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.
Federal Reserve Vice Chair for Supervision Michael Barr released his report on the failure of Silicon Valley Bank on Friday.
Bloomberg
As the dust settles on a pair of reports about last month’s failure of Silicon Valley Bank, parties on both sides of the issue are walking away wanting more.
Both the Federal Reserve and the Government Accountability Office released their findings on the matter on Friday, though it was Fed Vice Chair for Supervision Michael Barr’s report that garnered the most attention.
Backers and detractors alike commended Barr for putting together a comprehensive review that addressed the Fed’s own supervisory failings that contributed to the demise of the $200 billion bank last month, despite having just six weeks to do so. But bank groups argue the policy recommendations included in the 114-page report are misguided, particularly those relating to regulatory changes.
Kevin Fromer, president and CEO of the Financial Services Forum, a trade group that represents the eight largest banks in the country, took issue with Barr’s calls for heightened capital requirements for all large banks in the wake of the failure.
He argued that Barr is using the unique circumstances surrounding Silicon Valley Bank — a fast-growing bank with a distinct business model and distinctively poor risk management capabilities — to justify industrywide changes.
“One should not conflate a liquidity-driven event marked by management failures and supervisory shortcomings with capital adequacy at the largest U.S. banks,” Fromer said in a written statement. “The assertion in the introduction that the Fed should focus on large bank capital requirements is disconnected from the report’s conclusions.”
Similarly, Greg Baer, president and CEO of the lobbying group Bank Policy Institute, pushed back against Barr’s assessment that regulatory changes ushered in by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, also known as S. 2155, played a role in the bank’s failure.
Instead, Baer said, the issue was that Fed supervisors — from both the Board of Governors in Washington and the Federal Reserve Bank of San Francisco — failed to act on clear signs that the bank was in trouble, including the fact that it failed its own internal stress tests and that it had insufficient hedges on its interest rate risk exposures.
“Put simply, there is no provision of S. 2155 that requires examiners to misjudge interest rate risk,” Baer said in a written statement, “the examination materials make clear that nothing in S. 2155 prevented them from properly examining it.”
Meanwhile, Baer took a positive view of the congressionally requested GAO report, which hung more blame on the San Francisco Fed’s “lack of urgency” around addressing issues at Silicon Valley Bank. He called it “accurate and objective.”
Rob Nichols, president and CEO of the American Bankers Association, took a less hard-lined stance against the Fed. He applauded the focus of both the GAO report and the Barr report on the failure of bank supervisors to use the tools at their disposal, as well as the acknowledgment of both assessments that Silicon Valley Bank itself was a unique circumstance.
Yet, Nichols also cautioned against using either report to justify sweeping changes.
“We take any bank failure seriously, and we will review the findings and proposed policy changes in these reports carefully, including where the conclusions may differ,” he said in a written statement. “At the same time, we urge policymakers to refrain from pushing forward new and unrelated regulatory requirements that could limit the availability of credit and the ability of banks of all sizes to meet the needs of their customers and communities when these reports suggest that existing rules were sufficient.”
Dennis Kelleher, head of the consumer advocacy group Better Markets, took issue with the assertion by the banking organizations that certain policy changes enacted by Congress and the Fed in 2018 and 2019 played no role in Silicon Valley Bank’s failure. While no one change would have staved off the unprecedented deposit run that toppled the bank, he said the totality of the policy shifts would have resulted in less risk-taking by the bank.
Kelleher commended Barr for holding the Fed accountable for its supervisory failings, but said the vice chair could have done more. Specifically, Kelleher said he would have liked Barr to have hung the blame on individuals at the Fed who oversaw the shift toward lighter touch regulation and supervision in 2019, namely Fed Chair Jerome Powell and then-vice chair for supervision Randal Quarles.
“Chairman Jay Powell was not a bystander to Randy Quarles’s deregulation, he was a cheerleader of Randy Quarles’s deregulation and, in fact, Chair Powell proposed deregulation before Randy Quarles even got to the Fed,” Kelleher said. “The public would have been served and it would have enabled greater accountability if the report more appropriately identified, in detail, the actions taken by Chair Powell and others in the years of deregulation and under supervision during the Trump years.”
Kelleher was not the only regulation advocate to say Quarles should have been called out by name.
Alexa Philo, a senior policy analyst for banking at American for Financial Reform and a former examiner for the Federal Reserve Bank of New York, said Barr’s report was “notably light” on the role changes by current and past Fed leaders contributed to the situation at Silicon Valley Bank.
“Powell supported a light-touch approach to banking regulation and supervision before he even became chair, and Quarles handled these matters directly,” Philo said. “Yet the report gives us only vague impressions of lower-level officials about leadership, not concrete evidence.”
Despite not being cited in the report by name, the repeated reference to changes orchestrated on his watch were enough to elicit a response from Quarles, who left the Board of Governors in December 2021.
In a statement released Friday, Quarles questioned how the report could conclude that a “shift in the stance of supervisory policy” inhibited the Fed’s supervision of Silicon Valley Bank while also acknowledging that “no policy” led to the change. Instead, the report cites a perceived shift in expectations, which Quarles said fails to support the report’s ultimate verdict.
“I have the highest respect for the staff of the Fed– they are the cream of the federal civil service. Much of today’s report reflects that tradition,” he wrote. “I am disappointed that the conclusion on supervisory policy does not meet that high standard.”
Several banking experts picked out one specific sentence in the cover letter of Barr’s report that seemed to stand out, striking precisely the wrong chord.
Barr wrote: “Today, for example, the Federal Reserve generally does not require additional capital or liquidity beyond regulatory requirements for a firm with inadequate capital planning, liquidity risk management, or governance and controls.”
“That’s an amazing statement because that’s exactly what they’re supposed to be doing,” said Joe Lynyak, a partner at the law firm Dorsey & Whitney, who called the report “surprisingly candid.”
“What they are admitting is they just didn’t do their jobs with the authority they have,” he added. “It’s almost as if everybody failed bank supervision 101.”
Lynyak and others said that in past cycles, excessive growth has always been a warning sign that the Fed would monitor closely.
He also faulted the 90-page report for using the words “due process,” four times, in referring to the shift in supervision during the Trump administration. The report said that under Quarles, “supervisory policy placed a greater emphasis on reducing burden on firms, increasing the burden of proof on supervisors, and ensuring that supervisory actions provided firms with appropriate due process.”
Lynyak said he was astonished that the Fed said they were concerned about giving due process to the banks.
“Are you guys kidding me? There is no due process to the banks,” he said. “You toe the line and you do an enforcement order against [SVB] to make them do it.”
Ken Thomas, founder and CEO of Community Development Fund Advisors in Miami, faulted the Fed’s internal review, calling oversight of Silicon Valley Bank “a textbook case of mismanagement — not by the bank — but by the Fed.”
He also faulted Barr’s report for not addressing the fact that the Fed gave Silicon Valley Bank a “stamp of approval,” on its risk management procedures in 2021 when it bought Boston Private Financial Holdings. Silicon Valley Bank’s risk mismanagement issues should have been apparent to the Fed two years ago when deposits ballooned to $148 billion in the first half of 2021, from $103 billion at year-end 2020. Deposits continued to skyrocket in the second half of 2021 to $191 billion, he said.
“I put this whole thing on Jay Powell, because he gave Silicon Valley Bank a glowing stamp of approval on risk management in June 2021, so why should SVB’s board think management wasn’t doing a good job?” said Thomas. “If I was on the board of SVB and I knew nothing about banking, as most of them did not, why would I be concerned? Because Jay Powell said it was all right. That is the most important thing that is not mentioned in the report.”
Rohit Chopra, director of the Consumer Financial Protection Bureau, faces increased scrutiny and potential congressional hearings a data breach by a now-fired bank examiner who sent personal identifiable information to his own email.
Ting Shen/Bloomberg
The Consumer Financial Protection Bureau said it has not yet notified 256,000 consumers, nearly two months after data was potentially compromised by a bank examiner with access to supervisory information and large-scale data collections.
The CFPB said it is still working with financial institutions to notify consumers about the Feb. 14 breach in which a now-former bank examiner sent supervisory information on 45 institutions, and personal identifiable information on 256,000 consumers at seven institutions to his personal email account.
The bureau said there is no evidence that the information was disseminated beyond the former examiner’s email account, and it remains unclear what harm — if any — has occurred. The bureau notified lawmakers about the breach on March 21 but it took another month before the incident was first disclosed in the Wall Street Journal.
“To sit on it for this long, and to withhold from both consumers and the affected firms that this happened and then simply dismiss it was anything important and don’t worry about it — it is hard to imagine the CFPB would be okay if some private company did that,” said Todd Zywicki, a law professor at George Mason University and senior fellow at the Cato Institute. “I know I have in the past gotten data breach notifications even where there was no evidence of any actual harm, just to alert me that it had happened.”
Banks typically must report an outage or security breach within 36 hours of the incident being detected to their primary regulator — either the Federal Deposit Insurance Corp., the Federal Reserve or the Office of the Comptroller of the Currency — under a Biden administration rule that went into effect last year. The reporting requirements also cover tech vendors of banks that are affected by cybersecurity incidents.
The CFPB said the personal identifiable information on 256,000 consumers primarily included names and transaction-specific account numbers used internally by a financial institution. The data could not be used to gain access to a consumer’s bank account, the bureau said.
The CFPB’s data breach has exacerbated issues of trust with supervised entities and highlighted for some a double standard that exists in how the CFPB deals with its own security breach and how it treats security breaches at institutions it supervises.
“Mistakes happen, and that’s what institutions always tell the bureau, and so the table has been turned,” said Lucy Morris, a partner at Hudson Cook and a former CFPB deputy enforcement director. “Just like they expect companies to fully identify and remediate errors, they should do the same.”
