Trouble at a Regional. Fed Watching. Stay Calm.
The good news: It’s likely not a repeat of Silicon Valley Bank, if the fundamentals of the ongoing episode are any indication.
This bout of regional bank shakiness centers on commercial real estate (CRE), and New York Community Bancorp (NYCB).
Exposure to commercial real estate has been a pain point for regional banks. Delinquencies on mortgage-backed securities are expected to climb to 8.1% this year as a historic amount of commercial loans come due before 2028. Given lower property values and higher interest rates, a portion of the $2.2trn approaching maturity might go into default if borrowers can’t afford to refinance. Research indicates 70% of all outstanding CRE loans are concentrated among smaller banks.
As a consequence, New York Community Bancorp (NYCB) has been suffering from turbulence – shares falling, a credit rating cut down to junk – after surprise losses from commercial real estate loans appeared on its earnings at the end of January. Last Friday, execs bought more than $870,000 in stock, causing shares to climb, but by the end of Monday those gains had evaporated.
The KBW Regional Banking Index had fallen about 11% (as of Monday) since NYCB’s losses came out. What’s particular to the NYCB case, however: Over half its multifamily loan portfolio is “secured by properties in New York state, many of which are subject to rent regulation.” While rent-regulated housing defaults are typically low, they’d risen to 4.93% by December 2023, up from 0.32% in April 2020.
Bank Reg Blog provides A Little More Regulatory Context on NYCB. After 2023’s banking crisis, NYCB’s purchase of Signature assets put it above $100bn in assets and qualified it for enhanced regulatory standards. That included supervisory stress tests, capital plan submissions, and stricter capital and liquidity rules, among other provisions.
Regional bank bondholders aren’t too worried. And, Fed Vice Chair Barr doesn’t see systemic problems. At least not yet.
“A single bank missing its revenue expectations and increasing its provisioning does not change the fact that the overall banking system is strong, and we see no signs of liquidity problems across the system. Nevertheless, we continue to monitor conditions carefully across the sector, just as we always do.”
Furthermore, in a speech entitled “Supervision with Speed, Force, and Agility,” Barr made clear that Fed supervision is now tougher than it was last year, driven by changing market conditions. Part of his message: regional banks need to build risk-management capabilities as they grow, not suddenly when they hit a given regulatory threshold:
As a regional bank grows in size and complexity, the firm's management should be investing in the firm's ability to manage its risk, so that the firm's capabilities are growing commensurately with the firm's risk. If this happens, application of standards for larger banks should not require significant changes in a firm's risk management capabilities because the bank should have been making these investments along the way.
BANKING AND FINANCIAL STABILITY: Wells Fargo Consent Order – The Revolving Door – Shadow Banks – Self-Regulation – AI and Financial Stability – Bank Risk Management – Citigroup MRIAs – Heartland Tri-State – Don’t Text and Bank – The IRS Takes on SVB
CONSUMER: Overdraft – Credit Cards – Bank Deserts – Digital Payments – Buy Now, Pay Later
CAPITAL MARKETS: Advisers and Anti-Money Laundering – Gag Rule
PRIVATE MARKETS: Private Funds Rules – Private Equity and Healthcare – Blue Harvest – Other Private Markets News
CRYPTO: The Stablecoin Bill – Stablecoins Study – Crypto Attorney vs. Warren? – A Crypto Ambassador? – The Cruelty of Crypto
HOUSING: Preserving Homes and Communities – Who Owns What?
CLIMATE AND FINANCE: Asset Managers and Climate – BlackRock Voting – The Uninsurables
POLITICS AND MONEY: Crypto Pushback
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
Wells Fargo Consent Order
The OCC has terminated a consent order in place against Wells Fargo since 2016, when the lid blew on its fake accounts scandal. CEO Charlie Scharf called the move “a milestone.” (Wells customers would probably use saltier language.) Wells is still under a Fed-imposed asset cap. AFR has a useful resource to catch up on that scandal and Wells Fargo’s other abuses here, with 43 entries and an interactive timeline.
