Affluent Americans may want to double-check how much of their bank deposits are protected by government-backed insurance.
New rules implemented last month capped what the Federal Deposit Insurance Corporation (FDIC) will insure in a trust account at $1.25 million.
Before, there was no limit on trust accounts, which are legal arrangements that ensure an individual’s assets are distributed to specific beneficiaries.
The FDIC said the new rule will make it easier for consumers and bankers to understand deposit insurance rules. It is also designed to help FDIC agents more quickly determine which accounts are insured after a bank fails.
For tens of thousands of bank customers, the change could lower how much in those accounts are insured if their financial institution fails. Those affected may need to restructure their deposits or open new accounts at another bank to ensure their funds are protected.
“It’s somewhat of an obscure change … and the loss of some insured deposits is something I’m not sure the FDIC has highlighted enough,” said Ken Tumin, founder of DepositAccounts.com, which is owned by LendingTree.
“There may very well be a lot of depositors out there that might not have the insured deposits they had assumed when they originally opened the account.”
The Federal Deposit Insurance Corporation (FDIC) seal is shown outside its headquarters, March 14, 2023, in Washington. (AP Photo/Manuel Balce Ceneta, File) (ASSOCIATED PRESS)
What isn’t changing is that the FDIC still insures up to $250,000 per depositor and per account category at each bank.
Here’s how that works: Say you have $250,000 in an individual savings account and $50,000 in an individual checking account at Bank A. That means you, the depositor, have $300,000 total in one type of ownership category (single accounts) at the same bank, so only $250,000 is insured.
If you moved that $50,000 to another bank, it would be fully insured. Similarly, if you put that $50,000 in a joint account — which is a different ownership category — the amount would be fully insured even if it stayed at the same bank.
Trust accounts provided a loophole to insure more than $250,000. Under the old FDIC rules, each beneficiary of the trust would get $250,000 in insurance protection. So, for example, if the trust named 10 beneficiaries, then that account would be insured for $2.5 million.
“Before this change, many people weren’t aware that you could theoretically insure almost an infinite amount at one bank through the FDIC rules through a trust account,” Tumin said.
That’s no longer the case. The new rule limits the number of trust beneficiaries that receive the $250,000 insurance amount to five, totaling at most $1.25 million.
Additionally, irrevocable trusts and revocable trusts are now lumped together into one ownership category — trust accounts — under the new rules. That new category also includes any deposit account that has named beneficiaries upon the owner’s death, such as a certificate of deposit, or CD.
So, the trust that previously was insured for $2.5 million for its 10 beneficiaries is now insured only for $1.25 million.
“As of April, you lose half of that [insurance],” Tumin said.
(Photo: Getty Creative) (Helen King via Getty Images)
When the FDIC proposed these rules in 2022 — a year before talk about lifting the $250,000 insurance cap bubbled up during a run of bank failures — it estimated that almost 27,000 trust account depositors and just over 36,000 trust accounts “could be directly affected by this aspect of the final rule.”
Additionally, merging revocable trusts and irrevocable trusts into one ownership category could decrease coverage “in limited instances.”
Still, a small number of irrevocable trusts could see an increase in insurance coverage under the new rules, the FDIC said, while overall most depositors should not see a change in their coverage.
To find out if you’re affected, use the FDIC’s tool — Electronic Deposit Insurance Estimator — to figure out on a per-bank basis how much of your money, if any, exceeds the new coverage limits.
If you find that some of your money is now uninsured, talk to your bank. Financial institutions typically work with customers affected by regulatory changes to ensure their large deposits are protected. You may end up needing to open a different type of account or put the uninsured sum in an account at another bank.
Janna Herron is a Senior Columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.
Hundreds of small and regional banks across the U.S. are feeling stressed.
“You could see some banks either fail or at least, you know, dip below their minimum capital requirements,” Christopher Wolfe, managing director and head of North American banks at Fitch Ratings, told CNBC.
The majority of those banks are smaller lenders with less than $10 billion in assets.
“Most of these banks aren’t insolvent or even close to insolvent. They’re just stressed,” Brian Graham, co-founder and partner at Klaros Group, told CNBC. “That means there’ll be fewer bank failures. But it doesn’t mean that communities and customers don’t get hurt by that stress.”