The bureau has strict rules around companies disclosing confidential supervisory information with financial institutions being required to get permission to disclose. Several experts said the bureau now has special insight into understanding what a company goes through when a typical breach occurs.
“Would it be fair to punish or fine a regulated institution when its primary enforcement agency commits the very same negligent mistakes?” said David Stein, a partner at Taft Stettinius & Hollister LLP in Columbus, Ohio. “No company suffers a data breach without a lot of hand-wringing and it’s really important for the bureau to understand that every person who touches data can be a weak link.”
The breach could also evolve into a political issue that may further gum up the works of the agency, which is already responding to numerous documentation requests. Two Republican lawmakers, Sen. Tim Scott, ranking member of the Senate Banking Committee, and Rep. Bill Huizenga, R-Michigan, who chairs the House Financial Services subcommittee on oversight & investigations, have called for CFPB Director Rohit Chopra to explain what happened. Huizenga asked for a staff briefing by April 25, Scott expects a briefing by May 8. Many expect Chopra may be called to testify at a congressional hearing.
Both lawmakers asked for more information on remediation efforts to consumers, and any changes to mitigate further breaches and to address privacy concerns. The CFPB said it referred the breach to the Office of Inspector General, which declined to comment. It is not known if the bank examiner has been arrested or charged with theft of government property under 18 U.S.C. § 641, which makes it a crime to steal, sell, or dispose of any record, or something of value issued by the government.
The breach also has renewed concerns about the massive amount of information the CFPB collects and requests from financial institutions. Last year, Chopra announced that the CFPB would take action to protect consumers “from shoddy data security practices.” The CFPB even published a circular on data security that provided non-binding guidance on the potential misuse and abuse of personal financial data including an explanation as to how and when a financial firm may violate the prohibition on “unfair acts or practices,” in the Consumer Financial Protection Act.
Chopra also emphasized that financial companies can be held liable for engaging in “unfair” practices, a violation of the prohibition against “unfair, deceptive and abusive acts and practices,” known as UDAAP.
“Financial firms that cut corners on data security put their customers at risk of identity theft, fraud, and abuse,” Chopra said last year.
Others questioned why employees have so much access to so much information and why the employee was caught after already accessing so much data. The CFPB has had little patience or sympathy for institutions about the data requests, some said.
“The enormous amount of highly sensitive information that they ask for in exams and other sensitive information in other contexts, and the expectation that it will all be provided quickly and easily,” Morris said. “And here they have their own problems.”
She added that “companies always say they shouldn’t be punished with UDAAP and law enforcement penalties, and now the bureau can see that for themself.”
On the other hand, there are so many data breaches everywhere, and plenty of them are “inside jobs,” that few are surprising, lawyers said. Most consumers likely have reset their privacy expectations, and many already knowingly hand over passwords and other personal information to third-party fintechs to access financial applications.
The data breach also raises questions about how secure the CFPB’s internal data is and whether it is adhering to advanced security procedures. The Government Accountability Office issued a report in 2014 that found the bureau needed to improve its privacy and security given the large-scale data it collects.
At the time, the bureau had created a data intake and risk-management process, but GAO requested that more privacy controls be enacted and that more training of staff was needed. Some experts have questioned whether the CFPB took action at the time to safeguard its information security practices.
“There was a withering GAO report expressing concern about CFPB’s data protection policies [and] it was never clear to me what CFPB had done to shore that up, if anything,” Zywicki said. “It relates to this question of how much data the CFPB collects, what they use it for [and] who has access to it.”
“As we have evaluated the likely impacts of issuing a CBDC it has become clear that the purported benefits of a CBDC are uncertain and unlikely to be realized, while the costs are real and acute,” the American Bankers Association wrote the Federal Reserve.
Samuel Corum/Bloomberg
Banks worry a digital dollar would threaten their ability to attract and retain deposits and undermine their ability to fund loans, according to a Federal Reserve report released this week.
In January of 2022, the Fed published a white paper on what a U.S. central bank digital currency, or CBDC, might look like and sought public comment on nearly two dozen questions about potential risks, benefits and structural considerations. On Thursday, it released a summary of the more than 2,000 responses it received from financial institutions, their trade associations, academics, members of the general public and others.
Views about the prospects for a CBDC ranged from enthusiastic to skeptical to vehemently opposed.
Banking associations at both the state and national level supported the Fed’s efforts to gather information about a digital dollar before moving forward but complained that a CBDC would not be in the best interest of the industry or the country.
“As we have evaluated the likely impacts of issuing a CBDC it has become clear that the purported benefits of a CBDC are uncertain and unlikely to be realized, while the costs are real and acute,” the American Bankers Association wrote in its comment letter. “Based on this analysis, we do not see a compelling case for a CBDC in the United States today.”
The Fed report comes as politicians and conspiracy theorists stoke fears and misconceptions about the central bank’s interest in a digital dollar.
The Fed is not actively considering creating a digital dollar, and it has noted that it would like some form of authorization from Congress and the White House before rolling one out.The responses gathered will inform the Fed’s ongoing research into CBDCs, which includes initiatives at the Federal Reserve banks of Boston and New York.
The comments were based on the assumption that a U.S. digital dollar would be intermediated, meaning customers would keep their holdings at commercial banks rather than maintain accounts directly at the Fed. Some have worried about the implications of a direct-to-consumer CBDC for privacy and implementation of monetary policy, but Fed leaders have repeatedly said they do not want to be in the retail banking business.
Still, banks worry about the specifics of this arrangement. Because they might have to hold digital dollars in custody-like accounts, banks would not be able to treat these holdings as deposits, meaning they couldn’t use them to make loans. Not only would that arrangement force banks to incur an uncompensated cost, the Bank Policy Institute noted in its letter, it also would limit banks’ ability to extend credit.
“Any transfer of a dollar deposit from a commercial bank or credit union to a CBDC is a dollar unavailable for lending to businesses or consumers,” BPI wrote in its letter. “We believe that there is a widespread popular misconception on this point, which the Federal Reserve should strive to rectify.”
In particular, banks fear a shift from traditional deposits to digital dollars would be felt most acutely in markets served by small banks, which rely on individual deposits more than their larger peers. If the Fed were to pay interest on money held in digital dollars, this could supercharge the flow of holdings from traditional bank accounts to a CBDC, several groups noted.
“As proposed, the CBDC will be a government-backed competitor to bank retail deposits, which count for 71% of bank funding today,” the Texas Bankers Association wrote. “The loss of this funding source will severely limit credit availability to businesses and consumers.”
Another drawback to the model outlined by the Fed, according to industry groups, is the burden it would put on banks to maintain cybersecurity, combat money laundering and protect customers’ individual information, all at a considerable cost.
Some say current advancements already in the works by both the government — including the Fed’s forthcoming instant-payment system FedNow — and the private sector — such as tokenization and stablecoins — already provide many of the potential benefits CBDC-proponents are seeking.
“Concurrently, the growth of open banking, open finance and the ascendency of neobanks will increase competition and support a more inclusive financial system,” Mastercard wrote in its comment letter. “Therefore, while a CBDC is one approach to reducing frictions in payments and supporting a more inclusive financial system, it is not the only means of doing so.”
Other commenters praised a CBDC’s potential to open up the digital economy to the unbanked, make banking more affordable and preserve the dollar’s standing as the preferred settlement basis for cross-border transactions and the world’s reserve currency.
Merchant groups, for example, see a digital dollar creating more competition for current payment providers and thus drive down their costs.
Phyllis Meyerson and David Walker, heads of the consulting firm Tiller Endeavors and consultants on the Fed’s faster payments advisory groups, added that a Fed-issued CBDC could help facilitate payments both domestically and across borders in ways that current payments systems cannot.
“While there are several defensive reasons to pursue CBDC, such as international and nonbank competition in digital currencies and the risk of evolving, unregulated payment options, the primary opportunity before us is the creation of a payment system to support a global economy,” they wrote. “None of our current payment systems satisfy this growing need.”
Crypto companies “have chosen to be noncompliant and not provide investors with confidence and protections, and it undermines the $100 trillion capital markets,” SEC Chairman Gary Gensler told the House Financial Services Committee on Tuesday.
Al Drago/Photographer: Al Drago/Bloomberg
WASHINGTON — Securities and Exchange Commission Chairman Gary Gensler tied together cryptocurrencies and the recent banking crisis as he asked Congress for more resources to police the crypto market.
“Silvergate and Signature [banks] were engaged in the crypto business — I mean some would say that they were crypto-backed,” Gensler testified at a House Financial Services Committee hearing Tuesday.
The loss of deposits linked to cryptocurrency clients are widely believed to have contributed to Silvergate’s decision to close and the failure of Signature. Federal regulators took unusual steps to try to prevent a loss of public confidence in the banking system after the collapse of those two banks and Silicon Valley Bank last month.
Gensler emphasized that the crisis showed that the regulated banking sector and the less-regulated crypto market have mutual exposures that have to be addressed.
“Silicon Valley Bank, actually when it failed, you saw the country’s — the world’s — second-leading stablecoin had $3 billion dollars involved there, depegged, so it’s interesting just how this was all part of this crypto narrative as well.”
The stablecoin company Circle has confirmed that it held $3.3 billion of its $40 billion USD Coin reserves at Silicon Valley Bank, which failed on March 10.
While the SEC has the authority it needs to police crypto market, Gensler says, the agency “could use more resources.”
