BPInsights: March 11, 2023

FDIC Takes Control of SVB

Silicon Valley Bank, a tech and venture capital-focused lender, collapsed due to a run on deposits and a failed attempt to raise fresh capital, the Wall Street Journal reported. The FDIC has taken control of the bank and insured depositors will have access to their funds by Monday morning. Customers with funds exceeding insurance caps will receive receivership certificates for their uninsured balances, the article stated. 

Five Key Things

1.  Capital, Climate, Crypto: Powell on the Hill

Capital was a highlight of the semiannual Congressional hearings this week with Federal Reserve Chair Jerome Powell. The Fed and other banking agencies are expected to release a proposal soon implementing final changes to the Basel capital standards, and Vice Chair for Supervision Michael Barr is conducting a “holistic review” of the U.S. capital framework. All these developments could have significant effects on the banking system and funding for the real economy. Here are some key takeaways from Powell’s testimony.

  • Capital Framework: Lawmakers questioned Powell about the consequences of raising capital requirements and the process behind Barr’s holistic review. “We want to understand why it’s necessary for the Fed to conduct a holistic review and what that process is,” House Financial Services Committee Chairman Patrick McHenry (R-NC) said. Powell said it would be a “wide open process in the sunshine.” Senate Banking Committee Ranking Member Tim Scott (R-SC) expressed concern about potential harms of increasing capital requirements, particularly in a one-size-fits-all way, and he noted the resilience of the banking system during COVID: “Our financial institutions stepped up and delivered aid to support our families and businesses every single day.” Sen. Katie Britt (R-AL) said raising capital requirements would have “a chilling effect on the economy and the availability of financial services.”
  • Tailored fit: In response to Scott, Powell pledged that any regulatory proposals stemming from the Fed’s review would take a tailored, risk-based approach – basing requirements for banks on their individual risk profiles and business models.  “Anything we do will reflect tailoring, which is a long-held principle for us and also now a requirement in the law,” Powell said. Powell reiterated that sentiment in response to Sen. Bill Hagerty (R-TN): “As an institution, we’re strongly committed to tailoring.” The emphasis on tailoring – which was enshrined in a bipartisan law in 2018 – echoes the letter sent late last week by a group of senators led by Scott.
  • Still strong: Several lawmakers asked Powell if he still viewed banks’ capital levels as adequate. As the new Vice Chair for Supervision, it’s natural that Barr would “come in and take a fresh look,” Powell told Sen. Hagerty. “American banks are strongly capitalized, and I believe Vice Chair Barr has said that as well, but the point is that there haven’t been any real proposals to evaluate yet, and when there are, that will be done in a highly transparent manner,” he told Rep. Ann Wagner (R-MO). Powell acknowledged to Wagner the trade-offs inherent in adjusting capital requirements.
  • CRA: The interagency CRA rewrite will be finalized in “some months,” Powell said. Powell said he has tasked Vice Chair Barr with leading the effort for the Fed after Lael Brainard, who had spearheaded the process, left for the NEC.
  • Outside the perimeter: “So much of intermediation has moved away from the regulated banks, really for a long period of time,” Powell said to Sen. Mark Warner (D-VA), referring to stablecoins needing some regulatory scrutiny.
  • Climate: Powell reiterated in response to Rep. Frank Lucas (R-OK) that the Fed is “not looking to move into an area where we’re actually becoming a climate policymaker.” He said “over time that border needs to be very carefully guarded.” He emphasized in the Senate hearing that the Fed has a narrow role to play in climate.

2. Bank Fee Criticisms Ignore CARD Act Protections

The White House this week released a document titled “Guide for States: Cracking Down on Junk Fees to Lower Costs for Consumers.” It states that “junk fees” are “often not disclosed upfront and only revealed after a consumer has decided to buy something,” and implies that credit card late fees fall into that category, which is a deeply flawed mischaracterization. The document goes on to congratulate the Federal Communications Commission and the Department of Transportation on their efforts to promote more transparency in billing by internet providers and airlines. What this document fails to recognize is one of the signature achievements of the Obama-Biden Administration, the Credit Card Accountability Responsibility and Disclosure Act of 2009, or CARD Act. The CARD Act established enhanced disclosure requirements for credit card terms and conditions and limited how much credit card companies can charge for penalties such as over-the-limit fees and late fees, as well as limits on interest rate increases.  In the years since its passage, the CFPB has regularly touted the success of the Act, and its rules.

“Banks are subject to a Congressionally mandated disclosure framework that requires detailed, upfront cost and fee disclosures for virtually all consumer financial products and services. This framework has been administered and further refined by the Bureau through multiple regulations, which, in many cases, include model disclosures designed and extensively consumer-tested by the CFPB.  Nothing in today’s announcement takes issue with the law or regulations under which banks operate; it simply refuses to acknowledge their existence,” said Greg Baer, BPI President and CEO.

  • To learn more about how policymakers described the CARD Act in past statements, click here.

3. BPI: Required Scope 3 Emissions Disclosures Would Confuse, Not Clarify

BPI this week issued a statement in response to a Congressional letter urging the SEC to finalize a climate disclosure rule that would require companies to disclose indirect, or Scope 3, emissions: “The proposed Scope 3 emissions disclosure requirements are overly broad and would not result in consistent, comparable or reliable disclosures. These Scope 3 emissions mandates face bipartisan concern and practical limitations. Data quality challenges limit Scope 3 emissions disclosures’ usefulness for investors. These indirect emission disclosures would muddy the waters rather than provide clarity for investors.”

