Credit Cards, Consumers and Competition

Last week, this writer spent 12 hours in Washington Reagan National Airport in a single day, courtesy of his original plane getting grounded in Florida. With not much to do, a good portion of the time was spent doing laps around the terminal in between putting his nose in a book. 

On several revolving digital billboards, he saw something fashioned like a PSA from “Hands Off My Rewards” (see below). It claimed the “Credit Competition Act” would do away with credit card rewards and harm consumers. He thought the ad was pretty strange, since: 1) It got the name of the bill introduced by Sens. Durbin and Marshall wrong, and 2) It misrepresented the intent of the bill and its impact. 

Turns out, the Electronic Payments Coalition is behind the ad, backed by the likes of the Bank Policy Institute and American Bankers Association. Groups like these have spent tens of millions to lobby against beneficial legislation.

The Credit Card Competition Act (CCCA) is intended to promote competition and create a fairer market landscape for consumers and small businesses. The bipartisan Senate bill seeks to lower hefty interchange fees, also known as swipe fees, that banks charge merchants whenever a consumer swipes a card. And it would strike at the “Visa/Mastercard duopoly” that dominates 83% of credit transaction networks. The CCCA would require large, card-issuing banks with over $100bn in assets (so, less than 50 U.S. banks in total) to offer at least two credit card networks for use with their cards, and one must be something other than Visa or Mastercard. 

AFR, AELP, Accountable.US, the Institute for Local Self-Reliance, SEIU, the Teamsters and others in a new coalition announced support for Durbin's bill. They respond to the key myths, like the ones espoused on big billboards in airports, at www.lowercreditcardfees.com. 

The Visa/Mastercard duopoly harms small businesses, since they can’t negotiate rates and have to accept V/M’s terms. Swipe fees have more than doubled over the past decade; in 2022, merchants paid $126bn in processing. Credit card rewards are safe too. They’d decrease about a tenth of a percent. Visa and Mastercard still offer rewards in Europe, where swipe fees are a tenth of what they are here.

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FINANCIAL STABILITY: Capital Requirements – FDIC Special Assessment – Bad Budgetary Poison Pills – Treasury Leverage – ESG – Black Banks and Redlining – Top Four Banks – Further to the Banking Crisis – Rates and Recession
CONSUMER: CFPB SCOTUS Case – Big Tech – Forced Arbitration – Trapped by Banks – CFPB Enforcement Actions
PRIVATE MARKETS: Nursing Home Staffing Standards – Add-Ons – Synthetic Risk Transfers – Private Equity’s Reckoning – Other Private Markets News
CRYPTO: SBF and FTX
HOUSING: Assessing the FHLB System – Maui Foreclosures
CLIMATE AND FINANCE: Big Asset Managers’ Big Climate Impact – SEC Climate Disclosures – Teachers & Climate Risk

Feedback? Reach us at afrnews@ourfinancialsecurity.org

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FINANCIAL STABILITY

Capital Requirements.

A group of 39 Senate Republicans, led by Tim Scott, have fallen in line with the bank lobby to vocally oppose the Basel III “endgame,” a slate of critical rules that would shore up the largest banks’ capital to better shield them from systemic instability. In a letter sent to the heads of the Fed, FDIC and OCC, they argue the rules would hamper banking activity and reduce access to financial services like credit and mortgages.

AFR contends, in a new letter to the Senate Banking Committee (and in testimony to the House Financial Services Committee), that capital isn’t just money that’s locked away, as the implication of weaker lending activity suggests; higher capital levels don’t lead to lower lending. And better-capitalized banks are able to extend more credit during downturns. Some bank lobbyists even argue that the rules would dry up lending to BIPOC communities. Interestingly, many of those same institutions and trade associations are suing to block the CFPB’s Section 1071 data collection rule, which would aid lending to underserved populations. And many already don’t adequately service Black and Brown communities with mortgages. From AFR’s letter:

“By opposing larger capital cushions, banks are trying to privatize the gains to their firm and socialize any losses. Additionally, higher capital undermines bank CEOs’ shareholder- oriented compensation arrangements. Instead of owning up to this, the biggest banks have produced a long list of reasons why the Basel III Endgame provisions should not be implemented.”

FDIC Special Assessment.

The FDIC released a final rule for the special assessment to recoup the Deposit Insurance Fund’s losses from this year’s banking crisis, with first payments due after Q1 2024. Banks over $5bn in assets will be assessed based on their estimated uninsured deposits, at an annual rate of about 13.4 basis points over eight quarters (two years). Bank Reg Blog offers five key takeaways. The reported hit to the DIF is $500mn higher than in the proposal, at $16.3bn; banks will also have to pay more than previously proposed. The FDIC rejected suggestions from public comment, including treating public/collateralized deposits preferentially and allowing custody banks with high uninsured deposits to pay less. The FDIC also plans to conduct an “assessment reporting review” to ensure that uninsured deposits are captured accurately. 