“The dedicated staff of this agency has done remarkable work with limited resources,” Gensler said in his prepared remarks. “In the face of significant growth in registrants, more individual investor involvement in our markets, and increased complexity, the SEC’s headcount actually shrunk from 2016 through last year. With Congress’s help, our headcount this year now is approximately 3% larger than in 2016. I support the President’s FY 2024 request of $2.436 billion, to put us on a better track for the future.”
In its budget request, the SEC asked for funding for 5,475 new positions, some of which would increase the agency’s oversight of crypto assets, including policing the market for noncompliant and fraudulent activity.
“I think this is a field that, in the main, is built up around noncompliance, and that’s their business model,” Gensler said at the hearing. “They have chosen to be noncompliant and not provide investors with confidence and protections, and it undermines the $100 trillion capital markets.”
Gensler’s appearance was his first before the committee since Republicans took control of the House in January. They had little to say on Gensler’s call for more resources.
But Rep. Patrick McHenry, R-N.C., the chairman of the panel, has said that he intends to scrutinize the SEC and Gensler’s leadership of the agency as part of an aggressive oversight agenda.
“As you can see, we’re under new management and a new Congress,” McHenry said. “So please get comfortable.”
McHenry suggested he would use the committee’s subpoena power or other methods to get information that Republicans say the SEC has withheld from Congress.
“If you continue to thwart this institution by ignoring our requests and providing incomplete responses, we will be left with no choice but to pursue all avenues to compel the information or documents we need,” he said.
“I’m committed to getting this done,” Gensler said.
Rep. Andy Barr, R-Ky., the chairman of the subcommittee on financial institutions, questioned Gensler on an SEC staff bulletin that he said prevents banks from serving as custodians for crypto assets. Gensler defended the bulletin.
“I’m actually quite proud of the staff that put out that staff accounting bulletin, because what they said was public companies, not just banks, needed to put on their balance sheet their customers’ crypto, because what we found in bankruptcy court, Celsius bankruptcy and others, in bankruptcy investors just stand in line,” Gensler said.
When Barr asked if bank regulators were consulted beforehand, Gensler said that the agency discussed the issue with them “subsequently.”
“There was significant dialogue beforehand with the accounting profession and the big four [accounting firms] and others, because this question kept coming up, but there has been consultation about this with the bank regulators subsequently,” he said.
The unfinished Dodd-Frank rule would give the Federal Deposit Insurance Corp. more ability to claw back the compensation of failed-bank executives.
Andrew Harrer/Bloomberg
WASHINGTON — Finalizing the Dodd-Frank Act’s unfinished executive compensation rule might be a straightforward path to more easily punish the executives of failed banks in the wake of the Silicon Valley Bank and Signature Bank failures, but the regulatory process could be fraught with legal issues.
To avoid at least some of those, several progressive groups are urging financial regulators to finish the Dodd-Frank executive compensation rule, which would give the Federal Deposit Insurance Corp. the ability to claw back the compensation of some failed-bank executives — a growing priority for the Biden administration. Congress required the agencies to finalize the rule by May 2011, but while a rule was proposed in 2016, it remains incomplete.
The groups — which include Americans for Financial Reform Education Fund, Public Citizen, the Revolving Door Project, Governing for Impact, and the Center for LGBTQ Advancement & Research — asked financial regulators in a letter to be sent Tuesday to finish that 2016 plan rather than restart the rulemaking process. Beginning that process over again could leave the Biden administration vulnerable to more legal challenges than if the executive branch finalized a rule out of the one proposed in 2016, the groups argue.
Six agencies are involved in the rulemaking, including the Office of the Comptroller of the Currency, the Federal Reserve, the FDIC, the National Credit Union Administration, the Securities and Exchange Commission and the Federal Housing Finance Agency.
“More than a decade after the [Dodd-Frank Act’s] 2011 deadline, and after several failed starts — the most recent of which was the 2016 proposal — your agencies have yet to finalize a rule under section 956, leaving the financial system at risk,” the groups say in the letter. “Without it, covered institutions are subject to different requirements depending on their primary regulator, leading to regulatory arbitrage. And without having finalized a regulation, your agencies have potentially opened themselves up to litigation.”
Specifically, the agencies should finalize the rule before the middle of 2024 to avoid a Congressional Review Act challenge, the letter says, should Democrats do poorly in the 2024 elections.
“The 2024 election could usher in a new President, Senate, and House, allowing them to overturn rules finalized by the Biden regulatory agencies within 60 legislative days of Congress’s adjournment in December,” the groups said in the letter. “This special look-back period has traditionally begun running somewhere between May and September.”
Revisiting the 2016 rule should also not pose a risk under the Administrative Procedure Act, especially if the agencies introduce a brief comment period before finalizing the rule, the progressive groups argue. However, courts have in the past decided that an additional comment period is unnecessary if the original record is “still fresh.”
“There is an argument that the 2016 rulemaking record is still fresh, even after seven years; after all, the basic dynamics of inappropriate financial incentives do not change,” the groups said.
Instead, the agencies could face litigation should they fail to finalize a rule, according to the Administrative Procedure Act, the groups argue.
“Competitors to institutions who would be subject to the rule have standing to sue; and those competitors would be likely to prevail,” according to the letter.
In fact, policy watchers say the unfinished state of the executive compensation rule is one of the outstanding legal questions about the rulemaking going forward. Under Republican and Democratic administrations, regulators have prioritized other elements of Dodd-Frank, such as the Fed’s focus on “tailoring” capital requirements under former Vice Chair for Supervision Randal Quarles.
But while the executive compensation rule has lingered at the agencies due to a combination of attrition and turnover, experts said, the recent bank failures have made it more likely that regulators will complete it.
Karen Petrou, managing partner at Federal Financial Analytics, said that the wide range of financial regulators required to approve the final rule, from banking agencies to market cops, has historically made it difficult for the rule to be finalized. Currently the Biden administration has control of all of the agencies except for the NCUA, which still has two of three board seats allocated to Republican members.
“Sec. 956 required all the financial regulators to write a single rule,” Petrou said in an email. “That proved impossible not only due to the difficulty of doing so in general, but also the very different missions of each agency subsequently complicated by Trump appointees after the election.”
Ian Katz, managing director of Capital Alpha Partners, said that regulators nominated by both parties have simply had issues that have seemed more urgent compared with the executive compensation rule, but that the recent bank failures have made it more of a priority.
“It’s hard to explain how it’s taken this long except to say it clearly hasn’t been a very high priority for the regulators,” he said in an email. “I think there’s more interest in this issue now than there has been in many years. So I believe the chances for action on this have improved significantly and there’s a good chance this finally gets done.”
Carrie Tolstedt, the former head of Wells Fargo’s community banking unit, was arraigned in federal district court in Los Angeles on Friday and entered a not guilty plea on charges of obstructing a bank examination.
Bloomberg News
LOS ANGELES — Carrie Tolstedt, Wells Fargo’s former head of its community bank, entered a “not guilty” plea at an arraignment hearing on Friday, kicking off a legal battle that could result in prison time for the accused.
Tolstedt stood before District Court Judge Josephine L. Staton at the federal courthouse in downtown Los Angeles and entered a plea of “not guilty,” to the criminal charge of obstructing a bank examination. If found guilty, Tolstedt would become the highest-ranking executive at Wells Fargo to go to prison for the phony accounts scandal and its ensuing coverup.
Prosecutors said Tolstedt failed to disclose to federal bank examiners the number of Wells Fargo employees who had been fired or resigned for opening millions of bank accounts without customer authorization.
On Friday, Tolstedt, 63, stood before Judge Staton and agreed to waive her right to be indicted by a grand jury, and agreed to the conditions of her release on a $25,000 unsecured bond. The hearing took less than 10 minutes. Tolstedt’s “not guilty” plea starts the administration process that will end in 10 weeks with her sentencing.
“Ms. Tolstedt, have you read this information,” Judge Staton asked at the hearing, saying: “And I’m not asking you to admit or deny anything right now, but do you understand the contents of what the government is saying that you did?”
“Yes,” Tolstedt replied.
Last month, Tolstedt entered into a plea agreement with the U.S. Attorney’s Office for the Central District of California, in which she agreed to plead “guilty” to the single obstruction charge in exchange for prosecutors setting an upper limit of prison time. The law for obstruction of a bank examination allows for a broad sentence of up to five years, but the plea deal limits the statutory maximum sentence, or “statmax,” to 16 months, said Ranee A. Katzenstein, a 25-year veteran of the U.S. Attorney’s Office, assistant U.S. attorney and chief of the major frauds section. The guideline range is between 10 to 16 months.
The plea agreement has not yet been approved by Judge Staton. The district court will refer Tolstedt’s “not guilty” plea to the U.S. Probation and Pretrial Services System, which prepares a presentence report that will be the subject of the next hearing, prosecutors said. Staton set a status conference for May 19, and a trial date of May 30.
Tolstedt is being prosecuted by Assistant U.S. Attorney Alexander B. Schwab. The case’s ultimate resolution is the result of years of work by multiple agencies investigating corporate misconduct, a focus of the Department of Justice under Attorney General Merrick Garland.
Meanwhile, Tolstedt spent much of the hearing signing papers and conferring with her attorney Matthew Umhofer, managing partner at Umhofer, Mitchell & King and a former assistant U.S. attorney.
The prospect of a high-ranking former banker actually going to prison comes at a particularly inauspicious time for the banking industry. The failures of Silicon Valley Bank and Signature Bank in March — and revelations of stock sales and bonuses of the executives of both banks — have rankled policymakers and the public, giving Republican and Democratic lawmakers the political impetus to craft legislation to claw back compensation.
Back in 2016, just months before the first settlement was announced, Wells gave Tolstedt a golden parachute in which she was allowed to retire with $125 million of stock and options, including a $5.5 million incentive bonus the year the scandal broke. Some of it was ultimately clawed back.
