Small-business formation is booming. So are opportunities for fintechs targeting financial institutions that bank these entities to break into the business verification space.
Know-your-business, or KYB, refers to the regulatory requirement for industries such as banking to verify the ownership and legitimacy of a company and assess the risks it poses, both during onboarding and on an ongoing basis. It is related to rules on know-your-customer, or KYC, which focuses on individuals.
Alex Johnson noticed a flurry of startups tackling this problem as he monitored fundraising announcements for fintechs.
“There have been an unusual number of U.S.-based fintech startups that have raised money specifically around solving a KYB issue,” said Johnson, author of the Fintech Takes newsletter, including Baselayer, Ballerine, Coris, TrueBiz, Parcha, Accend and Greenlite. It could indicate a “groupthink” mentality in fintech, when “different people become obsessed with the same idea,” he said. But it also suggests there is a gap in the market where existing solutions aren’t cutting it.
There are numerous reasons why the KYB space is hot right now — and why banks are eager for more automated solutions to ensure companies are legitimate and not shells, to understand who the beneficial owners are and to screen for sanctions and adverse media. There were more than 430,000 business applications in the U.S. in June, according to data from the U.S. Census Bureau — about double the number of applications ten years ago. “It’s never been easier to set up a digital storefront,” said Danny Hakimian, CEO and founder of TrueBiz, which automates the process of investigating a business’s web presence.
KYB is also a highly manual process.
“There has been a huge push to get the KYC process in general more efficient, inclusive of KYB, because it’s a massive drain on bank spend,” said Spencer Schulten, executive director and U.S. head of financial crimes compliance for Capco. “Non-U.S. customers from higher-risk jurisdictions are seeking access to U.S. banks at a higher rate than I’ve seen in some time.” At the same time, compliance budgets are not growing to keep up with the demand, meaning fewer people have less time to do a greater amount of work.
The complexity of KYB is also becoming easier to solve.
“State business registries weren’t online 15 years ago, so you couldn’t build a direct API integration to pull data from them before,” said Johnson.
‘We do a lot of Googling’
First Internet Bank in Fishers, Indiana, and Nbkc bank in Leawood, Kansas, both use fraud and compliance management platform Alloy and business identity platform Middesk in tandem for KYB checks. But each is exploring other technologies to aid in their processes.
Anne Sharkey, chief risk officer at the $5.3 billion-asset First Internet, has spent the last couple of weeks with a vendor testing ways to improve customer due diligence for small businesses using artificial intelligence.
Normally, “we do a lot of Googling,” she said. “Do they have a website? Does the website work? Does it represent what the business says it does? Are there negative reviews out there about the company or owners?”
She sees potential in AI for flagging negative reviews, or a business model that First Internet does not want to bank (for instance, one relating to marijuana), or a nonfunctioning website, which could indicate the company is fraudulent.
“It still takes human intervention but making the process more efficient allows you to hone in on something that may look irregular, rather than getting buried in the detail and missing something right in front of you,” said Sharkey.
While Nbkc uses Middesk to retrieve Secretary of State data, not all states make this information available to the public. That means business owners need to upload such documents manually for an Nbkc employee to review. The $1.2 billion-asset bank is testing a homegrown system it built using Optical Character Recognition, or OCR, to extract the data it needs for its records and to review for certain signs of fraud or red flags, such as handwritten information or manipulated documents.
Nbkc had explored using a vendor, “but we weren’t sold on any in particular,” either because of pricing or functionality, said Brian Fellows, director of risk management at Nbkc. The bank will debut the technology this month.
The hope is that it will pare down the work for bank employees and reduce costs.
“Most of the time if [businesses] apply with us and we take a day or two to approve them, they’ve gone to another bank to open an account,” said Fellows.
He has explored using other startups to fill gaps in the bank’s current KYB process, but so far hasn’t found a combination that beats his current setup and that would justify the price of layering on more solutions.
What sets KYB fintechs apart
In his survey of the landscape, Johnson has wondered what distinguishes the slate of startups he has tracked from each other and from legacy providers.
“Why does the market need 12 of you?” he said.
Hakimian thinks there is room for venture-scale companies that focus on different angles to emerge in this space rather than a winner-takes-all. TrueBiz is not an end-to-end provider.
“Business entity verification is multifaceted and complex,” he said.
The 3-year-old TrueBiz scours a business’s website, social media, online reviews and more. Clients can use its API to retrieve a report analyzing hundreds of data points to construct a picture of the business’s owner and employees, the types of product it offers, its reputation, likelihood of fraud and more, in under 30 seconds, according to Hakimian. TrueBiz’s configurable decision modeling layer also indicates whether further due diligence is needed. Its clients tend to be acquiring banks in the U.S. and global fintechs offering merchant services.
Others say they are the rare or sole provider of certain capabilities.
Baselayer is another entrant to the KYB space. The nearly 2-year-old company purchased a wealth of government and court data, including Secretary of State filings, IRS identification numbers, sanctions data, state and federal tax liens, lawsuits and bankruptcy information. When a client — which includes banks, payment companies, lenders and fintechs — submits a name and address of a company it wants to investigate before onboarding, Baselayer’s AI-driven agent retrieves relevant information profiling a business’s identity along with a rating to indicate the risk level this business poses.
Baselayer tracks the “pulls” on a particular business’s information, as if a lender was pulling an individual’s credit report. Numerous pulls may be a sign of synthetic identity fraud, where criminals obtain personally identifiable information on different individuals and entities, and reformulate them into multiple fraudulent applications across banks. Baselayer also tracks the businesses and their repayment performance throughout its network to enhance risk profiling.
Co-founder and CEO Jonathan Awad says his is one of a handful of companies in the market that have purchased Secretary of State data, and that his is the only one tracking pulls on the entire profile of a business.
“Our solution is focused on the timeframe from when you get an application to every check you need to get through for Customer Identification Program or underwriting purposes,” said Awad.
The Supreme Court’s late June ruling on Loper Bright Enterprises vs. Raimondo reversed a 40-year-old legal doctrine. The new precedent is already being applied to active litigation involving the Federal Reserve.
The decision — Loper Bright Enterprises vs. Raimondo — was cited in two amicus briefs filed in the U.S. Court of Appeals for the 10th Circuit last week regarding Custodia Bank’s lawsuit against the Fed, including one written by the lead attorney for Loper Bright from the precedent-setting case.
Custodia, a Cheyenne, Wyoming-based digital asset bank, was denied a so-called master account with the Federal Reserve Bank of Kansas City last year. It sued the reserve bank and the Fed Board of Governors in Washington, D.C., arguing it was legally entitled to the account, which would have granted it access to the federal payments systems.
The lawsuit largely hinged on whether a provision of the Monetary Control Act of 1980 — which states that “all Federal Reserve bank services covered by the fee schedule shall be available to nonmember depository institutions” — dictates that the Fed must grant these services or that it simply may. The Fed asserted that it was the latter and the court agreed.
The Loper case marked the end of a concept known as Chevron deference. The doctrine — which derives its name from a 1984 Supreme Court ruling in a case involving the energy conglomerate — held that agencies had the ability to interpret ambiguous authorities granted to them by Congress. Such interpretations now must be made by courts.
Judge Scott Skavdahl, the district court judge who ruled on the Custodia case earlier this year, did not cite the Chevron case — Natural Resources Defense Council vs. U.S. EPA — in his ruling. Likewise, it was not referenced by the Fed Board of Governors or the Kansas City Fed in their opposition filings.
Still, in light of the Loper case, some say there is new ground for challenging the Fed’s reading of the law.
Last week, Paul Clement, who represented Loper Bright, wrote an amicus brief in support of Custodia on behalf of two crypto trade groups, the Digital Chamber of Commerce and the Global Blockchain Business Council. In it, he argued that the lower court’s ruling violates two key structures of the Constitution: “the vertical constraint of federalism and the horizontal constraints imposed by separation of powers doctrines.”
Specifically, he said the outcome undermines the dual banking system by giving federally supervised banks an advantage over those supervised only at the state level. The brief added that the district court’s ruling raises questions about the structure of the Federal Reserve system, including the powers granted to the 12 quasi-governmental regional reserve banks, which are technically private entities but still carry out key functions for the central bank — namely, in this instance, the granting of master accounts.
“In short, the district court’s interpretation affords politically unaccountable Federal Reserve Bank presidents unchecked discretion to unilaterally undermine state banking law and deprive state-chartered banks of any ability to engage in meaningful financial operations,” Clement wrote. “That reading is not only contrary to the statutory text, but raises serious concerns on two distinct constitutional dimensions.”
Michael Pepson, regulatory counsel for Americans for Prosperity — a conservative political action committee that frequently writes amicus briefs on cases of interest — also cited the Loper ruling in a brief filed in support of Custodia. He argues that the Fed’s “discretionary assertion”that it has the ability to deny master accounts contradicts previous policy stances put out by the central bank.
“The Federal Reserve’s longstanding practices further underscore that neither it nor the Kansas City Fed have discretion to deny master account applications from eligible depository institutions,” Pepson wrote.
He added that the court should “reject any suggestion by the Board or Kansas City Fed that their decision is outside of the scope of this Court’s purview.”
Three members of Congress — Sens. Cynthia Lummis and Steve Daines along with Rep. Warren Davidson — also submitted an amicus brief in support of Custodia, as did former Sen. Pat Toomey, Wyoming Attorney General Bridget Hill and the Blockchain Association, a crypto trade group.
The Fed declined to comment on the amicus briefs or their assertions.
Caitlin Long, founder and CEO of Custodia, declined to say what role the Loper decision would play in her company’s legal strategy moving forward, but noted that it — along with several other recent decisions — indicates that the Supreme Court is looking at administrative law disputes in a new and more critical light.
“The reaction to this particular Supreme Court term, which just ended, has been a theme of curbing federal regulatory agency authority,” Long said. “And Loper Bright, of course, is one example of that.”
The OCC’s new Vital Signs initiative gives bankers an important tool to help them assess the financial health and stability of their customers, and to help them build a strong foundation for the future, writes Jennifer Tescher, of the Financial Health Network.
Victor Moussa – stock.adobe.com
The Office of the Comptroller of the Currency’s recent encouragement of banks to support their customers’ financial health is a watershed moment for consumers and the industry. In placing products in service to financial health, the OCC has outlined a path by which the industry can reverse dwindling consumer trust and instead engage, support and earn the loyalty of its customers.
The OCC recently released areport encouraging banks to measure the financial health of their customers using a set of “vital signs,” indicators akin to those doctors assess at a routine checkup. The report also provides examples of the actions banks could take to support customers whose results suggest they are facing financial challenges.
This arrives as consumer trust in U.S. banks continues to fall significantly, with a newJ.D. Power report documenting a growing percentage of people having switched or planning to switch banks. Refocusing on financial health that is rooted in measurable progress is a powerful strategy for banks to deepen customer relationships and boost their overall performance.
Dozens of banks, credit unions and fintechs have been experimenting with financial health measurement for more than five years, largely through periodic customer surveys, and a small but growing number havelooked to administrative data for insights. The OCC’s recommended vital signs provide a common framework and a starting point for the industry to test how best to leverage transactional data to understand in real time both the state of their customers’ financial lives and what strategies work to improve them.
Acting Comptroller Michael Hsushared his vision for the Vital Signs initiative at my organization’sEMERGE conference as the report was released, making the case for why financial health matters for banks and for the banking system as a whole.
“Imagine if there were clear and objective measures of consumers’ financial health,” Hsu said. “… Consumer financial product offerings could be better aligned with customer needs. … Banks that support customers’ efforts to improve their financial health would enhance their customer relationships and demonstrate that the banks truly have their back and can be trusted.”
Banks play an important role in the financial lives of their customers. They could be even more effective partners if they had a simple, objective, accurate approach to taking their customers’ temperature, so to speak, and knowing what the equivalent of a fever looks like. As the Financial Health Network has long said, and as Hsu repeated, what gets measured gets managed.
The OCC defines consumer financial health in much the same way the Financial Health Network does: having stable day-to-day finances, resilience to withstand shocks and security for the future. The three vital signs the agency has identified — positive cash flow, liquidity buffer and on-time payments (or a prime credit score) — help measure the state of customer financial health. In addition, the agency has suggested a benchmark for each indicator. For instance, to measure the presence of a sufficient liquidity buffer, the agency suggests a threshold of $1,000 of available funds. These benchmarks are expected to evolve and may differ for different customer segments based on the research and insights that banks undertake while implementing the vital signs.