The Revolving Door.
Rep. Adam Schiff introduced the Financial Regulators Revolving Door Enforcement Act, a bill intended to slow moves between the private sector and financial regulatory agencies. If passed, the law would extend employment restrictions for “senior banking employees and high-ranking financial services regulators moving between roles” from one year to two, restrict contact with previous employers and clients, and require post-employment disclosures from agency employees who move into the private sector.
Shadow Banks.
Up from $894bn just a year earlier, shadow banks – nonbank entities like private equity firms, hedge funds, and other private creditors– have taken out $1trn in loans from traditional banks. Recently, the OCC’s Michael Hsu flagged the risk of private lenders increasingly pushing banks into low-quality, high-risk loans. Meanwhile, larger traditional institutions continue to cozy up to nonbanks, evidenced by Citigroup’s partnership with LuminArx announced last month or Wells Fargo’s loan to private equity firm Centerbridge last year.
Related: Reuters reports: “Wall Street banks are raising billions of dollars to regain ground in lending to companies in debt-backed deals after giant private equity and asset management firms muscled in on the business over the last two years.”
Self-Regulation.
After the private regulator booted it from the industry in 2022, Alpine Securities – a brokerage firm accused of misusing customer funds, conducting unauthorized trading, and other charges – sued the Financial Industry Regulatory Authority (FINRA), arguing the group acted as “unaccountable enforcers of federal law.” In what has been called an “existential” case for the self-regulator, Alpine argues the group should be held to the Appointments Clause of the Constitution, which would allow a member of the executive branch to remove board members and officers at will.
AI and Financial Stability.
Gensler warned Wall Street firms to create guardrails around their use of AI systems, whether that be by including up-to-date regulations in their calculus, stress-testing the model before they release it, or simply considering the possibility that it could be founded on incorrect data. Gensler in a speech at Yale:
“You don’t want your broker or adviser recommending investments they hallucinated while on mushrooms…So, when the broker or adviser uses an AI model, they must ensure that any recommendations or advice provided by the model is not based on a hallucination or inaccurate information.”
Bank Risk Management.
The FDIC is trying to require bank boards of directors to manage their risks and possible conflicts of interest. The Conference of State Bank Supervisors, a group of state bank regulators, sent a letter in opposition to the FDIC proposal. They say it would “set aside state laws and precedent for covered banks.”
Citigroup MRIAs.
Late last year, the Fed sent Citigroup three confidential notices of Matters Requiring Immediate Attention (MRIA) with deadlines set from six months to a year. “They instruct Citi to improve its data and governance around how it sets aside capital to account for counterparty credit risks,” Reuters reports. Separately, the Fed also sent consent orders in October 2020, directing the bank to shore up its risk management, data governance and internal controls. Since then, Citi’s own auditors have found its oversight-related plans insufficient.
Heartland Tri-State.
Last July, Kansas-based Heartland Tri-State Bank failed. Just before its collapse, it had borrowed $21mn from the Federal Home Loan Bank System. It’s “another example of troubled banks tapping the system prior to collapsing,” writes American Banker. Ahead of their own failures, SVB, Signature and Silvergate had received $30bn in loans from the FHLBs.
Don’t Text and Bank.
After a probe into the unmonitored communications of Wall Street traders, bankers and others, sixteen firms have agreed to pay more than $81mn to settle charges over deficiencies in recordkeeping of employee communications.
The IRS Takes on SVB.
The taxman is coming for the fallen bank, by way of a federal regulator. The IRS sued the FDIC over an estimated $1.45bn for taxes owed by SVB from 2020 to 2023. Acting as receiver for the bank, the FDIC previously denied the tax claim.
CONSUMER
Overdraft.
