Overdue Overdraft Reform
How do you save consumers billions of dollars every year in one decisive move? Do what the Consumer Financial Protection Bureau just did: rein in abusive bank overdraft fees.
These are junk charges often sprung by surprise on consumers that inadvertently try to withdraw more cash than they have in their deposit account. If you take out $10 more than you have, many of the 175 largest banks in the country might charge you another $35 on top, more than tripling your debt to the bank. The CFPB’s new proposal might bring that down to as low as $3. Said Director Chopra:
“Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail…We are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine.”
Americans for Financial Reform applauds the rule, calling it a “critical initiative” in reforming a predatory practice. Banks rake in about $9bn per year off overdraft, often from the most vulnerable consumers. Says AFR’s Kimberly Fountain:
“Curbing abusive overdraft fees will help stop Wall Street from padding its bottom line with the hard-earned money of millions of families in the United States. Overdraft fees are not so much a useful service as they are a lucrative profit center underwritten by the most economically vulnerable consumers.”
And since the rule targets the largest banks with over $10bn in assets, one leading voice from the Independent Community Bankers of America says that “Main Street” stands to benefit.
Unsurprisingly, the big banking industry is “gearing up to fight back with a multimillion-dollar market and lobbying campaign” and is likely to fire back with tired old arguments about the new protection harming those it seeks to help. But, says AFR’s Carter Dougherty: “Some banks have gotten rid of overdrafts entirely and the world is still spinning on its axis. If bankers can’t run a business without relying on gotcha fees, they should find a new line of work.”
FINANCIAL STABILITY: Capital Requirements – Foreign Debt – Commercial Real Estate – Liquidity Risk – Further to the Banking Crisis
CONSUMER: Bad Background Checks
CAPITAL MARKETS: SEC Oversight – A Gensler Profile
PRIVATE MARKETS: Private Capital Consolidation – Private Equity and Climate – Private Equity and Healthcare – Private Credit – Private Equity and the News – Other Private Markets News
CRYPTO: A Crypto Ambassador – Mixed Feelings on ETFs – Trump on CBDCs
CLIMATE AND FINANCE: Fossil Fuel Money
POLITICS AND MONEY: Jaime Dimon
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Capital Requirements.
AFR called for the implementation of strong capital rules in a series of letters to regulators. One addresses the importance of the Basel III “endgame” and associated surcharges on Global Systemically Important Banks (GSIBs) in preventing undercapitalization. Another calls for the agencies to “acknowledge and address climate-related financial risks” and clarify how their principles for risk management apply to capital requirements. And a comment letter supports how the rule incorporates lessons from the 2008 financial crisis, reduces reliance on risky internal models, addresses operational risk, includes unrealized losses and more.
The Center for American Progress signals that the slated requirements are too “modest and must be larger to substantially enhance the stability of the largest banks.” Research has shown that unrealized losses on securities and mortgages collectively amount to as much as $2trn, they write, and the new proposal may not sufficiently shore up the supplementary leverage ratio (SLR) – that’s capital compared to leverage exposure – at the United States’ eight global systemically important banks.
Meanwhile, pushback against where the rules currently stand: Trump-appointed Fed Governor Waller, who voted against the proposal, wants to scrap the plan and start over. He’s previously spoken against the parts of the rule that would guard against operational risk at big banks, even though he’s the community banker point person at the Fed. It’s a line of reasoning fairly similar to the big-bank lobby’s: that operational losses aren’t tied to credit risk events.
Lawmakers on both sides of the aisle have raised narrow issues with the rule. One letter fears reduced credit access for homebuyers, another worries clean energy tax credits could dry up. Sinema and Crapo questioned the effect on derivatives transactions. And a letter out of House Financial “warned of adverse effects on capital markets.” Sen. Brown, however, led Senate Democrats on a letter in support of the Basel Endgame proposal.
But the chair of the Basel Committee on Banking Supervision, the international prudential regulatory body, supports U.S. regulators’ initiative to strengthen capital requirements beyond what the UK and EU have on offer.
Foreign Debt.
AFR-EF and allies expressed serious concern about a proposed rule from the CFTC that would expand the list of permitted investments for customer funds to include foreign debt, potentially exposing customers to financial risk. The rule’s suggestion that the revenue and profits of exchanges and dealers would meet the requirement that approved products meet a public interest standard is distorted and sets a dangerous precedent.
Commercial Real Estate.