Last month, Tolstedt agreed to pay a $17 million fine to the Office of the Comptroller of the Currency for her role in the sales misconduct saga that ultimately led to the downfall of two Wells CEOs. Tolstedt also acceded to a ban from the banking industry in order to resolve certain civil charges she was facing.
Prosecutors said Tolstedt was aware of sales practices misconduct between 2004 and 2006, when employee firings linked to sales goals began rising. Wells has settled more than $3 billion in fines. The San Francisco bank admitted that employees were pressured for more than a decade to meet unrealistic sales goals leading to thousands of employees falsifying bank records or engaging in identity theft. The Office of the Comptroller of the Currency and L.A. City Attorney’s office announced the first settlement against Wells in September 2016.
The obstruction charge that Tolstedt faces stems from a memo that she and other Wells 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.
The scandal was first uncovered by former Los Angeles Times Reporter E. Scott Reckard, whose 2013 article found employees forged signatures, falsified phone numbers and opened customer accounts without their permission, igniting the public investigations.
Tolstedt was Wells Fargo’s senior executive vice president of community banking and headed the community bank during the time that the aggressive sale practices and firings took place.
On Friday, when Tolstedt first entered the nearly-deserted courthouse with her husband, she was stopped by a security guard after a beep went off at the metal detector. The guard ruffled through her belongings and repeatedly sent her wallet through the metal detector. The guard ultimately pulled out a metal credit card that had set off the alarm.
The Federal Reserve disclosed more details on its decision to deny Custodia Bank’s application for membership.
Bloomberg
The Federal Reserve said Custodia Bank has insufficient management experience, a non-viable business model and an over-reliance on the “speculation and sentiment”-driven crypto sector, and those factors contributed to its decision to deny the digital asset bank’s application to join the Fed system.
The Fed released the full 86-page order — albeit with some redactions — on Friday afternoon, explaining why the Cheyenne, Wyo.-based depository presented a safety and soundness risk too great to be permitted into the traditional banking system. It first announced the rejection nearly two months ago.
Among the litany of concerns outlined in the rejection summary were Custodia’s lack of federal deposit insurance, its liquidity risk management practices and its failure — in the eyes of the Fed — to meet necessary standards for implementing anti-money laundering and Bank Secrecy Act requirements.
The Fed expressed skepticism that the resolution requirements under Wyoming’s Special Purpose Depository Institutions were as robust as what is required by the Federal Deposit Insurance Corp. Wyoming is the first — and, so far, only — state with a licensing regime for digital asset banks.
The Fed’s order also detailed its many concerns with the digital asset sector, which it described as being not only volatile and highly interconnected, but also a hotbed for fraud, theft, money laundering and illicit finance. It described cryptocurrencies as being “not anchored to a clear economic use case.”
In a response statement issued on Friday afternoon, Custodia spokesman Nathan Miller pushed back against many of the facts cited in the Fed’s decision. He also suggested that, had Custodia been permitted to serve as a regulated bridge between the crypto space and traditional financial markets, recent turmoil in the banking sector could have been avoided.
“The recently released Fed order is the result of numerous procedural abnormalities, factual inaccuracies that the Fed refused to correct, and general bias against digital assets,” Miller said. “Rather than choosing to work with a bank utilizing a low-risk, fully-reserved business model, the Fed instead demonstrated its shortsightedness and inability to adapt to changing markets. Perhaps more attention to areas of real risk would have prevented the bank closures that Custodia was created to avoid.”
Miller said the bank engaged with its primary regulator, the Wyoming Division of Banking, as well as an independent compliance consultant last fall, both of which gave its risk management practices and controls a clean bill of health.
He also said Custodia would not need deposit insurance because it planned to hold more than a dollar in liquidity for every dollar deposited by a customer. He argued that doing so served as a better protection against deposit runs than insurance.
“Historic bank runs in the last two weeks underscore the dire need for fully solvent banks that are equipped to serve fast-changing industries in an era of rapidly improving technology,” Miller said. “That is the exact model proposed by Custodia Bank – to hold $1.08 in cash to back every dollar deposited by customers.”
One of the stipulations of the Wyoming SPDI charter is that banks cannot make loans using customer deposits. Typically, banks create loans for far greater amounts than they bring in through deposits, a concept known as fractional-reserve banking. Rather than profit off interest charged on loans or returns from investments, Custodia intended for its revenue to be entirely fee-based.
Yet, the Fed took issue with this business model. In its denial, it argued that such a reliance on fees would inextricably link Custodia to the broader health of the crypto ecosystem, which has proven to be volatile and unpredictable.
“The institutional clients and individual customers that Custodia is targeting will only need the bank’s services if crypto-assets are perceived as an attractive investment,” the Fed’s order notes. “Moreover, given the importance of fee income from planned crypto-asset-related activities to Custodia’s overall business plan and the concentration and interconnectedness of the crypto-asset industry, potential run-related risks with respect to assets under custody could impact the viability of Custodia via a significant and sudden reduction in fee-based revenue. For that reason, Custodia’s fortunes are tied directly to those of the crypto-asset markets.”
Custodia’s proposed business model includes providing custody, core banking and payment services to businesses and, eventually, wealthy individuals who use digital assets. In 2020, it sought to become the first bank of its kind to gain access to the Fed’s payments system by applying for a master account with the Federal Reserve Bank of Kansas City.
It later applied to become a state-chartered member bank, which would have made the Fed its primary regulator. Based on guidelines established last year, being federally supervised streamlines the application process for uninsured depositories to obtain master accounts.
Custodia’s bids for a master account and Fed membership were shot down on Jan. 27.
After its twin rejections in January, Custodia withdrew its initial lawsuit, which sought to compel the Fed to make a decision about its applications. It has since amended its complaint, arguing that the Board of Governors and the Kansas City Fed coordinated with other government agencies to block it and other digital asset-focused firms from the banking system.
“It is a shame that Custodia must turn to the courts to vindicate its rights and compel the Fed to comply with the law,” Miller said.
Custodia’s claims are poised to be put on trial later this year, a rarity for Fed-related legal challenges.
Rep. Maxine Waters, a California Democrat who is ranking member of the House Financial Services Committee, left, speaks with Rep. Patrick McHenry, a North Carolina Republican who chairs the committee, during a Feb. 7, 2023, hearing.
Ting Shen/Bloomberg
Representatives from the Federal Reserve and Federal Deposit Insurance Corporation are set to testify before Congress later this month at a hearing about the failures of Silicon Valley Bank and Signature Bank.
FDIC Chairman Martin Gruenberg and Federal Reserve Vice Chair for Supervision Michael Barr are scheduled to attend the March 29 hearing as witnesses and answer questions about the banks’ collapses.
The bipartisan hearing is expected to be the first of multiple hearings on the issue, according to House Financial Service Committee Chairman Patrick McHenry, R-N.C., and California Rep. Maxine Waters, the committee’s top Democrat.
“This hearing will allow us to begin to get to the bottom of why these banks failed,” McHenry and Waters said Friday in a joint statement.
Additional witnesses may be added as the hearing date approaches, McHenry and Waters said.
The Federal Reserve and FDIC did not immediately respond to requests for comment Friday afternoon.
The Fed said Monday that Barr will lead a review of Silicon Valley’s failure. The findings of that report are expected to be publicly available by May 1, the agency said.
The Senate Banking Committee has yet to schedule a hearing into the matter. Chairman Sherrod Brown, D-Ohio, this week urged regulators to review the circumstances around the failures of both Silicon Valley and Signature.
On Thursday, Treasury Secretary Janet Yellen became the first high-level administration official to testify before Congress after the failures set off a maelstrom across the banking industry. Yellen defended the federal government’s decision to step in and provide systemic-risk exceptions to both Silicon Valley and Signature, and maintained that not all deposits at other banks are guaranteed.
WASHINGTON — The top Democratic lawmaker on the House Financial Services Committee Maxine Waters, D-Calif., is floating the idea of guaranteeing all uninsured depositors in the future.
“Are we going to make sure that we take care of the uninsured in the way that we did with this fallout from Silicon Valley Bank?” Waters said in an interview. “I don’t know, but I will have to put it on the table.”
Waters didn’t commit to backing legislation for the idea, but said that she’s looking at different legislative solutions for what she called regulatory failures that allowed Silicon Valley Bank to mismanage its liquidity risk. Waters, like other Democrats, wants to revisit the 2018 clawback of some requirements for mid-sized banks, which would have included banks the size of Silicon Valley Bank, which is based in her home state, and Signature.
Representative Maxine Waters, a Democrat from California and ranking member of the House Financial Services Committee, said that expanded deposit insurance legislation could be coming. Photographer: Andrew Harrer/Bloomberg
Andrew Harrer/Bloomberg
“There are a number of issues to be looked at, everything from the uninsured to stress testing to understanding what rules should be in place for how you determine that your balance sheet assets are not worth today what they could have been some time ago because of inflation and the increase in interest rates,” she said. “I’m sure some of it will need legislation.”
Any losses associated with the resolution of Silicon Valley Bank or Signature Bank after their failure and extraordinary action by regulators to backstop uninsured depositors will come from the Deposit Insurance Fund, and will be recovered by a special assessment on banks.
‘That fund is paid for by the premiums that are paid by the banks,” Waters said when asked about the fee impacting small banks whose balance sheets don’t have the same interest rate exposure, unlike the $209 billion Silicon Valley Bank. “We’ve had no discussion about raising those amounts, it is very safe, it is very secure now with ample assets by which to take care of the uninsured.”