A class-action lawsuit alleges that the megabank Wells Fargo took advantage of the American Arbitration Association’s (AAA) mass arbitration protocols to dismiss thousands of arbitration claims related to improper overdraft fees. Under the AAA’s recent rules, an appointed process arbitrator can rule on administrative issues, like filing requirements or arbitration fees, meaning a defendant’s case can die on a technicality before it’s even initiated. The law firm representing the affected class argues that companies like Wells Fargo use forced arbitration to prevent plaintiffs from suing as a collective, then when they receive a flood of complaints, they can request a process arbitrator to impose classwide requirements to cull a slew of complaints all at once.
Often, consumers who use a wide variety of companies will unknowingly agree to arbitration, which typically strips them of their ability to sue and instead funnels complaints into a private, binding arbitration process that overwhelmingly favors the corporation. AFR has long supported regulatory efforts to curb forced arbitration.
Credit Cards.
Sens. Durbin and Marshall have brought on Sens. Hawley and Reed as cosponsors on their Credit Card Competition Act, which takes aim at the Visa/Mastercard duopoly and would introduce more competition into payment processing. It’s a very bipartisan bill.
Bank Deserts.
“Banking desert” describes a neighborhood without access to a banking branch within a certain radius from the population center – two miles in urban areas, five miles in the suburbs, and ten miles in rural areas. The Philly Fed found that between 2019-23, the number of banking deserts across the country increased by 271, leaving over 760,000 more people without adequate access to branches. A high number of branch losses came as “large” and “very large” banks receded. In absolute terms, most branch losses and desert growth happened in predominantly white, higher-income suburban neighborhoods. However, areas with higher concentrations of lower-income, Asian, Black and disabled people, as well as “racially diverse” areas, lost branches at a “disproportionate rate.” Banking desert increases in Black neighborhoods “outpaced the national average.”
Digital Payments.
The Bank of International Settlements details how “the use of digital payment methods continues to increase,” while cash withdrawal has declined and fewer small-denomination bills remain in circulation across the world. The growth of these payments underscores the CFPB’s work to rein in Big Tech’s digital wallets and payment apps.
Buy Now, Pay Later.
The NY Fed examined why and how consumers use Buy Now, Pay Later (BNPL) services, like Afterpay or Klarna, to make their purchases. Some of their findings: Households defined as “financially fragile” (having credit scores <620, having been rejected for credit in the past year, or having fallen 30+ days delinquent on a loan) use BNPL disproportionately more frequently than those defined as “financially stable.” Though both groups skew heavily toward using BNPL on smaller purchases, financially fragile households are considerably less likely to have a mean purchase price near $2,000. And financially stable households talk up BNPL’s interest-free quality, while the financially fragile are more likely to describe “ease of access and convenience.”
CAPITAL MARKETS
Advisers and Anti-Money Laundering.
This week, the Treasury proposed regulations to require SEC-registered or -reporting investment advisers to file Suspicious Activity Reports (SAR) to the Financial Crimes and Enforcement Network (FinCEN), like banks do. They’d also have to provide more detailed client information. The Financial Accountability & Corporate Transparency (FACT) Coalition and Americans for Financial Reform welcome the rule. Says AFR’s Andrew Park:
“There is no reasonable excuse for the $20 trillion private fund industry to sidestep basic anti-money laundering safeguards designed to prevent international and domestic criminals from investing their ill-gotten gains in our markets. A failure to implement sensible safeguards would continue to expose pensions, foundations, and university endowments to the risk of sharing their portfolios with dodgy, anonymous co-investors. Treasury must finalize strong rules to make sure that criminal proceeds are not used to buy up critical areas of America’s economy, whether healthcare, housing, defense, or sensitive technologies.”
Gag Rule.
Politico reports that pushback against a decades-old SEC rule is gaining steam. The New Civil Liberties Alliance, a right-wing legal activism group, has called the agency’s No-Admit-No-Deny rule – also known as the Gag Rule – an “occupational death sentence,” as the group embarks on what Politico calls “part of a broader attack by right-wing activists on the so-called administrative state.” The rule prevents offending parties who settle with the SEC from later speaking out against their charges.
PRIVATE MARKETS
Private Funds Rules.
