Fed Capitulates to Big Banks in Basel Endgame

When is the end not the end? When it’s the Basel Endgame. 

The Federal Reserve, led by Chair Powell, this week capitulated to Wall Street’s year-long campaign to weaken proposals that would have made the financial system more resilient to shocks. But he still has to convince other banking agencies to go along.

The Basel Endgame, as it is known, has not ended.

The updated capital rules, proposed by Fed Vice Chair Barr, would have increased regulatory capital levels; that is, require banks to use more equity and less debt to fund their operations. The overall goal was to reduce the likelihood and severity of financial crises by creating a larger buffer of capital at larger banks. The initial proposal was a 19 percent increase. 

Last week, Barr announced that the Fed intended to scrap the rule and start the whole process again but from a far less robust starting point. As he prepares to re-propose the entire rule, he is suggesting 9 percent – and that’s really only a starting gun for the next round of industry lobbying, which is promising to grind that number down further.

The Fed has caved to a massive industry lobbying effort and rewarded disingenuous Wall Street CEOs who pushed false claims that stricter capital requirements would lead to higher inflation or an inability to lend to lower-income people, and who threaten legal action. As Bloomberg Opinion put it: “The regulators appear to be settling for the prospect of renewed banking fragility, leaving taxpayers on the hook for the next round of bailouts.” Indeed, JPMorgan Chase is already reducing its levels of equity capital.

But Powell turned out to be Wall Street’s secret weapon at the Fed. He told Congress he would not support a rule the banks did not support. He huddled with the megabanks to encourage them to reach a consensus on an acceptably lenient level of regulatory oversight that banking regulators could implement without industry challenging them in court. AFR responded by calling on Powell to recuse himself from the rulemaking:

A private meeting or meetings with the biggest banks to negotiate contours of capital regulation that will be acceptable to industry undermines the impartiality and independence of the Federal Reserve and its mandate to serve the public interest in financial stability.. 

The Fed indicated it would move quickly to re-propose the rule this week but that didn’t pan out, as the two other responsible overseers – the OCC and the FDIC – considered the direction the Fed was headed. “The idea is that we're all moving together,” Powell said of the other bank regulators. “We're not moving separately.” But for now, they’re not moving at all.

While some revisions from Basel III will still be implemented, the new version of the endgame will lack the stricter approach. Basel III was the last step in a series of nationally-tailored safeguards that international banking regulators had jointly pursued after the 2008 financial crisis. The Fed’s capitulation has triggered fears, articulated by the Financial Times, that the surrender to the big banks will encourage a “race to the bottom” among global regulators since the United States is now leading the way with weaker capital rules – a change from the post-2008 world, when American officials led with stronger ones:

The real risk from the ignominious end of the endgame is that the world is bound to notice that the swing of the regulatory pendulum has changed direction. For more than a decade, US banks have benefited substantially from the fact that their capital was seen as more trustworthy than their global peers … When it comes to capital, bankers seem to be incapable of seeing the big picture. A few basis points on a ratio make hardly any difference in the long term. But a reputation for financial stability is incredibly valuable …

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BANKING AND FINANCIAL STABILITY: Bank Mergers – Fintechs and Banks
CONSUMER: Navient – What Voters Want – Auto Discrimination – Prisoners and Medical Debt – Airline Rewards – Overdraft – Buy Now, Pay Later – Do More, MOHELA – Putting a Cap on Predatory Lending – Enforcement Actions
CAPITAL MARKETS: Anti-ESG – Pro Bono Publico
PRIVATE MARKETS: Steward – PE and Retirement – Other Private Markets News
CRYPTO: Decoding DeFi – Crypto Cons – Tethered to the Underworld – eToro
HOUSING: Note Sales – Making Mortgages Easier
CLIMATE AND FINANCE: Insuring the Future
POLITICS AND MONEY: Harris, Khan, Gensler – Crypto In-Fighting

Feedback? Reach us at afrnews@ourfinancialsecurity.org

BANKING AND FINANCIAL STABILITY

Bank Mergers.