The recommended metrics are based on dozens of conversations with bankers, consumer advocates, researchers and others. Hsu and the OCC are eager for banks to pilot them, share their learnings and continue to refine them in ways that ensure they are both easy to measure and an effective signal.
The Vital Signs initiative builds on the Financial Health Network’s efforts to jump-start the financial health movement by engaging with more than 100 organizations to measure the financial health of their customers and workers. Some, likeRegions Bank, have embedded financial health questions diagnostics in a goal-setting tool or on their homepage. Others, likeSaverLife, use financial health measurement to assess the impact of their efforts. Still others, such asWright-Patt Credit Union in Ohio, leverage financial health data to better segment customers. We even built a technology company,Attune, to help organizations implement financial health measurement.
Beyond determining the best measurement scheme, banks have work to do to develop the “prescriptions” they will offer customers in response to what they learn from the data. While banks cannot control the macroeconomic conditions or life events that contribute to their customers’ financial health, they have the opportunity to offer a range of products, solutions and tools that can help their customers manage their finances through both good times and bad.
For consumers with negative cash flow, banks may not be able to manufacture money, but they can offer tools that will help consumers understand their expenses and even lower them — for example, by finding and eliminating zombie subscriptions, or by making customers aware of the late fees they are incurring and offering them alternative ways to avoid them.
Similarly, for those with an insufficient cash buffer, banks have a wealth of options for helping customersbuild savings — prize linked, goal based, automated, tax time, to name a few — that have been tested and successfully implemented in dozens of situations and settings. And for consumers with less than stellar credit histories, a variety ofcredit builder tools have proven to deliver results.
I commend the OCC for encouraging banks to shift the way they view their ultimate purpose, from delivering financial products to helping their customers achieve positive financial health. If financial health is what truly matters, then it’s time we measure it.
Michael Barr, vice chair for supervision at the Federal Reserve, left, shakes hands with Martin Gruenberg, chair of the Federal Deposit Insurance Corp., following a Senate Banking Committee hearing last May. Regulators are reportedly poised to offer a retooled Basel III endgame rule that significantly scales back some of the more controversial elements of last July’s proposed rule, but whether those changes are enough to quell banks’ opposition is unclear.
Bloomberg News
WASHINGTON — While it’s clear bank regulators plan to make substantive changes to a bank capital overhaul requiring institutions to put up more unborrowed funds to lend to consumers, banking experts vary on how this might be accomplished, and whether even a revised proposal will be enough to preclude legal challenges from the banking industry.
Lawyer Gregory Lyons of Debevoise and Plimpton said he isn’t confident of the timeline just yet, given regulators still appear to be hashing things out internally.
“I think there’s different proposals circling around how to amend it, but honestly, I’m not sure they know,” said Lyons. “We’re pretty close to what’s going on and I just do think there’s a lot of internal — good faith — but internal debates about how this is all going to play out.”
Corporate lawyer Chen Xu, also with Debevoise, says he thinks the heads of the agencies involved in the rulemaking — which is a joint effort between the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. — would like to strike a compromise with their capital skeptic colleagues, some of which are within the same agency.
“Some of the agency principals hope if they make enough concessions, they can get it through by August so this doesn’t get tied up with the election,” he said. “We’ve been hearing that view is gaining traction, but we’ve also heard that there are a number of folks inside the agencies who would rather have a reproposal, and right now it’s hard to see who’s winning.”
But whether those adjustments can be incorporated into a final proposal or must be included in a new proposal — or some mix of both — remains unclear. Under the Administrative Procedure Act, changes made to final rules must be a “logical outgrowth” of what was in the original proposed rule. Many in and around the banking sector argue that the changes needed for the Basel III endgame proposal exceed this standard, and therefore an entirely new rule should be put through its own notice and comment period.
Jaret Seiberg, financial policy analyst at TD Cowen says he expects regulators will at least partially withdraw and re-propose the rule — often dubbed Basel III endgame — given statements from one of the most influential players shaping the pending regulation: Federal Reserve chair Jerome Powell.
“Powell has effectively made this commitment to Congress,” commented Seiberg. “It doesn’t mean there is zero probability for the rule to be finalized, but a re-proposal seems likely.”
While the Fed is the most politically independent of the financial regulators, it is facing pressure from both the financial industry — which wants a re-proposed rule — while some Democrats and consumer advocates want the rule finished largely as is. A new proposal would significantly extend the timeline for finalization. Banking policy expert Ian Katz of Capital Alpha Partners says the Fed could devise a way to allow public comment on certain rule revisions without restarting the process.
“The Fed may put out something that basically looks like a reproposal but is called something else and allows the public to comment without starting the process from scratch,” said Katz. “If the Fed were to do that in the fall — before the elections — it could finalize the Basel endgame rule next year, probably in the first half.”
Banks and their trade group representatives have been vocal in their opposition to the Basel proposal and have availed themselves of novel tactics in elevating the issue with voters and lawmakers. From launching advertising campaigns on Sunday night football to identifying procedural weaknesses they could challenge in court, the industry has made it clear that it will oppose the rule on as many fronts as possible. Bank trade group the Bank Policy Institute, whose members would all be impacted by the rule, has retained corporate litigator Eugene Scalia — son of former Supreme Court Justice Antonin Scalia — to advise a potential legal challenge to the rule.
While the agency trio has yet to formally announce planned revisions to the rule, industry allies within the regulatory state have begun to provide cover for the kinds of changes banks are demanding.
“I think we addressed the challenges that we faced during the earlier financial crisis through the implementation of Dodd Frank, I think those have proven to be successful,” she said. “What led to SVB failing was not the same thing that led to the real estate crisis back then, earlier, a decade ago.”
Powell has repeatedly stressed the need for this consensus. Bowman called for the agencies’ to pare back what she called redundancies in the capital framework — between the new market and operational risk requirements in the rule and the stress capital buffer which she says burdens banks with redundant costs. She also called to recalibrate the market risk aspect of the rule to mitigate substantial increases in risk-weighted assets, and treat non-interest and fee-based income more reasonably to encourage revenue diversification. She made clear again this week she believes any rule that can proceed — let alone approach finalization — will need broad changes and input from interested parties in the industry and general public.
“While these steps would be a reasonable starting place, they are not a replacement for a data-driven analysis and a careful review of the comments submitted,” she said during a fireside chat following her remarks. “This would result in a better proposal that includes changes to address not only these concerns, but also many other concerns raised by the public.”
Lyons says two of the major issues banks have identified with the rule are the scope of banks — largely those with over $100 billion in assets — roped into the rule’s remit, as well as the market and operational risk portions flagged by Bowman, which he says is one of the key concerns for big banks.
“I think there are issues of relevance both to the larger banks, given the operational and market risk issues,” he said. “And to the smaller banks, in the $100 billion asset class, regarding how much of this will apply to them.”
Regardless of what path regulators take, the banking industry and its allies have questioned the need for capital reforms in the first place, given their view that firms are well-capitalized. But rather than fight tooth-and-nail to prevent any new capital requirements, some think they may accept a slimmed-down version of the proposal in order to achieve regulatory certainty.
“We believe banks would prefer to accept a reasonable final rule than to extend this battle for what could be another five years,” Seiberg remarked. “The timing for finalizing the rule is after the inauguration. It is why there is election risk, though we believe the bulk of the final rule is likely to have bipartisan support at the Federal Reserve.”
Given ongoing talks at the agencies about how to proceed, the industry will likely be eyeing its allies on the inside, who can help shape the rule to their liking. Bowman’s comments on Wednesday suggest the industry may get their way in many regards.
“As Chair Powell has said, that he expects broad and material change to this proposal, and I would hope that a number of the things that I’ve identified in a number of speeches throughout the last year or since the proposal was introduced would be included in some of those changes,” she said. “If the proposal is [put] forward, it has to be voted on by the board and the other regulatory agencies — so we’ll just have to see what happens.”
“[Chevron] raises the question of how much the courts have to defer to the agencies in rulemakings and so forth,” he said. “I think it heightens the stakes — or risks, depending on your point of view — banking agencies or their trade groups may push back in court against rules they perceive to be problematic.”
JPMorgan Chase, Bank of America, Wells Fargo and Citigroup were among the big banks that announced plans to increase their dividends following the Federal Reserve’s annual stress tests.
Bloomberg
The nation’s eight largest banks will all increase their dividends following affirmation from the Federal Reserve that they would have plenty of capital to power through a worst-case economic scenario.
each announced late Friday that they plan to add to the size of shareholders payouts. Bank of New York Mellon, State Street Corp. and Fifth Third Bancorp, which are also among the country’s 25 largest banks, signaled the same.
The announcements come on the heels of the Wednesday release of the Federal Reserve’s annual stress test results. The Fed found that the 31 large and midsize banks it tested could maintain capital levels above regulatory minimums when run through a recession scenario, but not without strain.
The tests, which modeled a severe global recession with high unemployment and a real estate crisis, found that banks could see losses of nearly $685 billion. Some banks’ balance sheets took a bigger hypothetical hit than others.
The annual stress tests results guide the Fed in setting banks’ so-called stress capital buffers, which are added on top of a common equity tier 1 capital ratio of 4.5% to calculate minimum capital requirements. Some of the largest banks — including Bank of America, Citi, JPMorgan, and Wells — are on the hook for an additional capital surcharge of at least 1%.
In practice, minimum current capital requirements range from 7% to nearly 14%, though many banks maintain levels far above their compliance baselines, especially amid policy uncertainty. The so-called Basel III endgame, a proposal from the Fed, could boost the big banks’ minimum capital requirements by about 16%, but movement on the rule is on pause.
Roughly half of the 31 banks that were stress-tested this year released statements after the stock market closed on Friday about their preliminary stress capital buffers. Nine of those companies said that their preliminary stress capital buffer is larger than last year’s, while the buffer was smaller at four banks, and it was unchanged at three more.
The Fed is expected to finalize the final stress capital buffers for the stress-tested banks by Aug. 31.
What the big banks said
Goldman Sachs reported one of the biggest increases in its stress capital buffer, as that number rose from 5.5% last year to 6.4%.
“This increase does not seem to reflect the strategic evolution of our business and the continuous progress we’ve made to reduce our stress loss intensity, which the Federal Reserve had recognized in the last three tests,” Chairman and CEO David Solomon said in a press release. “We will engage with our regulator to better understand their determinations.”
BofA also said that its stress capital buffer will rise this autumn. The Charlotte, North Carolina-based megabank is planning for a buffer of 3.2%, up from 2.5% currently. Wells Fargo said that it expects its stress capital buffer to rise from 2.9% to 3.8%, while JPMorgan announced that it anticipates that its buffer will increase from 2.9% to 3.3%.
The new stress capital buffers at all of the affected banks will be effective from Oct. 1, 2024, through Sept. 30 of next year.
Among the four U.S. megabanks, only Citi’s buffer is expected to decrease, moving from 4.3% to 4.1%. The decrease comes amid Citi’s “ongoing efforts to simplify” itself, CEO Jane Fraser noted in a press release Friday.
Under Fraser, the New York-based bank, which has far-flung operations, is working on a massive, multiyear restructuring that involves selling or winding down lagging businesses and eliminating 20,000 jobs, or about 10% of its total workforce, by the end of 2026.
Citi is planning to hike its quarterly dividend from 53 cents to 56 cents, but it did not commit Friday to restarting share buybacks. Instead, the bank said that it will “continue to assess share repurchases on a quarter-to-quarter basis.”
JPMorgan was the lone bank that announced plans Friday to both increase its dividend and authorize a new share buyback plan. The $4.1 trillion-asset bank said it would raise its dividend by 10 cents, to $1.25 per share, for the third quarter.
“The board’s intended dividend increase, our second this year, would represent a sustainable level of capital distribution to our shareholders, which is supported by our strong financial performance and continuous investments in our business,” Chairman and CEO Jamie Dimon said in a prepared statement.
He added that the share repurchase program, which could total $30 billion, provides “additional flexibility to return excess capital to our shareholders over time, as and when appropriate.”