Graham noted that communities would likely be affected in ways that are more subtle than closures or failures, but by the banks choosing not to invest in such things as new branches, technological innovations or new staff.
For individuals, the consequences of small bank failures are more indirect.
“Directly, it’s no consequence if they’re below the insured deposit limits, which are quite high now [at] $250,000,” Sheila Bair, former chair of the U.S. Federal Deposit Insurance Corp., told CNBC.
If a failing bank is insured by the FDIC, all depositors will be paid “up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.”
Watch the videoto learn more about the risk of commercial real estate, the role of interest rates on unrealized losses and what it may take to relieve stress on banks — from regulation to mergers and acquisitions.
Of about 4,000 U.S. banks analyzed by the Klaros Group, 282 banks face stress from commercial real estate exposure and higher interest rates. The majority of those banks are categorized as small banks with less than $10 billion in assets. “Most of these banks aren’t insolvent or even close to insolvent. They’re just stressed,” Brian Graham, Klaros co-founder and partner at Klaros. “That means there’ll be fewer bank failures. But it doesn’t mean that communities and customers don’t get hurt.”
David Smith of Autonomous Research discusses why he thinks Republic First Bank is not a “canary in the coal mine” and how a higher-for-longer interest rate environment might affect the regional bank sector.
Through the first quarter of the year, actions against fintech partner banks have accounted for 35% of publicized enforcement measures from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller, according to the consultancy Klaros Group. This is an uptick from 26% during the previous quarter, and 10% from the first quarter of 2023.
The jump in enforcement actions against firms engaging in so-called banking-as-a-service, or BaaS, business models corresponds with the adoption of a new joint guidance from the Fed, FDIC and OCC for evaluating third-party risks, which was codified last June. The following quarter, the share of fintech partner bank enforcement actions doubled from 9% to 18%, according to Klaros. The uptick in BaaS-related enforcement comes amid a doubling of total enforcement actions against banks over the same period.
“It’s undeniable that there’s more enforcement activity happening related to BaaS,” said David Sewell, a partner with the law firm Freshfields Bruckhaus Deringer. “You are seeing the fruits of the enhanced supervisory posture towards that space.”
The question moving forward is whether this recent string of activity is a momentary adjustment as agencies ensure their expectations are taken into account, or a permanent shift in regulators’ attitude toward BaaS models.
Along with crafting new expectations for fintech partnerships, Washington regulators are also putting together specialized supervision teams to explore these activities more comprehensively. Last year, the OCC launched an Office of Financial Technology to “adapt to a rapidly changing banking landscape,” and the Fed established a similar group called the Novel Activities Supervision Program, which tracks fintech partnerships, engagement with crypto assets and other emerging strategies in banking.
These fintech-specific developments come at a time when the agencies are changing their approach to supervision across the board with an eye toward escalating issues identified in banks more quickly and more forcefully. The effort is being undertaken in response to last year’s failure of Silicon Valley Bank, which had numerous unaddressed citations — known as matters requiring attention — at the time of its collapse.
The FDIC has already amended its procedures and now directs its supervisors to elevate issues if they are unresolved for more than one examination cycle. A Government Accountability Office report issued last month called for the Fed to adopt a similar approach.
Gregory Lyons, a partner at the law firm Debevoise & Plimpton, said the confluence of these various developments will result in significant supervisory pressure on fintech partner banks, most of which are small community banks leaning on the arrangements to offset declines in other business opportunities.
“You have a general concern from regulators about fintechs, you have these new divisions within agencies focused solely on fintech activities and risks, and then more generally you have an exam environment in which things are going to get elevated quickly,” Lyons said. “This is a fairly volatile mix for banks relying heavily on fintech partnerships.”
Measuring supervisory activity and determining its root causes are both fraught exercises, said Jonah Crane, partner with Klaros. Public actions make up just a fraction of the overall enforcement landscape, which is itself a small portion of the correspondence between banks and their supervisors. Public enforcement actions are also intentionally vague in their description of violations, as a way of safeguarding confidential supervisory information.
Still, Crane said recent disclosures exemplify the areas of greatest concern for regulators: money laundering and general third-party risk management. He noted that the main threat supervisors seem to be guarding against is banks outsourcing their risk management and compliance obligations to lightly regulated tech companies.