This week, the Department of Justice announced it would be replacing the 1995 Bank Merger Guidelines with the modernized 2023 Merger Guidelines released last December. AFR’s Patrick Woodall explains how the previous set of guidelines were much too narrow and limited to evaluate the overall impact of many mergers, especially larger, complex ones — like the pending Capital One-Discover merger. He writes:

The 2023 merger guidelines appropriately consider mergers that create such a steep increase and high level of concentration — such as in Capital One-Discover non-prime credit card lending — would tend to lessen competition and be presumptively illegal under the Clayton Antitrust Act.  They also address vertical combinations, where companies purchase firms that provide goods or services to the acquirer, such as Capital One’s proposed takeover of Discover’s credit card payment networks…

The 2023 merger guidelines address additional key strategies that banks have used over the past three decades under the ’95 guidelines to consolidate the industry into a handful of megabanks that shape the market, disadvantage smaller banks, and harm depositors, small businesses, and communities. They consider the harms of mergers that entrench market power or extend dominant positions — a common feature of mergers over the past three decades when bigger banks bought up rivals to enter new geographies that strengthened their market power. And the new guidelines address serial acquisitions, where companies pursue takeover after takeover to build up a very large bank.

Fintechs and Banks.

Sens. Chris Van Hollen (Maryland) and Elizabeth Warren (Massachusetts) demanded tighter regulation on partnerships between traditional banks and Banking as a Service (BaaS) providers, like Stripe or Finastra, or fintechs, like Venmo and Chime. They use the example of Synapse, a BaaS that facilitated fund transfers from apps to banks; when it failed, it harmed over 100,000 people with $265 million in deposits. The proliferation of these partnerships, they write, pose “a broader threat to the stability of our banking system and the economy.”

Just this week, the FDIC proposed a rule that, in light of the Synapse bankruptcy and the “rapid growth and increased complexity of these third-party deposit arrangements,” creates new recordkeeping requirements for banks with custodial deposit accounts with transactional features. 

CONSUMER 

Navient.

The CFPB banned the student loan servicer from the industry after “years of failures and lawbreaking.” The agency alleges that Navient, a repeat offender, pushed borrowers who would have been eligible for income-driven repayment into forbearance (during which interest accrued), illegally overcharged servicemembers, originated predatory student loans, botched payment processing, and more.  

What Voters Want.

According to a poll commissioned by AFR and the Center for Responsible Lending, voters overwhelmingly support financial regulation generally, as well as a variety of consumer protections spearheaded by the Consumer Financial Protection Bureau (CFPB). Some highlights:

• Roughly nine in ten voters across party lines agree that regulating financial services and products to ensure they are fair for consumers is important. Nearly three quarters of voters think there should be more regulation of financial companies. 

• Four in five voters (81%) express support for the agency; favorability for the Consumer Financial Protection Bureau has been consistently very high over the past decade, ticking up slightly in 2020 and remaining at an elevated level.

• After learning about the debate over CFPB funding, three quarters of voters (76%) agree with a statement that supports keeping the CFPB’s current secure and independent funding structure in place.

• 82% of voters support government regulators bringing monthly credit card late fees down to $8 from as high as $32.

• After reading information about overdraft fees, 84% of voters support reducing these fees to match how much they actually cost the bank.

• Three quarters of voters (76%) are concerned about Wall Street firms owning healthcare companies. (Looking at you, private equity.)

Said AFR’s Lisa Donner:

“Skepticism about Wall Street and worry about its ill effects on families and communities runs deep in the United States, and with good reason. Whether the subject is credit card late fees, medical debt, or private equity’s growing impact in health care, voters favor tough regulation and oversight of the financial sector.”

Auto Discrimination.

Car ownership is disproportionately expensive for consumers of color; dealers are more likely to overcharge Black customers while lenders are less likely to approve their loan requests, and a study of add-on products reveals widespread price discrimination against Latine consumers. In line with recent FTC enforcement targeting discriminatory business practices, Coulter Motor Company and Asbury Auto Group have reached FTC settlements based on allegations that it charged Black and Latine customers more in interest and unnecessary add-ons than it did to white customers. 

From Consumer Federation of America’s Erin Witte:

“Asbury Auto Group, one of the largest auto dealers in the country, allegedly encouraged employees to ‘pack add-ons’ more often with Latinx consumers and non-native English speakers, and it charged nearly $300 more to Black consumers for the same add-on products than it did to white consumers.”

CFA praised how the FTC has taken action against discrimination in the auto sector by charging offending companies with claims that they violated the Equal Credit Opportunity Act based on the disparate impact of their price-raising policies. 

CFA also chided an internal commissioner divide over how the FTC can wield its power, however, noting that statements made by some commissioners in ostensibly concurring opinions criticize the decisions and undermine the judicial doctrine of the ECOA and the “novel theory” that discrimination is unfair. 

