Not the Marvel movie, but just as anticipated in the run-up: In October 2012, Americans for Financial Reform sent a letter to the heads of the Fed, OCC and FDIC urging stronger implementation of Basel III bank capital reform. On Thursday, nearly eleven years later, the three agencies floated a proposal that hopes to “increase the overall resilience of the banking system,” finalizing provisions in what’s known as the Basel III “Endgame.” The headliner: an aggregate 16% increase in capital requirements, mostly affecting the largest and most complex banks.
The full Fed fact sheet here. Framework revisions targeting banks of $100bn or more will apply to four main areas: credit risk, market risk, operational risk and credit valuation adjustment risk (from losses on certain derivatives). The proposal also calls for these banks to include unrealized gains/losses from certain securities in capital ratios and comply with other measures related to leverage and capital buffers.
Bowman and Waller voted against the proposal. Fed Chair Powell is reportedly “skeptical,” despite voting yes. While he acknowledged the benefit of higher capital, he says “we must also consider the potential costs.” Powell believes the proposed rules may have the potential to reduce credit access, push lending into less-regulated nonbanks and stem some of the flow of trading.
Just before SVB collapsed, AFR called for stronger capital rules for Wall Street banks, which were “far below the threshold that would theoretically hamper economic activity.” The Fed’s Vice Chair for Supervision Michael Barr called for stronger rules earlier this month. And this week, the Treasury’s Graham Steele spoke on the “importance” of strong capital requirements.
Banks have lined up with their objections: BofA CEO Moynihan wants caution about global competitiveness, SIFMA believes it has no “justification,” the American Bankers Association thinks the proposal is “unnecessary” and the banking system is already “well capitalized.” Meanwhile: here’s a fact sheet from Better Markets debunking ten false claims about bank capital, reaffirming the need for stronger requirements.
Housing groups, including the NAACP and National Housing Conference, sent a letter to Powell, Hsu and Gruenberg requesting capital rules don’t include increases for mortgage lending, saying it would threaten Black homeowners-to-be and first-generation homebuyers.
Also: in a separate announcement, the Fed announced individual capital requirements for the largest banks, taking effect October 1.
FINANCIAL STABILITY: Further to the Banking Crisis – Republicans’ “ESG Month” – Rates and Recession – Credit Crunch – Fed Fine – FDIC Special Assessment – #BrokeButHappy – Regional Banks
CRYPTO: Un-FIT for the 21st Century – The Stablecoin Bill – Money-Laundering
CLIMATE AND FINANCE: Financial Risks from Climate – Green Lending Products
CONSUMER: Earned Wage Access – Citigroup Redlining Investigation – Harmful Practices – Cali Debt Collection
CAPITAL MARKETS: Custody Rule
HOUSING: A Republican Billionaire and His Landlords
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Further to the Banking Crisis.
The Treasury’s Assistant Secretary for Financial Institutions Graham Steele spoke at AFR’s “Lessons for Bank Regulation and Oversight from the 2023 Banking Stress” event. Watch it in full here. And find Steele’s prepared remarks here. The assistant secretary spoke on the role of complementarity in regulatory design, finding “less risk-sensitive” measures may be needed to augment risk-based ones, and signaled gaps in regulatory frameworks – like how the infrequency of stress test results for banks of SVB’s size couldn’t address the risk at “rapidly growing firms.” Bank Reg Blog says the speech hit the expected points, but made particular mention to reciprocal and brokered deposits. Per Steele:
Reciprocal and brokered deposits may warrant greater attention now that they are playing an increasingly important role in bank funding structures in light of the recent events. This recent episode can help to inform a broader consideration of how well the standardized liquidity frameworks are performing and if further refinements would be appropriate.
And: Senate Banking’s Vance introduced the Bank Failure Prevention Act this week. According to the senator’s press release, it would improve supervision and regulation for banks with $100bn or more, a lower bar for oversight than S.2155’s $250bn threshold. However, it would also strip the Fed and FDIC of its supervisory power, granting it fully to the OCC.
On SVB: Columbia fellow Todd Baker writes that SVB Financial Group is “getting off easy in bankruptcy court.” He raises that the Group’s creditors and shareholders are expected to come out of the process with most of its assets.
Republicans’ “ESG Month.”
The climax of Republicans’ “ESG Month” has arrived: a July 27 markup on a bundle of bills after a series of ESG-related hearings designed to discourage companies from prioritizing environmental, social and governance considerations in operations and disclosures. Politico reports four measures passed House Financial Services on Thursday.
AFR sent a letter to House Financial’s McHenry and Waters expressing opposition to the proposals, on the ground that the bills would undermine regulations that would arm investors with invaluable information to make better investment decisions, insulate management of public companies from investor input and accountability, and hamstring regulators from being able to respond to systemic risks.
Rates and Recession.