The outlook for regional banks
Among the 16 banks that released information about their stress capital buffers on Friday, Truist Financial is one of the four whose buffer will decrease. The $535 billion-asset company said its preliminary buffer — 2.9%, down from 2.8% currently — does not include the impact of the recent sale of its insurance arm or a balance sheet repositioning that took place in early May.
Truist plans to keep its common stock dividend flat, but the Charlotte, North Carolina-based company also announced that its board of directors has authorized a $5 billion share repurchase program through 2026 that will commence during the third quarter of this year. In April, Truistexecutives said they hoped to “resume meaningful share repurchases later in the year.“
Citizens Financial Group, which passed the Fed’s stress test with the second-lowest projected capital level out of the 31 banks tested, announced it would more than double the size of its share buyback plan. The Providence, Rhode Island-based company also said that its stress capital buffer increased from 4% to 4.5%.
CEO John Woods said in a statement that the Fed’s test modeled a decline in pre-provision net revenue, a common profit metric in the industry, that was much worse than what Citizens projected in its own self-exam. The $220.4 billion-asset asset bank said that it expects its upcoming second-quarter CET1 ratio to be 160 basis points above its regulatory minimum of 9%.
Citizens didn’t mention a shift on dividends, but said it will “assess potential changes to its capital distributions as conditions warrant.”
Also on Friday, Cincinnati, Ohio-based Fifth Third announced that it plans to recommend a two-cent per share increase to its quarterly cash dividend on its common stock in September, “consistent with its planned capital actions submitted to the Federal Reserve.”
Fifth Third’s stress capital buffer ticked up from 2.5% to 3.2%, but the $214.5 billion-asset bank noted that its CET1 ratio of 10.5% is well above its required minimum, which as of last year was 7%.
The Treasury Department’s Financial Crimes Enforcement Network issued a proposed rule overhauling banks’ anti-money laundering and counterterrorism financing programs, requiring financial institutions to step up their existing AML controls and sharpening anti-terrorism programs to ensure they are effective, risk-based, and reasonably designed
Bloomberg News
WASHINGTON— The Treasury Department’s Financial Crimes Enforcement Network Friday proposed reforms to the U.S. anti-money laundering regime, requiring financial institutions to step up their existing AML controls and sharpening anti-terrorism programs to ensure they are effective, risk-based, and reasonably designed.
“More than ever, financial institutions are partnering with government to address a range of serious law enforcement and national security issues with illicit financing implications, from fentanyl trafficking to Russia’s illegal invasion of Ukraine,” said Deputy Secretary of the Treasury Wally Adeyemo. “It has been an important priority for Treasury to issue this proposed rule that promotes a more effective and risk-based regulatory and supervisory regime that directs financial institutions to focus their … programs on the highest priority threats.”
The rule proposes amendments pursuant to the Anti-Money Laundering Act of 2020. Under the rule, financial institutions will be required to establish, implement, and maintain anti-money laundering and counterterrorism finance programs — known as AML/CFT — with certain minimum components, including a mandatory risk assessment process. Financial institutions must identify and understand their exposure to money laundering, terrorist financing, and other illicit finance activity risks and develop policies and controls commensurate with those risks. The rule also mandates periodic reviews and updates to the risk assessment process, especially when there are significant changes in the institution’s risk profile.
The rule requires institutions to integrate government-wide AML/CFT priorities — including high risk priorities like combatting Fentanyl trafficking and Russian money laundering — into their programs. The rule also establishes new technical amendments to ensure consistency across different types of financial institutions.
A Fincen fact sheet on the proposed rule notes the amendments were developed in consultation with several key regulatory bodies, including the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration “in order to collectively issue proposed amendments to their respective [Bank Secrecy Act] compliance program rules for the institutions they supervise.”
Fincen officials say the proposal compels firms to develop internal policies, designate a compliance officer, train employees, and conduct independent audits to promote compliance. Furthermore, it seeks to enhance cooperation between financial institutions and government authorities,
“Today’s publication is a significant milestone in Fincen’s efforts to implement the AML Act,” said Fincen Director Andrea Gacki. “The proposed rule is a critical part of our efforts to ensure that the AML/CFT regime is working to protect our financial system from long standing threats like corruption, fraud, and international terrorism, as well as rapidly evolving and acute threats, such as domestic terrorism, and ransomware and other cybercrime.”
Today’s proposed rule is one of many steps the agency has taken in response to the legal overhaul enacted by the 2020 Anti-Money Laundering Act. In addition to higher standards for AML compliance programs, the law compelled Fincen to establish a new beneficial ownership database containing ownership information for entities legally incorporated in the U.S.
Fincen will take written comments on the proposed rule for 60 days after publication in the Federal Register, which is currently scheduled for July 3. That schedule would put the deadline for comment on Sept. 1.
The Federal Reserve Tuesday issued an enforcement action against Evansville, Ind.-based United Fidelity Bank and its parent companies over board management issues. The bank told local news that regulators have expressed concern about the bank’s rapid growth over the past decade.
Bloomberg News
The Federal Reserve Board of Governors issued a cease and desist order against a fast-growing community bank in Indiana.
The Fed announced its enforcement action against United Fidelity Bank — a $6.4 billion bank based in Evansville, Ind. — on Tuesday morning, citing bank management and other concerns.
The order comes after the Office of the Comptroller of the Currency — the bank’s primary regulator — issued a similar citation last October. Following that action, a vice president with the bank told a local newspaper that the issue stemmed from the bank growing faster than regulators were comfortable with.
“The bank was highly successful in its affordable housing finance activities and as a result, the bank grew very quickly,” Angie Peters, United Fidelity vice president of marketing, told Current Publishing. “Over the past two years, the bank has generated approximately $200 million in profits — well in excess of our peer banks. Despite the financial performance, our regulator, the Office of the Comptroller of the Currency, was concerned about the pace of that growth.”
The failures of Silicon Valley Bank and Signature Bank in 2023 — and more recent upheaval at New York Community Bank, which acquired Signature, earlier this year — have increased regulatory scrutiny of banks that are growing quickly. In those cases, the pace of the bank’s growth often exceeded their ability to keep up with regulatory requirements that are expected of larger banks.
Pedcor, a real estate construction and finance firm affiliated with United Fidelity’s parent company, Pedcor Financial, did not immediately respond to a request for comment on Tuesday.
United Fidelity’s rapid growth in recent years is not due to its affordable housing business alone: The bank has also acquired eight banks during the past decade, including Community Banks of Shelby County in Cowden, Ill., in 2022, City Bank Federal Savings Bank in Long Beach, Calif., in 2021, and First City Bank of Florida in Fort Walton Beach, Fla., in 2020.
Five of its acquisitions have been government-assisted mergers of banks failed by the Federal Deposit Insurance Corp., accounting for more than $278 million of deposits.
Pedcor Financial, a savings and loan holding company, is the upper tier holding company for United Fidelity. It owns Pedcor Financial Bancorp, a registered savings and loan, which owns Fidelity Federal Bancorp, which owns United Fidelity.
On its website, Pedcor highlights United Fidelity’s “regulator knowledge, oversight and approval” as a point of distinction in its business model. It notes that the bank works with financial institutions across the country to expand its investments into affordable housing as well as “traditional community banking activities.”
As is customary in enforcement actions, the Fed did not disclose specific issues at the bank. Instead, the agency outlined several criteria that the bank must meet for the cease and desist order to be lifted. The order called for the bank to make changes to its board oversight policies, including those related to risk management and adherence to applicable laws and regulations.
The bank must put together a strategic plan and budget for meeting these obligations within the next 60 days and is prohibited from making dividend payments and other capital distributions until further notice.
“AI is innovating at such a fast clip that if we don’t ensure it is developed in an equitable manner, the wealth divide and racial homeownership gap will grow exponentially greater,” said Lisa Rice, president and CEO of the National Fair Housing Authority. “Part of the challenge was building a team that could help us innovate.”
It took her more than a year to find one person to lead such a team, and “I couldn’t find him in the U.S., quite frankly,” said Rice. The NFHA’s chief responsible AI officer, Michael Akinwumi, is from Canada.
These comments were made at the 2024 Conference on Artificial Intelligence and Financial Stability on June 6 and 7, hosted jointly by the Financial Stability Oversight Council and the Brookings Institution in Washington, D.C. Speakers from other agencies and companies, including the Consumer Financial Protection Bureau, Commodity Futures Trading Commission and JPMorgan Chase, touted their efforts to collaborate across divisions, pool hiring efforts and start new technology functions or positions from scratch.
The challenge of finding employees with the right backgrounds came up with other panelists.
Dominic Delmolino, vice president of worldwide public sector technology and innovation at Amazon Web Services, said AWS makes AI training available across its base so employees can gain basic knowledge on the subject. But finding people who can grapple with the potential for bias in data and who can supervise models after they have been deployed is another matter.
Until recently, “there was no undergraduate degree in data science in the U.S.,” said Delmolino.
When Ted Kaouk, now chief data and AI officer at the CFTC, was employed at the Office of Personnel Management, he saw significant year-over-year increases since 2020 in hiring related to data science and AI across government agencies.
Now, at the CFTC, “we’re emphasizing training our internal staff on the use of our own data and on AI,” he said on a panel about regulators and AI. He pointed to Rahul Varma, the deputy director for product and market analytics branch in the division of market oversight, who identifies training needs across divisions, “to make sure we have an enterprise approach.”
The CFPB launched a program in 2022 dedicated to hiring technologists steeped “not just in data science and engineering but in product management and human-centered design,” said Erie Meyer, chief technologist and senior advisor to the director at the CFPB. “When you are looking at something like dark patterns, there is a different set of technical insights you need that are more in the design realm.”
Meyer also brought up pooled hiring efforts, where a number of enforcement agencies can pull from a pool of candidates.
“We do technical vetting to ensure these are the right candidates and help place them in the right agency,” she said.
Terah Lyons, global head of AI policy at JPMorgan Chase, said the bank is investing in apprenticeships and upskilling as well as a new chief data and analytics function in the company.
“I work for a company with a vocal executive with respect to AI issues,” she said. In June 2023, CEO Jamie Dimon appointed Teresa Heitsenrether as the bank’s first chief data and analytics officer, leading the adoption of artificial intelligence technologies across its operations.
“She has provided a lot of strategic direction and more uniformity to our approaches,” said Lyons.
At the same time, Lyons acknowledged an imbalance in hiring.
“This talent question is experienced by sectors across the board, although particularly pronounced, in civil society and the public sector,” she said on her panel about ensuring the safe adoption of AI with Rice and Delmolino.
“That’s because you can pay more than I can,” quipped Rice.
In a largely anticipated move following weeks of criticism from its director, the Consumer Financial Protection Bureau issued an inquiry to examine the impact mortgage closing costs and fees have on borrowers.
In the past several months, CFPB Director Rohit Chopra has issued a stream of comments questioning the fairness of various housing related charges to consumers and other expenses he collectively deemed “junk fees.” But the request potentially foreshadows future CFPB rulemaking that might impose limits on what can be charged, according to some legal experts.
Among the items Chopra has criticized are interest rate buydowns, property inspections and title insurance.
“Junk fees and excessive closing costs can drain down payments and push up monthly mortgage costs,” said CFPB Director Rohit Chopra, in a press release. “The CFPB is looking for ways to reduce anticompetitive fees that harm both homebuyers and lenders.”
During a May speech at a leading mortgage industry conference, Chopra directed criticism at the credit reporting industry for steep increases in fees for score data. In those same remarks, he called out prices for employment verification services, and said that many of the fees charged to consumers still amounted to unreasonable and unfair burdens on consumers warranting examination even when disclosed upfront.
In its latest announcement, the bureau again singled out charges related to credit scores and title insurance. The request for information, or RFI, asked for public comment specifically addressing fees that are currently subject to competition, how they are set and if they have changed in recent years.
“Even if disclosed, borrowers are compelled to pay the fees and may have no control over cost. In 2022, median closing costs were $6,000, and these fees can quickly erode home equity and undercut homeownership,” the CFPB said.
Chopra finds himself regularly at odds with many in the mortgage industry, and the CFPB’s inquiry quickly garnered a mix of reactions ranging from praise to disapproval among industry stakeholders. While trade groups have characterized the CFPB’s actions as overregulation that display a lack of understanding about the way the mortgage process works, some lenders also appreciate the efforts to drive down costs that negatively impact their bottom line.