Bad Budgetary Poison Pills.

There would have been a government shutdown tonight, had the House not passed a stopgap bill that would fund a select few agencies until January and the remainder until February. It passed the Senate , and Biden has signed off.

This one was the second bill from House Republicans in a week. Earlier, they tried pushing their FSGG appropriations bill H.R.4664 through. The major problem: it contained what the Clean Budget Coalition identified as 51 poison pill riders that undermined consumer protections and benefit corporations. Some provisions would have killed reliable funding for the CFPB, blocked the SEC from requiring companies to disclose their climate-related risks, or stopped the FHFA from working to make homeownership more accessible, among many others. Some of those measures have since been blocked. Said AFR’s Renita Marcellin:

“This bill is not only dangerous for workers investing for their retirement, small business owners, and consumers but it also perpetuates a dangerous dynamic where lawmakers are pressured to accept harmful provisions in order to keep the government operating. Every member of the House should reject these amendments, which would dramatically weaken oversight of Wall Street and predatory lenders, and threaten the economic security of families, communities, and businesses across the country.”

Treasury Leverage.

The SEC’s Gensler warned that leverage in the $26trn Treasury market could lead to “instability.” Hedge funds and other investment firms continue to use leverage in risky ways, including a practice called basis trading, of which international regulators grow increasingly wary. During the pandemic and this year’s banking crisis, the market experienced considerable volatility. Risk could spread through the system, given these firms’ relationships with large banks. 

ESG.

AFR and over 30 other organizations oppose a bundle of anti-ESG bills, part of a broad and largely unpopular campaign against common sense investment practices. The anti-ESG actors behind these bills – seeking to prevent investment managers from investing in companies with environmental, social and governance considerations – would force these managers to ignore financial risks, threaten workers’ retirement security and financial system stability, and weaken corporate accountability mechanisms. 

Related: AFR and other organizations also made their views known in response to a House Ways and Means Committee hearing entitled “Ensuring what ‘Woke’ Doesn’t Leave Americans Broke: Protecting Seniors and Savers from ESG Activism.” Reads the letter:

“Many stakeholders have also strongly opposed anti-ESG congressional actions, including legislative proposals that would have a chilling effect on the consideration of financially relevant information and undermine regulations that would equip investors with more information to make better investment decisions.

Black Banks and Redlining.

Black Enterprise author Daniel Johnson highlights Black-owned banks and postal banking as solutions to the racist impact of historical redlining. Black people are twice as likely as white to be denied credit and Black families have six times less wealth. Black-owned banks, which must be at least 51% Black-owned and serve a minority population to qualify as such, could narrow the gap. But One United, the largest Black-owned bank in America, has about $625mn in assets, dwarfed by Bank of America’s $2.5trn. That disparity, he writes, is comparable to the Black-white wealth gap. 

Top Four Banks.

The country’s largest four banks are growing during the high-rate environment while their smaller peers struggle to keep up. Earnings at JPMorgan, Bank of America, Wells Fargo and Citi were up 23%; overall, the rest are down 19%. These big four represent almost half of the industry’s Q3 profits, as profits fall 5% across the board in the industry. 

Further to the Banking Crisis.

If you needed “evidence of how much [commercial] property prices have eroded,” WSJ writes, just look at the bids on Signature Bank’s loan sales. Pre-collapse, the bank held $33bn in CRE loans and other assets. Now that the FDIC has put them up for auction, bids are expected to be as low as 40% below face value. 

Separately: Earlier this year, SVB Financial Group, Silicon Valley Bank’s parent company, sued the FDIC to recover the $1.93bn the agency seized after the bank’s fall. The FDIC has denied their claim. A letter from the regulator said that “its public statements about protecting ‘all depositors’ did not create an obligation to protect the bank's owner as well,” per Reuters. 

Rates and Recession.

Moody’s warns that banks risk reinflation – when the curve starts to steepen again – if they don’t adjust their portfolios to account for interest rate moves. A management director at the firm is keeping an eye on Q4 2023 and Q1 2024, concerned that some banks are “waiting and just counting that the forward curve is correct and waiting for that rate cut.” 

CONSUMER 

CFPB SCOTUS Case.

Accountable.US reports that predatory payday lenders rewarded the members of Congress who endorsed the CFSA’s lawsuit against the CFPB with over $82,000 in campaign contributions, as the industry fights to defund the CFPB. Rep. Bill Posey, for example, received $7,500 from the owners of payday lender Amscot Financial before signing onto the pro-CFSA amicus brief earlier this July. Sen. Roger Wicker got $6,600 from a CFSA board member. 

Big Tech.