Related: A ProPublica investigation revealed that Exeter Finance, one of the country’s largest auto lenders, subjected numerous consumers to hidden costs and high-risk loans, then profited from their failure. The company provides high-risk loans to people with subprime credit scores, then offers so-called deferments when they’re unable to pay. During what may appear to be a grace period, interest continues to accrue, potentially adding thousands in charges to a borrower’s balance — and the company often fails to communicate that clearly to the consumer. Exeter profits on loans that end up delinquent — and they’ve got more than 200,000 of them on the books, a “degree of delinquency that is roughly twice that of any other subprime lender” in ProPublica’s investigation. 

Prisoners and Medical Debt.

A report from the National Consumer Law Center, Medical Debt Behind Bars, scrutinizes how medical fees incurred by prisoners “make it nearly impossible for the majority of incarcerated people to afford medical assistance without accumulating debt.” Prisons often rely on aggressive collection agencies on former prisoners to collect on debts for fines, fees, and services incurred while incarcerated (known as carceral debt), and in many cases there is little recourse to resolve legitimate disputes. The report raises concerns about the rise of for-profit corporations and private-equity-backed firms in the prison healthcare sector. NCLC offers solutions, such as providing free medical care to incarcerated people, stopping the collection of carceral medical debt, preventing private contractors from profiting off of incarcerated individuals, and increasing access to Medicare and Medicaid in prisons. 

Airline Rewards.

The Department of Transportation launched an inquiry into the rewards programs of American Airlines, Delta, Southwest and United in order to ensure the programs are “transparent and fair” for consumers, and whether they contain devalued rewards, hidden or dynamic junk fees, and reduced competition. Airline rewards have become, like bank accounts, a store of value for many Americans.

Overdraft.

The CFPB issued new guidance on overdraft fees linked to ATM and one-time debit card transactions that will help curtail predatory junk fees which obscure accurate pricing on banking services. Said AFR’s Amanda Jackson: “Today’s guidance will improve fee transparency, shield consumers from harmful practices by the financial services industry, and encourage banks to compete for depositors based on the quality of their services”

Buy Now, Pay Later.

Sens. Jack Reed (Rhode Island), Tammy Duckworth (Illinois) and Senate Banking Chair Sherrod Brown (Ohio) voiced support for the CFPB’s Buy Now, Pay Later interpretive rule, urging the the agency to follow through with the rule clarifying that Buy Now, Pay Later providers – like Afterpay or Klarna – must abide by “credit card-like” rules and protections. The senators observed that, “BNPL users seem to be struggling to repay their debts to an even greater degree than credit card holders”, and while BNPL products are marketed as interest free, these loans can still have hidden fees, weigh on credit reports, and cause consumers to rack up invisible debt.  

Do More, MOHELA.

In a letter to Education Secretary Miguel Cardona, more than 50 lawmakers from both chambers of Congress raised their concerns about the Higher Education Loan Authority of the State of Missouri (MOHELA), one of the country’s most prominent loan servicing companies. The members of Congress called attention to how the servicer made 1.5 million more errors than all other servicers combined during the post-pandemic return to repayment, as well as to how it received the most complaints between July 2022 and December 2023. The lawmakers also cite two lawsuits against the company levied by the American Federation of Teachers (AFT) and Project on Predatory Student Lending (PPSL), which they say reveal “careless, blatant, and harmful violations of [Department of Education] guidance.” 

The NCLC, Project on Predatory Student Lending, and Student Borrower Protection Center support the efforts to hold MOHELA accountable, as it receives “hundreds of millions in taxpayer dollars each year.”

Putting a Cap on Predatory Lending.

The NCLC argues that “rate limits are the simplest and most effective protection against predatory lending.” Almost all states, they write in an issue brief, cap the max annual percentage rate (APR) on small- to mid-sized loans. Majorities of voters supported rate caps of 36% (the widely-accepted cap for a $500 loan) or less in various states. 

Enforcement Actions.

TD Bank. The CFPB ordered the bank to pay $7.76 mn to tens of thousands of victims after years of sending inaccurate, negative information to consumer reporting companies. Consumer credit reports are used by financial institutions, employers, landlords and others to judge a potential creditee, employee or tenant.  

Horizon Card Services.  The CFPB sued the credit card provider and its CEO Robert Kane for allegedly misleading customers into signing up for its “most expensive membership credit card.” The suit alleges that Horizon charged consumers illegal and excessive fees and made it “unreasonably difficult” for consumers to cancel memberships and obtain refunds.   

FloatMe. The FTC will disburse $2.6 million in refunds to nearly half a million consumers harmed by the online cash advance provider, which used deceptive promises of “free money” to lure in customers and discriminated against some consumers who applied to cash advances. 

CAPITAL MARKETS

Anti-ESG.