“For every banking product in the marketplace, there’s a long check list of laws and regulations that need to be followed,” Crane said. “Those need to be clearly spelled out, and they still need to be done to bank standards when banks rely on third parties to handle those roles and responsibilities. That seems to be the crux of the issue.”
In official policy documents and speeches from officials, the agencies have described their approach to fintech oversight as risk-sensitive and principles-based. They emphasize the importance of banks knowing the types of activities in which their fintech partners engage as well as the mechanisms in place within them to manage risks.
“The OCC expects banks to appropriately manage their risks and regularly describes its supervisory expectations,” an OCC spokesperson said. “The OCC has been transparent with its regulated institutions and published joint guidance last June to help banking organizations manage risks associated with third-party relationships, including relationships with financial technology companies.”
The Fed declined to comment and the FDIC did not provide a comment before publication.
Some policy specialists say the expectation that buck stops with the bank when it comes to risk management and compliance should not come as a surprise to anyone in BaaS space, pointing to both last year’s guidance and long-running practices by supervisors. The Fed, FDIC and OCC outlined many of their areas of concern in 2021 through jointly proposed guidelines for managing third-party risks.
James Kim, a partner with the law firm Troutman Pepper, likens the recent surge in activity to supervisors clearing out low hanging fruit. He notes that the rapid expansion of BaaS arrangements in recent years — aided by intermediary groups that pair fintechs with banks, typically of the smaller community variety — has brought with it many groups that were not well suited for dealing with its regulatory requirements.
“Several years ago, there were real barriers for fintechs to partner with banks because of the cost, time and energy it took to negotiate agreements and pass the onboarding due diligence,” Kim said. “Some of the enforcement activity we’re seeing today is likely the consequence of certain banks, fintechs and intermediaries jumping into the space without fully understanding and addressing the compliance obligations that come with it.”
Others say the standards set last year are too broad to be applied uniformly across all BaaS business models, which can vary significantly from one arrangement to another.
Jess Cheng, a partner with the law firm Wilson Sonsini who represents many fintech groups, said regulators need to provide more detailed expectations for how banks can engage in the space safely.
“In light of these enforcement actions, there seems to be a real time lag between what has been going on in terms of ramped up supervisory scrutiny and the issuing of tools to help smaller banks comply with and understand how they can meet those expectations,” Cheng said. “That is badly needed.”
In a statement to American Banker, Michael Emancipator, senior vice president and senior regulatory counsel for the Independent Community Bankers of America, a trade group that represents small banks, called the recent uptick in enforcement actions has been concerning, “especially in the absence of any new regulation, policy, or guidance that explains this heightened scrutiny.”
Emancipator acknowledged the guidance that was finalized last year, but noted that the framework was largely unchanged from the 2021 proposal and gave no indication that substantial supervisory activity was warranted.
“If there has been a shift in agency policy that is now manifesting through enforcement actions, ICBA encourages the banking agencies to issue a notice of proposed rulemaking, which more explicitly explains the policy shift and how banks can appropriately operate under the new policy,” he said. “Absent that additional guidance and an opportunity to comment, we’re seeing a new breed of ‘regulation through enforcement,’ which is obviously suboptimal.”
Among specialists in the space, there is optimism that the Fed’s Novel Activities Supervision Program will be able to address some of these outstanding questions and provide the guidance banks need to operate in the space safely and effectively.
“I expect more clarity going forward both in the enforcement action context but also if they adopt exam manuals and a whole exam process,” Crane said. “I remain glass half-full about how the novel activities programs are going to impact the space. It’s a pretty strong signal that agencies aren’t just trying to kill this activity. They wouldn’t establish whole new supervisory programs and teams if that’s what you’re trying to accomplish.”
The program will operate alongside existing supervision teams, with the Washington-based specialist group accompanying local examiners to explore specific issues related to emerging business practices. Crane said until more formal exam policies are laid out, the scope of the enhanced supervision conducted by these specialists remains to be seen.
“In theory, that enhanced supervision should apply only to novel activity,” he said. “There is an open question as to whether, in practice, the whole bank will be held to something of a higher standard.”
Lyons said the layering on of supervision from a Washington-based entity, such as the Novel Activities Supervision Program, eats into the discretion of local examiners. It also inevitably leads to the identification of favored practices.
“When these types of groups get involved in supervision, it tends to lead to more comparisons of how one bank approaches issues versus another,” Lyons said. “It’s not formally a horizontal review, but it’s that type of principle, in which the supervisors identify certain practices they like more than others.”
