswell/Christopher Boswell – stock.adob

    Cross River Bank climbs past real-time payment transaction benchmark

    Cross River Bank, a banking-as-a-service provider that makes loans through fintech lenders, announced this week that it had handled more than one million real-time payments. The Fort Lee, New Jersey, bank was an early participant in The Clearing House’s RTP rail, which it joined two years after its launch in 2017. It has since employed an Application Programming Interface backed infrastructure to process over nine-and-a-half million transactions in areas like health care, insurance, sports betting, wallet off-ramps, marketplace and real estate. The bank said it had reined in $500 million in RTP volume in May alone.—Charles Gorrivan

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    Editorial Staff

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  • Millionaires support raising Federal Deposit Insurance Corp. limits. They may be overlooking ways to access more coverage on deposits now

    Millionaires support raising Federal Deposit Insurance Corp. limits. They may be overlooking ways to access more coverage on deposits now

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    Customers outside a Silicon Valley Bank branch in Beverly Hills, California, on March 13, 2023.

    Lauren Justice | Bloomberg | Getty Images

    Most millionaires — 63% — support Congress raising FDIC coverage limits following the recent failures of Silicon Valley Bank and Signature Bank earlier this year, a new CNBC survey finds.

    The survey found the wealthiest millionaires are most supportive of raising those limits, with 67% of those with $5 million or more in assets, according to CNBC’s Millionaire Survey, which was conducted online in April.

    The survey included 764 respondents with $1 million or more in investable assets.

    Currently, the Federal Deposit Insurance Corp. insures $250,000 per depositor for each ownership category for deposits held at an insured bank.

    More from FA Playbook:

    Here’s a look at other stories impacting the financial advisor business.

    FDIC basic coverage limits were last changed in response to the financial crisis of 2008.

    That year, the standard maximum deposit insurance amount was temporarily raised to $250,000, from $100,000. Congress made that change permanent in 2010.

    Since then, the $250,000 coverage level has remained unchanged.

    The March failures of Silicon Valley Bank and Signature Bank — and early May takeover of First Republic — have prompted renewed focus on whether the FDIC’s current coverage should be updated.

    How future deposit insurance may change

    The FDIC in May released a report that outlined three options for the future of the deposit insurance system.

    That includes a first option of limited coverage, which would maintain the current structure with a “finite” deposit insurance limit across all depositors and types of accounts. This may include an increased, yet also “finite,” deposit insurance limit, the FDIC’s report states.

    Alternatively, a second reform option could usher in unlimited coverage with no limits.

    A third choice, targeted coverage, would provide different levels of deposit insurance coverage for different types of accounts, with higher coverage for business payment accounts.

    In May, FDIC Chairman Martin Gruenberg spoke positively of the third option when testifying before the Senate Banking Committee.

    “Targeted coverage for business payment accounts captures many of the financial stability benefits of expanded coverage while mitigating many of the undesirable consequences,” Gruenberg wrote in his written testimony.

    Providing higher coverage on business accounts would increase financial stability because it would help limit the risk for spillovers from uninsured deposits associated with business accounts, he noted.

    Notably, congressional action would be required for any expansion of FDIC insurance.

    How investors can boost FDIC coverage now

    Because it has been so long since the current $250,000 coverage limit has been raised, some argue it is time to lift it once again.

    “At a minimum, I would think it would be $500,000 just to deal with inflation, and I think the FDIC may need to consider that over time,” said Ted Jenkin, a certified financial planner and e CEO and founder of oXYGen Financial, a financial advisory and wealth management firm based in Atlanta.

    Jenkin, a member of the CNBC Financial Advisor Council, said that when Silicon Valley Bank collapsed, people were contacting his firm to find out the best way to maximize their FDIC insurance.

    “Most people generally speaking don’t have millions of dollars of cash in the bank,” Jenkin said.

    At a minimum, I would think it would be $500,000 just to deal with inflation.

    Ted Jenkin

    CEO of oXYGen Financial

    As of December, more than 99% of deposit accounts were under the $250,000 deposit insurance limit, according to the FDIC.

    “But in the millionaire class, there are a lot of people now that may be sitting on $1 [million], $2 [million], $3 million in the bank,” he said.

    One of the biggest mistakes people make is to open up more bank accounts with the intention of amplifying their FDIC coverage on those deposits, Jenkin said.

    Instead, they may access higher levels of coverage if they add more beneficiaries — for example, their children — to those accounts, he said.

    Millionaires are betting on higher rates and a weaker economy, CNBC survey says

    Every beneficiary added brings another $250,000 in coverage, based on today’s limits.

    But one caution is that the way bank accounts are titled will supersede your will, Jenkin said.

    Investors may also amplify the amount of insured balances by having different kinds of accounts, such as savings accounts, individual retirement accounts or trust accounts.

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  • Banking news roundup

    Banking news roundup

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    Mark Kauzlarich/Bloomberg

    Bank of America reworks leadership in investment banking unit

    Bank of America announced several leadership changes in its investment banking unit, including shifting responsibility for its global transaction services business to Mark Monaco. Monaco will assume responsibility for GTS in addition to his current role leading enterprise payments, the bank said in a memo to staff seen by Bloomberg News. Faiz Ahmad, former head of global GTS, will become co-head of global capital markets alongside Sarang Gadkari, according to the memo. “Bringing these areas more closely together supports our effort to drive these capabilities even further for our business, corporate and institutional clients in the U.S. and around the world,” the Charlotte, North Carolina-based bank said. A representative for Bank of America confirmed the contents of the memo. Ahmad, who has led GTS since 2017, will continue to report to Matthew Koder, the bank’s head of global corporate and investment banking, according to the memo. Monaco will report to Dean Athanasia, president of regional banking. — Katherine Doherty, Bloomberg News

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    Editorial Staff

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  • Regulators were right not to greenlight the TD-First Horizon merger

    Regulators were right not to greenlight the TD-First Horizon merger

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    A merger of TD Bank and First Horizon would have further consolidated a banking sector that is already too concentrated, writes Shahid Naeem, a policy analyst for the American Economic Liberties Project.

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    Last month, TD Bank and First Horizon abandoned their $13.3 billion merger after failing to receive regulatory approval for the deal. In response, Keith Noreika, a former top Trump administration bank regulator, and Bryan Hubbard, his former OCC public affairs officer, took to the pages of this publication calling the banks’ termination of their deal the result of a “broken” merger review process and saying it “needs a reboot.” The truth is, Noreika — whose former law firm has been advising TD on its First Horizon acquisition — and Hubbard are right. Our bank merger process is broken, but it’s not for the reasons they think.

    Despite their claim that our bank merger review process is broken and overly restrictive, in recent decades bank regulators have almost entirely failed to enforce our bank antitrust laws. Instead, they have overseen the drastic consolidation of their industry. The Federal Reserve, OCC and FDIC have not denied a bank merger in twenty years, despite mounting evidence that rampant bank consolidation has led to a range of competitive, consumer and economic harms. The U.S. has lost ten thousand of the banks it once had forty years ago — a 70% drop — and today the six largest bank holding companies control more assets than all others combined.

    Bank consolidation is a policy choice, not a natural outcome. Noreika knows this particularly well — as acting head of the OCC, Noreika championed the Trump administration’s financial deregulation agenda, which sparked a wave of bank mergers and is now under fire for its role in enabling today’s crisis. As this publication has noted, eight of the ten biggest bank mergers of the past decade were announced since 2019, just a year after the passage of the Trump Dodd-Frank rollbacks.

    The TD Bank merger was also particularly dangerous. TD’s own track record offered regulators an abundance of reasons to block a deal that would make the bank even bigger and more powerful. In 2020, for example, the Consumer Financial Protection Bureau ordered TD to pay $122 million in fines and restitution to 1.5 million Americans for deceptively charging consumers overdraft fees on ATM and debit card transactions. In 2021, TD settled a lawsuit alleging the bank knowingly charged multiple nonsufficient fund fees on the same transaction, and also agreed to a $12 million settlement in a lawsuit alleging it overcharged customers on ATM fees. Already this year, TD paid out a whopping $1.2 billion to settle a lawsuit alleging it knowingly aided the Stanford Financial Ponzi scheme while raking in billions of investors’ money. 

    A 2022 Capitol Forum report revealed that TD’s “aggressive sales goals and lax controls” resulted in systemic fraud and abuse directed toward its customers, as employees were driven to open fake accounts and saddle customers with unwanted services and products. TD’s behavior drew the wrath of lawmakers, as did the OCC after it was reported that the agency opted for a private reprimand to TD that ensured details about the abuses were not made public. Noreika had been acting head of the agency at the time, but his former law firm told the Capitol Forum that he was recused from decisions related to TD. Democratic lawmakers including Senate Banking Committee member Elizabeth Warren called for regulators to block any TD acquisitions until the bank addressed its behavior.