AFR and 39 other organizations wrote to Speaker Johnson and Minority Leader Jeffries in opposition to H.R.s 4790 and 5339, two bill packages that favor corporate interests at the expense of workers, investors and the public. The two bundles of legislation are part of a broader effort to slow the clean energy transition and reverse corporate progress on racial justice, workplace diversity, and labor protections. H.R. 4790 would shield public companies from investor input and accountability and weaken the SEC. H.R. 5339 would threaten workers’ retirement security and block retirement plans from incorporating important diversity goals when hiring service providers. 

In an op-ed for The Hill, AFR’s Natalia Renta calls the anti-ESG war what it is: another boost for corporate greed bankrolled by the Koch Brothers. Renta notes that the efforts to kill shareholder democracy have been a “longtime priority of the Chamber of Commerce.” And they’re targeting the SEC, which protects investors, as well as a rule protecting workers’ retirement savings. She writes:

“By reviving Trump-era Department of Labor rules that seek to coerce those who manage trillions of dollars of workers’ money to focus exclusively on risky short-term returns, Republicans are actively trying to weaponize workers’ money against them while undermining their retirement security.”

Meanwhile: If you weren’t paying attention, you may have missed the SEC quietly disbanding the agency’s Climate and ESG Task Force, a group of enforcement lawyers who fought misleading ESG claims for over three years. 

Pro Bono Publico.

That’s “for the public good” in Latin – also a phrase that appeared in a speech by SEC Chair Gensler at the Peterson Institute for International Economics. In it, he reminded some of the world’s most important financial institutions about the importance of disclosures during a crisis event. Firms, he said, should be ready to provide information to the SEC and investors in the event of a failure somewhere in the financial system. 

PRIVATE MARKETS

Steward.

The Senate HELP Committee held a hearing about Steward Health Care, the for-profit healthcare company previously gutted by the private equity firm Cerberus before falling behind on its debts and failing earlier this year. Notably, Steward CEO Ralph de la Torre, one of the few who profited during Steward’s decline, was absent; he’d refused to come. A number of lawmakers, labor leaders, and advocates rallied behind efforts to pass the Health Over Wealth Act, which targets PE investment in healthcare. Said AFR’s Aliya Sabharwal:

“The management decisions at Steward drained safety net hospitals of cash, leaving them unable to provide medical care to their majority low-income, Black, and Latine, and Medicare and Medicaid patients. Chair Sanders and Senator Markey, and the communities organizing against these closures, are drawing much needed attention to how private equity firms like Cerberus pillage life-saving hospitals.”

PE and Retirement.

Private equity firms are moving into the insurance sector to tap the companies in the ring and their $15 trillion retirement pot. Insurers are increasingly investing in private credit products peddled by PE, which some traditional insurers say come with too much risk. The International Monetary Fund has asked regulators to pay more attention to the risk, fearing that increased leverage could worsen the situation for insurers in the event of an economic downturn. Meanwhile, the National Association of Insurance Commissioners (NAIC) is considering whether insurers should hold more capital against the “riskiest parts of structured credit.” Currently, regulation sits at a 45% capital charge – a “setback for private equity,” as Bloomberg indicates – and it may stay that way if the NAIC committee votes to keep it permanent.

AFR has long warned about the dangers of private equity’s foray into insurance, notably with a study that outlined how PE firms use the money to fuel the firms’ leveraged buyouts, fund private credit transactions, and generate billions in asset management fees

Other Private Markets News.

Hospice. In recent years, there’s been a significant rise of private equity ownership of hospice care facilities, against a backdrop of $1 trillion spent by the industry on healthcare acquisitions overall in the last decade. 

Getting Individuals In. Usually, it’s not individuals who invest in private markets; that field is dominated by large, institutional investors. Recently, however, BlackRock has partnered with the private equity firm Partners Group to provide a “model portfolio” that advisors for wealthy individuals can use to get their hands on private market investments.  

CRYPTO

Decoding DeFi.

At a hearing held by the House Financial Services Committee’s Subcommittee on Digital Assets, “Decoding DeFi: Breaking Down the Future of Decentralized Finance,” AFR’s Mark Hays advocated for caution in the face of the crypto industry’s claims about the decentralized finance sphere. He reminded lawmakers that decentralized finance can expose consumers, investors and financial markets to risks and real harms. The dangers range from fraud, hacks and exploitation to illicit finance and money laundering. 