The Community Home Lenders of America welcomed the inquiry “for highlighting third-party mortgage service provider junk fees, which can harm consumers and reduce access to homeownership,” according to its executive director, Scott Olson
“In particular, we are pleased the CFPB focused on two areas of concern to our members, credit scoring and title insurance,” Olson also noted in a press release.
But a consortium of industry trade groups, including the Mortgage Bankers Association, Housing Policy Council and American Bankers Association pointed out many of the fees questioned by the CFPB were required by federal statutes and other regulators as a condition of buying and insuring loans. Many of the rules currently in place received the stamp of approval from the CFPB, they added.
“The industry invested considerable resources to implement these new rules just a decade ago,” a joint statement read.
“If the CFPB is now modifying its previous position and is considering changing this complex regulatory disclosure regime, a rule-making process governed by the Administrative Procedure Act — and supported by a robust cost-benefit analysis — is the only appropriate vehicle to initiate that work,” the trade groups said.
“Given the significant home-price appreciation and swift inflation that consumers have encountered in recent years, a discussion about policies that address affordability burdens while maintaining healthy and competitive mortgage markets makes good sense,” they added.
Meanwhile, the American Land Title Association, which finds itself in the public eye after the announcement of a pilot program aimed at reducing borrower expenses that could offer alternatives or waivers to its products, also took issue with the “junk fee” label but said it appreciated the opportunity to educate federal agencies the value its members provided.
“Fees for title insurance and other closing costs must be provided and disclosed to consumers under a federally mandated rule that the CFPB itself developed in 2015,” ALTA said in a statement. “Lumping title insurance and settlement services into the category of ‘junk fees’ conflicts with the White House’s own definition, which cites the lack of disclosure of the fee being charged.”
But analyst Bose George of Keefe, Bruyette & Woods said any changes related to title insurance charges would only occur in the event of a second Biden presidential term and may not result in major changes, given the CFPB’s role in creating current regulations.
“We think a change like this, which might just move the title cost into the mortgage rate and effectively be passed on to the borrower in that sense, might not warrant a wholesale change to the closing process,” George said.
Attorneys serving the mortgage industry took a harsher tone toward the CFPB, with Richard Horn, co-managing partner of Garris Horn raising a red flag for the home finance community in a blog post.
“It appears to be an attempt to create an administrative record for a future rulemaking that substantively restricts closing costs in some way,” he wrote.
Meanwhile, Peter Idziak, senior associate to Polunsky Beitel Green, claimed the CFPB was engaging in some “sleight of hand” in its announcement, particularly when it came to labeling rate discount points as junk fees.
“It’s not surprising that more borrowers are choosing to pay points with interest rates more than double what they were in 2021, but it’s misleading for the bureau to lump these voluntary costs in with fees that are truly unavoidable,” Idziak said in a statement.
At the same time, Idziak said the CFPB deserved some of the blame for the current state of housing costs.
“A more accurate title of the CFPB’s press release could be, “Well, Well, Well, If it isn’t the ‘Consequences of My Own Actions.’ Completely absent from the bureau’s Request for Information is any acknowledgment that increasing and overburdensome government regulations and actions by FHFA as conservator of Fannie and Freddie have increased costs of doing business substantially for lenders.”
Analyzed from a property rights perspective, the dividends paid by the Federal Home Loan banks to their members are surprisingly stingy, and vary wildly between the different banks, writes Donald J. Mullineaux.
Andy Dean Photography/Andy Dean – stock.adobe.com
The 11 Federal Home Loan banks rank among the largest cooperative organizations in the U.S. Like all cooperatives, the Home Loan banks return a portion of invested capital as quarterly dividends. Recently, Senator Elizabeth Warren has joined others in claiming that these payouts are “excessive.” Dividend strategies vary substantially across the banks, but basic economic and cooperative principles suggest that, over the long haul, Federal Home Loan bank payouts have been too low rather than high.
The Home Loan bank boards of directors establish dividends (expressed as a percentage of capital stock) and must act in the fiduciary interests of members. Amounts not so paid flow onto the Home Loan banks’ balance sheets as retained earnings, where (with capital stock) they provide a buffer against the various risks assumed by the banks and protect the par value of the stock.
Home Loan bank capital has unique characteristics relevant to dividend decisions. First, the value of each share is fixed at $100 and cannot appreciate. Second, there is no secondary market in Home Loan bank shares, which consequently are illiquid. Third, members have limited claims on ownership of retained earnings and sometimes surrender them without compensation. Finally, each bank guarantees the debt obligations of the others in a “joint and several liability” arrangement.
These facts imply that the 6,800 Home Loan member banks have weak “property rights” in their invested capital. Strong rights imply that owners have exclusive rights to an asset’s use, can earn income from it and have the right to sell it. Member banks lack exclusive rights to retained earnings (given joint and several liability) and cannot sell their claims (since stock is illiquid). Members can earn income when retained earnings are invested, but the Home Loan banks purchase only low-return assets and investments cannot yield an increase in the fixed stock price. And most members have superior investment options to the Home Loan banks when it comes to investing cash they receive as dividends. If a member voluntarily exits the system or is acquired by an institution in a different district, it surrenders its claim on any accumulated retained earnings. While members cannot sell their stock, they can redeem it with the issuing Federal Home Loan bank. But it can take up to five years to close the transaction.
Weak property rights erode capital values in this cooperative setting, especially the retained earnings component. Members realize the full value of claims on retained earnings only if a Home Loan bank is liquidated, an extremely unlikely event. Once retained earnings are sufficient to buffer against relevant risks, members should prefer owning capital stock. Stock has stronger property rights because it promises periodic returns and can be redeemed in designated situations.
So, what do the Home Loan banks actually do when it comes to the dividend/retained earnings tradeoff? All 11 Home Loan banks have similar business models because their regulator, the Federal Housing Finance Agency, makes it so. Each must satisfy a requirement that the sum of advances (loans to members) and mortgage purchases exceed 70% of debt obligations. At year-end 2023, the average ratio was 77% and seven of the banks were less than two percentage points from this mean. Consequently, it’s reasonable to expect that the bank boards would follow roughly similar strategies in rewarding members with capital distributions. The data strongly suggest otherwise.
Data from the Federal Home Loan Banks Office of Finance indicates that the average payout ratio (dividends/net income) at the 11 Home Loan banks over 2022-23 was 46.7%, down from an average of 60% over the prior four years. The 2023 payout range was large, with the high of 67.8% (New York) more than doubling the low at 33.8% (Dallas). Rationalizing these sharp differences is difficult, given the similarity in cooperative business models. A payout ratio of less than 50% signals board preferences for retained earnings over dividends.
Over the last decade total Home Loan bank retained earnings grew 129% to a level of $27.9 billion, while capital stock holdings increased only about 34%. Retained earnings ranged from almost $5 billion (Chicago) to $1.4 billion (Topeka), again an enormous difference across a set of similar institutions. Asset sizes vary across the Home Loan banks and over time will influence dividend declarations. But payout ratios have no relation to bank size, and the amount of each bank’s retained earnings reflects a very long history of payout decisions.
All the Home Loan banks estimate retained earnings required to buffer against a variety of risks in extremely stressed environments. Seven of the banks disclosed these “targets” in 2023 annual reports and they vary sharply. The average ratio of actual retained earnings to the target levels at the reporting banks was 118%, with an enormous low-to-high range of 21% to 275%. There are no regulations addressing retained earnings in the capital structure of the Home Loan banks, but FHFA requires that capital stock be at least two percent of assets to assure that members have sufficient “skin in the game.” And in the system’s 90-year history, there has never been a case in which a Home Loan bank defaulted on its promise of par redemption of stock.
Property-right principles suggest that capital stock should exceed retained earnings if Home Loan bank boards are behaving in their members’ interests. Indeed, there was 60% more capital stock than retained earnings on the banks’ combined balance sheets at the end of 2023. But the range of capital stock/retained earnings outcomes is remarkably large, from a high of 2.92 (Cincinnati) to a low of 0.57 (San Francisco). Contrary to what property rights arguments imply, two banks had more retained earnings than capital stock. What accounts for the enormous, and anomalous, range of capital distribution results across the Home Loan banks in both the short and long runs? The answers cannot be found in any Home Loan bank-produced documents.
Home Loan bank boards (and CEOs, who play key dividend decision roles, but do not hold board seats) may be unaware of how property rights affect capital values or might discount their relevance. Or board members may apply approaches used in their companies that typically are not cooperatives. But standard “principles” for resolving dividend/retained earnings tradeoffs in a public-company setting do not apply at cooperatives like the Home Loan banks. An example concerns what one Home Loan bank cites as the potential “strategic value” of retained earnings. These funds cannot be the source of value creation discussed in MBA classes when the stock price is fixed at $100. And retained earnings are irrelevant to both the prospect and outcome of a merger between Home Loan banks for property-rights-related reasons.
So why Home Loan bank boards and their top management employ vastly different strategies of rewarding members with capital distributions remains a puzzle. The considerable amount of retained earnings on some banks’ balance sheets reflects a history of “withheld dividends” that, given the relevance of property rights, may not have been in members’ economic interests. If the Home Loan banks were operating in a competitive environment, it seems highly unlikely these sizable differences in payout strategies could survive. Since directors associated with member organizations constitute a majority of Home Loan bank boards, they especially would seem to have a strong incentive to resolve the puzzle.
The House of Representatives is teeing up a cryptocurrency bill developed by the House Financial Services and Agriculture Committees that would delineate whether the Securities and Exchange Commission or Commodity Futures Trading Commission would oversee different crypto tokens, as well as barring SEC from issuing rules on crypto custody.
Bloomberg News
WASHINGTON — The House will vote on one of its signature crypto bills on Wednesday, a significant step forward after months of effort from House Financial Services Committee Republicans who have hoped to make a crypto regulatory structure a hallmark of their time leading the committee.
The bill’s text, which has been hashed out between the House Financial Services Committee and the House Agriculture Committee, is largely concerned with delineating authorities between the Securities and Exchange Commission and the Commodity Futures Trading Commission, and establishes a criteria by which the agencies can determine which of them would oversee various digital assets.
Specifically, the bill would barr the SEC from requiring or taking any supervisory action that would cause a bank to record a crypto asset held in custody on the institution’s balance sheet “except that cash held for a third party by such institution that is commingled with the general assets of such institution.” It would also prevent the SEC from requiring that banks hold additional regulatory capital against assets in custody or safekeeping.
Zachary Zweihorn, a partner with law firm Davis Polk, said the bill will likely be supported by the banking industry because it could create much-needed legislative certainty around at least some aspects of the cryptocurrency market and would give them a clear basis for becoming service providers to that industry.
“As a supervisory matter, banking regulators have been hesitant about banks engaging in digital asset activities given the regulatory uncertainties and risks inherent in the market,” Zweihorn said. “Passage of a comprehensive federal regulatory regime for digital asset activities could reduce the risks that supervisors see as presented by the industry, eventually making them more comfortable with the asset class.”
Rep. French Hill, R-Ark., one of the lead sponsors of the legislation, said in an interview that banking regulators sought clarity in the legislation after the SEC didn’t consult them before releasing the accounting bulletin.
“The Staff Accounting Bulletin 121 on custody which was not reviewed with the bank regulators, was not reviewed with Treasury and was not consulted with anybody and actually took custody completely in the wrong direction,” Hill said. “Not consistent with custody rules that have been longstanding.
“The bank regulators have sought clarity here for custody,” he added.
The legislation is getting a last-minute boost from a surprisingly amenable Democratic contingent. While Democratic leaders on the House Financial Services Committee — including Reps. Maxine Waters of California and Stephen Lynch of Massachusetts — are opposing the legislation for applying too light a touch to the crypto industry, Democratic leadership isn’t whipping against the legislation.
That means that party leadership isn’t pressuring Democrats to vote along party lines, and there could be significant numbers that choose to back the Republicans’ bills.
Most Democrats voted against the measure in the Senate, but the vote still previews growing willingness among Democratic lawmakers, especially ahead of elections, to consider crypto bills, even those that are more permissive.
A senior committee staff member involved in the drafting of the bill told reporters that the bill’s authors, who include Reps. Patrick McHenry, R-N.C., the chairman of the House Financial Services Committee, and French Hill, the chairman of the subcommittee on digital assets and financial technology and potential future top Republican on the full panel, hope that the Senate sees Democratic votes in the House votes, and that it prompts them to negotiate on the legislation.