The CFPB wants to subject large Big Tech companies to the same supervisory exam process as banks, especially as they continue their foray into fintech services like digital wallets and payment apps, including Apple, Google, PayPal and maybe even Twitter. A previous report, for example, found that proprietary tap-to-pay offerings, one such service, have inconsistent regulations that reduce consumer choice and hurt competition. A proposed rule would allow the agency to oversee Big Tech’s entry into consumer financial markets to ensure they follow laws related to fund transfers, data privacy and consumer protection, and have to “play by the same rules as banks and credit unions.” Public Citizen supported the rule, calling for “sensible safeguards” and writing, “People shouldn’t be forced to depend on the kindness of Big Tech.” 

Speaking of PayPal: It’s been probed by the CFPB on how it resolves errors related to electronic fund transfer rules, how it deals with transactions with consumers’ linked bank accounts, and related matters. The SEC is also investigating its development of a dollar-backed stablecoin. 

Forced Arbitration.

More than 100 organizations asked the CFPB to create a rule to limit forced arbitration and restore a consumer’s right to file a case in court. Often hidden in the fine print of terms and conditions when you sign up for a service, a forced arbitration clause strips the customer of their ability to sue or join a class action when they have a complaint. It instead pushes them into a private and legally binding arbitration process where the offending entity has the upper hand every time. Said AFR’s Elyse Hicks:

“Forced arbitration is Wall Street’s way of denying consumers their day in court by exploiting the fine print. Without redress, forced arbitration sets consumers up to be ripped off again and again.”

Trapped by Banks.

The American Prospect details How Banks Keep You Trapped – “restrictions and fees that banks use to prevent their customers from shopping around” for better institutions – and a new rule proposed by the CFPB that would compel banks to “give their customers control of their banking data at no cost.” Financial Justice profiled the rule here before.

CFPB Enforcement Actions.

Citi. The bank will pay $25.9mn in fines and redress for “intentionally and illegally discrimination against credit card applicants the bank identified as Armenian American” from 2015 to 2021. Applicants with certain surnames were weeded out, “stereotyped…as prone to crime and fraud,” and supervisors at Citi instructed employees not to discuss the discrimination where it could be recorded. 

Enova. The online lender, now a repeat offender, will have to pay $15mn for “widespread illegal conduct including withdrawing funds from customers’ bank accounts without their permission, making deceptive statements about loans, and canceling loan extensions.” Reminder: Enova is part of the trade association, CFSA, that took the case against CFPB to SCOTUS.

PRIVATE MARKETS

Nursing Home Staffing Standards.

AFR-EF and 21 other organizations call for the Centers of Medicare and Medicaid Services to pass their CMS-3442-P rule, which would mandate minimum staffing standards for long-term care facilities. Nursing homes would have to have at least one registered nurse on-site 24/7, have a minimum number of RNs and nurse aides on staff, and staff at higher levels depending on resident needs. The groups highlighted the encroachment of private equity into 11% of nursing homes, which has led to critical understaffing and diminishment of patient care. Said AFR-EF’s Robert Seifert: 

“Private equity firms have been particularly bad actors in nursing home ownership. A private equity owner’s motivation is to take what it can from its investments in profits, fees, and charges, as quickly as possible. Even more than other private ownership models, return on investment is paramount, and there is ample evidence that shows they provide worse care at a greater cost to taxpayers.”

Add-Ons.

In an add-on transaction, a private equity firm will use one of its existing portfolio companies to acquire another one. These usually represent smaller transactions than the firm would perform on its own. Between January 1 and October 25, PE firms undertook almost 3,300 add-on transactions, according to Pitchbook. Add-ons easily become monopolistic roll-up schemes when firms start to use them to corner local markets, as with Texan anesthesiologists (see below). In another case, the Department of Justice and FTC ordered a PE fund to divest a number of veterinary clinics it rolled up. Antitrust regulators have stepped up scrutiny of these deals because of the potential for such harmful practices. Since 2018, the healthcare sector has had the most private equity add-on transactions, accounting for one out of every five.

Synthetic Risk Transfers.

How do banks reduce their risk? Increasingly, by offloading it onto shadow banks in the private-funds sector. Traditional financial institutions have been avoiding capital charges on the loans they make by “selling complex debt instruments” to private asset managers. Investors will pay cash for credit-linked notes or credit derivatives, which translates to the banks’ loan portfolios being 10% “de-risked,” and reap interest for taking on the burden if the borrowers in that portfolio up to that threshold default on their loans. Kind of like a form of insurance. 

Private Equity’s Reckoning.

“Private equity managers have increasingly been driven to esoteric, highly risky forms of debt financing to keep the corporate show on the road,” reports FT. Firms are overpaying for acquisitions and have launched fewer IPOs. Some of their investors, meanwhile, have jumped ship and “are accepting big discounts to reported values.” 

Other Private Markets News.