Lyons added that escalation policies, such as the one implemented by the FDIC, also take away examiner discretion and could create a situation where one type of deficiency — such as third-party risk management — can quickly transform into a different one with more significant consequences.
“If issues run over more than one exam cycle, they can go from purely being a third-party risk management issue, to also being a management issue for not monitoring a pressing risk well enough,” he said. “Management is typically considered the most significant of the six components of CAMELS for purposes of determining the composite rating, for example.”
While the FDIC’s move is intended to make insurance coverage rules for trust accounts simpler, it may push some depositors over FDIC limits, according to Ken Tumin, founder of DepositAccounts and senior industry analyst at LendingTree.
As part of its National Financial Literacy Month efforts, CNBC will be featuring stories throughout the month dedicated to helping people manage, grow and protect their money so they can truly live ambitiously.
The FDIC is an independent government agency that was created by Congress following the Great Depression to help restore confidence in U.S. banks.
FDIC insurance generally covers $250,000 per depositor, per bank, in each account ownership category.
If you have $250,000 or less deposited in a bank, the new changes will not affect you.
Under the new rules, trust deposits are now limited to $1.25 million in FDIC coverage per trust owner per insured depository institution.
Each beneficiary of the trust may have a $250,000 insurance limit for up to five beneficiaries. However, if there are more than five beneficiaries, the FDIC coverage limit for the trust account remains $1.25 million.
“For those who do go above $1.25 million under the old system, they definitely should be aware that changed,” Tumin said.
That may cause coverage reductions for certain investments that were established before these changes. For example, investors with certificates of deposit that are over the coverage limit may be locked into their investment if they do not want to pay a penalty for an early withdrawal.
“If you’re in that kind of shoes, you have to work with the bank, because you might not be able to close the account or change the account until it matures,” Tumin said.
The FDIC is also now combining two kinds of trusts — revocable and irrevocable — into one category.
Consequently, investors with $250,000 in a revocable trust and $250,000 in an irrevocable trust at the same bank may have their FDIC coverage reduced from $500,000 to $250,000, according to Tumin.
“That has the potential of causing loss of coverage, too,” Tumin said.
The agency is also revising requirements for informal revocable trusts, also known as payable on death accounts. Previously, those accounts had to be titled with a phrase such as “payable on death,” to access trust coverage limits. Now, the FDIC will no longer have that requirement and instead just require bank records to identify beneficiaries to be considered informal trusts.
“The bank no longer has to have POD in the account title or in their records as long as the beneficiaries are listed somewhere in the bank records,” Tumin said.
To amplify FDIC coverage beyond $250,000, depositors have several other options in addition to trust accounts.
That includes opening accounts at multiple FDIC-insured banks; opening a joint account for two people, which would bring the total coverage to $500,000; or opening accounts with different ownership categories, such as a single account and joint account.
The Federal Deposit Insurance Corp.’s Office of the Inspector General says that Sac City, Iowa-based Citizens Bank failed last year due to poor risk management and an overreliance on lending to trucking firms.
Bloomberg News
WASHINGTON — The Federal Deposit Insurance Corp.’s Office of Inspector General found lax lending and poor risk management led to the downfall of Citizens Bank in Sac City, Iowa, in November 2023 and its $14.8 million hit to the Deposit Insurance Fund.
As early as 2014, the report says the $65 million-asset bank — 100%-owned by the family of Thomas Lange, the bank’s chairman and president — made ill-informed commercial loans to trucking companies without adequate risk mitigation, board oversight or business expertise. Those loans were heavily strained as supply-chain snags during the pandemic imposed increased fuel, insurance and repair costs, making it increasingly hard for borrowers to repay.
“Citizens Bank compounded these issues by advancing additional funds to problem borrowers through overdrafts, often in excess of the state’s lending limit, and without first obtaining current financial information or conducting proper collateral analysis,” the OIG wrote. “The significant deterioration in the bank’s loan portfolio and operating losses led to a serious depletion of the bank’s capital and stressed its liquidity, ultimately resulting in its failure.”
According to the OIG, regulators caught wind of trouble at Citizens around the same time as the supply-chain issues began to emerge. At that time, management of the bank ramped up trucking loans outside of its primary trade area, and its corresponding poor credit underwriting and administrative weaknesses raised red flags for FDIC examiners.
