Reinvesting in the Community
A quick history lesson: The Community Reinvestment Act turned 46 years old this month, having been passed in 1977 during the Carter administration. An integral part of today’s fair lending efforts, it was intended to increase lending to low- and mid-income communities and tamp down on discrimination. The last big update of the rules came in 1995.
The Fed, FDIC and OCC finalized a much-awaited joint revision to CRA regulations on Tuesday. The agencies, whose goals are outlined here, sought to strengthen the application of the Act and tailor the law’s associated requirements to accommodate differently sized banks. Notably, however, the changes failed to update its regulations to include race as a factor in evaluating bank performance. Said AFR’s Caroline Nagy:
“We are disappointed at the lack of explicit race-based criteria to directly address harms caused by decades and decades of racist banking practices and the unwillingness of the regulators to expand their definition of displacement to all CRA-covered activity.”
Among revisions related to community investment, the updated rules include “disaster preparedness” and “weather resiliency” (rather than “climate” resiliency). Said AFR’s Jessica Garcia:
“Regulators and banks can better serve communities if they acknowledge growing climate risks and evaluate the full range of benefits conferred by resilience and clean energy investment.”
The bank lobby opposes the new loan-threshold test. They argue the requirements are too onerous and that some banks will restrict lending in less-populated areas to “avoid triggering CRA obligations for the broader region.” And retail-lending assessment thresholds, which would apply if the bank originated a certain number of mortgage loans and small business loans, saw an increase from their earlier versions. Bankers still don’t think the thresholds are high enough.
The full rule here, if you’re keen to read about 1,500 pages worth. Or, a fact sheet instead.
FINANCIAL STABILITY: Financial Stability Report – Capital Requirements – Stress-Testing – Consumer Loans – Swipe Fees – Ameris Redlining – Banking Access – Further to the Banking Crisis
CONSUMER: Small Business Data Collection – Open Banking – Consumer Credit Card Charges – Student Loan Debt
CAPITAL MARKETS: Diversity – Gensler’s Not Afraid
PRIVATE MARKETS: Leveraged Loans – Leveraged Hedge Fund Trades – Private Credit – More Upfront for PE – Retirement – Texas Two-Step – Other PE News
CRYPTO: Ripple – JPM Coin
HOUSING: Wall Street Takes Advantage of Housing Lending – Housing Stats
CLIMATE AND FINANCE: California Cliamte, Federal Rules – Climate Risk
POLITICS AND MONEY: Nikki Haley
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Financial Stability Report.
The Fed released its October 2023 Financial Stability Report. Four of the major areas they typically keep an eye on:
Asset Valuations, as equity price-to-earnings ratios pushed high, risk premiums narrowed somewhat and the prices of residential and commercial properties stayed relatively high.
Borrowing, as GDP growth tapers slightly (but remains close to average) and debt-to-GDP ratios among businesses remain high.
Financial sector leverage, as high interest rates chip away at the value of “longer-maturity, fixed-rate assets” and hedge fund leverage remained steep. The banking system, they say, “remained sound and resilient.”
Funding risks, as some banks “continued to face funding pressures, reflecting concerns over uninsured deposits and other factors,” and the persistence of structural vulnerabilities in money market funds, some mutual funds, and stablecoins. Liquidity risks for life insurers are also up, as their “share of illiquid and risky assets” increased.
In addition, the Fed is trying to understand how climate change affects financial system risk. Compared to their report in May, respondents to a Fed survey also reported greater worries about inflation, commercial/residential real estate (reminder: $1.5trn in commercial real estate mortgages will come due in the next few years; most of the bank-held ones are among smaller lenders), market liquidity and volatility and weakness in the Chinese economy. Concerns about banking sector stress stayed level at 56%.
Related: For the first time in 16 years, 10-Year Treasuries ran up to 5%, causing alarm among investors according to WSJ. Some traders fear the bond market selloff that prompted the climb may “have more room to run.”
On interest rates: Powell indicated the Fed would maintain its pause in hikes. The All-America Economic Survey says 41% of Americans aren’t feeling the effects of higher rates.
Capital Requirements.