With renewed possibility that a crypto structure bill passes along bipartisan basis, a group of critics, including consumer groups and prominent bank law professors, have released a statement that outlines deeper financial stability concerns with the bill.
Specifically in regards to banks, the coalition, which includes progressive groups like the Americans for Financial Reform, the National Consumer Law Center, National Community Reinvestment Coalition and Public Citizen, said that the bill could allow institutions like banks to bypass regulation.
“Not only could the decentralization framework named above allow crypto firms to largely continue with dangerous business practices as usual; it could also enable traditional financial firms to evade more robust regulatory oversight by claiming their products and platforms meet this decentralization rubric and thus are exempt from conventional regulatory requirements for securities issuers and actors,” the coalition said in their letter to House leadership. “This would create huge potential risks for consumers, investors, and markets due to less rigorous oversight than they would otherwise see with traditional regulatory approaches.”
Dave Fishwick, founder of Burnley Savings and Loans in the UK and subject of the hit Netflix movie “Bank of Dave,” at an Independent Community Bankers of America conference in Washington, D.C. Fishwick spoke with American Banker about his experience opening only the second community bank in the UK in 150 years and the importance of community banks all over the world.
Chris Williams
Dave Fishwick, the real-life British banker behind the hit Netflix movie “Bank of Dave” catapulted to stardom after a documentary series chronicled his Herculean efforts to open a local community bank, Burnley Savings and Loans in Britain.
Fishwick was already a self-made millionaire and minibus dealer when he began lending to local businesses in 2011. “Bank of Dave” chronicles the uphill battle Fishwick faced getting regulators to grant his bank a license — only the second banking license granted in Britain in 150 years.
Fishwick hopes the sequel — which is slated for release in 2025 — will shine a light on the practices of his new nemesis: The payday lending industry.
“I dislike them with a passion,” Fishwick said in an interview. “I feel they prey on the poor and the vulnerable.”
The sequel, “Bank of Dave II: The Loan Ranger,” just wrapped up filming and features actor Rory Kinnear playing Fishwick and searching for payday lenders and the CEOs — including a jaunt to the U.S. and its thriving payday industry.
Earlier this month, Fishwick spoke to bankers in Washington D.C. at the Independent Community Bankers of America’s Capitol Summit, where he was made an honorary member. He has become an ambassador for community banks, speaking worldwide about the need for more support of local banks due to branch closings and for more targeted regulations.
The following interview was edited for length and clarity:
American Banker: Bankers and banks are often vilified in the movies. But many have called “Bank of Dave” a modern-day version of “It’s a Wonderful Life.” Tell us about it.
Dave Fishwick: What happened in England is there was a documentary series called Bank of Dave that was made about me and the team, myself and partner David Henshaw, who is a very key part of the story of the bank, a very old-fashioned bank manager, and he’s the most honest, ethical man on the planet.
We went up against the big banks right at the beginning. We wanted to open a community bank, the Bank of Dave, to help people get the best rate of interest on the High Street. We then wanted to lend that money out to people in businesses who couldn’t borrow from the High Street banks, through no fault of their own, and the profit we wanted to give to charity. We thought, how difficult can it be? And it was just a nightmare. So difficult.
Bankers are important people and they’re the people that are needed. We do need some bankers and banks. We need honest, ethical, moral people who are doing it for the right reasons and doing it not because they need the wages. They’re doing it because they believe in what they’re doing. I’ve got some bankers working for me who are career bankers, and they are really good people.
AB: Why is it so hard to get a bank license?
Fishwick: We’ve now lent over $50 million to thousands of people and businesses all over the UK. There’s a huge need for what we do in our community. And the licenses we’ve got, it’s like a mixture of licenses at the moment. We’ve got a bunch of licenses that all fit together to allow us to do the things we want to do. They allow us to do mortgages, to do personal loans, to hold money, and an anti-money laundering license, to name just a few. And they all fit together.
What we want is a check-clearing license, which is the one that we’re going for now, but I think that’s probably another year to 18 months away. But we’ve got the licenses to do what I want to do at the moment. Each time we get a little bit nearer, we move a little bit further forward. Unfortunately here in Britain, we haven’t got something like the ICBA. Unfortunately here in Britain, there’s just me, David Henshaw and my team and the lawyers and everybody that works with me. Each challenge is met by a huge barrage of problems from the regulators and the big banks because they do not want me to exist. And what makes me very cross about that is [that] in 2008, the banks crashed like they did in the USA and they were bailed out by the taxpayer.
Royal Bank of Scotland here was run by a guy that we called Fred the Shred, who lost billions of pounds of the taxpayers money and he was given a knighthood. And here I am helping people to get the best rate of interest, I’m lending to businesses who can’t borrow from the High Street banks, and I’m a terrible person here in the UK. But in America, I win awards.
AB: The movie ‘Bank of Dave’ did really well in the U.S. Why do you think it resonated?
Fishwick: The movie was released December 18th, and within three days it was there in the top 10 alongside Tom Cruise’s Mission Impossible. Netflix has been really, really helpful and they are massively supportive of what we do and it’s been a real breath of fresh air to work with Netflix, who really believe in community banking. I’ve met the big bosses, and they came to the premiere and we got the fastest commissioned sequel in Netflix’s history.
The ‘Bank of Dave’ is the most successful independent British film on Netflix ever made. Normally they spend hundreds of millions getting to No. 1 around the world and they didn’t spend that. Now, the second one is much bigger. There are fantastic, huge American stars. You’ll see lots of actors from America in this one that you’ll recognize. America is where a lot of the payday loan company bosses are.
AB: The sequel, ‘Bank of Dave II,’ is coming out early next year. Tell us about the movie and this new passion of yours going after the payday lending industry.
Fishwick: I do feel the payday loans — they’re loan sharks, they’re terrible people. In just the last few weeks, I’ve just done a program for ITV, Good Morning Britain, here in the UK. And it’s the biggest and fastest growing news story of this year for ITV News.
In the documentary series, ‘The Lone Ranger,’ we take them on and we come up with a better way for more community lending, or being able to dig these poor people out of the payday loan debt and get them into an affordable loan that eventually they’re going to pay off. But in the documentary series, as in the movie, you will see that it’s much more difficult than it looks to be able to find these people to pay them.
I think sometimes in life you’ve got to think how to break something, to be able to learn how you can fix it and make sure you don’t go near there again. People don’t have access in the community to funds and they need money from somewhere.
AB: What do you want to tell bankers that you’ve learned about banking?
Fishwick: What is clear that I’ve learned over the last 12 years is the basic legislation around banking, in effect precludes the formation and operation of small community banks, not just here in the UK, but in America and Australia. I went to Australia and I met an awful lot of people in Australia that have exactly the same problem as we have in the USA and the UK.
There seems to be a one-size-fits-all model which simply is not proportionate to the operation of a small, local deposit-taking institution and credit facilities. And I don’t mean credit unions. I feel credit unions are actually getting in the way of the community banks. They don’t pay taxes, they don’t contribute to society, and they are probably getting in the way of the American community banks.
I feel that we’ve been very badly served by the big banks and we need change. One of my real bugbears is that the big banks just are not interested in customers anymore, they’re only interested in taking money in or giving people very little interest and then sending that money into the stock markets and investments ini the credit default swaps and things that I call ‘financial weapons of mass destruction.’ And if it goes well the banker makes a fortune in bonuses, and if it goes badly the taxpayer bails them out. They’ve got a no-lose situation.
AB: You’re advocating for local community banks that in your words “challenge the system,” yet Burnley Savings and Loans has fewer than 20 employees. How can small banks emulate what you’re doing?
Fishwick: What we do is very old-fashioned, but we do it better than the big banks. David Henshaw has taught my team to manually underwrite and that’s a skill that has been lost in the world today and he has brought it back. Most of my staff has been with me over a decade. We have about 14 full-time employees and another five or six and a few other volunteers. We’re a very small operation making a big noise all over the world. We’ve proved that you can have a community financial institution in every town or village across the UK or America that is run by people like us.
We are 100% capitalized. We only lend out money that comes in. And my money guarantees everybody’s money. I call it Granny’s money, because I think of it in my head as Granny’s money and then nobody could ever lose it. So there is no chance of us crashing.
We’re very much asset-based. If somebody wants a wagon, or a truck for their business, or a piece of machinery, we like lending on that sort of asset. We also do lots with cars and we’ve just started doing mortgages. I own six businesses. We’ve been incredibly successful and very lucky in lots of ways and I put that behind Burnley Savings and Loan so I give a personal guarantee for every single penny. And it could be rolled out all over the world with that model. There’s lots of people who love the place they live and they could become the entrepreneur behind it and that’s what you need.
KB: Why do you think that regulators and big banks are making it so difficult for small banks?
Fishwick: Regulations and computer systems need to be proportionate to the size of the community bank that you are opening. This is one of the problems that America’s got. The regulators and the powers that be, I think sometimes are governed by the big banks behind the scenes, and are trying to make it so difficult for a community bank to open. And they’re doing that for a reason. They’re making it so you can’t be a problem to their future earnings by keeping you to a very small size. Here in the UK, you need to have $50 million or $60 million worth of computer systems to even think about opening a standard bank. Why would you want $50 million of equipment to let in less than $50 million out?
If I can use my brand and movies to help community banks get a fairer go, a fairer crack, and maybe get some of the regulators and some of the powers that be to have a listen. Community banks work for the community to benefit that community and they are the way forward all over the world. If we can build as many community banks in as many communities as possible, then that stops the big banks having a monopoly. If the big banks are too big to fail then they’re too big to exist, and that’s the problem with some of the really big banks.
AB: You got into banking after growing several businesses. How does the industry attract more people?
Fishwick: Unfortunately, banking isn’t an interesting subject. It isn’t like Formula One. It feels a little bit boring. A lot of people don’t want to write about it. What I try to do is I try to make it a little bit fun, I try to make it interesting. I try to get people to understand and tell people in layman’s terms exactly how things work, because that’s how I had to understand it. And I really understand the whole banking industry. And then I stand at the front and then I get the media interested in things with television and programs and movies and radio and podcasts and newspapers and magazines. And then I’ll let career bankers, like the team you have at the ICBA, who really understand, put their point forward.
We’ve got to get young people using community banks. We’ve got to get them to understand. Young people love green technology, and they probably don’t want to work with a faceless bank.
Burnley Savings and Loans has the ability for all our customers to be in the cloud. But we also have all transactions written down on a pad and that goes into the safe every night. If we burned down this afternoon, we have the backup for everything. I think there’s an argument to have a community bank app but also to have a community bank for people like my mom who wants to be able to come in and talk about fraud, deception, deceit, if they get a bad phone call about somebody trying to steal money out of their account.
AB: You speak very highly about bankers.
Fishwick: Bankers are important people and they’re the people that are needed. I’ve got some bankers working for me who are career bankers, and they are honest, ethical and moral people who believe in what they’re doing.
I think it’s important for young people to understand the benefits of having a community bank. The problem is you either use them or lose them. There are 54 branches closing every month in the UK. Banks need to concentrate on lending more money and give hard work and serve us a better interest rate. I think banks have forgotten why they were put there in the first place and I think that we need to concentrate on helping the public and speaking about the positives of community banks.
An independent report released Tuesday detailed a pervasive culture of sexual harassment and workplace discrimination at the Federal Deposit Insurance Corp. FDIC chair Martin Gruenberg said he will “will spare no effort to create a workplace where every employee feels safe, valued, and respected.”
Bloomberg News
WASHINGTON — An independent examination of Federal Deposit Insurance Corp. workplace culture released Tuesday painted a picture of an agency with rampant instances of sexual harassment, discrimination, and various other forms of misconduct spanning several years.
The report, commissioned by the FDIC and performed by law firm Cleary Gottlieb, portrayed a culture characterized by patriarchy and insularity, with reports of discrimination and harassment, particularly from female employees and individuals belonging to marginalized groups.
“Far too many FDIC employees — substantially more than those who have previously reported internally — have suffered from sexual harassment, discrimination, and other forms of interpersonal misconduct for far too long,” the report noted. “We find that aspects of the FDIC’s culture and structure — including a lack of accountability, fear of retaliation, a patriarchal, hierarchic, insular and risk-averse culture, power imbalances, insufficiently clear guidance and reporting channels, inadequate recordkeeping, and an investigative process that lacks credibility internally — have contributed as root causes to the conditions that have allowed for this type of workplace misconduct to occur.”
