Reinvesting in the Community
The Community Reinvestment Act (CRA) charges banks with reinvesting in their communities by promoting lending to low- and mid-income neighborhoods and by tamping down on discrimination. First passed in 1977, the Fed, FDIC and OCC gave it a much needed, if somewhat lacking, touch up in October. The main ideas behind the update: A new loan-threshold test and retail-lending assessment to determine whether financial institutions qualify for CRA obligations.
AFR contended that the changes unfortunately failed to include race as a factor in evaluating bank performance, but approved the inclusion of “disaster preparedness” and “weather resiliency.” A glass half full, if you will.
But too full for the bank lobby. Last week, the American Bankers Association, Chamber of Commerce and Independent Community Bankers of America, among other groups, sued regulators over the CRA. According to Reuters, the most recent “comparable challenge” was when the ABA sued the Fed over proprietary trading rules.
The litigants took their suit to the Northern District of Texas in what is (sarcastically) “totally a coincidence,” as AP’s Ken Sweet wryly notes. Sweet alludes to judicial cherry-picking. Should one of the parties appeal the Texas court’s eventual ruling, the case will land in the Fifth Circuit Court of Appeals, a legal venue stacked with Trump-appointed judges and notorious for its efforts to undermine the regulatory state. Among their other extreme rulings, that’s the court that held the Consumer Financial Protection Bureau’s funding unconstitutional, triggering a SCOTUS battle.
Bankers are also waging their fight against higher capital requirements, which would place the onus on the nation’s largest banks to shore up financial security for everyone. One of their misguided arguments: Higher capital requirements would harm lending to underserved communities. But they don’t care enough about underserved communities to support the updated CRA.
BANKING AND FINANCIAL STABILITY: Yellen on Risk – Regional Banks – Bank Lending – Rewards for Banks and Airlines – Busting the Bankers’ Club – Social Media Did Not Bring Down SVB
CONSUMER: Overdraft – Junk Fees – CFPB Pay Fight
CAPITAL MARKETS: More Oversight – Where’s Gensler Going?
PRIVATE MARKETS: Private Equity Energy Investments – Private Funds Rule – Private Markets and Infrastructure – Brookfield’s Climate Paradox – Private Credit – Debt, Debt and More Debt – Other Private Markets News
CRYPTO: SEC SAB CRA
HOUSING: Corporate Landlord Collusion – Federal Home Loan Banks
CLIMATE AND FINANCE: Banks, Climate, and ESG – ESG Still Rising? – Fink Now Popular in Texas – ExxonMobil – The Banking Crisis
POLITICS AND MONEY: Billionaire Power – Bankers Bolstered
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
Yellen on Risk.
In a testimony before House Financial, Treasury’s Yellen highlighted the risks to the financial system posed by nonbanks, climate-related financial risks, cybersecurity threats, the growth of artificial intelligence, and digital assets. Of note: Though asked, she didn’t provide any concrete opinion, in agreement or otherwise, on the incoming Basel III “endgame” capital requirements.
Said House Financial’s Ranking Member Waters at Yellen’s hearing:
“Wall Street is peddling lies about what needed capital reforms will do…
What they want you to know is that the only people who benefit from lower capital requirements are the wealthy bank executives. Less capital means consumers are left more vulnerable, especially in a downturn, while bank execs take home bigger bonuses each year. Lower capital requirements also mean that taxpayers are more likely to be called on to bail these banks out when they run into trouble.”
Yellen also called for stronger stablecoin regulation.
At the Senate Banking hearing with Yellen, Chair Brown called on FSOC to defend the financial system from bankers’ risk-taking:
“Executives at SVB and the other poorly run banks put profits ahead of basic risk management. Then, as the banks imploded, small businesses all over the country worried how they’d make payroll if they couldn’t access their deposits. Families asked themselves if their money would be safe. So regulators had to step in to protect our economy, while the executives got off scot-free.”