A rise in interest rates and vacancies coupled with diminishing property prices have raised the alarm on commercial real estate potentially being the next source of financial system instability, as a historic number of CRE loans come due in the next couple of years. But, Bloomberg writes, there may finally be “hope” for the market: “Sellers and buyers are finally seeing more opportunities to transact after uncertainty nearly froze the market for much of last year…With some central banks starting to signal that the rapid rate-hiking cycle is winding down, investors have gained more insight into borrowing costs.”
Liquidity Risk.
The OCC, Fed, and FDIC are developing a plan that would require banks to have collateral ready for use at the Fed’s discount window. The idea aims to reduce the traditional stigma for banks using that lending facility.
Further to the Banking Crisis.
Silicon Valley Bank. SVB Financial, Silicon Valley Bank’s parent company, will hang onto its venture capital arm, and its billions of dollars of tax attributes, after transferring it to creditors. That’s happening in the background of its ongoing legal fight with the FDIC for $2bn worth of seized cash reserves.
Signature Bank. In December, the private equity giant Blackstone got its hands on a 20% stake in Signature Bank’s commercial real estate loan pool. Just a month later, it already looks ready to sell.
CONSUMER
Bad Background Checks.
The CFPB has put the “false, incomplete, and old information” that appears on background check reports in its sights, with a pair of advisory screenings issued last week. The guidance was spurred by comments from renters who reported inaccurate information on reports, which have had a “decades long impact on housing opportunities.” The agency cautions credit reporting agencies against furnishing information that’s been sealed from the public record, and urges them to provide disposition information related to arrests, criminal charges, eviction proceedings and other court filings. Any information that’s expired, or otherwise fallen out of its own reporting period, should stay out.
In a similar vein, the agency advises these companies to be able to provide complete credit reports on the consumer’s request, and that it should be made simple and straightforward to do so. These reports, they write, should contain clear and accurate information written in a way the average person could understand, formatted so as to help them identify both the inaccuracies and the sources of the information.
CAPITAL MARKETS
SEC Oversight.
In the latest attempt to gum up the gears of financial regulation, a group of House Republicans introduced the Review the Expansion of Government (REG) Act, intended to force the SEC to review every rule it finalizes every three years after its implementation.
A Gensler Profile.
Bloomberg takes a look at the SEC chair’s penchant for doing things that are good for capital markets and investors, but that draw fire from industry. Go figure.
PRIVATE MARKETS
Private Capital Consolidation.
Last week, the world’s dominant asset manager BlackRock announced its $12.5bn acquisition of Global Infrastructure Partners, an infrastructure fund that owns numerous international energy projects, airports and transit hubs, and more. It’s “early evidence of a wave of consolidation among asset managers,” FT suggests. “The impact will be felt across the private markets and force other prominent firms to consider whether they too need a partner or the extra financial muscle of a public stock listing.”
Related: Private equity firm General Atlantic announced on Tuesday it will buy Actis, a London-based infrastructure fund manager that owns ports, power and digital infrastructure projects.
Private Equity and Climate.
Last year, AFR, Global Energy Monitor and Private Equity Stakeholder Project released a report exposing private equity megafirm Carlyle Group’s hidden climate impact. Despite public statements to the contrary, Carlyle has pushed billions of dollars into polluting companies all across the fossil fuel energy supply chain – $22.4bn AUM in carbon-emitters, in contrast to the $1.4bn AUM in renewables. Now, Reclaim Finance indicates that Carlyle’s shareholders, which include the likes of BlackRock, JP Morgan, Vanguard and other heavy-hitters, broadly “turn a blind eye” to the firm’s fossil fuel investments. At its most recent annual general meeting, several key shareholders approved prospective strategies despite their “lack of serious consideration given to climate issues.”
Private Equity and Healthcare.
Bankruptcies among PE-backed portfolio companies soared to 104 last year, with radiology and oncology firm Akumin, backed by private equity firm Stonepeak, “topping the list in the healthcare industry.”
And as private equity’s incursion into the healthcare sector continues to strain practices and put pressure on patients to pay more to receive lower-quality care, a lobbying group called the American Independent Medical Practice Association has emerged to “advocate for private practice physicians” – really, they’re trying to get more PE through the door.
Related: Hospitals in Philly experience cutbacks and closures when private equity comes to town. But some states are fighting back with proposals to report changes in ownership or even allowing state officials to challenge an acquisition.
And: An op-ed in The Boston Globe calls for greater scrutiny of private equity in the healthcare sector: “Higher prices, worse outcomes don’t serve patients or providers.”
Private Credit.