From 2020 onward, the FDIC took a string of regulatory actions, including filing a “matters requiring board attention” report in a March 2020 examination. Both the FDIC and the Iowa state bank regulator identified credit administration and loan underwriting deficiencies in their respective April 2021 and July 2022 examination reports. The regulators also found the bank had violated Iowa’s ban on state banks’ granting loans and extensions of credit that exceed 15% of the firm’s aggregate capital to a single borrower.
In May 2023, a joint review by the FDIC and Iowa Division of Banking revealed serious issues at Citizens, leading to a downgrade in its supervisory rating. Despite a consent order issued in August 2023, the bank’s financial condition deteriorated further by October. Consequently, the FDIC declared Citizens “critically undercapitalized” and took over as receiver on Nov. 3, 2023.
The report said Citizens’ impact on the Deposit Insurance Fund was average relative to losses over the last five years, and thus not sufficient to warrant a more comprehensive review by the agency’s watchdog.
The FDIC OIG is mandated by law to conduct a preliminary investigation of a state bank regulator’s stated cause for a failure when the DIF suffers a loss of less than $50 million and to decide whether further review is needed. Losses above that threshold automatically receive a full investigation.
The OIG, however, said Thomas Lange had a multitude of conflicts of interest in loans administered by the bank, which it says have been communicated to the appropriate authorities. These conflicts were determined not to be contributing factors to the bank’s failure, which was the main concern of the report.
The OIG also found that the FDIC’s supervision itself did not contribute to the failure. In fact, the agency repeatedly pinpointed the problems, issued notices and took steps to address the concerns.
“Ultimately,” the OIG wrote, “the bank’s inaction to address these supervisory recommendations resulted in its failure.”
Travis Hill, vice chairman of the FDIC, criticized the U.S. banking restrictions on handling digital assets for clients.
On Monday, Hill urged a proactive approach to blockchain technology, indicating that current regulatory stances hinder innovation.
He emphasized the need for clarity in policies regarding permissible actions and standards for safety and soundness. Hill, who previously worked as a Republican Senate staffer, pointed out the challenges in policy-making due to the rapid evolution of technology.
In 2022, top U.S. bank regulators, including the FDIC, Federal Reserve, and Office of the Comptroller of the Currency, warned banks about the risks of engaging with cryptocurrencies, highlighting concerns over volatility. The agencies stressed the importance of preventing uncontrollable risks from affecting the banking system.
Hill criticized the FDIC’s apparent reluctance to collaborate with industry entities interested in exploring blockchain or distributed ledger technologies for purposes beyond cryptocurrency, such as tokenized deposits.
“The confidential nature of the existing process means there is little public information on what types of activities the FDIC might be open to, if any,” Hill said.
He called for more precise distinctions between crypto and tokenization, the latter referring to digital representations of physical assets often utilizing blockchain technology.
Additionally, Hill commented on the SEC’s guidance requiring firms to treat crypto assets as liabilities on balance sheets, diverging from traditional custodian accounting practices.
The vice chairman argued that this guidance, Staff Accounting Bulletin No. 121, hampers banks’ ability to expand digital asset services for customers by increasing costs. Since its publication in 2022, this has sparked criticism from the banking sector.
Big bank CEOs will likely convey deposits and earnings are stable to lawmakers on Wednesday, according to a major financial services executive. Thomas Michaud, CEO of Stifel company Keefe, Bruyette & Woods, thinks the hearing before the Senate Banking Committee will successfully provide assurance to Washington and Wall Street. Banking chiefs slated to speak at the “Annual Oversight of Wall Street Firms” hearing include JPMorgan CEO Jamie Dimon and Goldman Sachs CEO David Solomon. “The crisis of the spring where we had three of the four largest failures in history is behind us,” Michaud said on CNBC’s ” Fast Money ” on Tuesday. He’s referring to Silicon Valley Bank , Signature Bank and First Republic — the latter of which was the nation’s biggest bank failure since the 2008 financial crisis. Michaud, who testified before Congress in May on the bank failures, hopes Wednesday’s hearing re-addresses the call for changes to prevent bank runs from pushing other financial institutions over the edge. “One way to fix it is deposit insurance reform,” he said. “The targeted approach to change deposit insurance to reduce the ‘too big to fail’ thinking, so depositors don’t run like that. That is what we need, and that effort has stalled in Congress.” He thinks action is needed to keep mid-sized banks competitive with the big banks — starting with lifting Federal Deposit Insurance Corp coverage limits for small businesses. Currently, the FDIC covers $250,000 per depositor, per insured bank, per ownership category — an amount that is likely inadequate for small businesses . “If deposit insurance reform in my opinion doesn’t happen, there’s going to be tremendous pressure on those [mid-size] banks to consolidate,” Michaud said. Disclaimer
In the U.S., 516 publicly listed firms have filed for bankruptcy from January through September 2023. Many of these firms have survived for several years with surging debt and lagging sales.