    TD also has an unsettling track record of racial disparities in its lending. Among large U.S. banks, TD denied the highest proportion of mortgage applications from Black and Latino applicants. Instead of addressing its conduct, in the two years following, TD rejected Black mortgage applicants at nearly twice its overall rate.

    Now that the deal has been called off, Noreika and Hubbard attribute the merger’s failure to a new “hostile environment” for mergers. It’s true that the Biden administration has moved to address consolidation in banking, but TD’s own poor record offered plenty to deter regulators from rushing to rubber-stamp the merger.

    Ultimately, regulators’ long-running apprehension toward approving this deal is a welcome step toward addressing dangerous consolidation in our banking system. However, the truth is that bank regulators should endeavor to swiftly and decisively block mergers that will harm competition, communities and consumers. To that end, as the DOJ and FDIC review their bank merger guidelines, they must strengthen the merger review process to account for the wide array of harms caused by bank consolidation. Only then, with more robust enforcement and better bank merger policy in place, can we turn the page on an era of lax antitrust enforcement in banking and move toward a more competitive banking sector that benefits all Americans.

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    Shahid Naeem

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  • Frank founder Charlie Javice says JPMorgan documents will exonerate her

    Frank founder Charlie Javice says JPMorgan documents will exonerate her

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    Charlie Javice was charged criminally in April in Manhattan federal court, where she faces charges including conspiracy, wire fraud affecting a financial institution and bank fraud in connection with the sale of her company to JPMorgan Chase. The bank has also filed a fraud suit against her.

    Bob Van Voris/Photographer: Bob Van Voris/Bloo

    Frank founder Charlie Javice is seeking access to JPMorgan Chase documents she says will exonerate her in the bank’s fraud suit against her, as well as in the criminal and Securities and Exchange cases she’s also facing.

    In a court filing Thursday, Javice asked the Delaware federal judge overseeing JPMorgan’s lawsuit to allow her to demand documents from the bank and firms that advised it on the $175 million acquisition of her college loan planning site.

    All three cases against Javice — by JPMorgan, Manhattan federal prosecutors and the Securities and Exchange Commission — allege that she falsified data to vastly inflate the number of Frank users during deal negotiations with the bank. 

    She has pleaded not guilty in the criminal case and is free on $2 million bond.

    Pretrial evidence-gathering in JPMorgan’s lawsuit is on hold under a law governing civil securities fraud cases. In her Thursday filing to U.S. District Judge Maryellen Noreika in Delaware, Javice said her lack of access to documents has left her unable to counter JPMorgan’s narrative of the case. 

    The bank’s “cherry-picked snippets of documents have been repeated aggressively in the press and, more tellingly, provided by JPMC to governmental authorities for use in those authorities’ investigations,” Javice said. Meanwhile, she’s faced “increasing monetary constraints and reputational damage with each passing day,” Javice added, noting that prosecutors have frozen her accounts.

    “Defendants should not be put in a position of fighting the weighty allegations against them with their hands tied behind their backs,” Javice said.

    JPMorgan sued Javice and another Frank executive, Olivier Amar, in December, alleging they used fake customer accounts to exaggerate the number of people using the Frank site, in a scheme to dupe the bank. She allegedly engaged an outside data scientist to create fake user data when Frank’s own engineering director refused to do it.

    Lawyers for Javice have called the suit “nothing but a cover” and said JPMorgan was just trying to “retrade the deal.” She is also countersuing JPMorgan.

    Javice was charged criminally in April in Manhattan federal court, where she faces charges including conspiracy, wire fraud affecting a financial institution and bank fraud. Amar was not charged. 

    She was set to make $45 million from the deal, prosecutors said.

    JPMorgan has also sought to lift the stay on document production, asking the court to give it access to Javice’s financial records. The bank said it was worried she had moved her money into accounts tied to shell companies in Nevada. 

    Javice has said the government’s freezing of her accounts negates any fears about her moving money. She said she wanted to move her money out of JPMorgan after the bank accused her fraud, though she noted that she initially transferred her funds to the ill-fated Signature Bank. 

    Javice founded Frank in 2017 as an online platform to help college students fill out the Free Application for Federal Student Aid, or Fafsa. Forbes named her to its “30 Under 30” list for finance in 2019. JPMorgan shut down the site earlier this year.

    The case is U.S. v. Javice, 23-cr-251, U.S. District Court, Southern District of New York (Manhattan).

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  • Hill Democrats urge Supreme Court to preserve CFPB’s funding structure

    Hill Democrats urge Supreme Court to preserve CFPB’s funding structure

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    The Consumer Financial Protection Bureau has appealed a Fifth Circuit Court of Appeals ruling, which found that its funding structure was unconstitutional, to the Supreme Court.

    Joshua Roberts/Bloomberg

    In a brief filed Monday with the U.S. Supreme Court, more than 140 current and former Democratic lawmakers defended the constitutionality of the Consumer Financial Protection Bureau’s funding structure.

    The legislators, who include key architects of the 2010 law that established the CFPB, urged the Supreme Court to overturn a high-stakes ruling last year by the 5th U.S. Circuit Court of Appeals. The appeals court found that the bureau’s funding, which comes from a portion of the Federal Reserve’s earnings, violates the Constitution’s separation of powers doctrine.

    In their friend-of-the-court brief, the Democratic lawmakers argued that the CFPB’s funding structure aligns with how Congress wielded its appropriations powers in the early years of the United States. That kind of originalist argument has long been popular with conservative jurists.

    The legislators wrote that it has been routine since 1789 for Congress to fund programs through assessments, fees and other agency revenues.

    “By appropriating funds on a standing basis, rather than year by year, Congress matched the CFPB’s funding structure to the approach that it had already determined effective for other financial regulators, some going back over 150 years — but imposed more constraints on the CFPB,” the Democratic lawmakers wrote.

    The brief cited four ways in which the CFPB is subject to greater constraints, or more oversight, than the Office of the Comptroller of the Currency. Like the CFPB, the OCC is not funded through the annual congressional appropriations process.

    But the CFPB, unlike the OCC, is subject to an annual dollar limit on its budget, the Democratic lawmakers noted. And CFPB regulations are subject to a potential veto by the Financial Stability Oversight Council, which is not the case for OCC regulations.

    “Congress’s long-exercised authority to structure appropriations as it sees fit to solve a wide array of national problems is as crucial now as it was at the Founding,” the Democratic lawmakers wrote.

    In February, the Supreme Court agreed to hear the CFPB’s appeal of the 5th Circuit’s ruling. The appeals court’s decision came in a case filed back in 2018 by a payday lending trade group, which sought to invalidate a CFPB rule that put restrictions on small-dollar consumer loans.

    If the Supreme Court upholds the 5th Circuit’s ruling, the CFPB could be subjected to the annual appropriations process, which can result in fluctuating budgets depending on the partisan makeup of Congress. That would be an outcome that Democratic members of Congress have long sought to avoid.

    The Democratic lawmakers who signed the court brief include Senate Majority Leader Chuck Schumer, House Minority Leader Hakeem Jeffries, Senate Banking Committee Chair Sherrod Brown and Rep. Maxine Waters, the top Democrat on the House Financial Services Committee.

    Other signers included the two namesakes of the law that created the CFPB — former Sen. Christopher Dodd and former Rep. Barney Frank.

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    Kevin Wack

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  • Use of small-dollar loans is up as inflation, credit crunch stretch wallets

    Use of small-dollar loans is up as inflation, credit crunch stretch wallets

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    While the inflation trend took a welcome turn in the latest data, many shoppers are still dealing with historically high prices and sticker shock across the economy.

    The consumer price index, a key barometer of inflation, increased 4.9% in April compared to last year, marking the smallest annual reading in two years, according to the U.S. Bureau of Labor Statistics.

    But with the CPI reading still up, and much higher than the Federal Reserve target inflation rate of 2%, many consumers won’t notice prices falling even as the rate at which they’re rising is nowhere near the increases seen last summer.

    That is adding to the overall economic fragility that many Americans are dealing with: the prices of goods and services are still high and the cost of borrowing money is getting more expensive as the Fed raises interest rates the most in decades, which comes as pandemic-era savings are being depleted.

    Those challenges are leading many consumers to turn to alternative ways to access needed capital, especially consumers that historically have been underserved by the traditional banking system.

    Helping this underserved consumer segment was the impetus of SoLo Funds, which ranked No. 50 on the 2023 CNBC Disruptor 50 list. The fintech firm acts as a peer-to-peer lending platform, letting would-be borrowers create a loan request and the terms, and put it on a marketplace where other individuals can fund those loans directly.