House Financial’s McHenry and Barr asked the Government Accountability Office to examine the role of regulators in developing the Basel III “Endgame” capital requirements. Reminder: the rules would require an aggregate 16% increase in capital requirements, mostly affecting the largest and most complex banks, and bankers don’t like that because it puts downward pressure on stock prices. The Fed, FDIC and OCC recently decided to extend the comment window for the rule to January of next year.
Stress-Testing.
In a speech, Vice Chair Barr announced the possibility to strengthen the Fed’s supervisory stress-testing regimen, expanding the assessments to capture a wider range of risks under “exploratory scenarios.” These supplementary tests might, for example, “probe the interplay between capital and liquidity” or “the behavioral response of depositors to losses” rather than “the usual demand-driven recession.” Unlike their core tests, Barr emphasized the wider range wouldn’t be used to determine an institution’s capital buffer requirement, but would inform the Board’s risk management.
Consumer Loans.
Banks are making fewer of them, per the WSJ. It isn’t just borrowers that feel the crunch, but credit bureaus too. One such company, TransUnion, has “undershot its quarterly revenue guidance, cut its expectations for the full year and withdrew its 2025 financial targets,” citing lower mortgage activity and the general sluggishness of consumer lending, especially among regionals.
Swipe Fees.
On Wednesday, the Fed proposed to sharply reduce swipe fees by about a third. Swipe fees, also called interchange fees, are the charges assessed to merchants whenever a customer uses their debit card. The new proposal would bring the maximum fee on a $50 transaction down to 17.7 cents, from 24.5. The move comes some years after a report showed that card issuers’ costs have decreased for several years.
Ameris Redlining.
Ameris Bancorp, a bank holding company based in Atlanta, will pay $9mn to settle redlining allegations from the Department of Justice. The DoJ’s complaint alleges that, from 2016 to 2021, the bank “avoided providing mortgage services to majority-Black and Hispanic neighborhoods in Jacksonville [Florida] and discouraged people seeking credit in those communities from obtaining home loans.” The same neighborhoods that Ameris harmed were some that were first redlined by the Home Ownership Loan Corporation in the 1930s. A consent order will compel the bank to invest that $9mn to expand credit opportunities in Jacksonville’s communities of color.
Banking Access.
Forbes released a tally of the best and worst states for banking access, taking into account five metrics: banks/credit unions per capita, predatory lenders per capita, the percent of unbanked residents, the change in percent of unbanked residents and the percent of residents who lack internet access for online banking. The best: Vermont, where payday lending is banned in the state; the worst: South Carolina, which has the sixth-highest rate of predatory lenders and the eleventh-highest portion of unbanked households. In general, Southern states populate the bottom of the list.
Further to the Banking Crisis.
The Office of the Inspector General released its Material Loss Review of Signature Bank. The primary findings: the bank failed “due to insufficient liquidity and contingency funding mechanisms and inadequate management practices,” and the FDIC failed to downgrade its Management rating, didn’t consistently or punctually perform supervision, didn’t revise its supervisory guidance after a change in market conditions, and declared the bank was “well capitalized.” The Review contained some recommendations, including improving guidance and implementing metrics to supervise “large banks.”
The Richmond Fed published some Perspectives on the Banking Turmoil of 2023, hoping to provide a bird’s eye view of the broad issues that influenced the events.
CONSUMER
Small Business Data Collection.
Section 1071 is a provision of Dodd-Frank that would allow the CFPB to collect small-business lending data in the interest of upholding fair lending practices and ensuring women- and minority-owned businesses have access to the opportunities they need. There’s been plenty of pushback, including a lawsuit by a Texas association trying to block the rule. Previously, the federal judge presiding over Texas Bankers Ass'n, et al. v. CFPB issued an injunction applying to certain banks, awaiting a ruling from the Supreme Court on CFPB v. CFSA. This week, the Chief Judge Randy Crane of the U.S. District Court for the Southern District of Texas expanded the injunction to apply nationwide, preventing the CFPB from collecting the data.
Open Banking.
The principle of “open banking” means consumer financial data – such as banking, transaction, etc. – from their bank and nonbank institutions could be shared with third parties, like fintechs and other similar service providers. Last week, the CFPB issued a proposal that would help boost competition within and spur the transition toward open banking. Invoking a dormant Dodd-Frank provision, the rule would forbid institutions from storing someone’s data exclusively, instead requiring them to share it, at the consumer’s discretion, with other companies offering better products. Called the Personal Financial Data Rights rule, it would let people request their data without junk fees, share it freely and legally, and use it to “walk away from bad service.”
