BPInsights: February 26, 2022

Stories Driving the Week

Five Key Facts on U.S. Banking Competition

The U.S. executive branch has questioned the competitiveness of the American banking industry, but clear evidence shows it is highly competitive.

What happened: The Department of Justice sought public input on bank merger review guidelines in December 2021. The request followed an Executive Order directing the DoJ to review competition policies across all industries. A factsheet accompanying the Executive Order said “excessive consolidation” in the banking industry raises costs for consumers.

Five facts show that this view is incorrect. Banking industry competitiveness is thriving.

  • National concentration is modest in commercial banking compared to other consumer-facing industries.
  • Trending down: National concentration in commercial banking has been trending downward for some time.
  • Unconcentrated vs. international peers: Concentration in the U.S. commercial banking industry is low relative to other advanced economies.
  • Stable for over 20 years: Local market concentration has not materially changed since 1998.
  • Steady profit levels for decades: If the banking industry had in fact evolved to become too concentrated over the last 30 years, then one would expect to see profit margins increasing; evidence shows that profit margins have remained flat in this period.

An understatement: The analysis cited in this note understates the high level of banking competition, because it does not include FinTechs, credit unions, money market funds or banks that serve customers in areas where they don’t have a branch. The absence of FinTech competitors is also a significant challenge in DoJ’s bank merger guidelines — ignoring a seismic shift in the competitive landscape of financial services.

Russia Hit With Sanctions Over Ukraine Invasion

The U.S. and its allies announced multiple sanctions this week against Russia and its key firms and figures in response to Russia’s invasion of Ukraine. The U.S.-sanctioned targets include major Russian banks VTB and Sberbank and several members of President Vladimir Putin’s inner circle. The actions also extend restrictions relating to Russian sovereign debt and included debt and equity prohibitions against state-owned and private entities. The sanctions ramped up incrementally this week as Russia progressed toward a full invasion on Thursday. BPI is working closely with its member and government partners to help navigate the highly technical implementation process.

Russia Sanctions Evasion, Canada Trucker Protests: This Week in Crypto

Geopolitical events this week from the Russia Ukraine invasion to the Canadian convoy protests highlighted the potential use cases for crypto in subverting the law.

  • Russia: Russia could use cryptocurrency tools, from a digital ruble to ransomware, to evade sanctions from the U.S. or its allies, BloombergCNN and the New York Times reported this week. Cryptocurrency could enable the country to steal money, transact anonymously, move money across borders and avoid touching the dollar. The Treasury Department has warned of the risk of crypto in sanctions evasion. 
  • Canada: Tweets by the CEOs of crypto exchanges Coinbase and Kraken — encouraging the use of non-custodial wallets to evade government freeze orders targeting Canada’s trucker convoy protests – were flagged by Ontario’s securities regulator for Canadian police. “Please do not fund causes directly from custodial wallets. I’m sure freeze orders are coming. Withdraw to non-custodial before sending,” Kraken CEO Jesse Powell wrote in one of the tweets. Unhosted wallets exist outside of the reach of AML and sanctions laws, and provide a clear path for criminals and terrorists to utilize a secret financial system to fund their priorities. 

How to Send Money Fast — and Safely

Peer-to-peer (P2P) payment platforms like Zelle and Venmo offer near-instant ways to pay. However, as with all payment methods, consumers using these services may be targets of fraud and scams. Here’s how these payment platforms work and how to avoid common scammer tactics.

Key differences: Zelle is a payments service offered by FDIC-insured banks while other P2P payments services like Venmo are standalone apps offered by FinTechs that are neither FDIC insured nor subject to oversight by the federal banking agencies.  

For a deeper look at how Zelle and FinTech competitors differ, see our infographic here.

Eurofi Speech: Banks Need Scale

Banks need scale, Banque de France Governor François Villeroy de Galhau noted in a speech this week at the Eurofi conference. “More than anything else, our banks need economies of scale to have the means to invest properly – including in their digital transformation,” Villeroy de Galhau said. “Digital is mainly about IT investment, hence fixed costs, hence size.” The necessity of scale in banking to survive today’s highly competitive global marketplace is gaining traction in Europe.