Over a span of five months, investigators took testimony from more than 500 individuals, primarily current FDIC employees. The firm also conducted interviews with another 167 individuals and meticulously reviewed thousands of related documents uncovering hundreds of instances of misconduct, some occurring as recently as weeks before the report’s publication on Tuesday.
The misconduct detailed in the review ranged from inappropriate and racially discriminatory comments towards minorities to instances of sexual harassment, stalking and unwelcome advances — mostly towards women — at the agency. These incidents occurred across various levels of the organization, from field offices to agency headquarters. The misconduct, according to the report, often went unaddressed, with wrongdoers being moved to different positions rather than facing official sanction. Employees also reported a fear of retaliation within the FDIC, which they said discouraged them from reporting instances, while those who did make reports faced job loss or reprisal.
In one instance, one employee stalked and sent unwelcome sexualized text messages to a female employee, which the female employee said instilled her with fear for her physical safety despite her complaints to superiors. In other instances female employees endured routine sexual objectification by their supervisors, who made inappropriate comments about their bodies. Another supervisor reportedly mocked an employee with a disability by calling them offensive nicknames. Employees of color reported receiving remarks from colleagues speculating that they had only been hired to fill diversity quotas, and black employees in particular cited instances of disparate interpersonal treatment as well as being passed over for promotions in favor of their white colleagues. Homophobic remarks were also reported, with a supervisor referring to gay men as “little girls.”
Chairman Martin Gruenberg’s conduct and reputed temper — previously reported in a Wall Street Journal article — was also highlighted. In one notable incident at a meeting intended to cover corporate governance-related regulation, Gruenberg went off topic and reportedly berated a specific individual for about 45 minutes. This behavior, according to Cleary’s report, was corroborated by Microsoft Teams message exchanges and reportedly left participants feeling uncomfortable and disrespected. Other instances of Gruenberg’s temper were mentioned by both current and former FDIC employees, though some also noted positive experiences with him.
While Gruenberg’s conduct was not cited as a root cause of the pervasive misconduct at the agency, the report acknowledges challenges posed by his leadership style and emphasizes the need for a genuine commitment to cultural transformation, including a candid acknowledgment of past shortcomings.
“We do find that — as a number of people we spoke to in our review have noted — ‘tone at the top’ is important and that positive workplace culture needs to be modeled and reinforced from the top down,” the report noted. “As the FDIC faces a crisis relating to its workplace culture, Chairman Gruenberg’s reputation raises questions about the credibility of the leadership’s response to the crisis and the ‘moral authority’ to lead a cultural transformation.”
Gruenberg acknowledged the seriousness of the findings, expressing regret and assuming responsibility for the agency’s failings.
“To anyone who experienced sexual harassment or other misconduct at the FDIC, I again want to express how very sorry I am,” he said. “As Chairman, I am ultimately responsible for everything that happens at our agency, including our workplace culture.”
The report made seven recommendations to help improve workplace culture, and prevent further harassment, discrimination, and misconduct within the FDIC.
It suggests the agency support victims of misconduct through enhanced mental health resources, appointing a Culture and Structure Transformation Monitor to oversee necessary changes, holding leadership accountable through improved performance evaluations, developing and communicating additional policies such as Anti-Fraternization and Anti-Retaliation Policies, implementing comprehensive training programs for all employees, restructuring oversight and investigation processes for better efficiency and reliability and fostering greater transparency through improved communication about investigations and annual surveys.
The report’s release will bring renewed skepticism towards Gruenberg, who faced Congressional calls for resignation after allegations were first unveiled.
Outgoing House Financial Services Chairman Rep. Patrick McHenry, R-N.C., swiftly called for Gruenberg’s resignation following the report’s release.
“It’s time for Chair Gruenberg to step aside. The independent report released today details his inexcusable behavior and makes clear new leadership is needed at the FDIC,” said McHenry. “This report confirms the toxic workplace culture at the FDIC — which starts at the top — has led to entrenched and widespread misconduct at the agency.”
Rep. Bill Huizenga, chairman of the House Financial Services Subcommittee on Oversight and Investigations, which has been conducting its own investigation into the allegations of workplace misconduct at the FDIC, also told American Banker that Gruenberg should resign.
“Today’s independent report by Cleary Gottlieb makes it clear that Chair Gruenberg is not the right person to lead a much needed cultural overhaul at the FDIC,” he said. “Chairman Gruenberg should resign immediately to allow the healing and reform process to begin. I urge all of my colleagues to join me in demanding the same.”
At least one Democrat, Rep. Bill Foster, D-Ill., also called for Gruenberg’s resignation.
“I am appalled and deeply disturbed by the details of widespread sexual harassment and discrimination at the FDIC outlined in the report released today, and I commend the brave individuals who came forward to shed light on these abuses,” Foster said. “Sweeping changes must be made to mend the toxic work environment that has run rampant for far too long, and that starts with a change of leadership. It is time for Chair Gruenberg to resign.”
The White House fell short of calling for Gruenberg’s resignation, but a spokesman declined to say if President Biden still had confidence in the agency’s leadership.
“It’s an independent agency, as you know, the president of course expects the administration to reflect the values of decency and integrity and to protect the rights and dignity of employees,” said White House spokesperson Karine Jean-Pierre in a briefing on Tuesday. “My understanding is the FDIC chairman spoke to this, he apologized and has committed to the recommendations provided by the independent report and going to further fix the longstanding issues that are in the report. But I don’t have any thing beyond that. But he apologized, I would refer you to that.”
Many industry experts have long voiced skepticism that the Gruenberg would resign, both because of the political ramifications and because the workplace misconduct occurred only partially under his leadership. A change in leadership would likely slow down the Biden administration’s financial regulatory agenda, particularly regarding pending proposals on bank capital requirements. Were Gruenberg to step down, Republican appointee and FDIC Vice Chair Travis Hill would assume leadership until another chair is confirmed.
Gruenberg said in a statement that he is up to the challenge of reforming the FDIC’s workplace culture.
“We will spare no effort to create a workplace where every employee feels safe, valued, and respected,” said Gruenberg. “Making meaningful and sustained change to our workplace culture will not be easy … [but] I believe that we can and we will rise to this challenge, as we have so many others over the past 90 years.”
Federal regulators might find reasons beyond antitrust concerns to block the Capital One-Discover merger.
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As federal regulators review Capital One’s merger application to buy Discover Financial Services, they will need to untangle a host of regulatory issues, across multiple competitive dimensions. All of this will be done against the backdrop of fierce criticism of the deal from powerful coalitions in Washington.
The regulators that are most likely to have the power to scuttle the acquisition are the Federal Reserve and the Office of the Comptroller of the Currency under federal banking laws and the Department of Justice under antitrust statutes. The likelihood of approval will depend on their relative satisfaction with whether the transaction will not substantially lessen competition and how a combined Capital One-Discover would prevent damage to the broader economy in the event of its failure or financial distress.
Capital One is subject to examination and regulation by the Federal Reserve and the OCC. The banking regulators work in parallel with the DOJ when evaluating bank mergers. But if they disagree over the competitive effects of the transaction, the DOJ may still challenge the proposal in court, though these disagreements are rare. The DOJ and the banking agencies both assess the competitive effects of the proposal, but the banking agencies also take into account other banking-specific factors, including the supervisory views of other agencies, such as the Consumer Financial Protection Bureau, and whether the merger could increase risk to the stability of the U.S. financial system.
Although the DOJ released revised merger guidelines that shift away from completely relying on the concepts of “horizontal” and “vertical” mergers, that framework is still helpful. “Horizontal mergers” refer to mergers that occur between firms in the same industry, and “vertical mergers” refer to mergers that occur between companies at different stages of the production process. The deal has components of both and they should be analyzed separately.
Capital One and Discover are both credit card issuers, which has horizontal merger implications. Capital One would become the largest credit card issuer in the country, with a 22% market share. There are at least a dozen sophisticated, well-capitalized businesses competing as credit card issuers. Federal regulators may conclude that there is insufficient evidence that the merger should be blocked over antitrust concerns.
But federal regulators might find other reasons to block the deal. Discover is a payment network, which has vertical merger implications. In its updated merger guidelines, one of the factors the DOJ considers in assessing whether a merger could substantially lessen competition is if there is an industry trend toward consolidation. There is a reasonable possibility that Capital One’s purchase entices American Express to seek a buyer in the long term. In addition to its plans to migrate all of its debit spend away from Mastercard’s network, Capital One is also considering moving its credit spend as well. That would total possibly $606 billion dollars worth of credit card volume moving to Discover’s payment rails.
Any increase in revenue as a result of fees charged to new cardholders, more processing activity from merchants or income from any applicable customers in the broader payments ecosystem could significantly increase Discover’s ability to invest in upgrades and enhancements that improve its service. While it is unlikely Discover will ever exceed Mastercard or Visa in market share given the scale of their respective networks and their significant lead in overseas markets, Discover may become the third largest credit card network in the United States, overtaking American Express.
Regulators should also gather information about whether the merger would bring any decrease in credit and debit swipe fees charged to merchants and assess if Discover will continue to be exempt from rules that cap debit interchange pricing set by the Durbin Amendment.
Additionally, regulators should evaluate Discover’s supervisory records with the CFPB, which has issued multiple consent orders against Discover for issues in student loan servicing. They should also question plans to improve Discover’s compliance with consumer protection laws, as required by a consent agreement with the Federal Deposit Insurance Corp.
Regulators should also determine whether the failure of the combined company could inflict damage on the broader economy. Under the Dodd-Frank Act, Capital One must create a living will that describes how it would address bankruptcy or dissolution. The Federal Reserve recently extended the deadline for a living will to March 31, 2025.
But given the overlapping timelines for the merger and the new deadline, federal banking regulators should explore whether Capital One can proactively describe how the combined entity would handle financial stress. Importantly, regulators would need to ensure the American people do not pay for it.
Through the first quarter of the year, actions against fintech partner banks have accounted for 35% of publicized enforcement measures from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller, according to the consultancy Klaros Group. This is an uptick from 26% during the previous quarter, and 10% from the first quarter of 2023.
The jump in enforcement actions against firms engaging in so-called banking-as-a-service, or BaaS, business models corresponds with the adoption of a new joint guidance from the Fed, FDIC and OCC for evaluating third-party risks, which was codified last June. The following quarter, the share of fintech partner bank enforcement actions doubled from 9% to 18%, according to Klaros. The uptick in BaaS-related enforcement comes amid a doubling of total enforcement actions against banks over the same period.
“It’s undeniable that there’s more enforcement activity happening related to BaaS,” said David Sewell, a partner with the law firm Freshfields Bruckhaus Deringer. “You are seeing the fruits of the enhanced supervisory posture towards that space.”
The question moving forward is whether this recent string of activity is a momentary adjustment as agencies ensure their expectations are taken into account, or a permanent shift in regulators’ attitude toward BaaS models.
Along with crafting new expectations for fintech partnerships, Washington regulators are also putting together specialized supervision teams to explore these activities more comprehensively. Last year, the OCC launched an Office of Financial Technology to “adapt to a rapidly changing banking landscape,” and the Fed established a similar group called the Novel Activities Supervision Program, which tracks fintech partnerships, engagement with crypto assets and other emerging strategies in banking.
These fintech-specific developments come at a time when the agencies are changing their approach to supervision across the board with an eye toward escalating issues identified in banks more quickly and more forcefully. The effort is being undertaken in response to last year’s failure of Silicon Valley Bank, which had numerous unaddressed citations — known as matters requiring attention — at the time of its collapse.
The FDIC has already amended its procedures and now directs its supervisors to elevate issues if they are unresolved for more than one examination cycle. A Government Accountability Office report issued last month called for the Fed to adopt a similar approach.
Gregory Lyons, a partner at the law firm Debevoise & Plimpton, said the confluence of these various developments will result in significant supervisory pressure on fintech partner banks, most of which are small community banks leaning on the arrangements to offset declines in other business opportunities.
“You have a general concern from regulators about fintechs, you have these new divisions within agencies focused solely on fintech activities and risks, and then more generally you have an exam environment in which things are going to get elevated quickly,” Lyons said. “This is a fairly volatile mix for banks relying heavily on fintech partnerships.”