    More coverage of the 2023 CNBC Disruptor 50

    “Getting access to capital is incredibly important, particularly in this macro environment,” SoLo Funds co-founder and CEO Travis Holoway told CNBC’s Frank Holland on “Worldwide Exchange” on Wednesday. “More people, with inflation and just the overall cost of living increases, aren’t able to afford financial shocks, and they’re looking for access to more equitable small-dollar loans.”

    As credit and loan conditions continue to tighten, Holoway said that SoLo Funds is seeing more people come to its platform who may not have otherwise needed access to these sorts of services, which it also saw in the early periods of the pandemic.

    The company has issued over $200 million in loans and run $400 million in transaction volume. The majority, or 82%, of its members are from underserved zip codes.

    “We’ve seen over the life of our company, like when we had the government shutdowns, individuals would be using our platform who would normally not be in the market for a small-dollar loan,” he said. “What we’re seeing now is more people who need access to this emergency gap-filling capital.”

    The tough market conditions are also pushing new lenders to SoLo Funds, investors who Holoway said are “chasing that yield-generating opportunity,” which the P2P platform is providing “in a very decentralized way.”

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  • A.I. trade is leaving investors vulnerable to painful losses: Evercore

    A.I. trade is leaving investors vulnerable to painful losses: Evercore

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    The artificial intelligence trade may be leaving investors vulnerable to significant losses.

    Evercore ISI’s Julian Emanuel warns Big Tech concentration in the S&P 500 is at extreme levels.

    “The AI revolution is likely quite real, quite significant. But… these things unfold in waves. And, you get a little too much enthusiasm and the stocks sell off,” the firm’s senior managing director told CNBC’s “Fast Money” on Monday.

    In a research note out this week, Emanuel listed Microsoft, Apple, Amazon, Nvidia and Alphabet as concerns due to clustering in the names.

    “Two-thirds [of the S&P 500 are] driven by those top five names,” he told host Melissa Lee. “The public continues to be disproportionately exposed.”

    Emanuel reflected on “odd conversations” he had over the past several days with people viewing Big Tech stocks as hiding places.

    “[They] actually look at T-bills and wonder whether they’re safe. [They] look at bank deposits over $250,000 and wonder whether they’re safe and are putting money into the top five large-cap tech names,” said Emanuel. “It’s extraordinary.”

    It’s particularly concerning because the bullish activity comes as small caps are getting slammed, according to Emanuel. The Russell 2000, which has exposure to regional bank pressures, is trading closer to the October low.

    For protection against losses, Emanuel is overweight cash. He finds yields at 5% attractive and plans to put the money to work during the next market downturn. Emanuel believes it will be sparked by debt ceiling chaos and a troubled economy over the next few months.

    “You want to stay in the more defensive sectors. Interestingly enough with all of this AI talk, health care and consumer staples have outperformed since April 1,” Emanuel said. “They’re going to continue outperforming.”

    Disclaimer

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  • Big banks are bidding for troubled First Republic as FDIC deadline looms | CNN Business

    Big banks are bidding for troubled First Republic as FDIC deadline looms | CNN Business

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    New York
    CNN
     — 

    Federal regulators are holding an auction for ailing regional bank First Republic, a person familiar with the matter tells CNN.

    Final bids are due for First Republic Bank at 4 p.m. ET on Sunday, the source said.

    The Federal Deposit Insurance Corporation, the independent government agency that insures deposits for bank customers, is running the auction.

    Neither First Republic nor the FDIC were immediately available for comment.

    Shares of First Republic

    (FRC)     plunged from $122.50 on March 1 to around $3 a share as of Friday on expectations that the FDIC would step in by end of day and take control of the San Francisco-based bank, its deposits and assets. But that never happened.

    The FDIC had already done so with two other similar sized banks just last month — Silicon Valley Bank and Signature Bank — when runs on those banks by their customers left the lenders unable to cover customers’ demands for withdrawals.

    The Wall Street Journal previously reported that JPMorgan Chase and PNC Financial are among the big banks bidding on First Republic in a potential deal that would follow an FDIC seizure of the troubled regional bank.

    PNC declined to comment. JPMorgan did not respond to requests for comment.

    “We are engaged in discussions with multiple parties about our strategic options while continuing to serve our clients,” First Republic said in a statement Friday night.

    If there is a buyer for First Republic, the FDIC would likely be stuck with some money-losing assets, as was the case after it found buyers for the viable portions of SVB and Signature after it took control of those banks.

    A kind of shotgun marriage, arranged by regulators who didn’t want a significant bank to end up in the hands of the FDIC before it was sold, occurred several times during the financial crisis of 2008 that sparked the Great Recession. Notably, JPMorgan bought Bear Stearns for a fraction of its earlier value in March of 2008, and then in September bought savings and loan Washington Mutual, soon after Bank of America bought Merrill Lynch.

    The failure of Washington Mutual in 2008 was the nation’s largest bank failure ever. First Republic, which is bigger than either SVB or Signature Bank, would be the second largest.

    Soon after collapses of SVB and Signature in March, First Republic received a $30 billion lifeline in the form of deposits from a collection of the nation’s largest banks, including JPMorgan Chase

    (JPM)    , Bank of America

    (BAC)    , Wells Fargo

    (WFC)    , Citigroup

    (C)     and Truist

    (TFC)    , which came together after Treasury Secretary Janet Yellen intervened.

    The banks agreed to take the risk and work together to keep First Republic flush with the cash in the hopes it would provide confidence in the nation’s suddenly battered banking system. The banks and federal regulators all wanted to reduce the chance that customers of other banks would suddenly start withdrawing their cash.

    But while the cash allowed First Republic to make it through the last six weeks, its quarterly financial report Monday evening, with the disclosure of massive withdrawals by the end of March, spurred new concerns about its long-term viability.

    The financial report showed depositors had withdrawn about 41% of their money from the bank during the first quarter. Most of the withdrawals were from accounts with more than $250,000 in them, meaning those excess funds were not insured by the FDIC.

    Uninsured deposits at the bank fell by $100 billion during the course of the first quarter, a period during which total net deposits fell by $102 billion, not including the infusion of deposits from other banks.

    The uninsured deposits stood at 68% of its total deposits as of December 31, but only 27% of its non-bank deposits as of March 31.

    In its earnings statement, the bank said insured deposits declined moderately during the quarter and have remained stable from the end of last month through April 21.

    Banks never have all the cash on hand to cover all deposits. They instead take in deposits and use the cash to make loans or investments, such as purchasing US Treasuries. So when customers lose confidence in a bank and rush to withdrawal their money, what is known as a “run on the bank,” it can cause even an otherwise profitable bank to fail.

    First Republic’s latest earnings report showed it was still profitable in the first quarter — its net income was $269 million, down 33% from a year earlier. But it was the news on the loss of deposits that worried investors and, eventually, regulators.

    While some of those who had more than $250,000 in their First Republic accounts were likely wealthy individuals, most were likely businesses that often need that much cash just to cover daily operating costs. A company with 100 employees can easily need more than $250,000 just to cover a biweekly payroll.

    First Republic’s annual report said that as of December 31, 63% of its total deposits were from business clients, with the rest from consumers.

    First Republic started operations in 1985 with a single San Francisco branch. It is known for catering to wealthy clients in coastal states.

    It has 82 branches listed on its website, spread across eight states, in high-income communities such as Beverly Hills, Brentwood, Santa Monica and Napa Valley, California; in addition to San Francisco, Los Angeles and Silicon Valley. Outside of California, branches are in other high-income communities such as Palm Beach, Florida; Greenwich, Connecticut; Bellevue, Washington; and Jackson, Wyoming.

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  • Community groups seek investigation of KeyBank over alleged redlining

    Community groups seek investigation of KeyBank over alleged redlining

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    In response to allegations of redlining, KeyBank said it does not discriminate or make lending decisions based on customers’ race. The bank also said that it recently launched a special purpose credit program that provides affordable terms to eligible homeowners who want to refinance their mortgages.

    Joe Buglewicz/Bloomberg

    More than 80 community development and fair-lending groups are calling on federal regulators to investigate KeyBank’s mortgage lending practices for alleged redlining.

    The National Community Reinvestment Coalition is leading the groups, which are also asking regulators to downgrade the bank’s Community Reinvestment Act rating — a move that would prevent it from merging or opening new branches until it receives a higher rating on a future exam.

    The groups also want the regional bank’s regulators to examine how well it complied with commitments it made in a $16.5 billion community benefits agreement that it negotiated as part of its 2016 acquisition of First Niagara Financial Group.

    Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition, wrote in a blog post Thursday that Key’s CRA rating should be lowered based on “flagrant violations of commitments it made” as it sought approval to buy First Niagara.