Last week, the SEC and CFTC adopted changes to the confidential Form PF, submitted by private funds’ investment advisers to the SEC. The amendments will introduce greater transparency into the activities of private fund advisers, improve how hedge fund advisers report different exposures and metrics, and will require more basic information about said advisers and the funds they manage.
Private Equity and Healthcare.
Private equity firm Cerberus gutted Steward Health Care and left it unable to pay crucial bills, ultimately resulting in the repossession of life-saving equipment that could have stanched a new mother’s fatal bleeding. Many “could have predicted” Steward’s downfall when the former Massachusetts attorney general insisted the for-profit takeover of a hospital group would serve the “public interest.” AFR’s Rob Seifert, speaking on private equity’s incursion into healthcare:
“It’s very incompatible with health care, especially today with movements toward improving quality care in health care, increasing the coordination among different types of health care providers, being very focused on patients and patient needs.”
A Massachusetts congressional delegation sent a letter to Cerberus demanding to know how much money it extracted from the hospital chain, as well as details about its initial investment, profits and transactions between the private equity firm and the healthcare company.
Blue Harvest.
Sens. Warren and Markey and Rep. Keating sent a letter to the private equity firm Bregal Partners for its role in Blue Harvest Fisheries’ bankruptcy, failure to pay over $100mn in debts, and harming small businesses in New Bedford, Massachusetts. The senators accused Bregal of “price gouging, mistreating workers, saddling consumers with junk fees, and stripping assets” and said its actions harmed the fishing industry, and over 1,000 contractors, businesses and creditors.
Other Private Markets News.
Private Equity’s New Normal. Several private equity firms are up around 40% since mid-2023, as the industry looks to the year ahead with “bullish vibes.” Writes Bloomberg’s Chris Hughes: “Interest rates have peaked, bringing some predictability to the cost of capital. Spreads – the extra cost to reflect the risk of the borrower – have fallen. Buyout firms should find it easier to refinance existing investments and initiate new transactions that see idle client funds — ‘dry powder’ — start earning fees.”
In contrast: Last year, private equity funds returned the least amount of cash to their investors since the 2008-09 financial crisis.
KKR-Cotiviti. The private equity megafirm KKR will acquire a portion of the healthcare technology Cotiviti in a transaction that values the company, previously taken private by Veritas, at $11bn.
Rich Europeans. The private equity giant Carlyle joins Blackstone and Ares in deploying funds to capture the wealth of individuals in Europe. Their new private credit fund will focus on lending to European businesses.
TPG. The equity firm TPG wields more than $51bn in dry powder, and it’s sniffing out opportunities in credit, infrastructure and real estate.
CRYPTO
The Stablecoin Bill.
House Financial Republicans have been workshopping their legislation on stablecoins, crypto tokens pegged to the value of the U.S. dollar, like Tether and USDC. McHenry reports that they’ve reached “an understanding” with Democratic Ranking Member Maxine Waters. Last year, negotiations “broke down” after the White House reportedly took issue with how issuing power would be split between federal and state. At the time, AFR and allies had opposed the bill, fearing that the framework would make it easier for Big Tech to become stablecoin issuers and create their own, less-than-accountable “private money.”
Stablecoins Study.
“The tokens connect volatile digital-asset trading to the wider financial world, raising concerns that they could one day rock traditional markets,” reports Bloomberg, remarking on why regulators are worried about stablecoins. The $136bn stablecoin market is “becoming more interconnected, more interlinked with the traditional financial system,” says American University’s Prof. Hilary Allen. A New York Fed paper likened the risk from stablecoin tokens to that of money-market funds, which in 2008 caused a crisis when investors fled in flight-to-safety dynamics away from funds too exposed to the Lehman Brothers. If there’s turbulence in crypto markets, similar flights to safety can happen – and have happened before.
Crypto Attorney vs. Warren?
A prominent crypto attorney, John Deaton, may attempt to unseat Sen. Elizabeth Warren in the Senate. The senator has been a vocal opponent of the industry, spearheading an effort to crack down on crypto-driven illicit finance.
A Crypto Ambassador?