JPMorgan predicts that more than $30bn of private credit will “change hands,” per Bloomberg, as insurance and pension firms reshuffle their allocations and sovereign wealth funds continue to pump cash into private markets. The sector’s growing rapidly: it’s a $1.4trn market now (about the size of the entire U.S. junk bond market), and estimates put it at the $2trn mark about three years from now. When someone goes looking for a loan, AFR’s Andrew Park explains:
“You instead have a hedge fund or a private equity firm that makes the same loan itself. You will see a lot of conditions that would traditionally be demanded by banks being waived by nonbank lenders.”
Related: The Yale Program on Financial Stability’s Steven Kelly writes that private credit doesn’t really reduce systemic risk. Moving money from a bank account into a private fund’s account and ultimately to a borrower doesn’t change the system’s leverage, though some narrow arrangements might cause liquidity to change hands.
Private Equity and the News.
The Scranton Times-Tribune is a small-town newspaper that had always been owned by the Lynett family, after a coal miner scraped up enough cash to buy it in 1895. Then, the MediaNews Group, owned by the hedge fund Alden Global Capital, took it over. When one columnist found out about the sale, he said: “You didn’t just sell it to a hedge fund, you sold it to the worst one.”
Alden Global Capital owns the second-largest chain of papers in the country, spanning the distance between the San Jose Mercury News and the Chicago Tribune and beyond. They’ve got a news-gutting track record: “Alden has slashed payrolls, consolidated journalistic beats, closed offices and otherwise squeezed its properties in a scratch-and-claw pursuit of cash flow.”
Other Private Markets News.
“Back to the Future.” That’s where private equity will have to go, according to Marc Nachmann, a Goldman Sachs exec, if the sector wants to make returns. Sky-high interest rates means the “era of cheap money” has ended, and with it a decade of expansion seeded by leverage and cheap capital. Instead, Nachmann suggests a return to the way things used to go: targeting underperforming divisions and making internal improvements, Yahoo Finance reports.
Fewer PE Transactions in ‘23. Private equity and venture capital’s “deal value and volume in 2023 were at their lowest in at least five years,” per S&P Global. Private equity made up a quarter of the year’s M&A activity.
More PE Transactions in ‘24. Various industry types interviewed by the Financial Times predict that the drought will end as PE firms relent and drop selling prices so they can return cash to their own investors.
Less Fundraising in ‘23. From S&P Global: Fundraising activity also dipped to a six-year low last year, falling 11.5% YoY. And fewer than 2,000 funds closed, the lowest number in a year since 2015.
Blackstone and Housing. The world’s largest PE firm burrowed more deeply into residential housing with the purchase of Tricon Residential for $3.5 billion.
Mariner Finance Lawsuit. A multi-state lawsuit against Mariner Finance, the predatory lender owned by the PE firm run by former Treasury Secretary Tim Geithner can go forward, a judge ruled.
CRYPTO
A Crypto Ambassador.
Sean Patrick Maloney, a revolving-door former Congressman who became an adviser to Coinbase – the country’s largest crypto exchange, which is currently locked in a prolonged battle with the SEC over whether crypto assets are securities – has been nominated as the U.S. ambassador to the Organisation of Economic Co-operation and Development (OECD). It’s “a clear conflict of interest,” writes the Revolving Door Project and American Prospect, as the OECD’s been working on frameworks for crypto regulation.
Mixed Feelings on ETFs.
A few crypto enthusiasts have realized that having crypto ETFs means control by Wall Street, which is not exactly what the techno-utopians promised with the arrival of these alternative currencies. “[O]ne day, these Wall Street institutions will own 70% of the Bitcoin in circulation,” a crypto CEO said. “I’m not so sure that is the thing that we were trying to build.”
Trump on CBDCs.
Trump has seemingly bought into the conspiracy that the Fed’s potential creation of a digital dollar (a central bank digital currency, or CBDC) would allow the federal government to surveil Americans. Eleven countries have already launched CBDCs, and a study finds that 130 countries are researching digital versions of their own currency.
CLIMATE and FINANCE
Fossil Fuel Money.
Big new report from Unlocking America’s Future on how the fossil fuel industry has fought the SEC’s proposed climate disclosure rule.
POLITICS and MONEY
Jaime Dimon.
This week, megabank CEO Jaime Dimon praised Trump for his stance on the economy and taxes. No doubt inspired by the $3.7bn that Trump-era tax cuts for corporations piled onto JPMorgan’s profit. In any case, Dimon “joins the Trump normalizers,” as Never-Trump Republicans wrote in The Bulwark.