    “When a bank breaks promises, the law says there are consequences, and it’s our government’s job to enforce that accountability,” Van Tol wrote.

    The groups’ demands were outlined in a March 31 letter to the Federal Reserve and the Office of the Comptroller of the Currency. The letter was made public on Thursday.

    In a November 2022 report, the National Community Reinvestment Coalition was highly critical of Key’s mortgage lending record to Black borrowers. Two months later, the community reinvestment group warned that it would take its concerns to regulators ahead of Key’s next scheduled CRA exam period, which was set to begin on April 1.

    The 2022 report, which is based on Home Mortgage Disclosure Act data, included several troubling findings. Of the nation’s 50 largest mortgage lenders, Key had the lowest percentage of mortgage originations to Black borrowers in 2021, and it ranked near the bottom in terms of the percentage of originations to minority borrowers, according to the report.

    The report accused KeyBank, which is the banking subsidiary of Cleveland-based KeyCorp, of engaging in systemic redlining by making very few home purchase loans in certain neighborhoods where the majority of the residents are Black.

    Key currently has a CRA rating of “outstanding,” the highest possible score in a four-tiered ratings system. It has received 10 consecutive “outstanding” ratings from the OCC since 1977, when the Community Reinvestment Act was enacted, a Key spokesperson said Thursday.

    KeyBank’s most recent “outstanding” rating was “the wrong call,” Van Tol wrote in the blog post.

    His group wants regulators to conduct a review of the integrity of the community development data submitted during Key’s previous CRA exam period.

    “They promised to use their merger with First Niagara to buoy the economic interests of under-resourced communities, then turned around and did the opposite in most of the cities they serve — all while passing the new profits from the merger on to shareholders and insiders,” Van Tol wrote. “Regulators have an obvious duty to act, not only for the communities KeyBank hoodwinked but also to show the industry as a whole that this kind of conduct is not okay.”

    In response, the KeyBank spokesperson pointed to a lengthy statement the bank issued back in December after the NCRC’s report was published. That statement says that KeyBank does not discriminate or make lending decisions based on customers’ race.

    “Lending decisions are applied consistently to all potential borrowers and are based on predetermined criteria in accordance with fair lending laws,” the bank said. “Any decision to deny an applicant is based solely on the financial information and data associated with the applicant.”

    The Key spokesperson also pointed Thursday to new details added to the bank’s original statement, which discussed a special purpose credit program. The new statement notes that the bank has since launched a second special purpose credit program that provides affordable terms to eligible homeowners who want to refinance their mortgages. Those loans feature fixed rates, zero origination fees and first- or second-lien options of up to $100,000.

    Since 2017, when the five-year community benefits plan commenced, Key has provided $29 billion in lending and investments in affordable housing, home lending and small business lending in low- and moderate-income communities and philanthropic endeavors, according to the bank.

    The relationship between Key and the National Community Reinvestment Coalition hasn’t always been so tense. They worked together amid Key’s acquisition of Buffalo, New York-based First Niagara to draft a community benefits agreement, and the National Community Reinvestment Coalition hailed it as a “landmark” agreement in March 2016.

    But the once-cordial relationship turned sour after the community reinvestment group began to question whether Key had fulfilled the various lending promises it made in the agreement.

    The National Reinvestment Coalition and Key had been trying to work together on an expanded $40 billion community benefits plan. But the relationship came to a halt in December when the two sides couldn’t agree on certain lending goals for people of color, Van Tol said in January. 

    Van Tol wound up resigning from KeyBank’s corporate responsibility national advisory council, and KeyBank is no longer part of the NCRC’s Bankers/Community Collaborative Council.

    KeyBank has said that it fulfilled all of the commitments it made in the original agreement.

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    Allissa Kline

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  • Silicon Valley Bank collapse renews calls to address disparities impacting entrepreneurs of color | CNN Business

    Silicon Valley Bank collapse renews calls to address disparities impacting entrepreneurs of color | CNN Business

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    CNN
     — 

    When customers at Silicon Valley Bank rushed to withdraw billions of dollars last month, venture capitalist Arlan Hamilton stepped in to help some of the founders of color who panicked about losing access to payroll funds.

    As a Black woman with nearly 10 years of business experience, Hamilton knew the options for those startup founders were limited.

    SVB had a reputation for servicing people from underrepresented communities like hers. Its failure has reignited concerns from industry experts about lending discrimination in the banking industry and the resulting disparities in capital for people of color.

    Hamilton, the 43-year-old founder and managing partner of Backstage Capital, said that when it comes to entrepreneurs of color, “we’re already in the smaller house. We already have the rickety door and the thinner walls. And so, when a tornado comes by, we’re going to get hit harder.”

    Established in 1983, the midsize California tech lender was America’s 16th largest bank at the end of 2022 before it collapsed on March 10. SVB provided banking services to nearly half of all venture-backed technology and life-sciences companies in the United States.

    Hamilton, industry experts and other investors told CNN the bank was committed to fostering a community of minority entrepreneurs and provided them with both social and financial capital.

    SVB regularly sponsored conferences and networking events for minority entrepreneurs, said Hamilton, and it was well known for funding the annual State of Black Venture Report spearheaded by BLK VC, a nonprofit organization that connects and empowers Black investors.

    “When other banks were saying no, SVB would say yes,” said Joynicole Martinez, a 25-year entrepreneur and chief advancement and innovation officer for Rising Tide Capital, a nonprofit organization founded in 2004 to connect entrepreneurs with investors and mentors.

    Martinez is also an official member of the Forbes Coaches Council, an invitation-only organization for business and career coaches. She said SVB was an invaluable resource for entrepreneurs of color and offered their clients discounted tech tools and research funding.

    Minority business owners have long faced challenges accessing capital due to discriminatory lending practices, experts say. Data from the Small Business Credit Survey, a collaboration of all 12 Federal Reserve banks, shows disparities on denial rates for bank and nonbank loans.

    In 2021, about 16% of Black-led companies acquired the total amount of business financing they sought from banks, compared to 35% of White-owned companies, the survey shows.

    “We know there’s historic, systemic, and just blatant racism that’s inherent in lending and banking. We have to start there and not tip-toe around it,” Martinez told CNN.

    Asya Bradley is an immigrant founder of multiple tech companies like Kinley, a financial services business aiming to help Black Americans build generational wealth. Following SVB’s collapse, Bradley said she joined a WhatsApp group of more than 1,000 immigrant business founders. Members of the group quickly mobilized to support one another, she said.

    Immigrant founders often don’t have Social Security numbers nor permanent addresses in the United States, Bradley said, and it was crucial to brainstorm different ways to find funding in a system that doesn’t recognize them.

    “The community was really special because a lot of these folks then were sharing different things that they had done to achieve success in terms of getting accounts in different places. They also were able to share different regional banks that have stood up and been like, ‘Hey, if you have accounts at SVB, we can help you guys,’” Bradley said.

    Many women, people of color and immigrants opt for community or regional banks like SVB, Bradley says, because they are often rejected from the “top four banks” — JPMorgan Chase, Bank of America, Wells Fargo and Citibank.

    In her case, Bradley said her gender might have been an issue when she could only open a business account at one of the “top four banks” when her brother co-signed for her.

    “The top four don’t want our business. The top four are rejecting us consistently. The top four do not give us the service that we deserve. And that’s why we’ve gone to community banks and regional banks such as SVB,” Bradley said.

    None of the top four banks provided a comment to CNN. The Financial Services Forum, an organization representing the eight largest financial institutions in the United States has said the banks have committed millions of dollars since 2020 to address economic and racial inequality.

    Last week, JPMorgan Chase CEO Jamie Dimon told CNN’s Poppy Harlow that his bank has 30% of its branches in lower-income neighborhoods as part of a $30 billion commitment to Black and Brown communities across the country.

    Wells Fargo specifically pointed to its 2022 Diversity, Equity, and Inclusion report, which discusses the bank’s recent initiatives to reach underserved communities.

    The bank partnered last year with the Black Economic Alliance to initiate the Black Entrepreneur Fund — a $50 million seed, startup, and early-stage capital fund for businesses founded or led by Black and African American entrepreneurs. And since May 2021, Wells Fargo has invested in 13 Minority Depository Institutions, fulfilling its $50 million pledge to support Black-owned banks.

    Black-owned banks work to close the lending gap and foster economic empowerment in these traditionally excluded communities, but their numbers have been dwindling over the years, and they have far fewer assets at their disposal than the top banks.

    OneUnited Bank, the largest Black-owned bank in the United States, manages a little over $650 million in assets. By comparison, JPMorgan Chase manages $3.7 trillion in assets.