Regional Banks.
In the two days after New York Community Bancorp released its earnings report, its stock value plunged 45% and sent a shock through the regional bank ecosystem. By last Tuesday, it had sunk by double digits for the fourth time in five days, closing at its lowest level since 1997. Short sellers who bet against regional banks made $1.1bn amid this year’s regional-bank rumbles, in an episode that mirrors what happened during last year’s banking crisis. (When First Republic collapsed, shorts made $1.6bn in paper profits.) Now, Moody’s has downgraded NYCB to a junk rating. It’s been reaching out to investors to finance a portfolio of residential mortgages.
Separately: At the end of 2022, Blue Ridge Bank had $690mn in fintech-related deposits. By the end of 2023, that number had contracted to $465.9mn. As it now works to offboard fintechs on the heels of an OCC enforcement action, it “has to lean on expensive brokered deposits to fill the gap.” Writes Fintech Business Weekly: “The situation is worth paying attention to, as it is likely to repeat at other banks that decide — or are forced — to wind down BaaS [Banking as a Service] business models.”
Bank Lending.
The Fed released its Senior Loan Officer Opinion Survey (SLOOS) last Monday. In general, Q4 2023 saw lower loan demand and tightened standards. One thing to keep an eye on: Tighter standards and weaker demand across all commercial real estate loans. This is one space fin-reggers are particularly worried about. With a historic amount of CRE loans coming due over the next couple of years, a slothful market and diminishing office space values may mean many of those loans go into default. Since they’re heavily concentrated in regional banks, that could spell trouble for the sector as it grapples with ongoing turbulence.
Rewards for Banks and Airlines.
One of the arguments against Sens. Durbin and Marshall’s Credit Card Competition Act – which would strike at the Visa/Mastercard duopoly, open the market to competitors, and help ease up on fees to small businesses – suggests that the rules would put a damper on rewards cards business. (For the unaware: rewards programs advertise getting goodies the more you spend with a particular card.) In reality, rewards would drop by about a tenth of a percent. In any case, it’s like Vegas: the house – banks and airlines – always wins. The rewards are funded by swipe fees levied on merchants, but the difference between the rewards and the fees is worth up to $20bn a year alone at the two biggest card issuers, AmEx and JPMorgan, alone.
Writes Bloomberg’s Paul Davies: “At heart, they are a classic trick that lets people think they’re getting something for nothing while the real costs are hidden. Rewards are very profitable for the businesses that run loyalty programs: They encourage customers to spend more and return to the same brands.”
Busting the Bankers’ Club.
The title of a new book by Gerald Epstein of UMass’ Political Economy Research Institution that dives into how any meaningful financial system reform must take to task “the powerful people and institutions that benefit from our broken financial system” and will require “breaking up this club of politicians, lawyers, and CEOs who sustain the status quo.”
AFR’s Mark Hays made a cameo, speaking on efforts to unravel crypto regulation:
“With cryptocurrencies cratering or collapsing entirely and an industry using an unproven technology, Congress should encourage regulators to use the tools they have to protect investors and consumers…Instead, too many lawmakers are rushing to introduce legislation that, in the name of fostering innovation, could legitimize bad actors and bad practices. Just because an industry that pumps millions into the political process claims it is innovative does not mean it deserves its own special rulebook.”
Social Media Did Not Bring Down SVB.
Did social media cause SVB’s collapse? No. The Yale Program on Financial Stability’s Steven Kelley debunks the idea that the run on Silicon Valley Bank’s deposits were driven by a snowballing of frantic social media posts. It’s a theory that was propped up by the likes of SVB’s former CEO Greg Becker and some lawmakers, in an easy way to shirk meaningful discussions on re-strengthening regulations and safeguards. Writes Kelley:
“The ‘the internet caused the bank run’ narrative lacks material evidence and structural consistency with the actual dynamics of the bank runs. Absent new evidence, we risk skipping over the simpler explanation for the unprecedented speed of the run on SVB, which is just that, as far as banking crises go, the vulnerabilities of the banking system at the time were fairly straightforward.”