“The share of zombie firms has been increasing over time,” said Bruno Albuquerque, an economist at the International Monetary Fund. “This has detrimental effects on healthy firms who compete in the same sector.”
“A really healthy, well-capitalized banking system and financial sector is one of the most important factors in ensuring that unhealthy firms are wound down in a timely way rather than being propped up,” said Kathryn Judge, a professor of law at Columbia University.
Economists say that zombie firms may become more prevalent when banks or governments bail out unviable firms. But the Federal Reserve says the share of firms that are zombies fell after the Covid-19 emergency stimulus measures were implemented. The Fed says banks are refusing to keep weak firms in business with favorable extensions of credit.
The Fed economists point to healthy balance sheets at U.S. firms, despite the increasing weight of interest rate hikes. The effective federal funds rate was 5.33% in October 2023, up from 0.08% in October 2021.
“The biggest implication of the rapid rise in interest rates that we’ve seen the last five or six quarters, actually, is that it reestablished cash,” said Lotfi Karoui, chief credit strategist at Goldman Sachs. “That actually puts some constraints on risk assets.”
The Fed says it thinks interest rates will remain higher for longer. “Given the fast pace of tightening, there may still be meaningful tightening in the pipeline,” Fed Chair Jerome Powell said at an Economic Club of New York speech Oct. 19.
Watch the video above to learn more about the Fed’s battle with unviable zombie firms in the U.S.
Some firms sustain their businesses by taking on more debt that they can repay. Economists call them zombie companies. When compared to their peers, zombies are smaller in size and deliver lower returns to investors. These companies distort markets, keeping resources from their fundamentally sound competitors. Banks and governments keep zombie firms alive with bailout loans. As the Federal Reserve resets the economy with higher interest rates, many zombie firms are filing for bankruptcy.
Key findings about discrimination in home valuations are under dispute. That hasn’t stopped them from informing policy decisions.
During the past two years, regulators and lawmakers have introduced and adopted new rules and guidelines aimed at curbing the impacts of racial bias on home valuations. But some appraisers and researchers insist these efforts have been based on faulty data.
Conflicting findings from a pair of non-profit research groups call into question whether or not recent actions will improve financial outcomes for minority homeowners without leading to banks and other mortgage lenders taking on undue risks.
The debate centers on a 2018 report from the Brookings Institution, which found that homes in majority-Black neighborhoods are routinely discounted relative to equivalent properties in areas with little or no Black population, a trend that has exacerbated the country’s racial wealth gap. The study, which adjusts for various home and neighborhood characteristics, found that homes in Black neighborhoods were valued 23% less than homes in other areas.
“We believe anti-Black bias is the reason this undervaluation happens,” the report concludes, “and we hope to better understand the precise beliefs and behaviors that drive this process in future research.”
The study, titled “Devaluation of assets in Black neighborhoods,” has been cited by subsequent reports published by Fannie Mae and Freddie Mac, academics and White House’s Property Appraisal and Valuation Equity, or PAVE, task force, which used the data to inform its March 2022 action plan to address racial bias in home appraisal.
Meanwhile, as the Brookings’ findings proliferated, another set of research — based on the same models and data — has largely gone untouched by policymakers. In 2021, the American Enterprise Institute replicated the Brookings study but applied additional proxies for the socioeconomic status of borrowers.
By simply adding a control for the Equifax credit risk score for borrowers, the AEI research asserts, the average property devaluation for properties in Black neighborhoods falls to 0.3%. The researchers also examined valuation differences between low socioeconomic borrowers and high socioeconomic borrowers in areas that were effectively all white and found that the level of devaluation was equal to and, in some cases, greater than that observed between Black-majority and Black-minority neighborhoods.