Small Minority-Owned Banks Seeking Treasury Support Hit Capital Ratio Snag 

Some small banks serving minority communities, including CDFIs and MDIs, face stark limits on the federal investments they can receive due to Federal Reserve guidance, according to a recent American Banker article. As the Treasury Department’s Emergency Capital Investment Program aims to invest billions of dollars in specialized small banks serving minority communities, the funds are being constrained by a conflict between the tax structure of many such banks and a Fed document that guides examiners on small bank leverage ratios.

In Case You Missed It

Standing Repo Stigma, Balance Sheet Shifts: BPI’s Latest Symposium

On Feb. 17, BPI hosted its fourth roughly annual informal symposium on monetary policy, bank regulations, and money markets.  The symposium was attended by current and senior policymakers from multiple government agencies and central banks; academic experts on monetary policy and financial markets; and market participants including bank treasurers, front-end rate strategists from buy-side and sell-side firms, and chief economists.  As described in the agenda available here, the symposium covered four topics:  the outlook for deposit rates and deposit levels, the prospects for the Fed’s new Standing Repo Facility (SRF), how the Fed’s balance sheet and money market rates will evolve as the Fed tightens policy, and Treasury market functioning as the Fed switches from purchases to redemptions. 

Banking Agencies, CFPB, HUD, FHFA, DoJ, NCUA Emphasize Special-Purpose Credit Options

The federal banking agencies, along with the CFPB, Justice Department, HUD, FHFA and NCUA, issued a rare joint statement recently to remind lenders of their ability under the Equal Credit Opportunity Act and Regulation B to launch special-purpose credit programs to meet the needs of underserved communities. The joint statement from multiple regulators is a welcome development as banks continue to explore new ways to reach underserved consumers. Previous uncertainty on special-purpose credit programs stems from the inherent tension between programs aimed at serving specific populations and the statutory obligation to serve all borrowers equally.

Citizens Closes HSBC Branch Acquisition

Citizens Financial this week finalized its purchase of 80 HSBC Bank USA branches, plus the bank’s national online deposit business. The acquisition expands Citizens’ presence on the East Coast.

M&T, People’s United Extend Merger Deadline

M&T Bank and People’s United have extended the deadline for their merger to June 1, according to a recent American Banker article. The original deadline was Feb. 21. The two companies are awaiting Federal Reserve approval for the deal.

What’s New in CBDC

Here’s the latest in central bank digital currency around the world.

  • Russia: Russia recently announced a pilot phase of its digital ruble, which the government explicitly wants to supplant private cryptocurrencies.
  • DCash: The digital version of the Eastern Caribbean dollar, which is used by seven small countries in the region, has been offline for over a month, according to a recent Bloomberg piece. The outage draws attention to technical problems that could plague central bank digital currencies.
  • Kenya: The African nation is considering a CBDC and has issued a discussion paper seeking public comment on the possibility. The prospect is particularly interesting in Kenya, as the country was a pioneer in mobile money and is the home of the M-Pesa, a smartphone wallet that got the world talking about FinTech in developing economies.  Thus, the question of what benefits a CBDC would provide is particularly relevant in this context.

FDIC’s Meghji: Why I Quit as FDIC Innovation Chief

Sultan Meghji, former innovation chief at the FDIC, described why he left the position in a recent Bloomberg op-ed: “technophobia.” Meghji said he encountered resistance to technology in many aspects of the job, spanning policy areas such as ransomware, crypto and artificial intelligence. “[T]he assumption is that 20th-century rules can be jury-rigged to cover 21st-century technology. That’s a dangerous view when dealing with fast-paced innovations such as web3 and artificial intelligence,” Meghji wrote. He suggested several changes at the agency, such as continuing education, hiring reforms, collaboration with universities and the private sector and work with international allies like the U.K.

BofA’s Moynihan Q&A with the Associated Press

Bank of America CEO Brian Moynihan gave an interview to the Associated Press, where he discussed strong consumer spending and inflation’s effects on small businesses.

BMO PU.S. Bank Moving Most Software Applications to Cloud

U.S. Bank announced recently that it is moving most of its software applications to Microsoft’s Azure cloud over the next few years. The move is part of a general trend of banks migrating to cloud storage.

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.