Interest rates hit their “highest level since 2001” after the Fed announced another quarter-point hike this week. FOMC remains open to another hike come its meeting in September, committed to reaching their 2% annualized goal. Powell wants to see more of a slowdown in the economy and labor markets to tamp down inflation. WSJ’s Nick Timiraos observes this meeting’s press release is largely unchanged from its last in June, when the Committee voted to pause hikes. At the earlier meeting, the central bank predicted two more increases this year would be needed; this one would be the first of two.
The Messenger has a selection of Powell’s statements on a range of related issues from his press conference on Wednesday. Worth noting: officials “are no longer forecasting a recession.”
Credit Crunch.
NYT is keeping an eye on corporate debt markets, which some economists say weighs down the Fed’s effort to evade recession. When borrowing costs were low and interest rates near-zero, companies scooped up debt. Now, after a series of consecutive Fed hikes, banks may be compelled to renew these financing streams at higher rates, pushing up the rates of bankruptcies and defaults. Corporate defaults this year are already moving at more than a decade-high pace.
Fed Fine.
The Fed issued a consent order and levied a $268.5mn fine against UBS Group AG, the Swiss investment bank that purchased Credit Suisse after the bank’s collapse earlier this year. The enforcement action, undertaken jointly with international regulators, charged UBS with Credit Suisse’s misconduct in their “unsafe and unsound counterparty credit risk management practices” in its dealings with investment fund Archegos Capital Management. The Fed reports that the bank failed to manage the risk posed by Archegos despite numerous warnings before the fund’s eventual default, which slammed Credit Suisse with $5.5bn in losses.
FDIC Special Assessment.
Senate Banking’s Brown and Vance sent a letter to FDIC’s Gruenberg last week to defend “Main Street-focused regional banks” in Ohio from facing the brunt of the agency’s special assessment to recoup the losses borne by the deposit insurance fund this year. They suggested using post-crisis deposit data to make the determination and “better reflect the migration of deposits to the largest megabanks who already have a disproportionate competitive advantage in our banking system.”
#BrokeButHappy.
It’s a hashtag that blew up on TikTok, sometimes posted under videos of users showing off their shopping hauls made possible due to Buy Now, Pay Later services like Klarna or Afterpay. Three researchers suggested in a paper that financial regulators might be able to glean insight into consumer experiences, fintech trends and risks by following FinTok – that’s a portmanteau of Finance and TikTok – content. Their research produced “tentative evidence” that BNPL carries “payment difficulties and strategic default.” Earlier this year, the Consumer Financial Protection Bureau released a report on consumer financial profiles of BNPL borrowers.
Regional Banks.
PacWest will merge with fellow regional lender Banc of California in an agreement that would create a $36bn-in-assets bank. The companies also announced a $400mn equity raise propped up by the private equity firms Warburg Pincus and Centerbridge. PacWest faced depositor flight, low share values and a shrinking asset sheet while it offloaded its loans during this year’s banking stress. NYT notes that this deal would see a smaller bank, Banc of California, purchasing a larger one.
A strategist at investment bank Piper Sandler chatted with Bloomberg about the future of small banks. Talking about the threats to the business model, he foresees “massive consolidation” ahead.
CRYPTO
Un-FIT for the 21st Century.
This week, House Agriculture and House Financial approved H.R. 4763, the digital asset market structure bill titled the “Financial Innovation and Technology for the 21st Century Act.” Led by Republicans, the legislation crafted jointly with House Financial seeks to rewrite the landscape of digital asset regulation – chiefly, it would grant the CFTC jurisdiction over tokens which could be classed as commodities, among other provisions. Few things changed between the bill’s original form and what was more recently marked up; this version funnels $120mn to the CFTC over five years and removes a portion that protects provisional registrants from SEC enforcement actions pertaining to offering securities. In House Financial, a 35-15 vote sent the bill through, including 6 Democrats; Rep. Waters called it “a wish list of Big Crypto.” Read McHenry’s opening remarks here.
Before the vote, AFR and 18 other organizations sent a letter (and also re-upped an older letter) to the Committees expressing opposition. One of the chief concerns: the bill’s attempt to require the SEC use “innovation” as a criterion in its evaluations, effectively hamstringing its rulemaking process and undermining its authority. It would simultaneously cut into the agency’s authority over crypto, ceding power to the CFTC. The bill would also provide a blueprint crypto asset issuers could issue “unregistered stock,” allow financial institutions to use “decentralized networks” to evade oversight, set up weak regulatory requirements for crypto securities and offer a generous safe harbor for crypto platforms that “rewards noncompliance.”
The Stablecoin Bill.
Even after talks reportedly “broke down,” with McHenry blaming the White House, House Financial advanced the stablecoin bill on Thursday. Rep. Waters reported the White House took issue with how power was distributed between federal and state: “It is one thing to have the states wanting to be issuers – to be approved by New York or someone else – but your central bank is responsible for the whole country…That’s a real issue – that the Feds have to have real involvement.” Eventually, a 10 p.m. vote sent the bill through despite requests from Democrats to continue negotiations.