    Because of these disparities, entrepreneurs also seek funding from venture capitalists. In the early 2010s, Hamilton intended to start her own tech company — but as she searched for investors, she saw that White men control nearly all venture capital dollars. That experience led her to establish Backstage Capital, a venture capital fund that invests in new companies led by underrepresented founders.

    “I said, ‘Well, instead of trying to raise money for one company, let me try to raise for a venture fund that will invest in underrepresented — and now we call them underestimated — founders who are women, people of color, and LGBTQ specifically,’ because I am all three,” Hamilton told CNN.

    Since then, Backstage Capital has amassed a portfolio of nearly 150 different companies and has made over 120 diversity investments, according to data from Crunchbase.

    But Bradley, who is also an ‘angel investor’ of minority-owned businesses, said she remains “really hopeful” that community banks, regional banks and fintechs “will all stand up and say, ‘Hey, we are not going to let the good work of SVB go to waste.’”

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  • IMF: Banking crisis boosts risks and dims outlook for world economy | CNN Business

    IMF: Banking crisis boosts risks and dims outlook for world economy | CNN Business

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    London
    CNN
     — 

    At the start of the year, economists and corporate leaders expressed optimism that global economic growth might not slow down as much as they had feared. Positive developments included China’s reopening, signs of resilience in Europe and falling energy prices.

    But a crisis in the banking sector that emerged last month has changed the calculus. The International Monetary Fund downgraded its forecasts for the global economy Tuesday, noting “the recent increase in financial market volatility.”

    The IMF now expects economic growth to slow from 3.4% in 2022 to 2.8% in 2023. Its estimate in January had been for 2.9% growth this year.

    “Uncertainty is high, and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled,” the organization said in its latest report.

    Fears about the economic outlook have increased following the failures in March of Silicon Valley Bank and Signature Bank, two regional US lenders, and the loss of confidence in the much-larger Credit Suisse

    (CS)    , which was sold to rival UBS in a government-backed rescue deal.

    Already, the global economy was grappling with the consequences of high and persistent inflation, the rapid rise in interest rates to fight it, elevated debt levels and Russia’s war in Ukraine.

    Now, concerns about the health of the banking industry join the list.

    “These forces are now overlaid by, and interacting with, new financial stability concerns,” the IMF said, noting that policymakers trying to tame inflation while averting a “hard landing,” or a painful recession, “may face difficult trade-offs.”

    Global inflation, which the IMF said was proving “much stickier than anticipated,” is expected to fall from 8.7% in 2022 to 7% this year and to 4.9% in 2024.

    Investors are looking for additional pockets of vulnerability in the financial sector. Meanwhile, lenders may turn more conservative to preserve cash they may need to deal with an unpredictable environment.

    That would make it harder for businesses and households to access loans, weighing on economic output over time.

    “Financial conditions have tightened, which is likely to entail lower lending and activity if they persist,” said the IMF, which hosts its spring meeting alongside the World Bank this week.

    If another shock to the world’s financial system results in a “sharp” deterioration in financial conditions, global growth could slow to 1% this year, the IMF warned. That would mean “near-stagnant income per capita.” The group put the probably of this happening at about 15%.

    The IMF acknowledged forecasting was difficult in this climate. The “fog around the world economic outlook has thickened,” it said.

    And it warned that weak growth would likely persist for years. Looking ahead to 2028, global growth is estimated at 3%, the lowest medium-term forecast since 1990.

    The IMF said this sluggishness was attributable in part to scarring from the pandemic, aging workforces and geopolitical fragmentation, pointing to Britain’s decision to leave the European Union, economic tensions between the United States and China and Russia’s invasion of Ukraine.

    Interest rates in advanced economies are likely to revert to their pre-pandemic levels once the current spell of high inflation has passed, the IMF also said.

    The body’s forecast for global growth this year is now closer to that of the World Bank. David Malpass, the outgoing World Bank president, told reporters Monday that the group now saw a 2% expansion in output in 2023, up from 1.7% predicted in January, Reuters has reported.

    In a separate report published Tuesday, the IMF said that while the rapid increase in interest rates was straining banks and other financial firms, there were fundamental differences from the 2008 global financial crisis.

    Banks now have much more capital to be able to withstand shocks. They also have curbed risky lending due to stricter regulations.

    Instead, the IMF pointed to similarities between the latest banking turmoil and the US savings and loan crisis in the 1980s, when trouble at smaller institutions hurt confidence in the broader financial system.

    So far, investors are “pricing a fairly optimistic scenario,” the IMF noted in a blog based on the report, adding that access to credit was actually greater now than it had been in October.

    “While market participants see recession probabilities as high, they also expect the depth of the recession to be modest,” the IMF said.

    Yet those expectations could be quickly upended. If inflation rises further, for example, investors could judge that interest rates will stay higher for longer, the group wrote in the blog.

    “Stresses could then reemerge in the financial system,” it noted.

    That bolsters the need for decisive action by policymakers, the IMF said. It called for gaps in supervision and regulation to “be addressed at once,” citing the need in many countries for stronger plans to wind down failed banks and for improvements to deposit insurance programs.

    — Olesya Dmitracova contributed to this report.

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  • Who will end up paying for the banking crisis: You | CNN Business

    Who will end up paying for the banking crisis: You | CNN Business

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    A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.


    New York
    CNN
     — 

    It cost the Federal Deposit Insurance Corporation about $23 billion to clean up the mess that Silicon Valley Bank and Signature Bank left in the wake of their collapses earlier this month.

    Now, as the dust clears and the US banking system steadies, the FDIC needs to figure out where to send its invoice. While regional and mid-sized banks are behind the recent turmoil, it appears that large banks may be footing the bill.

    Ultimately, that means higher fees for bank customers and lower rates on their savings accounts.

    What’s happening: The FDIC maintains a $128 billion deposit insurance fund to insure bank deposits and protect depositors. That fund is typically supplied by quarterly payments from insured banks in the United States. But when a big, expensive event happens — like the FDIC making uninsured customers whole at Silicon Valley Bank — the agency is able to assess a special charge on the banking industry to recover the cost.

    The law also gives the FDIC the authority to decide which banks shoulder the brunt of that assessment fee. FDIC Chairman Martin Gruenberg said this week that he plans to make the details of the latest assessment public in May. He has also hinted that he would protect community banks from having to shell out too much money.

    The fees that the FDIC assesses on banks tend to vary. Historically, they were fixed, but 2010’s Dodd-Frank act required that the agency needed to consider the size of a bank when setting rates. It also takes into consideration the “economic conditions, the effects on the industry, and such other factors as the FDIC deems appropriate and relevant,” according to Gruenberg.

    On Tuesday and Wednesday, members of the Senate Banking Committee and the House Financial Services Committee grilled Gruenberg about his plans to charge banks for the damage done by SVB and others, and repeatedly implored him to leave small banks alone.

    Gruenberg appeared receptive.

    “Will you commit to using your authority…to establish separate risk-based assessment systems for large and small members of the Deposit Insurance Fund so that these well-managed banks don’t have to bail out Silicon Valley Bank?” asked the US Rep. Andy Barr, a Republican who represents of Kentucky’s 6th district.

    “I’m certainly willing to consider that,” replied Gruenberg.

    “if smaller community banks in Texas will be left responsible for bailing out the failed banks in California and New York?” asked US Rep. Roger Williams, a Republican who represents Texas’ 25th district.

    “Let me just say, without forecasting what our board is going to vote, we’re going to be keenly sensitive to the impact on community banks,” replied Gruenberg.

    Representatives Frank Lucas, John Rose, Ayanna Pressley, Dan Meuser, Nikema Williams, Zach Nunn and Andy Ogles all asked similar questions and received similar responses. As did US Sens. Sherrod Brown and Cynthia Lummis.

    “I don’t doubt he’s still fielding a lot of phone calls,” from politicians pressuring him to place the burden on large banks, former FDIC chairman Bill Isaac told CNN.

    Smaller banks are saying that they’re unable to pick up this tab and didn’t have anything to do with the failure of “these two wild and crazy banks,” said Isaac. “They’re arguing to put the assessment on larger banks and as I understand it, the FDIC is thinking seriously about it,” he added.

    A spokesperson from the FDIC told CNN that the agency “will issue in May 2023 a proposed rulemaking for the special assessment for public comment.” In regard to Greunberg’s testimony they added that “when the boss says something, we defer to the boss.”

    Big banks: “We need to think hard about liquidity risk and concentrations of uninsured deposits and how that’s evaluated in terms of deposit insurance assessments,” said Gruenberg to the Senate Banking Committee, indicating that smaller banks that are operating carefully could be asked to bear less of the assessment.

    A larger assessment on big banks would add to what will already be a multi-billion dollar payment from the nation’s largest banks like JPMorgan Chase

    (JPM)    , Citigroup

    (C)    , Bank of America

    (BAC)     and Wells Fargo

    (WFC)    .