“To the extent that these banks’ failure reflected liquidity weaknesses, the liquidity coverage ratio – the liquidity rule that was eliminated for most bank holding companies with less than $250 billion in assets after S. 2155 – likely would not have prevented either bank’s problems, and might have made them worse,” said the Bank Policy Institute in a statement. “Although the LCR does require banks to hold a large pool of ‘high-quality liquid assets,’ it strongly encourages banks to hold primarily government securities for that purpose – precisely the securities that SVB and Signature held, exposing them to losses when the Fed raised rates.”
Waters said that she and House Financial Services Committee Chairman Patrick McHenry, R-N.C., have agreed to hold a hearing “as early as we possibly can” on Silicon Valley Bank and Signature, making it a bipartisan issue.
“There are those that don’t like regulation and have been involved in the deregulation that has been done,” she said. “And of course there are those of us who really do believe we have to have credible regulation in order to protect the people in this country who trust their money to the banks and expect for it to be there when they want to get it out.”
The Federal Deposit Insurance Corp. will likely have to raise its Deposit Insurance Fund fees in the event that it is reduced due to the failures of Silicon Valley Bank and Signature Bank. Smaller banks are unhappy about paying more fees for what they see as larger banks’ mismanagement.
Andrew Harrer/Bloomberg
Many in the banking industry fear that Sunday’s intervention to shore up Silicon Valley Bank and Signature Bank could compel the Federal Deposit Insurance Corp. to hike assessments on all banks to replenish its Deposit Insurance Fund, and some smaller banks are particularly unhappy about paying to make up for larger banks’ failures.
FDIC’s Deposit insurance guarantees up to $250,000 of depositors funds will be repaid even if the bank fails. Member banks pay deposit insurance premiums, known as assessments, to fund the DIF, which stood at 128.2 billion as of December 31, 2022.
The FDIC has made clear banks — not taxpayers — will pay for the rescue of Silicon Valley Bank and Signature Bank’s uninsured deposits.
“Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law,” the agency wrote in a release detailing their response to the failures.
While there is no doubt that the FDIC will raise fees, how they raise fees and from whom remains to be seen. Arthur Wilmarth, professor emeritus at George Washington University Law School, thinks the increasing regularity of the systemic risk exception should be factored into banks’ future assessments.
“We’ve essentially protected all bank deposits twice — during the financial crisis of 2008-09 and again this time,” Wilmarth wrote in an email. “If we’re going to protect all deposits during a crisis, banks should pay for that privilege on an ongoing basis. I’ve argued that the same should be true for money market funds, which we bailed out in 2008 and 2020.”
Smaller community banks were initially alarmed by regulators’ announcement, which didn’t specify which banks would pay for this special assessment.
To be sure, small community and regional banks stand to benefit greatly from the FDIC’s bailout largely because the system is staving off a run on small banks, but small banks also do not receive the kinds of interventions that Silicon Valley Bank and Signature Bank’s customers benefitted from. Wilmarth thinks lessons from Silvergate’s recent demise reveal which institutions regulators are willing to take extraordinary measures to save. He says community banks dislike the idea of paying for a problem they didn’t cause, and a remedy they will not benefit from.
“As we saw with Silvergate, it is very unlikely that a bank smaller than $25 billion would have received treatment similar to SVB and Signature,” Wilmarth wrote in an email.
Jill Castilla, president and CEO of $345.7 million-asset Citizens Bank of Edmond, said she thinks the FDIC should tailor the special assessment to big banks.
“I’m not necessarily happy to bear that cost,” Castilla said. “But if it’s a price that we have to pay in order to ensure stability in the U.S. banking system, I will, knowing that it’s for the broader good.”
Castilla said she was rethinking the concept of the special assessment on banks after seeing a Twitter post from Sen. Bernie Sanders, I-Vt., who admonished the bailout of venture capitalists. Sanders said in a tweet and press release: “If there is a bailout of Silicon Valley Bank, it must be 100 percent financed by Wall Street and large financial institutions.”
Indeed, bankers that said they have long stuck to prudent asset liability management practices — sometimes at great expense — are voicing opposition to funding depositors of banks that failed due to bad management.
“It will be a travesty if the FDIC fund is used to guarantee deposits in excess of FDIC insurance thresholds,” said Steven M. Gonzalo, president and CEO of $1.2 billion-asset American Commercial Bank & Trust, a 10-branch bank on the outskirts of Chicago that was founded in 1865.
Sticking small banks with the failures of larger ones is nothing new, said Gonzalo. During the financial crisis in 2008, Gonzalo said, the bank’s FDIC premiums jumped 10-fold to $300,000 a year, from $30,000 a year.
“We were forced to prepay three years of premiums to bail out the very banks that created the problem,” he said.
Former FDIC lawyer Todd Phillips thinks small banks shouldn’t be too worried, even if Congress is considering raising total insured deposits, big banks and systemically important institutions will pay for mitigating the risk.
“Unless Congress changes the law around the deposit insurance ceiling, I don’t expect banks to pay higher insurance premiums. The statutory minimum is still the same,” Phillips wrote in an email. “To the extent the FDIC decides to increase the size of the DIF as a result of this weekend, increased premiums will come from the largest institutions, not community banks.”
Many small community bankers said they also were shocked that the failed banks did not maximize FDIC insurance by using tools for reciprocal deposit arrangements.
Both Signature and Silicon Valley Bank were members of IntraFi, a privately-held firm in Arlington, Va., that allows deposit swapping, whereby a customer has a single relationship with a bank but can spread deposits among other FDIC-insured institutions, thus helping to maximize deposit insurance coverage. Intrafi was created more than two decades ago by former regulators at the Federal Reserve, FDIC and Office of the Comptroller of the Currency.
Silicon Valley Bank had just $469 million in reciprocal deposits on its balance sheet at year end; Signature had $228.4 million, according to call report data from the Federal Financial Institutions Examination Council.
Republicans on the Senate Banking Committee are keeping a watchful eye on the Federal Reserve’s ongoing review of bank capital requirements.
Sen. Tim Scott, R-S.C., the ranking member on the committee, sent a letter to Fed Chair Jerome Powell on Friday afternoon, urging him to make sure any changes to capital requirements are tailored to each bank’s specific activities, risks and complexities.
Should the review fail to adequately tailor capital requirements, the letter warns, the Fed’s actions could have a “chilling effect on market making activities and availability of financial services.”
The letter also noted that the committee expected to be kept fully informed with “robust analysis” from the Fed as it conducted its review and adjusted policies accordingly. A Federal Reserve spokesperson said Friday afternoon that the central bank has “received the letter and [plans] to respond.”
Sens. Mike Crapo, R-Idaho, Mike Rounds, R-S.D., Thom Tillis, R-N.C., John Kennedy, R-La., Bill Hagerty, R-Tenn., Cynthia Lummis, R-Wyo., Katie Britt, R-Ala., Kevin Cramer, R-N.D., and Steve Daines, R-Mont., co-signed the letter.
The senators also argued that the banking sector’s ability to withstand the shock of the COVID-19 pandemic and ensuing liquidity crunch in spring of 2020 without widespread failures serves as evidence that they are already sufficiently capitalized.
The missive is in response to the “holistic” capital review being led by Fed Vice Chair for Supervision Michael Barr. The effort is poised to encompass all of the central bank’s various capital standards and assess how they work with one another and independently to address safety and soundness concerns within the banking system.
Among the policies to be considered are the Fed’s supplementary leverage ratio, the stress capital buffer — and the stress testing regime that determines it — and the final implementation of capital requirements related to Basel III, known as the Basel III endgame.
Barr, who has made the holistic capital review his first signature act as the Fed’s top regulatory official, has not taken an official stance on whether capital requirements should be higher or lower. However, in a December speech at the American Enterprise Institute, Barr stated that “current U.S. requirements are toward the low end of the range described in most of the research literature.”
In their letter, the Senate Banking Republicans pointed to the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act’s provisions on tailoring requirements. The law narrowed portions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which established new principles for bank regulation in the wake of the subprime mortgage collapse in 2008.
“As the Vice Chair of Supervision, Mr. Barr should adhere to the letter and spirit of the tailoring provisions as enacted by Congress,” the senators wrote. “Reports of regulators’ efforts to unwind those tailoring reforms are concerning and do not comply with the law.”
The functioning of the U.S. government debt market remains a concern for the Federal Reserve.
In brief remarks delivered at an event hosted by the University of Chicago’s Booth School of Business, FedGov. Michelle Bowman said it was important for the central bank to continue working with other regulators to review Treasuries markets to make sure they are appropriately supervised and resilient.
“Doing so can increase the ability of private markets and institutions to function during times of stress and reduce the likelihood of future market interventions by the central bank,” she said. “In this regard, it is important for the Federal Reserve to engage along with the other agencies in a thoughtful consideration of possible regulatory adjustments and structural reforms to increase the resiliency of the Treasury markets and reduce the likelihood of future market dysfunction.”
Financial regulators in Washington have been studying the impacts of the COVID-19 era actions on Treasury markets. The Interagency Working Group for Treasury Market Surveillance, which consists of the Fed Board of Governors, the Federal Reserve Bank of New York, the Securities and Exchange Commission, the Treasury Department and the Commodity Futures Trading Commission, has issued two reports on the matter during the past two years.
During the Friday afternoon event, Bowman moderated a panel discussion on “Design Issues for Central Bank Facilities in the Future.” In her opening remarks, she detailed how the Fed’s various interventions helped support the U.S. economy in the early stages of the COVID-19 pandemic, including creating lending facilities and buying assets.
The Fed’s actions, she said, were integral to preserving the flow of credit in the financial system. But, she noted, some of the various tools the central bank used saw differing levels of use by market participants.