Sean Patrick Maloney is a revolving-door former Congressman who became an advisor to Coinbase and then was nominated for the position of ambassador to the Organisation of Economic Co-operation and Development. Because of the organization’s focus on crypto regulation frameworks, the Revolving Door Project and American Prospect called it a “clear conflict of interest.” Sen. Elizabeth Warren raised similar concerns. Now, Maloney has agreed to recuse from work on crypto issues if confirmed.
The Cruelty of Crypto.
An op-ed in Aeon argues that while crypto peddles itself as a new version of the American Dream, it “exposes the vulnerable to fraud and scams, and loads risk onto the poor.” The author likens trades in crypto and meme stocks to a “spot in the lifeboats” as many grappled with “debt and with no chance of financing their future through so-called ‘legitimate’ channels.” But playing these (or any) financial markets, she warns, is “a giant lottery in search of the prize of security, gambling for a spot in the lifeboats.”
HOUSING
Preserving Homes and Communities.
Sens. Reed, Brown, Smith, Wyden & Merkley reintroduced the Preserving Homes & Communities Act, a bill intended to mitigate losses by homeowners whose mortgages are included in government-sponsored note sales. These sales see nonperforming mortgages (meaning a borrower hasn’t made any payments in a certain period of time) sold at a discount to buyers, often institutional investors and private equity firms.
The senators’ bill would provide borrowers at least 90 days notice before their loan is swept into a sale, would require all “loss mitigation options” to be exhausted, and would require purchasers of these nonperforming loans to offer at least 75% of the foreclosed properties to owner-occupants at fair market value, to nonprofits or local governments, or to renters with income at or below the area median income.
Who Owns What?
When a Wall Street landlord comes to the block, they may purchase several homes in a neighborhood in all-cash transactions, beating out any actual homebuyer. Often, they’ll use a cryptic LLC name to obscure the true ownership. These institutional investors aren’t the only ones who use this tactic: The Financial Crimes Enforcement Network (FinCEN) suggests that some bad actors use these shell companies to launder money through their property purchases. Treasury proposed a rule last week which would require title insurance companies to identify the owners of the LLCs involved in all-cash property transactions in certain areas of the country, such as Manhattan or Miami. The ownership details, though useful, will not be available to the general public.
CLIMATE and FINANCE
Asset Managers and Climate.
BlackRock, JPMorgan Asset Management and State Street Global Advisors joined the Climate Action 100+ group, a coalition of investors designed to urge polluting companies to reduce their carbon footprint. Now, JPMorgan and State Street have announced they’d be exiting the group. BlackRock will scale back. FT reports that the “reduced participation means none of the top five money managers fully back” the organization.
BlackRock Voting.
The world’s dominant asset manager BlackRock plans to allow retail investors to vote on corporate and shareholder proposals. Individual investors would be able to access the firm’s Voting Choice program, effectively folding in about $2trn more assets under management, where previously only institutional investors representing an aggregate $598bn in assets could use it. It’s a break from the norm, whereby retail investors would otherwise have to leave the voting to BlackRock. The firm has “touted its Voting Choice program in the face of Republicans' anti-ESG rhetoric,” Politico reports.
The Uninsurables.
A man-made climate crisis has intensified natural disasters, resulting in a record number of billion-dollar insured losses last year. Insurance companies have reacted by sending premiums through the roof – that is, if they don’t pull out of a particularly endangered region altogether. It’s effectively a “carbon price” on consumers. One major factor in the price hikes: property catastrophe reinsurance (that’s insurance for insurance companies, in the event they can’t cover the total cost of disaster policy payouts).
POLITICS and MONEY
Crypto Pushback.
Fairshake, one of a trio of prominent crypto super-PACs operating on the Hill, has set its sights on Democratic Rep. Katie Porter, running for Senate in California. It recently spent at least $2.9mn on an ad push attacking Porter. The representative retorted in an email: “Crypto billionaires don’t want a strong voice for consumers in the Senate, because they fear anyone who calls out corruption and greed.”