    The argument is that the largest US banks will be able to shoulder extra payments without collapsing under it. Those large banks also benefited greatly from the collapse of SVB and Signature Bank as wary customers sought safety by moving billions of dollars worth of money to big banks. 

    Passing it on: Regardless of who’s charged, the fees will eventually get passed on to bank customers in the end, said Isaac. “It’s going to be passed on to all customers. I have no doubts that banks will make up for these extra costs in their pricing — higher fees for services, higher prices for loans and less compensation for deposits.”

    It’s hard out there for a Wall Street banker. Or harder than it was.

    The average annual Wall Street bonus fell to $176,700 last year, a 26% drop from the previous year’s average of $240,400, according to estimates released Thursday by New York State Comptroller Thomas DiNapoli.

    While that’s a big decrease, the 2022 bonus figure is still more than twice the median annual income for US households, reports CNN’s Jeanne Sahadi.

    All in, Wall Street firms had a $33.7 billion bonus pool for 2022, which is 21% smaller than the previous year’s record of $42.7 billion — and the largest drop since the Great Recession.

    For New York City and New York State coffers, bonus season means a welcome infusion of revenue, since employees in the securities industry make up 5% of private sector employees in NYC and their pay accounts for 22% of the city’s private sector wages. In 2021, Wall Street was estimated to be responsible for 16% of all economic activity in the city.

    DiNapoli’s office projects the lower bonuses will bring in $457 million less in state income tax revenue and $208 million less for the city compared to the year before.

    Beleaguered retailed Bed Bath & Beyond will attempt to $300 million of its stock to repay creditors and fund its business as it struggles to avoid bankruptcy, reports CNN’s Nathaniel Meyersohn.

    If it’s not able to raise sufficient money from the offering, the home furnishings giant said Thursday it expects to “likely file for bankruptcy.”

    Bed Bath & Beyond was able to initially avoid bankruptcy in February by completing a complex stock offering that gave it both an immediate injection of cash and a pledge for more funding in the future to pay down its debt. That offering was backed by private equity group Hudson Bay Capital.

    But on Thursday, Bed Bath & Beyond said it was terminating the deal with Hudson Bay Capital for future funding and is turning to the public market.

    Shares of Bed Bath & Beyond dropped more than 26% Thursday. The stock was trading around 60 cents a share.

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  • Too big for Switzerland? Credit Suisse rescue creates bank twice the size of the economy | CNN Business

    Too big for Switzerland? Credit Suisse rescue creates bank twice the size of the economy | CNN Business

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    London
    CNN
     — 

    The last-minute rescue of Credit Suisse may have prevented the current banking crisis from exploding, but it’s a raw deal for Switzerland.

    Worries that Credit Suisse’s downfall would spark a broader banking meltdown left Swiss regulators with few good options. A tie-up with its larger rival, UBS

    (UBS)    , offered the best chance of restoring stability in the banking sector globally and in Switzerland, and protecting the Swiss economy in the near term.

    But it leaves Switzerland exposed to a single massive financial institution, even as there is still huge uncertainty over how successful the mega merger will prove to be.

    “One of the most established facts in academic research is that bank mergers hardly ever work,” said Arturo Bris, a professor of finance at Swiss business school IMD.

    There are also concerns that the deal will lead to huge job losses in Switzerland and weaken competition in the country’s vital financial sector, which overall employs more than 5% of the national workforce, or nearly 212,000 people.

    Taxpayers, meanwhile, are now on the hook for up to 9 billions Swiss francs ($9.8 billion) of future potential losses at UBS arising from certain Credit Suisse assets, provided those losses exceed 5 billion francs ($5.4 billion). The state has also explicitly guaranteed a 100 billion Swiss franc ($109 billion) lifeline to UBS, should it need it, although that would be repayable.

    Switzerland’s Social Democratic party has already called for an investigation into what went wrong at Credit Suisse, arguing that the newly created “super-megabank” increases risks for the Swiss economy.

    The demise of one of Switzerland’s oldest institutions has come as a shock to many of its citizens. Credit Suisse is “part of Switzerland’s identity,” said Hans Gersbach, a professor of macroeconomics at ETH university in Zurich. The bank “has been instrumental in the development of modern Switzerland.”

    Its collapse has also tainted Switzerland’s reputation as a safe and stable global financial center, particularly after the government effectively stripped shareholders of voting rights to get the deal done.

    Swiss authorities also wiped out some bondholders ahead of shareholders, upending the traditional hierarchy of losses in a bank failure and dealing another blow to the country’s reputation among investors.

    “The repercussions for Switzerland are terrible,” said Bris of IMD. “For a start, the reputation of Switzerland has been damaged forever.”

    That will benefit other wealth management centers, including Singapore, he told CNN. Singaporeans are “celebrating… because there is going to be a huge inflow of funds into other wealth management jurisdictions.”

    At roughly $1.7 trillion, the combined assets of the new entity amount to double the size of Switzerland’s annual economic output. By deposits and loans to Swiss customers, UBS will now be bigger than the next two local banks combined.

    With a roughly 30% market share in Swiss banking, “we see too much concentration risk and market share control,” JPMorgan analysts wrote in a note last week before the deal was done. They suggested that the combined entity would need to exit or IPO some businesses.

    The problem with having one single large bank in a small economy is that if it faces a bank run or needs a bailout — which UBS did during the 2008 crisis — the government’s financial firepower may be insufficient.

    At 333 billion francs ($363 billion), local deposits in the new entity equal 45% of GDP — an enormous amount even for a country with healthy public finances and low levels of debt.

    On the other hand, UBS is in a much stronger financial position than it was during the 2008 crisis and it will be required to build up an even bigger financial buffer as a result of the deal. The Swiss financial regulator, FINMA, has said it will “very closely monitor the transaction and compliance with all requirements under supervisory law.”

    UBS chairman Colm Kelleher underscored the health of UBS’s balance sheet Sunday at a press conference on the deal. “Having been chief financial officer [at Morgan Stanley] during the last global financial crisis, I’m well aware of the importance of a solid balance sheet. UBS will remain rock-solid,” he said.

    Kelleher added that UBS would trim Credit Suisse’s investment bank “and align it with our conservative risk culture.”

    Andrew Kenningham, chief Europe economist at Capital Economics, said “the question of market concentration in Switzerland is something to address in future.” “30% [market share] is higher than you might ideally want but not so high that it’s a major problem.”

    The deal has “surgically removed the most worrying part of [Switzerland’s] banking system,” leaving it stronger, Kenningham added.

    The deal will have an adverse affect on jobs, though, likely adding to the 9,000 cuts that Credit Suisse already announced as part of an earlier turnaround plan.

    For Switzerland, the threat is acute. The two banks collectively employ more than 37,000 people in the country, about 18% of the financial sector’s workforce, and there is bound to be overlap.

    “The Credit Suisse branch in the city where I live is right in front of UBS’s, meaning one of the two will certainly close,” Bris of IMD wrote in a note Monday.

    In a call with analysts Sunday night, UBS CEO Ralph Hamers said the bank would try to remove 8 billion francs ($8.9 billion) of costs a year by 2027, 6 billion francs ($6.5 billion) of which would come from reducing staff numbers.

    “We are clearly cognizant of Swiss societal and economic factors. We will be considerate employers, but we need to do this in a rational way,” Kelleher told reporters.

    The Credit Suisse headquarters in Zurich

    Not only does the deal, done in a hurry, fail to protect jobs in Switzerland, but it contains no special provisions on competition issues.

    UBS now has “quasi-monopoly power,” which could increase the cost of banking services in the country, according to Bris.

    Although Switzerland has dozens of smaller regional and savings banks, including 24 cantonal banks, UBS is now an even more dominant player. “Everything they do… will influence the market,” said Gersbach of ETH.

    Credit Suisse’s Swiss banking arm, arguably its crown jewel, could have been subject to a future sale as part of the terms of the deal, he added.

    A spinoff of the domestic bank now looks unlikely, however, after UBS made clear that it intended to hold onto it. “The Credit Suisse Swiss bank is a fine asset that we are very determined to keep,” Kelleher said Sunday.

    At $3.25 billion, UBS got Credit Suisse for 60% less than the bank was worth when markets closed two days prior. Whether that ultimately turns out to be a steal remains to be seen. Large mergers are notoriously fraught with risk and often don’t deliver the promised returns to shareholders.

    UBS argues that by expanding its global wealth and asset management franchise, the deal will drive long-term shareholder value. “UBS’s strength and our familiarity with Credit Suisse’s business puts us in a unique position to execute this integration efficiently and effectively,” Kelleher said. UBS expects the deal to increase its profit by 2027.