Measuring supervisory activity and determining its root causes are both fraught exercises, said Jonah Crane, partner with Klaros. Public actions make up just a fraction of the overall enforcement landscape, which is itself a small portion of the correspondence between banks and their supervisors. Public enforcement actions are also intentionally vague in their description of violations, as a way of safeguarding confidential supervisory information.
Still, Crane said recent disclosures exemplify the areas of greatest concern for regulators: money laundering and general third-party risk management. He noted that the main threat supervisors seem to be guarding against is banks outsourcing their risk management and compliance obligations to lightly regulated tech companies.
“For every banking product in the marketplace, there’s a long check list of laws and regulations that need to be followed,” Crane said. “Those need to be clearly spelled out, and they still need to be done to bank standards when banks rely on third parties to handle those roles and responsibilities. That seems to be the crux of the issue.”
In official policy documents and speeches from officials, the agencies have described their approach to fintech oversight as risk-sensitive and principles-based. They emphasize the importance of banks knowing the types of activities in which their fintech partners engage as well as the mechanisms in place within them to manage risks.
“The OCC expects banks to appropriately manage their risks and regularly describes its supervisory expectations,” an OCC spokesperson said. “The OCC has been transparent with its regulated institutions and published joint guidance last June to help banking organizations manage risks associated with third-party relationships, including relationships with financial technology companies.”
The Fed declined to comment and the FDIC did not provide a comment before publication.
Some policy specialists say the expectation that buck stops with the bank when it comes to risk management and compliance should not come as a surprise to anyone in BaaS space, pointing to both last year’s guidance and long-running practices by supervisors. The Fed, FDIC and OCC outlined many of their areas of concern in 2021 through jointly proposed guidelines for managing third-party risks.
James Kim, a partner with the law firm Troutman Pepper, likens the recent surge in activity to supervisors clearing out low hanging fruit. He notes that the rapid expansion of BaaS arrangements in recent years — aided by intermediary groups that pair fintechs with banks, typically of the smaller community variety — has brought with it many groups that were not well suited for dealing with its regulatory requirements.
“Several years ago, there were real barriers for fintechs to partner with banks because of the cost, time and energy it took to negotiate agreements and pass the onboarding due diligence,” Kim said. “Some of the enforcement activity we’re seeing today is likely the consequence of certain banks, fintechs and intermediaries jumping into the space without fully understanding and addressing the compliance obligations that come with it.”
Others say the standards set last year are too broad to be applied uniformly across all BaaS business models, which can vary significantly from one arrangement to another.
Jess Cheng, a partner with the law firm Wilson Sonsini who represents many fintech groups, said regulators need to provide more detailed expectations for how banks can engage in the space safely.
“In light of these enforcement actions, there seems to be a real time lag between what has been going on in terms of ramped up supervisory scrutiny and the issuing of tools to help smaller banks comply with and understand how they can meet those expectations,” Cheng said. “That is badly needed.”
In a statement to American Banker, Michael Emancipator, senior vice president and senior regulatory counsel for the Independent Community Bankers of America, a trade group that represents small banks, called the recent uptick in enforcement actions has been concerning, “especially in the absence of any new regulation, policy, or guidance that explains this heightened scrutiny.”
Emancipator acknowledged the guidance that was finalized last year, but noted that the framework was largely unchanged from the 2021 proposal and gave no indication that substantial supervisory activity was warranted.
“If there has been a shift in agency policy that is now manifesting through enforcement actions, ICBA encourages the banking agencies to issue a notice of proposed rulemaking, which more explicitly explains the policy shift and how banks can appropriately operate under the new policy,” he said. “Absent that additional guidance and an opportunity to comment, we’re seeing a new breed of ‘regulation through enforcement,’ which is obviously suboptimal.”
Among specialists in the space, there is optimism that the Fed’s Novel Activities Supervision Program will be able to address some of these outstanding questions and provide the guidance banks need to operate in the space safely and effectively.
“I expect more clarity going forward both in the enforcement action context but also if they adopt exam manuals and a whole exam process,” Crane said. “I remain glass half-full about how the novel activities programs are going to impact the space. It’s a pretty strong signal that agencies aren’t just trying to kill this activity. They wouldn’t establish whole new supervisory programs and teams if that’s what you’re trying to accomplish.”
The program will operate alongside existing supervision teams, with the Washington-based specialist group accompanying local examiners to explore specific issues related to emerging business practices. Crane said until more formal exam policies are laid out, the scope of the enhanced supervision conducted by these specialists remains to be seen.
“In theory, that enhanced supervision should apply only to novel activity,” he said. “There is an open question as to whether, in practice, the whole bank will be held to something of a higher standard.”
Lyons said the layering on of supervision from a Washington-based entity, such as the Novel Activities Supervision Program, eats into the discretion of local examiners. It also inevitably leads to the identification of favored practices.
“When these types of groups get involved in supervision, it tends to lead to more comparisons of how one bank approaches issues versus another,” Lyons said. “It’s not formally a horizontal review, but it’s that type of principle, in which the supervisors identify certain practices they like more than others.”
Lyons added that escalation policies, such as the one implemented by the FDIC, also take away examiner discretion and could create a situation where one type of deficiency — such as third-party risk management — can quickly transform into a different one with more significant consequences.
“If issues run over more than one exam cycle, they can go from purely being a third-party risk management issue, to also being a management issue for not monitoring a pressing risk well enough,” he said. “Management is typically considered the most significant of the six components of CAMELS for purposes of determining the composite rating, for example.”
Senator Tim Scott, R-S.C., who serves as ranking member of the Senate Banking Committee, introduced a Congressional Review Act resolution Monday that would undo the Consumer Financial Protection Bureau’s credit card late fee rule, which is also being challenged in court.
Bloomberg News
WASHINGTON – Sen. Tim Scott, R-S.C., ranking member of the Senate Banking Committee, introduced a long shot measure that would overturn the Consumer Financial Protection Bureau’s late fee rule, though the measure is unlikely to pass both houses of Congress and receive President Biden’s signature.
Scott introduced the Congressional Review Act resolution on Monday, the first day lawmakers are back in Washington from their spring recess.
It received support from a number of other Senate Banking Republicans, as well as other high-profile lawmakers. Republican Sens. John Thune of South Dakota, John Barrasso of Wyoming, Jerry Moran of Kansas, John Boozman of Arkansas, Steve Daines of Montana, Mike Rounds of South Dakota, Thom Tillis of North Carolina, Marsha Blackburn of Tennessee, Kevin Cramer of North Dakota, Mike Braun of Indiana, Bill Hagerty of Tennessee and Katie Britt of Alabama joined Scott’s resolution.
Banking industry trade groups supported the resolution. It has the backing of the Consumer Bankers Association, America’s Credit Unions, Independent Community Bankers of America, Bank Policy Institute, American Bankers Association, Americans for Tax Reform, Competitive Enterprise Institute and the U.S. Chamber of Commerce, Scott’s office said.
The CFPB’s late fee rule, which would in many cases cap credit card late penalties at $8, has already faced heavy pushback from many of those trade groups. A number of banking industry trade groups sued the agency over the rule in a case that’s drawn attention for so-called judge shopping.
The banking groups filed their complaint in Texas in a bid to have the case heard by a court that’s become a favorite venue for those seeking to challenge Biden administration regulations. Just on Friday, a federal judge sent the case back to Texas after a judge in that state said that it should be heard in a Washington, D.C. court — a procedural win for the industry interests that have complained about the rule.
The pushback against the CFPB credit card late fee rule is emblematic of the increasing scrutiny that regulators are facing from outside interests, including banking lobbyists and Congress. A challenge against another CFPB rule, the small-business data-collection rule, passed in both the House and Senate with some Democratic support, before being ultimately vetoed by President Joe Biden.
Joseph Otting, a former Comptroller of the Currency, took over as CEO of New York Community Bank on April 1. The Long Island bank is in recovery mode after pulling in a $1 billion investment led by former Treasury Secretary Steven Mnuchin.
Andrew Harrer/Bloomberg
New York Community Bancorp’s brand-new management team is seeking shareholder support for its $1 billion rescue, arguing they have a “clear vision for the future” and becoming a more resilient bank.
In documents filed ahead of a shareholder meeting, new CEO Joseph Otting acknowledged it will “take time and consistent results” to regain shareholders’ trust.
Otting, a former Comptroller of the Currency, stepped into the job April 1. His installment as CEO was part of the $1 billion investment led by former Treasury Secretary Steven Mnuchin, whose capital infusion helped restore confidence in New York Community after its stock price dove about 80% in a month.
As part of the deal, the $114-billion asset bank agreed to increase the number of shares it can issue to absorb its new investors. Though the capital infusion averted a more dire scenario, it massively dilutes existing shareholders’ positions, and some changes require their approval at the upcoming annual meeting. The Long Island-based company’s materials did not say when the meeting will take place, though it noted it will be virtual.
In a letter to shareholders, Otting wrote that the new team is doing everything it can to mitigate the hits New York Community has taken to its balance sheet recently, driven by stress in its hefty commercial real estate portfolio.
“We have a dedicated leadership team, a talented workforce, strong liquidity, and a clear vision for the future,” Otting wrote. “I believe we will emerge from this challenging period a more resilient, successful bank with a more diverse, balanced business model and a stronger risk management framework.”
New York Community, however, needs shareholder approval for a final rubber stamp on the deal because of the amount of stock it plans to issue.
The $1 billion and additional shares will boost capital levels, the company said, strengthening its position in the case of potential loan losses. While it’s unclear what losses New York Community may take going forward, bolstering its protection is a salient advantage, since its troubles were set off when it disclosed an unexpected $552 million loan loss provision in January.
Chairman Alessandro “Sandro” DiNello said on a call after the investment was announced that the capital will be sufficient to put the bank back on track.
“That’s why we raised capital, right?” DiNello said. “All the people that I’ve spoken to in the last month, the first question is always about credit. We want to put to bed the concern that we can’t handle whatever that might be.”
A chunk of the capital raise is happening through preferred shares, though the deal envisions converting them into common shares with shareholders’ approval. The bank noted that doing so would increase the type of loss-absorbing cushion regulators like best: common equity. If the conversions occur, the bank’s common equity tier 1 capital ratio would rise from 9.1% last year to 10.3%.
If shareholders don’t sign off on the deal, the company warned of negative impacts to its capital ratios and said it would be saddled with high dividends to preferred shareholders. New York Community also said in its proxy that, if the investment doesn’t win approval, the bank “would be severely limited in options should it need to raise capital.”
Bank consultant Bert Ely said the proposals seem prudent for the convalescing bank, adding that the proposals represent “corporate cleanup” work to give New York Community more flexibility if future issues arise.
“What they’re doing is preparing themselves for more pain,” Ely said. “Now, whether that’s going to be enough or not, who knows?”
He added that the actions also position the company better for a future acquisition.
Mnuchin and Otting reaped major gains the last time they partnered on a bank turnaround after the financial crisis. Mnuchin had led a group that bought IndyMac during a Federal Deposit Insurance Corp. auction. After installing Otting as CEO and rebranding the bank as OneWest, the two turned around the bank and sold it in 2015 to CIT Group.
While proposals related to the capital infusion make up the lion’s share of the proxy, the company also addressed some other housekeeping items subject to approval.
The bank is also asking shareholders to reapprove the accounting firm KPMG as its auditor, a role it’s held since 1993. New management has had to grapple with accounting-related questions and whether it had the proper controls in place for reporting financial metrics. The shortcomings raise concerns over whether KPMG flagged issues on time, though some experts note it’s hard to know what occurred behind the scenes.
KPMG said in its most recent audit that New York Community’s board of directors hadn’t exercised enough oversight, which led to ineffective risk assessment and monitoring.
The proxy statement also shed light on how the bank’s former CEO, Thomas Cangemi, would be compensated for last year’s performance. Cangemi, who resigned at the end of February, received just under $1.3 million in base salary in 2023. Upon leaving the company, Cangemi also forfeited unvested equity awards, the market value of which totaled nearly $9.5 million.
Additionally, New York Community disclosed it didn’t meet certain criteria to pay out short-term incentive awards, missing earnings per share thresholds and internal milestone progress.