“That, to us, really suggests that it cannot be race but it has to be due to other factors — socioeconomic status, in particular — that is driving these differences in home valuation,” said Tobias Peter, one of the two researchers at the AEI Housing Center who critiqued the Brookings study.
Contrasting conclusions
Peter and his co-author, Edward Pinto, who leads the AEI Housing Center, acknowledge that there could be bad actors in the appraisal space who, either intentionally or through negligence, improperly undervalue homes in Black neighborhoods. But, they argue, the issue is not systemic and therefore does not call for the time of sweeping changes that the PAVE task force has requested.
Brookings researchers have refuted the AEI findings, arguing that, among other things, their controls sufficiently rule out socioeconomic differences between borrowers as the cause of valuation differences. They also attribute the different outcomes in the AEI tests to the omission of the very richest and very poorest neighborhoods.
Jonathan Rothwell, one of the three Brookings researchers along with Andre Perry and David Harshbarger, said the conclusion reached by AEI’s researchers ignored the well documented history of racial bias in housing.
“No matter how nuanced and compelling the research is, no one can publish anything about racial bias in housing markets, without our friends Peter and Pinto insisting there is no racial bias in housing markets,” Rothwell said. “Everyone agrees that there used to be racial bias in housing markets. I don’t know when it expired.”
Mark A. Willis, a senior policy fellow at New York University’s Furman Center for Real Estate and Urban Policy, said the source of the two sets of findings might have contributed to the response each has seen. While both organizations are non-partisan, AEI, which leans more conservative, is seen as having a defined agenda, while the centrist Brookings enjoys a more neutral reputation.
Still, Willis — who is familiar with both studies but has not tested their findings — said while the Brookings report notes legitimate disparities between communities, the AEI findings demonstrate that such differences cannot solely be attributed to racial discrimination.
“The real issue here is there are differences across neighborhoods in the value of buildings that visibly look alike, maybe even technically the neighborhood characteristics look alike, but aren’t valued the same way in the market,” Willis said. “Whatever that variable is, Brookings hasn’t necessarily found that there’s bias in addition to all of the other real differences between neighborhoods.”
Setting the course or getting off track?
The two sets of findings have become endemic to the competing views of home appraisers that have emerged in recent years. On one side, those in favor of reforming the home buying process — including fair housing and racial justice advocates, along with emerging disruptors from the tech world — point to the Brookings report as a seminal moment in the current push to root out discriminatory practices on a broad scale.
“It’s been really helpful in driving the conversation forward, to help us better define what is bias and be specific about how we communicate about it, because there’s a number of different types of bias potentially in the housing process,” Kenon Chen, founder of the tech-focused appraisal management company Clear Capital, said. “That report really … did a good job of highlighting systemic concerns and how, as an industry, we can start to take a look at some of the things that are historical.”
Appraisers, meanwhile, say the Brookings findings made them a scapegoat for issues that extend beyond their remit and set them on course for enhanced regulatory scrutiny.
“What’s causing the racial wealth gap is not 80,000 rogue appraisers who are a bunch of racists and are going out and undervaluing homes based on the race of the homeowner or the buyer, but rather it’s a deeply rooted socioeconomic issue and it has everything to do with buying power and and socioeconomic status,” Jeremy Bagott, a California-based appraiser, said. “It’s not a problem that appraisers are responsible for; we’re just providing the message about the reality in the market.”
Responses to the Brookings study and other related findings include supervisory guidelines around the handling of algorithmic appraisal tools, efforts to reduce barriers to entry into the appraisal profession and greater data transparency around home valuation across census tracts.
But appraisers say other initiatives — including what some see as a lowering of the threshold for challenging an appraisal — will make it harder for them to perform their key duty of ensuring banks do not overextend themselves based on inflated asset prices.
Even those who favor reform within the profession have taken issue with the Brookings’ findings. Jonathan Miller, a New York-based appraiser who has deep concerns about the lack of diversity with the field — which is more than 90% white, mostly male and aging rapidly — said using the study as a basis for policy change put the government on the wrong track.
“There’s something wrong in the appraisal profession, and it’s that minorities are not even close to being fairly represented, but the Brookings study doesn’t connect to the appraisal industry at all,” Miller said. “Yet, that is the linchpin that began this movement. … I’m in favor of more diversity, but the Brookings’ findings are extremely misleading.”