“Significant asset purchases and take-up of the Fed’s repo operations were required to restore smooth functioning in Treasury markets because of the liquidity needs of a wide swath of investors,” she said. “By comparison, many of the 13(3) lending facilities saw relatively limited take-up, but they helped support market functioning and the supply of credit in the targeted markets by offering a backstop and bolstering investor confidence.”
Bowman said the lending programs proved effective because they offered funding at a penalty rate, because it served as a backstop for banks without expanding the Fed’s footprint too greatly in any particular market.
Bowman said targeted purchasing was an appropriate response for the Treasuries market, given the severe liquidity shortage in the spring of 2020. But, she said, such programs raise issues that must be addressed by central banks, including how to “clearly distinguish asset purchases from the central bank’s monetary policy actions.”
Other considerations include how to minimize the Fed’s footprint in the market and how to “construct and communicate an exit strategy to reduce the enlarged balance sheet over time.”
The Fed stopped purchasing Treasuries and mortgage-backed securities in March 2022 and then began allowing assets to roll off its balance sheet last June.
WASHINGTON — The Consumer Financial Protection Bureau is plowing ahead with a busy enforcement agenda despite a cloud of uncertainty hanging over it from the Supreme Court’s decision to take a case challenging the bureau’s funding.
The CFPB said it was “pleased” that the Supreme Court had decided on Monday to take a case about the constitutionality of its funding mechanism. CFPB Director Rohit Chopra weighed in on the case for the first time, saying a decision could have massive repercussions for financial institutions, the agency and others.
“We don’t want a situation where there are financial institutions all over the country getting sued because of a lack of clarity on the validity of actions,” Chopra said at the Credit Union National Association’s Governmental Affairs Conference in Washington, D.C., on Monday. “I’m hopeful that this is the next step to create that clarity, and we’ll let the process go forward.”
The CFPB had petitioned the high court to review a decision in October by a three-judge panel of the U.S. Court of Appeals for the 5th Circuit. The three judges, all appointees of former President Donald Trump, found that the bureau’s funding through the Federal Reserve Board violates the Constitution’s appropriations clause.
Chopra made clear that the agency is continuing its enforcement. The bureau in 2010 faced a similar period of limbo when the Supreme Court accepted a constitutional challenge to the protections its single director had from being fired by the president; that case threatened to hamper the CFPB, but it went on with its work as before.
“I will be very clear that we are not holding back when it comes to our enforcement program,” Chopra said. “We do know that many repeat offenders [and] bad actors want to use this to escape liability and accountability, and we are not holding back on that front.”
But the CFPB also faces significant litigation risks if the high court finds that the bureau’s funding is unconstitutional. Financial firms that have paid billions in settlements may ask the CFPB to return their money, lawyers said. Even some attorneys that have been highly critical of the CFPB said that situation would be chaotic.
Joe Lynyak, a partner at Dorsey & Whitney LLP, said the Supreme Court will have a hard time finding that the CFPB’s funding is unconstitutional because doing so would automatically mean financial firms that have paid roughly $14.9 billion to the CFPB in past settlements may sue to get their money back.
“If the CFPB is declared to be unconstitutional then all its actions from the past 10 years are void, and from a practical perspective, courts do not favor this result,” Lynyak said. “It would open up a whole new can of worms, including the enforceability of any payments made to injured consumers.”
Isaac Boltansky, managing director and director of policy research at the investment bank BTIG, listed nearly a dozen companies that stand to benefit from a ruling against the CFPB because they currently face enforcement actions or pressure from CFPB regulations.
“From a practical perspective, this means that the cloud of uncertainty will remain over the Bureau’s rulemaking and enforcement actions,” Boltansky wrote in a research note.
He thinks the CFPB faces even more litigation because of the court case. The bureau will likely be sued once it finalizes its proposal to regulate credit card late fees, he said.
“The CFPB will still push to finalize its credit card late-fee rule this year, but that would likely be challenged on its own grounds and could be overshadowed by the funding mechanism review,” Boltansky said.
Roughly a dozen CFPB enforcement cases have been stayed since the 5th Circuit’s ruling in October. Boltansky said that the CFPB may end up partnering with state attorneys general “to provide more legal staying power” to its enforcement actions, Boltansky said.
Richard Hunt, a senior advisor to Boston Consulting Group, said that if the Supreme Court decides that the bureau’s funding is unconstitutional, the core issue will be how the high court “defines a remedy.” Many experts think a Supreme Court decision against the CFPB could require bipartisan legislation by a closely divided Congress just months before a presidential election.
“Fast-forward a year from now, and the Supreme Court could rule in June or July 2024,” said Hunt, a former CEO of the Consumer Bankers Association. “A decision could come out just before an election year that changes the whole bailiwick.”
Hunt said he is concerned about the time period between a high court ruling and when Congress would have to act on the bureau’s funding even as he acknowledged that there are more questions than can be answered about how Congress might respond if the CFPB loses.
“There are probably 20 questions that are unanswerable right now. Is there a remedy for past actions? Will Congress compromise to keep the agency afloat?” he said. “If Jan. 2, 2025, comes around and Congress has not passed any funding for the CFPB, does it exist or not?”
Consumer advocacy groups also are raising a flurry of concerns about what could happen if Congress ties the CFPB’s funding to congressional appropriations.
“If the CFPB has to rely on congressional funding, the banking industry could try to influence members of Congress to withhold funding from regulators unless they do their bidding,” said Mike Litt, consumer campaign director at U.S. PIRG. “Making the CFPB the only banking regulator subject to congressional appropriations would put the most pro-consumer federal agency at risk of being starved of the funding it needs to protect consumers.”
Financial firms also face larger questions about whether they would have to jettison compliance and risk management programs that were created around the CFPB’s rules.
“To unwind the large compliance and risk management structures that companies have already built over many years on reliance of these expectations would be itself a huge undertaking that would ironically detract from the goal of efficient regulation,” said Jenny Lee, a partner at Reed Smith LLP and a former CFPB enforcement attorney. Lee said that any remedy in the Supreme Court could require a congressional solution “which is not an easy lift in today’s environment.”
Illinois financial regulators argue that three legislative proposals introduced this month are necessary to protect consumers and small-business borrowers from unscrupulous companies.
John Zich/Bloomberg
Financial regulators in Illinois have unveiled a sweeping legislative package that’s intended to enhance consumer protections while also creating a regulatory framework for digital-asset firms.
The measures draw on numerous ideas that have been enacted in recent years by Democratic lawmakers in New York and California, as well as by congressional Democrats.
One bill would require digital-asset exchanges and related businesses to obtain a license to operate in Illinois. Another proposal would create new disclosure requirements for providers of small-business financing. And a third bill would expand the authority of the Illinois Department of Financial and Professional Regulation, which officials said will help the agency to target bad actors.
“You can’t scroll through your phone these days without seeing a headline about the latest tech scam or cryptocurrency collapse wiping out someone’s savings,” David DeCarlo, the state agency’s regulatory innovation officer, said Tuesday in a press release.
In addition to boosting consumer protections, the bills would force less-regulated financial companies to compete on more equal regulatory footing with Illinois banks and credit unions, state officials argue.
Still, the legislative proposals drew a mixed response Wednesday from the Illinois Bankers Association.
Ben Jackson, the trade group’s executive vice president for government relations, offered positive comments about the proposal for licensing of digital-asset businesses that do business in Illinois.
That proposal is modeled on the so-called BitLicense requirement that New York state regulators enacted in 2015. Similar legislation was introduced two years ago in Illinois, but it failed to get across the finish line, despite support from the Illinois Bankers Association.
Jackson was more critical of the other two measures, which would require more disclosure in connection with small-business financing and expand state regulators’ consumer protection authority.
The latter measure would allow the Department of Financial and Professional Regulation to adopt rules in connection with so-called unfair, deceptive or abusive acts or practices. That language is modeled on legal authority that Congress granted to the Consumer Financial Protection Bureau more than a decade ago over the banking industry’s opposition.
Jackson expressed general support for adding protections from predatory lenders, but he likened the Illinois proposals to trying to kill a gnat with a sledgehammer. “It’s overkill,” he said.
He also expressed disappointment that the Illinois regulators did not collaborate more with industry groups in developing the legislation.
“I think that this package of bills shows a departure from that collaborative relationship that we’ve had in the past,” he said. “And I’m very hopeful that we can rectify that and move forward together.”
The Illinois Credit Union League is reviewing specific pieces of legislation that have the state agency’s backing, according to a spokesperson for the trade group who declined to comment further.
During an interview Tuesday, state officials indicated that financial industry groups will likely support some parts of the legislative package and oppose other parts.
“We’re having conversations with them, like we do with all different stakeholders,” said Chase Rehwinkel, state banking director at the Department of Financial and Professional Regulation. “I don’t think we’re at a point yet where we know exactly where they’re going to stand at the end of the day.”
Illinois officials argued that the legislative proposals are necessary to protect both consumers and small-business borrowers from unscrupulous companies.
“The Small Business Truth in Lending Act will help make small-business owners aware of the terms they’re signing up for when they take out a loan,” Christopher Slaby, a spokesman for the department, said in an email.
“These kinds of basic disclosures are made available to consumers under existing federal law, and small-business owners deserve similar protections,” Slaby added. “It’s an approach that’s working for small-business owners in California and New York, and we can do the same for our small businesses in Illinois.”
All three measures were introduced this month by Democratic lawmakers. If they pass both the Illinois House and Senate, they will go to the desk of Democratic Gov. J.B. Pritzker.
“We’re pretty optimistic that we’re in good shape to get through here,” Rehwinkel said.