Note to the curious reader: Why, then, did Chair Powell hold up social media as a reason for the crisis in an interview last week? Perhaps because talking that up means you talk less about failed regulation and supervision?
CONSUMER
Overdraft.
Some weeks after the CFPB proposed a rule to cap banks’ overdraft fees to a lower maximum, the National Credit Union Administration’s chairman announced that the agency would collect data from credit unions about their own overdraft and nonsufficient funds fees. Any incoming requirement will apply to 400 credit unions, which hold 90% of all credit-union assets.
Speaking of overdraft: Accountable.US has been debunking the Consumer Bankers Association’s misinformation, hitting back at an pro-industry website with a new pro-consumer site: DefendAmericanConsumers.org.
Junk Fees.
To the average consumer, junk fees are just that: junk. They’re the hidden, excess fees charged during transactions – like the weirdly unexplained, yet exorbitant “service fee” Ticketmaster charges to send you digital tickets. In October, the FTC proposed a rule to ban junk fees altogether. Last week, the U.S. Chamber of Commerce, a trade association that represents industry interests, issued a public comment against the rule.
But, strangely, Accountable.US flags, nowhere in the document does the Chamber mention how one of its board members is the executive vice president of Hilton Hotels & Resorts. Hilton was sued in December for “not disclos[ing] the full costs of its hotel rooms upfront, luring customers in with lower rates and then applying fees in excess of $35 per day at the end of the booking process.” Those sound like junk fees!
A group of 52 public interest groups, including AFR-EF, endorse the FTC’s rule.
CFPB Pay Fight.
A group of unionized employees at the CFPB has engaged the agency in salary negotiations, accusing it of approving pay hikes for senior officials but not middle management or employees. Union chiefs suggest that the compensation isn’t commensurate with the agency’s Dodd-Frank obligations.
CAPITAL MARKETS
More Oversight.
In a change to what it means to be a securities dealer, the SEC will “now require dozens of firms, including high-speed traders and hedge funds, to face new capital requirements, register their activities and report more information on their transactions,” WSJ reports. It’s tougher regulation to promote strength and transparency in an industry used to “light-touch regulation,” so the targeted traders have jumped to arguments of a pullback in activity.
Where’s Gensler Going?
In case you were wondering, Gensler would stay at the SEC if Biden secures a second term. “I love this job,” he said.
PRIVATE MARKETS
Private Equity Energy Investments.
The Private Equity Climate Risks project launched the Private Equity Energy Tracker, a first-of-its-kind, searchable portal that catalogs all the energy holdings of eight of the top North American private equity firms, including Blackstone, KKR, Carlyle, Apollo and others. Said AFR’s Dustin Duong:
“We knew that private equity has been secretly expanding into the global energy sector, but this data has been truly eye-opening. It punctures their claim that they understand the urgency of the energy transition and the need to pivot to investments that can help solve the climate crisis. Until they stop supporting polluting industries, their claim of protecting communities, especially those in minority and low-income neighborhoods, will always ring hollow.”
Private Funds Rule.
Last Monday, the SEC defended its private funds rule from a group of trade associations in the Fifth Circuit Court of Appeals, a legal venue notorious for siding with right-wing business interests over consumers. It’s the rule that would require hedge funds, private equity firms and others in the opaque private funds market to disclose more information to investors more frequently. AFR and other advocates have strongly supported the agency’s push for more transparency. Two of the three judges, however, seemed “more sympathetic” to the industry.
Private Markets and Infrastructure.