    The transaction is expected to close in the coming months, but fully integrating the two institutions will take three to five years, according to Phillip Straley, the president of data analytics company FNA. “There’s a huge amount of integration risk,” he said.

    Moody’s on Tuesday affirmed its credit ratings on UBS but changed the outlook on some of its debt from stable to negative, judging that the “complexity, extent and duration of the integration” posed risks to the bank.

    It pointed to challenges retaining key Credit Suisse staff, minimizing the loss of overlapping clients in Switzerland and unifying the cultures of “two somewhat different organizations.”

    According to Kenningham of Capital Economics, the “track record of shotgun marriages in the banking sector is mixed.”

    “Some, such as the 1995 purchase of Barings by ING, have proved long-lasting. But others, including several during the global financial crisis, soon brought into question the viability of the acquiring bank, while others have proven very difficult to implement.”

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  • Biden White House closely watching Federal Reserve following bank failures | CNN Politics

    Biden White House closely watching Federal Reserve following bank failures | CNN Politics

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    CNN
     — 

    All eyes are trained on the Federal Reserve as it prepares to announce another potential interest rate hike Wednesday afternoon – exactly 10 days after the Biden administration stepped in with dramatic emergency actions to contain the fallout from two bank failures.

    Biden White House officials will be closely watching the highly anticipated rate decision – and monitoring every word of Fed Chairman Jerome Powell’s public comments – for any telling clues on how the central bank is processing what has emerged one of the most urgent economic crises of Joe Biden’s presidency.

    The moment creates a complex, if carefully observed, dynamic for the administration’s top economic officials who have spent much of the last two weeks engaged in regular discussions and consultations with Powell and Fed officials as they’ve navigated rapid and acute risks to the banking system.

    The Fed’s central role in not only supervising US banks and the stability of the financial system, but also in serving as a liquidity backstop in moments of systemic risk, has once again thrust the central bank back to center stage in the government’s effort to stabilize rattled markets.

    But Biden has made the central bank’s independence on monetary policy an unequivocal commitment – and has repeatedly underscored that he has confidence in the Fed’s central role in navigating inflation that has weighed on the US economy for more than a year and remained stubbornly persistent.

    Even as some congressional Democrats have directed fire at Powell for the rapid increase in interest rates and the risks the effort poses to a robust post-pandemic economic recovery, White House officials have taken pains not to shed light on their views publicly.

    Officials stress nothing in the last week has changed that mandate from Biden – and note that the widespread uncertainty about what action the Fed will take on rates only serves to underscore that reality.

    It’s a reality that comes at a uniquely inopportune time for a banking system that has shown clear signs of stabilizing in the last several days, but is still facing a level of anxiety among market participants and depositors about the durability of that shift.

    “I do believe we have a very strong and resilient banking system and all of us need to shore up the confidence of depositors that that’s the case,” Treasury Secretary Janet Yellen said during remarks Tuesday in Washington.

    Yellen said a new emergency lending facility launched by the Fed, along with its existing discount window, are “working as intended to provide liquidity to the banking system.”

    But prior to the closures of Silicon Valley Bank and Signature Bank, analysts had widely predicted that the Fed would unveil a half-point rate hike. But after the sudden collapse of the two banks that sent shockwaves across the global economy, there has been a growing belief among Wall Street analysts that the central bank will pull back, and only raise rates by a quarter-point – in part to try to alleviate concerns that the Fed’s historically aggressive rate hikes over the past year were precisely to blame for this month’s financial turmoil.

    But there are also concerns that a dramatic pullback, like choosing to forgo any rate increases altogether until a later meeting, would bring its own risks of signaling to the market that there are deeper systemic problems.

    It’s a conundrum top Fed officials started grappling with in the first of their two-day Federal Open Market Committee meeting on Tuesday. How they choose to navigate the path ahead will remain behind closed doors until their policy statement is released Wednesday afternoon.

    Powell is scheduled to speak to reporters shortly after.

    For officials inside the Biden White House, Wednesday is poised to offer critical insight into how the central bank is grappling with its urgent priority of bringing down inflation, while at the same time, minimizing the risk of additional dominoes falling in the US banking sector.

    Those two imperatives – bringing prices down and maintaining stability across the US financial sector – are urgent priorities for the Biden White House, particularly as the president moves closer to a widely expected reelection announcement and the health of the economy remains the top issue for voters.

    Yet the Fed’s decision will come at a moment of accelerating political pressure on the Fed itself – and Powell specifically.

    Massachusetts Democratic Sen. Elizabeth Warren, a member of the Senate Banking Committee, slammed Powell, saying he has failed at two of his main jobs, citing raising interest rates and his support of bank deregulation.

    “I opposed Chair Powell for his initial nomination, but his re-nomination. I opposed him because of his views on regulation and what he was doing to weaken regulation, but I think he’s failing in both jobs, both as oversight manager of these big banks which is his job and also what he’s doing with inflation,” Warren said on NBC’s “Meet the Press.”

    White House officials have made clear – with no hesitation – that Biden’s long-stated confidence in Powell is unchanged. Powell, who was confirmed for his second four-year term as Fed chair last year, announced last week that the Fed would launch a review into the failure of Silicon Valley Bank.

    Treasury and Fed officials, along with counterparts at other federal regulators and their international counterparts, have continued regular discussions this week as they’ve monitored the system in the wake of the weekend collapse, and eventual sale, of European banking giant Credit Suisse.

    US officials viewed the Credit Suisse collapse as unrelated to the crisis that took down the US banks a weekend prior, although they acknowledged it posed broader risks tied to confidence, or the potential lack thereof, in the system.

    In recent days, White House officials have begun to cautiously suggest that they see signs of the US economy stabilizing, following the turbulent aftermath of the closures of Silicon Valley Bank and Signature Bank. Biden, for his part, has credited the sweeping steps his administration announced – namely, the backstopping of all depositors’ funds held at the two institutions and the creation of an emergency lending program by the Federal Reserve – as having prevented a broader financial meltdown.

    He has also called on US regulators and lawmakers to strengthen financial regulations, though it is not yet clear what specific actions the president may ultimately throw his weight behind.

    Press secretary Karine Jean-Pierre declined to comment Tuesday afternoon at the White House press briefing on how she and other officials were watching the Fed’s upcoming decision.

    “The Fed is indeed independent. We want to give them the space to make those monetary decisions and I don’t want to get ahead of that,” Jean-Pierre said. “I don’t even want to give any thoughts to what Jerome Powell might say tomorrow.”

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  • Deal to put ex-Wells Fargo executive behind bars sends tough message

    Deal to put ex-Wells Fargo executive behind bars sends tough message

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    Carrie Tolstedt, who left Wells Fargo in 2016, is scheduled to make her initial appearance in federal court in Los Angeles on April 7. Her plea agreement with federal prosecutors has yet to be approved by U.S. District Judge Josephine Staton.

    LOUIS LANZANO/Bloomberg

    For six years, federal prosecutors investigated the Wells Fargo phony-accounts scandal amid a drumbeat of criticism. No big-bank executives went to prison following the 2008 financial crisis, and it didn’t appear that pattern would change anytime soon.

    But last week, the U.S. Attorney’s Office in Los Angeles made an unexpected announcement. Carrie Tolstedt, Wells Fargo’s longtime former head of retail banking, agreed to plead guilty to a single felony charge of obstructing a bank examination. The deal calls for a 16-month prison term.

    The plea agreement was a victory for Attorney General Merrick Garland and Deputy Attorney General Lisa Monaco, who have emphasized the principle of individual accountability in corporate enforcement cases. It was also a win for bank regulators, signaling to industry executives that there can be severe consequences for misleading bank regulators.

    “This is a stern, stern warning to every senior bank person who could be producing material that the examiners eventually rely on,” said a former Wells Fargo executive who spoke on condition of anonymity.

    The criminal case against Tolstedt is part of a coordinated set of actions by multiple federal agencies in response to the fake-accounts scandal.

    The Office of the Comptroller of the Currency announced last week that Tolstedt agreed to pay a $17 million fine and accepted a ban from the banking industry in order to resolve civil charges. And the Securities and Exchange Commission said that it has reached a tentative settlement with Tolstedt on separate civil charges.

    “The case filed by the Justice Department — as well as the related administrative action by the OCC and the pending civil lawsuit by the SEC — should put bank executives on notice that obstruction and fraudulent conduct very well may result in a criminal prosecution,” Thom Mrozek, a spokesperson for the U.S. Attorney’s Office in Los Angeles, said in an email.

    When asked why the case has taken six years to investigate, Mrozek said: “This was an extremely complex investigation, and the plea agreement is the result of extensive negotiations between the parties.”