New York Community has made a number of changes in the last two months to get back on track, including overhauling its board, packing its executive bench with risk management leaders, reassessing its loan-review process and portfolio and beefing up risk practice assessments.
“We believe our actions will be effective in remediating the material weaknesses, and we continue to devote significant time and attention to these efforts,” the company said in its annual report, released in mid-March.
Rohit Chopra, director of the Consumer Financial Protection Bureau, said in Wednesday remarks that meeting antitrust standards shouldn’t be enough to accept a bank merger application.
Ting Shen/Bloomberg
WASHINGTON — Consumer Financial Protection Bureau Director Rohit Chopra said banks’ mergers should go beyond meeting regulatory requirements by also proving that they’re filling unmet needs in the communities they serve.
Chopra touted recent efforts by federal regulators to enhance scrutiny of bank mergers in a speech at the National Community Reinvestment Coalition’s conference Wednesday. He added that regulators had lost focus on the best ways to evaluate whether a bank combination would better the lives of community members.
The Federal Deposit Insurance Corp. proposed Bank Merger Act revisions last month that, if passed, would require banks to provide proof that a merged entity could better serve the community and maintain financial stability. Chopra, along with Michael Hsu, Acting Comptroller of the Currency, sits on the FDIC’s board.
“We see so many individual towns, cities, communities, have dealt with the harms inflicted by the creep of consolidation across the banking sector,” Chopra said to the audience of nonprofit leaders, consumer group advocates and bankers. “[The policy revisions] are intended to address all of this and restore a reconnection to service to the community and the public.”
As Chopra lambasted current “rubber stamp” regulation, one of the biggest, and most contentious, proposed bank acquisitions in 15 years awaits its fate. Capital One filed its official application to acquire Discover Financial Services last month in what would be a $35.5 billion deal, creating a credit card behemoth.
Critics of the deal, including the NCRC, fear it would limit options for subprime borrowers and decrease competition. The bank claims the merger would create more competition by bolstering Discover’s network against powerhouses Visa and Mastercard.
Although the FDIC doesn’t have pull in the blockbuster transaction, which needs approval from the Federal Reserve and Hsu’s OCC, Chopra made clear in his Wednesday remarks that he doesn’t jive with the prospect of the deal crossing the finish line. Whether the banks’ plan will satisfy regulatory hurdles is still unknown.
Federal Reserve Vice Chair for Supervision Michael Barr, who also spoke Wednesday at the NCRC conference, said that while the FDIC and the OCC are updating their merger rubrics, the central bank wouldn’t be likely to amend its own policies. Barr added that he thinks “we have a pretty robust process,” which includes gauging companies’ financial and managerial capacity for execution, financial stability, community impact and go-forward plans.
While highlighting provisions of the FDIC’s proposed changes, Chopra said that bank combinations should boost competition, but the review of community impact is a distinct, equally important evaluation.
“The community should be better served by the combined institution, not just shown that it won’t be worse,” Chopra said. “We have to have answers to the questions: Does the merger address the gap or unmet need in the community? Will the merger improve the product services and delivery channels the community already has or doesn’t have now? In other words, is there any benefit at all?”
Chopra added that community groups have often taken the onus of negotiating community benefit plans with merging banks, but don’t have means of enforcing compliance. The FDIC proposal increases accountability for the regulators, Chopra said, by establishing community commitments as formal conditions of a merger’s approval.
For example, the NCRC and KeyBank’s parent company, KeyCorp, collaborated on a community benefit plan in 2016 that helped smooth the way for the Cleveland bank’s acquisition of First Niagara Financial Group, only for the relationship to sour a few years later. However, on Wednesday, NCRC President and CEO Jesse Van Tol announced that the fair-lending group and Key had mended fences and were reuniting in a $25 million effort to revitalize the community benefits plan.
A Texas Judge dealt a blow to the credit card industry by moving litigation challenging the Consumer Financial Protection Bureau’s $8 credit card late fee rule to the District of Columbia.
In a blow to banks and credit card issuers, a Texas judge has agreed to move a lawsuit challenging the Consumer Financial Protection Bureau’s $8 credit card late fee rule to the District of Columbia.
The ruling on Thursday by Judge Mark T. Pittman is a blow to the U.S. Chamber of Commerce and five other trade groups that sued the CFPB in early March to stop the late fee rule from going into effect on May 14. Pittman sided with the CFPB, which claimed the trade groups had engaged in “forum shopping” by filing the case in Texas in order to get a judge sympathetic to the industry.
“Venue is not a continental breakfast; you cannot pick and choose on a Plaintiffs’ whim where and how a lawsuit is filed,” Pittman wrote. “Federal courts have consistently cautioned against such behavior.”
The rule could potentially wipe out $10 billion a year in late fee revenue, a massive hit to the industry which currently collects $14 billion a year in late fees. The rule would cut credit card late fees to $8 from $32.
Pittman said there was “a strong interest” in having the dispute resolved in the District of Columbia and not Texas.
“A review of the record shows there are ten attorneys spanning five different firms or organizations representing the various Parties in this case. Of the ten, eight list their offices in the District of Columbia,” he wrote. “This means that any proceeding this Court conducts … will require all of Defendants’ counsel and two-thirds of Plaintiffs’ counsel to travel to Fort Worth—a task that will be charged to their clients or to the government. This would mean that taxpayers, including residents of Fort Worth, would foot an expensive bill for this litigation.”
Earlier this week, Pittman wrote a blistering critique denying the trade groups’ emergency request to stop the CFPB’s rule from going into effect on May 14.
The CFPB had asked the court for a change of venue by claiming that the Fort Worth Chamber of Commerce lacked standing to file in Texas. The bureau alleged that Synchrony Bank — a $106 billion-asset bank based in Stamford, Connecticut, and chartered in Utah — had only recently become a member of the Fort Worth chamber in order to file the lawsuit in the Northern District of Texas.
“The fact that there are customers of businesses in the Northern District of Texas that will potentially feel the effects of the Rule does not create a particularized injury in the Northern District of Texas, nor does it represent a substantial part of the events giving rise to the claim,” the judge wrote in the order. “Plaintiffs could find any Chamber of Commerce in any city of America and add them to this lawsuit in order to establish venue where they desire.”
The trade groups filed the suit against the CFPB largely because the Fifth Circuit Court of Appeals ruled in 2022 that the CFPB is unconstitutional due to its funding structure. That case is being challenged before the Supreme Court, which is expected to rule on the CFPB’s funding by June.
Analysts said the Texas lawsuit has been a surprise from the get-go.
Isaac Boltansky, managing director and director of policy research at BTIG, said he viewed the case as “an execution failure mixed with bad luck rather than a strategic failure.”
“There was an undeniable logic in filing this litigation in Texas given its ideological bent,” Boltansky wrote in a research note. But he added that “Judge Pittman’s denial order is the cheekiest order we have ever seen from the bench and our sense is that he is primarily motivated by a frustration with what he views as court shopping by the industry.”
The CFPB’s late fee rule ended an automatic inflation adjustment for late fees and lowered the safe harbor amount to $8, from $32 for the first late fee and $41 for subsequent late fees. The rule only impacts the 30 to 35 largest credit card issuers including JPMorgan Chase, Citibank, Capital One, Bank of America and Discover.
“The credit card late fee lawsuit has been a rollercoaster, and it is not even one month old,” wrote Ed Groshans, senior research and policy analyst at Compass Point Research & Trading, in a research note.
The lawsuit was filed by the U.S. Chamber of Commerce, American Bankers Association, Consumer Bankers Association and three Texas trade groups: the Fort Worth Chamber of Commerce, Longview Chamber of Commerce and Texas Association of Business.
Capital One’s deal to purchase Discover has drawn opposition from the National Community Reinvestment Coalition, which has more than 700 member organizations.
Capital One is “proactively meeting” with organizations to gather feedback that would help with the creation of such a plan, the McLean, Virginia, company disclosed in a merger application submitted last week to the Federal Reserve.
Capital One did not disclose the names of specific community groups with which it is engaging. But the bank said in its merger application that its 27-member Community Advisory Council has helped it to better understand the financial needs of underserved consumers.
Current members of the company’s Community Advisory Council include the National Coalition of Asian Pacific American Community Development, the National Association of Latino Community Asset Builders and the Local Initiatives Support Corporation.
One group that is not active in discussions with Capital One is the National Community Reinvestment Coalition, a fair-lending advocacy group that has negotiated 21 community benefits plans with banks since 2016, according to its website.
The NCRC, which has more than 700 member organizations, opposes Capital One’s pending acquisition of Discover, arguing that much of Capital One’s business model takes advantage of lower-income credit card holders, and that the deal would diminish competition.
A source familiar with Capital One’s thinking said that the company is not closing doors on the involvement of any community groups. This source also said that Capital One plans to move quickly to develop a community benefits plan after the public comment period on the proposed merger ends.
Community benefits plans have become commonplace in connection with acquisitions as banks seek to outline to regulators how their deals will satisfy Community Reinvestment Act requirements.
Such agreements often include pledges to expand banking services in low- and moderate-income areas. The commitments typically fall in three buckets — community development lending and investments; affordable housing and residential mortgage lending; and philanthropic dollars.
In connection with Capital One’s 2011 acquisition of ING Direct USA, the bank agreed to a plan that included a community lending pledge of $180 billion over 10 years. Despite this pledge, the Capital One-ING Direct transaction still ran into opposition from consumer groups, and the regulators’ review process took longer than expected, but the deal was ultimately approved.
On Monday, NCRC President and CEO President Jesse Van Tol said in an email that Capital One’s pledge related to the ING Direct acquisition was “largely a commitment to do the same level of subprime credit card and auto lending as they were already doing.” He said one part of the commitment — related to mortgages — wasn’t fulfilled because Capital One exited the residential mortgage business.
“We don’t need to speculate about what a Capital One community benefits agreement would look like,” Van Tol said in the email. “Nobody should believe a Capital One-developed commitment.”
Andy Navarette, Capital One’s head of external affairs, said in a written statement that the company has a “proud history of serving the full spectrum of American consumers and of outstanding Community Reinvestment Act performance.
“Through the creation of our Community Advisory Council in 2013, as well as our deep relationships with over 1,000 non-profit partners, we work every day to develop innovative ways to best serve our communities and customers, including being the first large bank to completely eliminate overdraft fees in 2021,” Navarette said.
“As noted in our application, we are in the process of seeking input as we develop our community benefit plan, and we welcome the opportunity to work with any individual or organization that shares our commitment to investment in communities,” he added.
In its merger application, Capital One noted that it received an “outstanding” rating on its most recent Community Reinvestment Act performance evaluation in 2020 — the second consecutive evaluation where it got the highest possible rating.
Discover’s banking unit received “outstanding” ratings in its 2016, 2018 and 2020 performance evaluations before more recently being downgraded to “satisfactory” because of ongoing deficiencies in its student loan servicing business, Capital One said in its merger application.
Critics of community benefits plans point out that the agreements aren’t codified, and thus banks don’t have a legal obligation to fulfill the financial commitments they lay out. There have recently been renewed calls to hold banks accountable for what they promise.
Last week, the Federal Deposit Insurance Corp. issued a policy statement on bank merger transactions that called for a change in the way regulators would assess a merger’s impact on communities. The Capital One-Discover deal needs to be approved by the Fed and the Office of the Comptroller of the Currency, but not the FDIC.
The FDIC’s policy statement aims to force banks to show not only their past performance, but also how communities will be better off after an acquisition, according to Rohit Chopra, who is a member of the FDIC’s board of directors as well as director of the Consumer Financial Protection Bureau.
The FDIC statement would mean that regulators stop “outsourcing their legal requirement to community organizations,” and it would give those organizations “more confidence that the commitments made have some real teeth to them” and are “not just utter fakery,” Chopra said at an event in Washington last week.
“We saw a number of community organizations ask some real big questions after the failure of Silicon Valley Bank,” Chopra said.
In November, First Citizens BancShares, which acquired parts of Silicon Valley Bank after its collapse, updated the community benefits plan. It agreed to invest more than $6.5 billion in California and Massachusetts communities that were set to benefit from Silicon Valley Bank’s plan.
Discussions about the FDIC’s policy statement might help “to figure out how we can make some of this merger review actually lead to improvements rather than what I see as a hollowing out of a lot of services to a lot of low- to moderate-income people,” Chopra said.