Ahead of the vote, AFR and Demand Progress sent a letter in opposition to the bill. Notably, the two organizations fear the bill’s framework would make it easier for Big Tech companies to become stablecoin issuers, raising concerns around how a tech firm’s creation and control of its own “private money” could pose threats ranging from online surveillance and privacy issues to corporate monopolies and economic justice. American University Prof. Hilary Allen had an X/Twitter thread scrutinizing the bill’s failure to address stablecoin conflict of interest disclosure, financial institutions issuing uninsured stablecoins, blockchain privacy, resolution mechanisms, and more.
Money-Laundering.
The anti-money laundering crypto amendment championed by Sens. Gillibrand, Lummis, Warren and Marshall has made it onto the National Defense Authorization Act. Politico reports that Warren says that crypto has become a means of payment for rogue nations, drug lords, ransomware gangs and fraudsters.
CLIMATE and FINANCE
Financial Risks from Climate.
AFR-EF, the Sierra Club, Sunrise Project and Public Citizen issued a comment letter pushing the Financial Stability Oversight Council (FSOC) to enact safeguards and propose guidelines to regulate nonbanks that may threaten financial stability. The first proposal would update guidance on how FSOC makes determinations about nonbanks, as well as the process for subjecting these companies to supervision and standards. The second seeks to establish an analytical framework to help FSOC identify, assess and respond to potential risks, particularly climate-related. The groups, joined by 21 others, also sent a shorter comment letter.
Green Lending Products.
AFR-EF and 20 partner organizations sent a letter to the CFPB about the agency’s proposed rule on residential Property Assessed Clean Energy (PACE) financing. The rule would help ensure that funds loaned to finance clean energy improvements (e.g. solar panels) would account for a borrower’s ability to repay and “provide a framework for how these loans will be treated under the Truth in Lending Act.” The letter urges the CFPB to finalize the rule swiftly to protect consumers, especially given the federal government’s role in incentivizing green projects.
CONSUMER
Earned Wage Access.
Nevada and Missouri are the first to introduce laws regulating the earned wage access (EWA) industry. Reminder: EWA services allow workers to access their paychecks early, in some cases at the cost of high fees or high APRs. Law360 provides an overview of what to know as more states consider legislation. EWA industry heads, they report, laud tailored laws, preferring their offerings to remain legally distinct from other lending products.
Consumer advocacy groups, such as the Center for Responsible Lending, call on EWA products to be regulated like credit or loans. As Lauren Saunders of the National Consumer Law Center, argues: “Earned wage advances are loans. They're a form of payday loan…They need to comply with the laws that govern loans, including interest rate limits and fee caps.”
Citigroup Redlining Investigation.
Capitol Forum reports the Department of Justice has launched an investigation into Citigroup for alleged redlining in regions of California and Florida. The nation’s third-largest bank faces a probe into why they issued so few home loans to Hispanic consumers in Ventura County, CA, and Black consumers in Miami, FL. In Miami, the proportion of home loans originated for Black families dropped over 8 percentage points, according to Capital Forum.
Harmful Practices.
A report from the Consumer Financial Protection Bureau outlines a number of unfair, deceptive or abusive practices characteristic across a range of financial product lines: auto lending, medical debt collection and payday lending. In light of the CFPB’s report, Accountable.US scrutinizes House Financial’s McHenry’s donors. They note that the representative has accepted $190,000 from the payday loan industry (and filed an amicus brief in CFSA v CFPB on the side of the payday lending lobby) and tens of thousands from the auto-dealer industry.
Cali Debt Collection.
Research from the Debt Collection Lab finds that “debt cases are an increasing burden on consumers and the civil court system,” as large creditors file hundreds of thousands of cases against unrepresented consumer defendants. In 2020, over a quarter of civil cases in sixteen California counties were debt collection cases. Unrepresented consumers “rarely file a response with the court…creating a one-sided litigation process.” Because of this, creditors win 57% of cases.
CAPITAL MARKETS
Custody Rule.
Members of the House and Senate Agriculture Committees sent SEC Chair Gensler a letter urging him to halt a plan to make investment advisers’ client assets more secure. The rule would require registered advisers to keep all assets with banks, broker-dealers or qualified custodians. Normally, only funds and securities had to be stored with qualified custodians. The lawmakers think the proposal would hinder access to derivatives markets, asserting that current CFTC protections are “robust” enough.
HOUSING
A Republican Billionaire and His Landlords.
Revolving Door Project exposed Republican megadonor Harlan Crow’s connections to the National Multifamily Housing Council (NMHC), a “developer and corporate landlord lobbying group” headed by one of Crow’s own executives at Crow Holdings. Over 2,000 members – among them abusive private equity firms, the nation’s largest banks and real estate developers, as well as several companies associated with Crow – pay dues to the NMHC. And a number of Crow Holdings’ executives have contributed to the NMHC’s PAC. The Council touts a notoriously “pro-corporate, anti-tenant agenda, having opposed rent stabilization measures, attempted to overturn the CDC’s pandemic-era eviction moratorium, fought to cut corporate taxes and opposed fair-housing and anti-discrimination provisions.