    Tolstedt, who left Wells Fargo in 2016, is scheduled to make her initial appearance in federal court in Los Angeles on April 7. Her lawyer, Enu Mainigi, did not respond to a request for comment.

    The plea agreement has yet to be approved by U.S. District Judge Josephine Staton. She could impose a sentence that is either shorter or longer than the agreed-upon 16 months, though in the latter scenario Tolstedt could withdraw from the plea agreement, according to Mrozek. The federal sentencing guidelines call for a range of 10-16 months behind bars.

    The obstruction charge that Tolstedt faces stems from a memo that she and other Wells Fargo executives prepared for the risk committee of the bank’s board of directors in May 2015. Even though the memo was written for a board committee, Tolstedt knew that it would also be provided to the OCC, according to the plea agreement.

    Just two weeks earlier, the Los Angeles City Attorney’s Office had sued the San Francisco bank, alleging that Wells employees engaged in fraudulent conduct in order to meet unrealistic sales quotas.

    The May 2015 memo failed to disclose that an average of at least 1,000 employees per year were either fired or resigned pending investigation in connection with sales abuses, according to the plea agreement. It also omitted the fact that only a very small percentage of the employees whose activity constituted potential sales misconduct were investigated under the bank’s monitoring standard, the plea agreement states.

    Previously filed documents in civil litigation brought by the OCC provide more detail about the contents of the May 2015 memo. For example, the memo failed to state that 1% of employees were terminated annually, even though that figure was contained in prior drafts, according to a report by an OCC examiner in 2020.

    And the May 2015 memo misleadingly stated that there had been a “dramatic reduction in inappropriate practices in the past year” — without noting that assertion stemmed from a time when Wells Fargo paused monitoring for at least seven months — according to the same OCC report.

    Former Wells Fargo CEO John Stumpf has testified that the memo was misleading. In 2020, Stumpf agreed to pay a $17.5 million fine and a ban from the banking industry in connection with his own role in the fake-accounts scandal.

    Samuel Buell, a Duke University law professor who focuses on corporate crime, said that prosecutors often bring obstruction charges when they are unable to establish that the underlying conduct was criminal.

    But he also said that the type of obstruction to which Tolstedt has agreed to plead guilty — involving efforts to obscure misconduct before a criminal investigation gets opened — is considered more serious than obstruction at a later stage.

    “It sounds like someone who had an awareness that there was a serious underlying problem before there was law enforcement scrutiny and tried to cover it up,” Buell said.

    Obstructing a bank examination is a rarely filed charge, which carries a statutory maximum of five years in prison.

    When the charge has been brought in the past, the defendant has typically been a senior executive at a community bank, according to David Weber, a former enforcement official at the OCC, the SEC and the Federal Deposit Insurance Corp.

    Weber speculated that there may be a specific document or witness that made Tolstedt’s lawyer feel that accepting 16 months in prison was preferable to the risk of taking the case to trial.

    If the case had gone to trial, prosecutors would have had to prove beyond a reasonable doubt that Tolstedt acted “corruptly” in obstructing the examination, which is a high bar for the prosecution to meet.

    Weber said that prosecutors might have been able to charge Tolstedt with making a false entry in the books of a bank, which carries a statutory maximum of 30 years in prison, for the same underlying conduct. That possibility could have motivated Tolstedt to plead guilty to a charge that carries a lesser maximum sentence, he said.

    “My Occam’s razor theory is that they were afraid of a maximum 30-year sentence,” said Weber, who is currently a professor teaching forensic accounting at Salisbury University’s Perdue School of Business.

    Weber said that while Tolstedt would not have been sentenced to 30 years in prison if convicted for making a false entry in the books of a book, the sentence likely would have been more than 16 months.

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  • What are AT1 bonds and why are Credit Suisse’s now worthless? | CNN Business

    What are AT1 bonds and why are Credit Suisse’s now worthless? | CNN Business

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    London
    CNN
     — 

    Investors in a riskier type of Credit Suisse’s bonds had the value of their holdings slashed to zero Sunday after Swiss authorities brokered an emergency takeover of the bank by rival UBS.

    On Sunday, the Swiss National Bank (SNB) announced that UBS would buy Credit Suisse for 3 billion Swiss francs ($3.25 billion) — or about 60% less than the bank was worth when markets closed on Friday. Credit Suisse shareholders will be largely wiped out, receiving the equivalent of just 0.76 Swiss francs in UBS shares for stock that was worth 1.86 Swiss francs on Friday.

    But it is the owners of Credit Suisse’s $17 billion worth of “additional tier one” (AT1) bonds who have been left fully in the cold. Swiss authorities said those bondholders would receive absolutely nothing. The move is at odds with the usual hierarchy of losses when a bank fails, with shareholders typically the last in line for any kind of payout.

    “The extraordinary government support will trigger a complete write-down of the nominal value of all AT1 shares of Credit Suisse in the amount of around 16 billion [Swiss francs],” the Swiss Financial Market Supervisory Authority said in a statement Sunday.

    David Benamou, chief investment officer at Axiom Alternative Investments, a French wealth management firm with exposure to AT1 bonds, called the decision “quite surprising, not to say … shocking.”

    The European market for such bonds is worth about $250 billion, according to the Financial Times. It could now go into a deep freeze.

    AT1 bonds are also known as “contingent convertibles,” or “CoCos”. They were created in the wake of the 2008 financial crisis as a way for failing banks to absorb losses, making a taxpayer-funded bailout less likely.

    They are a risky bet — if a lender gets into trouble, this class of bonds can be quickly converted into equity, or written down completely.

    Because they are higher-risk, AT1s offer a higher yield than most other bonds issued by borrowers with similar credit ratings, making them popular with institutional investors.

    It is not the write-down of Credit Suisse’s AT1 bonds that has rocked investors, but the fact that the bank’s shareholders will receive some compensation when bondholders will not.

    Ordinarily, bondholders are higher up the pecking order than shareholders when a banks fails. But because Credit Suisse’s demise has not followed a traditional bankruptcy, analysts told CNN, the same rules don’t apply.

    “The hierarchy of claims remains applicable in the EU… there is no way that shareholders can be paid and AT1 holders [are] paid zero,” Benamou said. “The decision taken by the Swiss authorities is really very strange.”

    Michael Hewson, chief market analyst at CMC Markets, told CNN: “It appears that in this case, because it was not a bankruptcy situation it was considered that AT1 bondholders and shareholders would both feel the pain.”

    EU banking regulators and the Bank of England moved Monday to reassure AT1 investors more broadly that they would take priority over shareholders in the event of future bank crises.

    “Common equity instruments [stocks] are the first ones to absorb losses, and only after their full use would additional tier one be required to be written down,” the EU regulators said in a statement. “This approach has been consistently applied in past cases.”

    Christine Lagarde, president of the European Central Bank, said in a speech Monday that banks in the eurozone had “a very limited exposure” to Credit Suisse, particularly in relation to AT1 bonds.

    “We’re not talking billions, we’re talking millions,” she said.

    The Bank of England said that “holders of [AT1s] should expect to be exposed to losses” when a bank fails according to their usual ranking in the capital hierarchy.

    The legal basis for the Credit Suisse losses may be contested. Quinn Emanuel Urquhart & Sullivan, a litigation firm headquartered in Los Angeles, said Monday that it had assembled a team of lawyers who were discussing options with Credit Suisse’s AT1 bondholders.

    The surprise move by the SNB has rattled Europe’s AT1 bond market, with investors now questioning whether their holdings could be obliterated if another bank collapses.

    Joost de Graaf, co-head of European credit at Van Lanschot Kempen, a Dutch wealth management firm, told CNN that his fund did not invest in AT1s because he was “afraid [of] something like this,” where regulators could decide that a bank was no longer viable and write down the bonds’ value.

    “For the coming few years, [the AT1] market is going [to go] into some kind of a hibernation probably, where new AT1s will be very hard to place for issuers at acceptable levels,” de Graaf said.

    The impact will likely spill over into the wider bond market, he added, with investors demanding higher yields for bonds now seen as riskier.

    “For the foreseeable future, [banks’] funding [through bonds] will be more expensive,” de Graaf said.

    There are signs that shift may already be happening.

    Invesco’s AT1 Capital Bond exchange-traded fund, which tracks AT1 debt, is currently trading down 5.5% compared with last Friday’s close. WisdomTree, another AT1 ETF listed on the London Stock Exchange, fell 7.4% in afternoon trade.

    But the real damage is the precedent the write-down may have set, said Benamou of Axiom Alternative Investments.

    “No financial analyst had ever believed that AT1 bonds would be brought to zero… given the level of solvency of Credit Suisse… [and] pretty high level of regulatory capital,” he said.

    — Mark Thompson contributed reporting.

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