The Supreme Court has not yet agreed to hear a challenge to the funding structure of the Consumer Financial Protection Bureau, though the high court could still take the case this term or next.
The Supreme Court on Tuesday did not list the case — Community Financial Services Association of America v. CFPB — among the cases it intended to hear in the current session, but the high court may still take the case next week or at any time, experts said. The court regularly releases a list of cases each Monday. But the court also may issue individual “miscellaneous” orders at any time. The CFPB case is being closely watched for its impact on not only its own funding structure but those of other regulatory agencies as well. The case also threatens to undo all of the bureau’s past actions and rules, depending on how sweeping the Supreme Court’s decision on the case ultimately is.
In November, the CFPB petitioned the high court to review an appellate decision that the bureau’s funding through the Federal Reserve Board violates the appropriations clause. A three-judge panel of the U.S. Court of Appeals for the Fifth Circuit had ruled in October that the CFPB’s funding contravenes the Constitution’s separation of powers. The three judges, all appointees of President Donald J. Trump, found that Congress had ceded its own “power of the purse” by funding the CFPB outside congressional appropriations, even if the funding was authorized by statute.
The CFPB was created by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, which structured the bureau as an independent agency within the Federal Reserve. The CFPB’s budget is drawn from the Federal Reserve and capped at up to 12% of the central bank’s operating expenses. In 2022, the agency’s maximum budget was $734 million.
Few experts think the high court will abolish the CFPB outright. But the Fifth Circuit’s ruling opened the door for the bureau’s 12-year history of rules and enforcement actions to be challenged. Many experts think any Supreme Court decision will lead to a fight in Congress over the CFPB’s future funding. Though some banks and financial institutions want the CFPB to be abolished outright, many others are hoping for a ruling that would force Democratic lawmakers to bow to reforms, including funding the agency through congressional appropriations and adopting a commission structure.
The CFPB argued in its petition that many agencies including the Post Office and National Mint are funded from sources other than annual appropriations. Prudential regulators — including the Office of Comptroller of the Currency and Federal Deposit Insurance Corp. — are funded through fees or assessments imposed on financial firms, while the Federal Reserve Board is funded through its own open market operations. When the Dodd Frank Act was being written, financial firms objected to the CFPB being funded through fees or assessments, experts said.
“No other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending,” the CFPB said in its petition. The bureau is being represented by U.S. Solicitor General Elizabeth B. Prelogar. The CFPB also said a ruling against it “threatens to inflict immense legal and practical harms on the CFPB, consumers and the nation’s financial sector.”
The Supreme Court already ruled on the CFPB’s constitutionality once. In a split 5-4 decision written by Chief Justice John Roberts, the high court in 2020 ruled that the CFPB’s single director could not be shielded from being fired by the president and could be fired without cause. The practical effect of that ruling was limited. The court simply struck down the words “for cause” removal in a provision of the Dodd-Frank Act and the bureau continued to operate as it had before.
The implications of the current case are less clear, experts say. The Supreme Court has become highly skeptical of administrative agencies and increasingly has sought to assert its power over the other two branches of government, research shows.
Republican lawmakers have long pushed for the bureau to be reconstituted as a commission. Republicans have proposed more than 70 bills in the past decade — all without success — seeking to limit the CFPB’s authority. The bureau has become so politicized that it is unclear if Democrats would support a commission structure or if Republicans would provide funding through appropriations, experts said, potentially leaving the agency in limbo.
The Fifth Circuit’s ruling last year struck down the CFPB’s 2017 payday lending rule, which many experts think will never go into effect. Two payday trade groups had sued the CFPB in 2018 claiming various arguments including that the CFPB”s funding violated the appropriations clause.
The CFPB continues to face legal challenges citing its funding as unconstitutional. Last year, bank trade groups and the U.S. Chamber of Commerce filed a 116-page lawsuit challenging the bureau’s authority to adopt a policy that for the first time claimed discrimination on the basis of age, race or sex — regardless of intent — violates the federal prohibition on “unfair, deceptive or abusive acts or practices,” or UDAAP.
“The CFPB relies on this unconstitutional funding scheme to carry out its overly expansive UDAAP authority to Plaintiffs’ detriment,” the groups said.
New York City will now require banks that want to hold city deposits to provide detailed plans about what they’re doing to root out discrimination in their lending and employment practices.
The city will also, for the first time, accept public comments online or in person as part of its biennial process to determine which banks are eligible.
Both actions are designed to help New York make decisions about where to put its deposits.
A total of 28 banks, including JPMorgan Chase, Bank of America, Citigroup, U.S. Bancorp and PNC Financial Services Group, are currently approved hold New York City’s deposits.
Ismail Ferdous/Bloomberg
The transparency measures, which were announced Friday morning by the New York City Banking Commission, come less than a year after the city said it would no longer open any depository accounts at Wells Fargo due to mounting discrimination claims against the bank.
The decision to cut ties with Wells Fargo was one factor in the commission’s decision to reevaluate its process for designating city depositories, City Comptroller Brad Lander said in an interview Friday. Lander is one of three members of the banking commission, along with New York City Mayor Eric Adams and the city’s department of finance commissioner, Preston Niblack.
“There were several key steps that weren’t part of the process,” Lander said. “We thought it was important to develop a new set of certifications and forms to provide information about ways they are working to meet the needs of our communities, and create a public comment opportunity.”
Every two years, banks must apply to become approved depositories for the city’s billions of dollars of public funds. Each bank must supply a list of documents by March 1 and, in May, the banking commission determines designated depositories by majority vote.
There are currently 28 banks approved to hold the city’s deposits. The list includes several of the nation’s largest banks — names like JPMorgan Chase, Bank of America, Citigroup, U.S. Bancorp and PNC Financial Services Group — as well as midsize and smaller regionals such as KeyCorp, M&T Bank and Webster Financial, and a few foreign-owned banks.
Wells Fargo remains on the list as a designated bank, but it does not hold any New York City deposits.
The city’s designated banks have already been made aware of the enhanced information they must provide, said Louis Cholden-Brown, senior advisor and special counsel for policy and innovation at the comptroller’s office.
Public comments can be submitted throughout an online portal until May 25, the same day that a public hearing will be held to collect in-person comments, after which the banking commission will determine which banks will be designated depositories, Cholden-Brown said.
Some community organizations and advocacy groups said the city’s new policies are a step in the right direction when it comes to putting deposits into banks that are practicing fair and equitable lending in all communities. They encouraged the city to do even more.
“We hope this is just a first step in deepening community engagement, scrutiny and transparency in this public process,” Barika Williams, executive director of the Association for Neighborhood and Housing Development, said in a press release announcing the changes.
The city’s enhanced process is “a welcome development,” but there’s more work to do, Andy Morrison, associate director of the advocacy group New Economy Project, said in an interview.
His group has long been advocating for a public banking framework at the state and city levels. Public banks are lending and depository institutions that are owned and managed by a governmental entity.
“What’s really needed to ensure that public deposits are being used for the public good and held by an accountable institution is a public bank,” Morrison said. “We’ve been very clear about that being the ultimate solution.”
There’s a chance that New York City’s current list of 28 designated banks will dwindle now that banks must disclose more information, Lander said.
“Banks will have to, at minimum, make affirmations and fill out forms and provide information,” Lander said. “And I guess it’s possible that some will choose not to do it.”
The Federal Reserve’s top regulator wants to “eradicate discrimination” from the financial services sector and he’s ready to use all the tools at his disposal to do so.
Fed Vice Chair for Supervision Michael Barr delivered a speech on financial inclusion Tuesday afternoon at Jackson State University, a historically black research university in Mississippi. In it, he said the central bank would incorporate screening for discriminatory practices into all of its supervision practices, including evaluating applications for mergers and acquisitions.
“Congress provided regulators with supervisory and enforcement tools to help ensure that supervised firms resolve consumer protection weaknesses as well as the more pervasive risk management issues that often lead to those weaknesses,” Barr said. “We have a close working relationship with the Consumer Financial Protection Bureau and other regulators and integrate other regulators’ consumer-focused reviews—such as examinations for unfair, deceptive, or abusive acts or practices, as well as fair lending—into our assessments of bank holding companies, including in the context of applications for mergers and acquisitions.”
Michael Barr, vice chair for supervision at the Federal Reserve, said Tuesday that the central bank and other regulators are working to further bridge the racial wealth gap and “eradicate” discrimination in lending.
Bloomberg News
During his prepared remarks, Barr highlighted racial wealth gaps, the difficulties Black-owned small businesses have in obtaining credit and the fact that Black households are nearly six times as likely to be unbanked as their white counterparts. He said many of these issues are part of the “long shadow” of past discriminatory practices at banks and policies set by the U.S. government.
“For most of our country’s history, the United States government and many state and local governments, as well as many private individuals, corporations, and organizations, did not merely fail to protect minorities from discrimination, they actively reinforced segregation, entrenched inequality, and enforced unequal policies,” he said, “including through brutal violence.”
Barr pointed to auto and small business lending as areas of top concern for bank regulators, noting the Black borrowers have faced higher interest rates and more restricted access to these products than their white peers.
He also expressed concerns around mortgage lending, singling out residential appraisals as an area of keen focus for the Fed and other regulators, picking up on a subject that has been a top priority for the Biden administration in its effort to root out systemic racial inequity.
Barr nodded to the Fed’s participation in a hearing on appraisal bias held by the Federal Financial Institutions Examination Council’s Appraisal Subcommittee last month, saying: “I look forward to working with my fellow regulators to help ensure that individuals are treated equally in the appraisal process regardless of race or the racial composition of neighborhoods.”
The central bank sits on the council alongside other bank and housing regulatory agencies, including the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Federal Housing Finance Agency and the Department of Housing and Urban Development.