Banks are already mounting a legal response, depending on what the final rule looks like in regard to security. Financial institutions are “worried about their potential liability should a data aggregator of fintech suffer a breach,” Bloomberg Law reports.
Consumer Credit Card Charges.
A report from the CFPB on the consumer credit market found credit card companies charged consumers a record-high $130bn in interest and fees in 2022. Total credit card debt grew beyond $1trn for the first time since the agency began collecting the data. Some of their other major findings: credit card companies’ profits have reached pre-pandemic levels, APRs are climbing far higher than the actual cost of offering credit, a tenth of card users are in “persistent debt,” which means they’re charged more in interest and fees than they can pay down the principal, and those with revolving balances were charged more in interest and fees than they earned from rewards.
Accountable.US reminds everyone that House Financial’s McHenry and his allies have “vigorously defended the practice of excessive overdraft and late penalties after taking millions of dollars from the same industries that abuse them.”
Student Loan Debt.
The Debt Collective, a debtors’ union, and its sister organization the Rolling Jubilee Fund purchased and cancelled the student loan debt of 2,777 accounts from Morehouse College, a historically Black men’s liberal arts college in Atlanta. The group bought the debt, totalling almost $10mn, for $125,000. Then, with the college’s permission, they released all of it.
CAPITAL MARKETS
Diversity.
In 2021, the SEC required companies listed on the NASDAQ to employ women and minority directors on their boards or otherwise explain their absence. Last week, the Fifth Circuit Court of appeals rejected a number of lawsuits which sought to prevent the rule from taking effect. Now, one of the rejected conservative groups, The Alliance for Fair Board Recruitment, has requested the Court to review its decision.
Gensler’s Not Afraid.
SEC Chair Gensler has some fightin’ words for the industry: His agency’s “not afraid to litigate matters, whether against the best-resourced founders, the oldest firms, the newest industries, and yes, the largest crypto exchanges.” In FY2023, he reports the Commission filed more than 780 actions, secured $5bn from judgements and orders, and recovered $930mn for harmed investors.
PRIVATE MARKETS
Leveraged Loans.
In August, a federal court ruled that leveraged loans, also called syndicated loans, are not considered securities. It’s a $1.4trn market with much of it spent to finance private equity takeovers. AFR criticized the decision, warning it would let banks off the hook when they make clear misstatements and omissions when they sell to investors and expose those investors – which include pension funds – to risk of losses with little recourse. During a speech at an event sponsored by the Center for American Progress, SEC Commissioner Crenshaw echoed many of the concerns AFR raised in an amicus brief earlier this year, which pointed out leveraged loans function more similarly to high-yield “junk” bonds, which are considered securities.
Leveraged Hedge Fund Trades.
“Top US regulators are zeroing in on dangers posed by highly leveraged hedge fund trades,” reports Bloomberg. They’re particularly worried about basis trades, “which involves the use of leverage to profit from the price gap between Treasury futures and the underlying cash market.” One possible solution: a minimum 2 percentage-point haircut on repo borrowing.
Private Credit.
A paper from BlackRock foresees a “tectonic shift” toward private credit ahead. More private credit funds will finance more businesses as banks try to keep up. Banks will focus more on building and maintaining their deposit bases, they suggest, leading to a pullback in lending.
More Upfront for PE.
WSJ reports private equity firms have to front more equity to extend loans. “The rebalancing of private-equity’s financing mix toward more equity and less debt presents several challenges for private-equity firms. Among them are deciding which companies have the long-term potential to justify an equity bailout. There is also a likelihood that higher equity investments reduce a firm’s profit from successful deals and increase losses from bad ones.”
Retirement.
Fidelity and Charles Schwab both help individuals save for retirement with IRA offerings. Private equity megafirms harvest that wealth in the background, dipping into what’s been called the “largest pool of liquid capital on earth.” Typically, institutional investors buy in to private equity funds while firms struggle to attract individual investors. “Schwab and Fidelity are listed alongside Morgan Stanley Smith Barney and Rockefeller Financial in regulatory filings as potentially receiving compensation through a private placement by KKR Infrastructure Conglomerate,” reports Bloomberg. Conglomerates like these directly own businesses and assets, then co-invest in buyouts and deals run by KKR. They “qualify for exemptions from rules that would otherwise cap the amount of IRA money they can take in at 25% of net assets.”