Two major infrastructure deals made the news last month: asset manager BlackRock’s $12.5bn acquisition of Global Infrastructure Partners and private equity firm General Atlantic’s purchase of Actis. That puts private asset managers in control of significant infrastructure and in grabbing distance of more, in transactions that “aim to capitalize on rising demand for investment in modern infrastructure driven by trends such as the shift to clean energy and the data-intensive needs of artificial intelligence,” per WSJ. As of last June, private asset managers held over $1.3trn in infrastructure investments, double the amount of just five years earlier.
Brookfield’s Climate Paradox.
The private equity firm Brookfield projects an almost convincing image of itself as a giant in responsible, green investing, as evidenced by this WSJ article highlighting its new $10bn clean-energy fund. Don’t forget: Brookfield’s Climate Paradox, a report released in December that squares the private equity firm’s green claims with reality. Obfuscating much of their fossil fuel footprint through their ownership of Oaktree Capital Management, its portfolio and the portfolio of its subsidiaries belches over 159mn metric tons of CO2 equivalent every year.
Private Credit.
The $1.7trn private credit market is notoriously opaque, able to grow exponentially and invisibly in the absence of adequate regulatory safeguards. JPMorgan’s trades in private credit loans, however, may “lift the veil on a world where a key selling point has been privacy of information,” Bloomberg reports. Larger private lenders are against the bank’s trades, since it would force them to constantly value the loans on a marked-to-market basis instead of whenever they wanted (usually quarterly).
Related: Investors are putting more money into private credit. The 200 largest U.S. retirement funds had $126.2bn in related assets as of Sept. 30, up 29% from five years ago.
Debt, Debt and More Debt.
Lower borrowing costs means private equity firms are scrambling to load up their portfolio companies with greater debt burdens and use the cash to enrich themselves and their shareholders, driven by demands to generate more returns in a period of low transaction activity.
Speaking of debt: Private equity-backed companies made up over half of all defaults in Q4 2023, totaling $7.8bn.
Other Private Markets News.
KKR. The private equity megafirm reportedly feels good about its prospects, optimistic about its ability to sell off assets to return cash to investors. It had strong fourth-quarter profits, making bank on fees and its ownership of Global Atlantic’s insurance business.
General Atlantic. The private equity firm will acquire a minority stake in the asset manager Partners Capital, a firm with $50bn AUM.
CRYPTO
SEC SAB CRA.
Last May, the Securities and Exchange Commission published Staff Accounting Bulletin (SAB) 121, which directed companies to mark crypto assets as both liabilities and assets on their balance sheets, in an effort to acknowledge crypto’s volatility and inherent riskiness. Recently, Sens. Lummis, Nickel and Flood introduced a resolution to subject the rule to the Congressional Review Act (CRA), an act that would allow Congress to vote to overturn the agency’s guidance.
HOUSING
Corporate Landlord Collusion.
A group of renters has taken fourteen corporate landlords to court, accusing them of a price-fixing scheme using RealPage, a real estate software provider owned by private equity firm Thoma Bravo. A summary of the problem in Financial Justice here.
Related: NYC is facing its worst “housing crunch” in fifty years. Only 1.4% of the city’s rentals were available in 2023. And “the market was even tighter for lower-cost apartments.”
And: House Financial’s Ranking Member Waters addressed the housing crisis at the Democratic Issues Conference 2024:
“Unfortunately, for far too long Federal spending on housing has lagged behind growing need among families. In fact, since 2019, the federal government has spent less than 1 percent of the entire federal budget on housing. This is absolutely unacceptable.”
Federal Home Loan Banks.
A group of Republican senators accused the Federal Home Loan Banks of implementing “racially discriminatory policies,” citing programs like FHLB Indianapolis’ Minority Down Payment Assistance Program (which provides $15,000 to first-time homebuyers from underserved groups), FHLB Boston’s Lift Up Homeownership (which provides people of color who are first-time homebuyers and are around or below the area median income with $50,000 in downpayment and closing-cost assistance), or FHLB Atlanta’s Multifamily Housing Bridge Fund (which awards gap funding to affordable housing projects that demonstrate a commitment to, and leadership by, underserved populations).