Barr said the Fed will lean on enhanced data collection to identify discriminatory practices by banks and craft policies accordingly. He noted that under section 1071 of the Dodd-Frank Act, banks should be reporting more data on small business lending. Once this provision is fully implemented, he said, the Fed will have “tangible insights into the availability and pricing of credit” being extended to Black-owned businesses.
At the same, Barr also encouraged banks to be proactive in identifying discriminatory practices, suggesting that they use “mystery shoppers” tests to evaluate their employee practices. This involves two people who have identical profiles except for a different protected class, such as race, both applying for similar loans. The idea is to test whether individuals receive different credit offerings based solely on their race, gender or personal attributes.
Another focal point for the Fed and other regulators, Barr said, will be the use of artificial intelligence or computer algorithms for determining credit scores or otherwise evaluating loan applications.
“[Banks] should review the underlying models, such as their credit scoring and underwriting systems, as well as their marketing and loan servicing activities, just as they should for more traditional models,” he said.
Barr said ongoing efforts to update the Fed’s supervision and regulation policies on bank mergers and the Community Reinvestment Act will both prioritize access to financial services for low and moderate income communities.
He added that it is also important for regulators to encourage innovations that help banks extend services to traditionally underserved areas, especially as it relates to community development financial institutions and minority deposit institutions, which he said provide services in which traditional banks cannot.
“One thing we do is make sure that our examiners understand the CDFI space and the MDI space and the role that CDFIs and MDIs play, and the particular kinds of circumstances that MDIs and CDFIs face such as being able to do small consumer loans and to do character lending and to lend to people without a credit score,” Barr said during a question and answer session following his speech. “Our examiner’s need to know and understand what the offsetting risk mitigation measures that CDFIs and MDIs are using, including knowing the family. It makes a difference.”
Barr also said the Fed is doing its part to help facilitate better services for low-income and underserved customers, noting specifically its instant payments network, FedNow, which is due to roll out this summer. He said FedNow will enable faster services at lower costs to consumers.
“We can also make a difference by updating our rules on check clearance, so that consumers and small businesses still receiving checks have access to their funds in a timelier manner,” Barr said. “And of course, we need strong consumer protections in place so that consumers don’t have to worry about making payments in a safe way.”
WASHINGTON — Cratered support among the Republican base, new priorities in the banking industry and simple pragmatism have significantly weakened the relationship between banks and the GOP, and opened up room for modest but increasing partnerships with Congressional Democrats, in a role reversal that would have been unthinkable just a decade ago.
According to a study late last year by Pew Research, while likely Democratic voters’ views on banks and big corporations have remained relatively stable, Republican attitudes toward banks have rapidly soured over the past four years.
“About four-in-ten Republicans and Republican-leaning independents (38%) and Democrats and Democratic leaners (41%) now say banks and other financial institutions have a positive effect on the way things are going in the country” Pew Research wrote in a piece on the study.
Senate Banking Committee chair Sherrod Brown, D-Ohio, introduced a bill in the last Congress that would rein in Industrial Loan Companies — a move that banks largely favor. Declining approval for banks by Republican voters and a focus on curbing diversity and ESG policies by Republican lawmakers is compelling banks to increasingly align withy Democrats on their policy priorities.
Bloomberg News
This represents a steep decline, since as recently as 2019, 63% of Republican voters thought banks had a positive effect on the country, as opposed to 37% of Democrats. Experts say that while banks have long faced bipartisan criticism, the GOP’s culture war has worsened banks’ already-dwindling favor among the GOP base, and fractured the party’s historically finance-friendly reputation.
In the midst of this decoupling, and with the GOP engaged in an unpredictable culture war, Democrats and banks appear to be increasingly siding with the devil they know, at least in certain areas where their policy priorities align.
Ian Katz, managing director at Capital Alpha Partners, agrees that populist sentiment in the Republican Party has been growing for some time now. In the era of increasing politicization of social and cultural issues, Republicans see anti-wokeness as a political strategy that resonates with their base.
“Republicans in Congress have become less like the pro-business, free-trade Republicans of a decade or more ago,” Katz said. “They are more populist now. They were moving in that direction, but Trump accelerated it. So now Republicans in Congress aren’t the reliable defenders of banks that they used to be. I think in the past year or two the trend has accelerated even more because of Republican suspicions that banks are adopting the Democrats’ views on issues such as ESG and inclusion.”
Democrats and big bankshave been some of the loudest critics of cryptocurrency, borne of a mutual distrust of unregulated market actors and fears of consumer exploitation. Democrats and banks have also found themselves aligned in their skepticism of fintechs and alternative banking charters — such as Industrial Loan Companies.
Those concerns have been strengthened in the wake of crypto scandals like the precipitous decline of crypto exchange FTX and recent indictment of the owner of Hong Kong-based Bitzlato on money laundering charges. Both banks and Democrats have expressed unified support — albeit with disparate motives — for proposals like Senate Banking Committee Chair Sherrod Brown’s Close the Shadow Banking Loophole Act, which was introduced late in the 117th Congress. Though both are concerned with the risks of dark finance like consumer abuses and fraud, banks have an interest in making sure non-bank charters don’t get all the benefits of banking without playing by the same set of rules.
By contrast, many GOP lawmakers worry more about the dangers of regulatory overreach than the dangers of under-regulated financial firms. Biden-appointed bank regulators and Republicans have repeatedly clashed over the issue, and it will continue to feature prominently given that House Financial Services Committee chair Patrick McHenry, R-N.C. created a new subcommittee specifically to address digital assets.
The increasing trend for banks to employ values-based investment practices, which consider an environmental, social and corporate governance framework known as ESG, has also caused friction with Republicans. The GOP has lashed out at ESG efforts, along with bank diversity, equity and inclusion initiatives as part of what thea “woke” agenda, and Republican State officials have gone so far as to retaliateagainst bankswho pursue climate-conscious ESG policies.
Republican staff of the Senate Banking Committee released a report recently floating the idea of punishing the big three accounting firms that adopt ESG or DEI measures by classifying them as bank holding companies because of the way their political stances influence banks, threatening to punish any semblance of liberal capitulation with onerous regulatory burdens.
Consumer advocates like Carter Dougherty of Americans for Financial Reform think the wedge between the GOP and banks has been growing for some time, suggesting ESG outrage is merely a symptom of broader disenchantment that Americans feel toward financial services writ large.
“The change here is that there is more bipartisan criticism of Wall Street in Congress.” Carter said in an email. “For over a decade, the country as a whole, across both parties, has been bank-critical, and supportive of efforts by Congress to be tough on Wall Street. The 2008 crisis and the Great Recession left deep scars on this country.”
But other observers think growing Republican hostility may drive banks towards working increasingly with the left. Former FDIC lawyer and independent consultant Todd Phillips believes that banks have a real interest in currying favor with an increasingly liberal public, and that the profit incentive behind being perceived as socially conscious outweighs any threats the right can lob at them.
“I think it’s almost a perfect storm that is helping the banks gain ground with Democrats,” Phillips said. “Banks are really just trying to do what they think is in their own economic interest. It’s just really strange that we have the party of free markets that is trying to tell banks what to do, and I think that’s fracturing the bond between banks and Republicans that’s been building for about a decade now.”
The Nebraska Bankers Association is raising concerns about legislation that would bar state treasurers from depositing public funds in financial institutions that could use the money to promote social or political objectives.
Legislative Bill 67, introduced in January by conservative lawmakers, is part of a pushback in Republican-led state governments across the country against so-called “woke capitalism,” a term that encompasses new environmental, social and governance policies at many banks and other large corporations. Critics worry that lenders’ efforts to address climate change and promote diversity and equality will translate into politically biased credit decisions.
Robert Hallstrom, the bankers association’s general counsel, said that LB 67 is “too vague” and that the trade group is pressuring supporters of the bill as well as Nebraska’s state treasurer, who supports the legislation, to ensure wording of the bill matches its “original intent.”
“We are working to make sure that [LB 67] gets back to the intent of having the state treasurer remain neutral with regard to exerting any influence or direction over financial institutions regarding their banking activities or practices,” Hallstrom said during an interview.
“Other than the fact that state funds are some portion of our deposit base, we can’t identify that state money was specifically used for one purpose or another,” Hallstrom said.
During a public hearing on Monday to discuss the legislation, Nebraska Sen. Julie Slama, a Republican who proposed LB 67, said that the bill is meant to protect against future state treasurers using public funds “to further political or social agendas,” according to a Nebraska Examiner article.
John Murante, Nebraska’s Republican state treasurer, has voiced support for passing LB 67 and in November wrote an opinion article for the National Review describing the adoption of ESG policies by banks as an attempt to “achieve through the backdoor goals that even our own legislation hasn’t been able to achieve.”
In December, Nebraska State Attorney General Doug Peterson issued a report warning against ESG lending and investment strategies as “a threat to our democratic form of government.”
This week’s political back and forth over ESG in Nebraska is playing out alongside conservative reaction in other state governments.
Republican lawmakers in Wyoming this month introduced House Bill 210 to clamp down on “financial institution discrimination.” The legislation calls for the state treasurer to make a list of lenders that refuse to do business with energy companies operating in the state.
In Kentucky, State Attorney General Daniel Cameron was sued in November by the Kentucky Bankers Association, which claims the state’s top lawyer overstepped statutory limitations and violated the First Amendment rights of banks by compelling documents, communications and information related to their environmental lending practices.
Overall, more than a dozen Republican-led states have launched investigations into alleged antitrust and consumer law violations related to ESG investment practices at six banks that are members of the United Nations’ Net-Zero Banking Alliance.