Texas Two-Step.
PE-backed prison healthcare provider Corizon filed for bankruptcy with a controversial technique called a Texas Two-Step, meant to mitigate the losses from numerous lawsuits against them. This week, Sen. Warren and a cohort of senators sent a letter searching for answers from executives at YesCare and Tehum, the two companies that emerged from the bankruptcy proceedings. They demand the companies “provide full relief for meritorious claims against Corizon by all incarcerated people” after their effort to “manipulate bankruptcy law with the aim of skirting accountability for the harms that incarcerated individuals have endured under Corizon’s care.”
Other PE News.
South Park and Carlyle. The creators of South Park are conferring with Carlyle about a possible $800mn private loan to “refinance an existing credit facility and fund a cash payout.”
CRYPTO
Ripple.
The SEC dropped its claims against a pair of executives from Ripple Labs, the fintech whose XRP crypto token was declared sometimes-a-security by a federal judge earlier this year. Previously, the chief and co-founder were both alleged to have “aided and abetted sales…which a judge has found amounted to unregistered sales of securities,” reported Reuters.
JPM Coin.
The too-big-to-fail, $3.7trn-in-assets JP Morgan has a token called JPM Coin. According to the bank, the asset handles $1bn in transactions a day.
HOUSING
Wall Street Takes Advantage of Housing Lending.
The Federal Home Loan Banks (FHLBs) are a $1.4trn meant to provide banks across the nation with capacity to lend to prospective homebuyers and spur access to homeownership. Instead, Wall Street and the super-wealthy draw billions of dollars from the System for other purposes, including a Vegas high-roller who took out $4.4bn in loans from two banks, who drew from the FHLBs according to Bloomberg Law. Before their collapses, three of the banks that fell during this year’s crisis – Signature, SVB and First Republic – had all used the home-loan banks as a lender of second-to-last-resort.
Housing Stats.
Home Sales. Goldman Sachs predicts that 2024 will be the weakest year for existing home sales since the early 90s.
CLIMATE and FINANCE
California Climate, Federal Rules.
AFR-EF, Public Citizen and the Sierra Club have a new report that examines how landmark climate disclosure legislation recently passed in California will impact federal rulemaking, as the SEC moves to finalize its own climate disclosure rule. Over 75% of public companies in the Fortune 1000 will likely be required to disclose their Scope 1, 2, and 3 greenhouse gas emissions. It’s that last part, Scope 3, that the SEC has been on the fence about: It captures emissions generated up and down the value chain, like when the customers of a gas company burns that gas. The report finds that, since most major U.S. companies will need to comply with California’s already, the cost of keeping in line with overlapping requirements will be “minimal to non-existent for many firms.” And excluding Scope 3 from the federal rule wouldn’t reduce compliance costs, since it’s information they’d have anyway. AFR’s Alex Martin:
“The California laws are going to drastically improve the landscape of corporate climate disclosure in the U.S., establishing a new norm and generating more high-quality data for investors. This is the clear direction of travel, and the SEC should lean in and strengthen the GHG provisions in their proposal.
Climate Risk.
The Fed, FDIC and OCC laid out expectations for climate-related financial risk management among banks over $100bn on Tuesday. The principles, contained in a joint guidance document, direct banks on how to manage their physical and transition risks to ensure safety and soundness and promote financial stability, and include guidance pertaining to governance, climate scenario analysis, net zero commitments and fair lending assessments. Said AFR’s Alex Martin:
“These long-awaited principles are a solid foundation on which to build a supervisory and examination framework to protect consumers, banks, and the financial system from escalating climate risks. Supervisors and examiners must now turn their attention to effective implementation, and the regulators should provide more detailed guidance in coordination with the Treasury Department on credible net zero transition plans.”
POLITICS and MONEY
Nikki Haley.
To Ken Griffin, the billionaire hedge fund chief and founder of alternative asset manager Citadel, Nikki Haley is a “rockstar.” Business Insider reports that he’s “been looking for an alternative to former President Donald Trump” in the Republican race for the presidency. He previously supported Ron DeSantis, who he now says needs to win Iowa to have a shot.