Despite the industry’s claims that decentralization can “democratize” finance, decentralized finance markets are in reality mostly consolidated in or controlled by the hands of a few major players. Hays calls for a robust regulatory approach that can hold crypto and DeFi actors accountable for complying with existing rules:

“The DeFi ecosystem poses real risks to investors today that would be greatly reduced or largely prevented if the industry were subject to existing financial market regulations to promote fair markets and protect investors from fraud and market manipulation. We know enough about DeFi as it stands for regulators to take or continue to take action to protect investors and consumers from the risks and harms present in the sector, and to ensure actors in the DeFi industry do their part to adhere to robust and effective regulatory standards and comply with the law.” 

Crypto Cons.

According to consumer complaints made to the FBI, crypto fraudsters stole $5.6 billion from consumers last year. That’s 45% more than the year prior, and the result of 69,000 consumer complaints. Over $1.6 billion of those crypto crime-related losses impacted people over 60. And, while crypto-related complaints were about 10 percent of all financial fraud complaints captured in the report, crypto-related financial losses accounted for almost half of the total losses from such crimes. The FBI suggests that criminals facilitate their scams through crypto because of its decentralization, its reliance on irrevocable transactions that happen almost instantly and the difficulty of tracing where the funds go. 

Related: Sens. Reed, Whitehouse and Durbin have requested information from ten of the largest Bitcoin ATM machine operators to understand how they are (or are not) protecting elderly Americans from scams facilitated over their crypto kiosks. A Bitcoin ATM looks like a normal ATM, but instead of helping you deposit or withdraw dollars from their bank account on demand, people use them either to buy that moment’s worth of a volatile, unpredictable crypto token and put it in their new “wallet” or deposit crypto into another person’s wallet. Losses related to crypto kiosks totaled over $189 million last year, according to the FBI. 

Tethered to the Underworld.

According to WSJ, the unregulated stablecoin Tether – that’s a crypto token pegged to the value of something real (in this case, the U.S. dollar) and backed by collateral assets meant to guarantee token holders can redeem the token for that price – has become a fan favorite among arms dealers, sanctions evaders, scammers and other unsavory characters. Last year, as much money moved through its network as through Visa cards. In a day, the trading of Tether across crypto platforms and exchanges can see as much as $190 bn pass between users. 

eToro.

The crypto exchange eToro will limit its offerings to only three tokens (down from 28) and pay a $1.5 mn fine to settle an SEC claim that the company acted as an unregistered broker and clearing agency. 

HOUSING

Note Sales.

AFR-EF submitted comments on the Department of Housing and Urban Development’s Single Family Home Sale Program in support of improved borrower protections for homeowners impacted by FHA note sales – that’s when Fannie Mae or Freddie Mac sell off bundles of loans they owned or guaranteed, often ones in default or were previously in default. AFR-EF also called on the FHA to change practices that allow private equity and other corporate landlords access to large note pools, highlighting the negative impacts on homeowners and their neighborhoods.

HUD’s proposal improves the framework for the agency’s ongoing note sales, including requiring notice to homeowners before their loan is sold and requiring purchasers to offer loss mitigation options to help borrowers in financial hardship. 

Making Mortgages Easier.

AFREF joined the NCLC in expressing support for the CFPB’s ongoing rulemaking efforts to streamline mortgage servicing for borrowers in need, and offered recommendations to enhance the protections. The CFPB’s proposal includes helping borrowers avoid foreclosure by linking protections to requests for assistance, the implementation of a prohibition on foreclosure and legal fees, and the expansion of language access in loss mitigation, among numerous other measures. 

CLIMATE and FINANCE

Insuring the Future.

Insurance companies make money by investing the money they get from policyholders, and many invest in oil, gas and coal expansion which makes climate change worse. Now that climate change is causing more severe and frequent weather disasters, insurers are responding by raising property insurance premiums or pulling out of vulnerable regions altogether, leaving households with all of the risk. New York Communities for Change are launching a campaign next Monday, September 23, to hold insurance companies responsible. They’re inviting the New York assembly members, Sen. Hoylman-Sigal and Assemblymember Forrest, who are sponsoring a bill that tackles the crisis. The event is cosponsored by AFR.

POLITICS and MONEY

Harris, Khan, Gensler. 

Some of Vice President Kamala Harris’ biggest donors are pushing for her to fire FTC Chair Lina Khan and SEC Chair Gary Gensler should she win. Many wealthy people in her orbit, especially those in private equity and investment banking, blame the pair for fewer mergers and acquisitions. Both were appointed by President Biden.

Crypto In-Fighting.

Crypto lobby insiders can’t decide who to support, as internal Democratic and Republican fronts disagree over which candidates to fund. After Fairshake announced it would funnel millions to oust Senate Banking Chair Brown in Ohio, the super PAC lost Democratic mega-donor Ron Conway, for example.