Some helpful reminders for the senators: According to Harvard’s Joint Center for Housing Studies, in nearly every state, people of color are less likely to own their homes than white people (47% ownership rate vs. 71.7%). By 2020, only 43.4% of Black families owned their homes.
CLIMATE and FINANCE
Banks, Climate, and ESG.
A couple of years ago, Bank of America, the second-largest bank in the country, said it would stop financing coal projects. In its most recent “Environmental and Social Risk Policy,” however, it walked back its promise. Instead of holding back cash altogether, the bank will subject such projects to “enhanced due diligence.” NYT suggests the shift comes as a result of Republicans’ anti-ESG efforts, which seek to prevent money managers from making Environmental, Social and Governance considerations when investing: “These actions have sent a chill through the E.S.G. world. Last year, big investors pulled money out of sustainability-focused funds at a record rate as they shied away from the sector amid conservative criticism.”
Remember: You can visit https://esgexplainer.org/ as a reminder as to why ESG investing is a net good: positive impact, risk-consciousness, more money saved and more.
Related: The Union of Concerned Scientists published an article calling out how “Banks Continue to Prop Up the Fossil Fuel Industry.”
ESG Still Rising?
All said: A study by Morgan Stanley indicates that over half of investors surveyed plan to increase their allocations to sustainable investments over the next year. “A large majority of investors believe that strong ESG practices can lead to better long-term returns,” ESG Today reports.
Fink Now Popular in Texas.
And: Once the target of the state’s Republican lawmakers’ derision in their war on ESG, this week Texas Lieutenant Governor Dan Patrick celebrated BlackRock’s Larry Fink as the “King of Wall Street” as officials try to court “investment in the state’s power grid.”
ExxonMobil.
After ExxonMobil filed its lawsuit against Arjuna Capital and Follow This, activist investors who sought to introduce a climate-focused proposal at the company’s upcoming shareholder meeting, Pensions & Investments questioned whether other companies might follow the oil company’s lead. It was a departure from precedent, they write, as if a company believes a certain proposal to be “out of bounds” it can request the SEC not to include it on its proxy statement. Exxon, however, “sidestepped the SEC and brought its case straight to court.”
The Banking Crisis.
Last year’s banking instability, which sent a rippling shock through the regional bank sector still felt today, has reportedly driven one bank – Virginia-headquartered Blue Ridge Bankshares – to pull out of the Net-Zero Banking Alliance, a UN-backed coalition of banks from across the world focused on bringing down emissions in their lending and investment portfolios. After it joined in 2021, its share of non-performing loans shot up and its stock value fell by 85% once it “got swept up in the U.S. regional bank crisis.”
POLITICS and MONEY
Billionaire Power.
A disturbing notion, aired in this op-ed in The New York Times, floats the idea that billionaire intervention in all facets of life is becoming the norm. Wall Street billionaire Bill Ackman helped take down Harvard president Claudine Gay. Private equity billionaire Marc Rowan is aiming at Penn. The author traces it back to when the Supreme Court opened the floodgates in political spending:
The Supreme Court’s 2010 Citizens United decision — which declared that political spending is a protected form of free speech — started as a legal judgment but is slowly becoming a cultural norm as well.
An op-ed by Harvard’s Khalil Gibran Muhammad, whose alma mater was UPenn, reads:
“Many academics who teach about the history of race and racism in America, as I do, are being unjustifiably blamed for the rise in antisemitism on campus and falsely accused of creating racial divisions in the country. This has had the undesirable effect of putting us in the crosshairs of some of the most powerful people in the country, including Republican politicians, conservative activists and billionaire donors.”
Bankers Bolstered.
Amid a growing campaign against regulation, bank lobbyist ranks have reached their highest since the global financial crisis. By the end of 2023, 486 were working on the Hill on behalf of banks with $50bn or more in assets.