• PE Wants to be Your Bank. PE firms are shoring up more capital to purchase assets from traditional lenders. 

• Private Debt. It’s everywhere now, even amid high interest rates, as companies rush to refinance their debts. WSJ warns they might “risk fueling a kind of Ponzi scheme.”

• China Disclosure. Sens. Bob Casey and Rick Scott unveiled a bill that would require PE firms to disclose how much they invest in China, Iran, Russia and North Korea. 

• Texas Roll-ups. ICYMI: Financial Justice has discussed how private equity firm Welsh, Carson, Anderson & Stowe used a “roll-up” scheme to buy out almost every large anesthesiology practice in Texas to corner the market. Boston’s WBUR talks about it here, and puts it into a wider account of How private equity is changing American health care. 

CRYPTO

SBF and FTX.

Sam Bankman-Fried, the founder of the collapsed crypto exchange FTX, was found guilty on charges of fraud and conspiracy earlier this month, after a protracted scheme to steal billions in customer funds. Senate Banking’s Brown supports the conviction, writing:

“This verdict is a victory for everyone fighting fraud and scams in crypto. In this trial, we saw how crypto companies like FTX think the law doesn’t apply to them, gamble with consumers’ money, and lie to the public. Americans continue to lose money every day in crypto scams and frauds. We need to crack down on abuses and can’t let the crypto industry write its own rulebook.”

HOUSING

Assessing the FHLB System

The Federal Home Loan Banks system was intended to offer banks increased capacity to issue home loans to motivate homeownership, though lately it’s been criticized for propping up ailing banks as a lender of second-to-last resort, like in the case of SVB, Signature and First Republic earlier this year. 

This month, the Federal Housing Finance Agency issued a report on what and how it’s done since its inception over 90 years ago, and looks ahead to the future. The agency clarifies that, while it does serve the function of promoting liquidity, the system doesn’t “have the functional capacity to serve as the lender-of-last resort for troubled members that could have significant borrowing needs over a short period of time.” In particular, the report recommends banks coordinate with regulators and avoid encouraging excessive risk-taking. It also clarifies its primary mission: to provide “stable and reliable liquidity” to its members and support housing and community development.” Fact sheet with other high-level evaluations here. 

Said AFR’s Jessica Garcia:

“The FHFA has put forth a well-researched roadmap for the Federal Home Loan Bank System – which has been in operation for almost a century – to more robustly support affordable housing and community development, and not merely to serve as a liquidity provider. Additionally, the FHFA appropriately recognized the need for FHLBanks to improve climate risk assessments, including how climate is incorporated into credit evaluations, similar to the recommendations of other federal banking regulators.”

One major takeaway, highlighted by Bloomberg: A rule that would compel member banks to hold at least 10% of their assets in mortgage loans. American Banker highlights another: A rule that would provide “metrics and thresholds for measuring how each of the 11 FHLBs advance” the clarified mission of the FHA, and an associated assessment.

Maui Foreclosures.

After the devastating wildfires earlier this year, the Federal Housing Administration extended the foreclosure moratorium in Maui until May of next year. 

CLIMATE and FINANCE

Big Asset Managers’ Big Climate Impact.

A report from Majority Action scrutinizes how the largest asset managers – BlackRock, Vanguard, Fidelity and State Street – have “continued to use the shareholder voting power entrusted to them by their clients to rubber-stamp the strategies of carbon-intensive companies failing to take necessary action on climate change.” 

The report recommends asset managers and proxy advisers update voting policies to incorporate climate-related systemic risk and commit to voting against directors at companies that aren’t working to curb climate change. 

SEC Climate Disclosures.

Sens. Manchin and Hagerty called on the SEC to “postpone” rules that would force companies to disclose their carbon footprint. The two senators claim that business would be subject to California’s recent climate disclosure rules and the SEC’s, and that Scope 3 requirements – they capture emissions all the way up and down the value chain — would be too onerous. But an analysis from Americans for Financial Reform and Public Citizen found that the SEC’s rule wouldn’t “substantially increase compliance costs” for 75% of the largest companies, since many would already be covered by California’s disclosure rules. And if the SEC excludes Scope 3 emissions, compliance costs wouldn’t come down anyway.

Teachers & Climate Risk.

Debra Rowe of the US Partnership for Education for Sustainable Development, one of 120 teachers who wrote to Chair Powell asking how he planned to protect them and their students from the economic risks associated with climate change, criticizes the regulator for ignoring their questions and failing to act on climate risk. She writes:

“But the Chair can be sure of the fact that the Fed, under his supervision, has actively contributed to accelerating the climate emergency by failing to regulate banks' financed emissions — inaction in this case is a policy choice, one that supports banks' lending and underwriting for the fossil fuel industry that is on its way out while causing environmental, economic and social damage and instability.”