Willis, who previously led JPMorgan Chase’s community development program, said appraisers are justified in their concerns over new policies, noting this is not the first time the profession has shouldered a heavy blame for systemic failures. The government rolled out new reforms for appraisers following both the savings and loan crisis of the 1980s and the subprime lending crisis of 2007 and 2008.
But, ultimately, Willis added, appraisers have left themselves open to such attacks by allowing bad — either malicious or incompetent — actors to enter their field and failing to diversify their ranks.
“It seems clear that the burden is on the industry to ensure that everybody is up to the same quality level,” he said. “Unless the industry polices itself better and is more diverse, it is going to remain very vulnerable to criticism.”
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 wouldrequire 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.
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.
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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.
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.
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.
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.
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.
Rohit Chopra, FDIC Board of Directors member, joins ‘Closing Bell Overtime’ to discuss the special assessment fee for large banks, the state of regional banks, and more.
Tech-forward Cross River Bank reached a consent agreement with the Federal Deposit Insurance Corp. in March following a cease-and-desist order from a standard review in 2021 regarding “unsafe and unsound banking practices related to its compliance with applicable fair lending laws,” according to the consent agreement. “We had identified areas for improvement prior to the […]
Martin Gruenberg, the FDIC’s chairman, has said he would give special consideration to the fee burden on smaller lenders.
Anna Rose Layden/Photographer: Anna Rose Layden/B
The U.S. is poised to exempt smaller lenders from kicking in extra money to replenish the government’s bedrock Deposit Insurance Fund, and instead saddle the biggest banks with much of the bill.
Smaller lenders with less than $10 billion of assets wouldn’t have to pay, said the people, who weren’t authorized to discuss the deliberations. There were more than 4,000 institutions under that threshold at the end of last year, FDIC data show.
Depending on the size of their deposit portfolio, some banks with as much as $50 billion of assets could also avoid the payments, which might be spread out over two years or paid at once, two of the people said.
Under the plan, bigger lenders would all face the same fee structure, but could end up having to kick in more money because of balance sheet size and number of depositors, the people said. The riskiness of deposits won’t be a factor.
A political battle has been raging over who should be on the hook for refilling the fund after it was depleted by billions of dollars when the government took the extraordinary step of making all SVB and Signature depositors — even uninsured ones — whole. Smaller banks have lobbied hard to avoid paying the so-called special assessment fees, in addition to the contributions that all lenders make to fund quarterly.
The FDIC declined to comment on its plans. Martin Gruenberg, the agency’s chairman, has said he would give special consideration to the fee burden on smaller lenders.
The DIF, as the fund is known, is a linchpin of the U.S. financial system as it’s used to insure most accounts for up to $250,000. It’s refilled by all insured banks paying quarterly fees known as assessments. The amount is based on formulas.
At Signature and SVB, many depositors had millions in their accounts — meaning they were uninsured — and were businesses that desperately needed the cash. The FDIC declared a “systemic risk exception” to use the fund to repay those depositors, in addition to those who would fall under the $250,000.
The FDIC has said that covering uninsured depositors will cost the DIF $19.2 billion and would be paid by special assessment fees. The agency may vote next week to introduce its plan for charging them and then take public comment on the proposal, before finalizing it months later.
The move to use the DIF to cover uninsured depositors has jump-started a long-simmering debate over whether the $250,000 cap needs to be raised. On Monday, the FDIC said it supported expanding coverage to business and laid out three options for overhauling the fund.
Beyond the special assessment that could be proposed next week and the broader overhaul considerations, the agency is also poised to announce changes to the regular quarterly fees that banks have to pay into the DIF. That plan will help blunt any impact from the First Republic to the DIF, the people said.
JPMorgan Chase & Co. agreed to acquire First Republic Bank in a government-led deal for the failed lender, putting to rest one of the biggest troubled banks remaining after turmoil engulfed the industry in March. The transaction, announced in the early morning hours Monday after First Republic was seized by regulators, makes the biggest US […]
First Republic Bank shares fell as much as 54% in extended New York trading on speculation that it would be seized by regulators, as regional US lenders are pressured by deposit drains and weakening investments. Regulators were poised to place the San Francisco-based lender into receivership, Reuters reported late Friday, citing a person it didn’t […]