  • To learn more about the challenges of the SEC climate disclosure proposal, see BPI’s comment letter here.

4. The Myth of Bank Branch Destruction

A recent research paper by Federal Reserve Board economists analyzed detailed data on banking market structure, deposit growth and deposit account interest rates in the U.S. from 1980-2014. While the study involved major data gathering and statistical analysis efforts, the authors appear to have drawn conclusions unsupported by the empirical findings. The study attempts to determine how the effects of bank mergers on branches differ between areas where the two original banks both had branches versus areas where only one did. It paints a picture of bank branches disappearing as a result of mergers, but that narrative does not reflect reality.

  • The study appears to minimize the major increase in U.S. bank branches (during a period of bank consolidation) by shifting the focus to neighborhood-level comparisons. While the number of U.S. banks shrank during the period in question, the number of branches more than doubled. This fact contradicts the contention that mergers were leaving customers unserved.
  • The paper finds that fewer net additional branches were established in places where the merging banks’ networks overlapped. Conflating that with “branch destruction” is misleading – net branches generally increased, indicating that banks expanded to new communities. Closed branches were primarily in areas where merging banks’ networks closely overlapped.
  • Breaking down the misconceptions: In addition, two top federal regulators have cited another academic paper in support of the notion that bank mergers drive branch closures that ultimately hurt consumers. But the study they cite – a research paper authored by Hoai-Luu Q. Nguyen, a professor at the UC Berkeley Haas School of Business — finds only that merger-related closings most frequently occur where the merging banks’ branch networks closely overlap. During the time period covered in this study, the total number of bank branches in the U.S. increased more than 20 percent.
  • Bottom line: Neither of these studies indicate that bank mergers lead to broad-based, systematic branch closings.

5. Silvergate to Shut Down

Silvergate Bank, the crypto-focused institution that has been roiled by the crypto crash, this week announced its intent to wind down and voluntarily liquidate its business. The liquidation plan includes repayment of all depositors, the bank’s announcement says.

  • FDIC: FDIC examiners had recently visited the bank, reportedly to discuss ways to salvage its operations.
  • Regulatory backdrop: The collapse comes as banking regulators have warned about the liquidity risks of crypto customers’ deposits. These risks would be amplified if a bank did not diversify its customer base beyond the crypto industry.
  • Bottom line: Silvergate’s shutdown stems from the crypto crash, but it happened in a more traditional way than losing money investing in crypto assets. “Silvergate is having a real run on the bank! It has lost money, not by making dumb Bitcoin loans — the Bitcoin loans are fine — but by doing the normal business of banking, borrowing short (taking deposits from crypto firms) to lend long (buying Treasuries and munis). Silvergate’s assets are real boring normal stuff, and if its depositors had kept their money at Silvergate, its bonds would have matured with plenty of money to pay them back. Instead, the depositors demanded their money back all at once, and Silvergate had to dump its long-term assets at big losses to repay them,” Bloomberg’s Matt Levine wrote in a recent newsletter.

In Case You Missed It

Shell Companies and Shell Games: The Crypto Ledger

The firms behind Tether and Bitfinex used shell companies and falsified documents to gain access to the banking system, according to the Wall Street Journal. The Journal refers to a “cache of emails and documents” that “show a long-running effort to stay connected to the financial system,” with the companies often shielding their identities behind other businesses or people. The schemes include alleged ties to a designated terrorist organization, the Journal reported. Here’s what else is new in crypto.

  • ‘Shell games’: The FTX collapse demonstrated the need for consolidated, home-country supervision of crypto firms to prevent them from nefarious activities through interaffiliate transactions, Acting Comptroller Michael Hsu said in a recent speech. “Until that is done, crypto firms with subsidiaries and operations in multiple jurisdictions will be able to arbitrage local regulations and potentially play shell games using interaffiliate transactions to obfuscate and mask their true risk profiles,” Hsu said.
  • Case in point: Binance and allegedly separate U.S. entity Binance.US maintained close ties despite their supposed independence, according to the Wall Street Journal. Binance launched a plan to “neutralize U.S. authorities,” the Journal reported, citing messages and documents over several years and interviews with former employees. The goal was to erect an apparent firewall between Binance’s U.S. customers and its overseas operations in order to avoid U.S. prosecution or regulatory scrutiny.
  • Left holding the bag: Coinbase said it was not responsible for a customer’s $96,000 stolen in a hack. The firm has refused to reimburse the customer, Jared Ferguson, arguing that he bears responsibility for the security of passwords and two-factor authentication codes.
  • Binance’s new voyage: Voyager Digital received approval from a federal bankruptcy judge to sell itself to Binance.US despite regulatory objections to the deal, including from the SEC.
  • New crypto team: The Fed is forming a specialized crypto team, Vice Chair for Supervision Michael Barr said in a speech this week. The team “can help us learn from new developments and make sure we’re up to date on innovation in this sector,” Barr said. Barr reiterated the Fed’s expectations that supervised banks conduct activities in a safe and sound manner and warned about stablecoin run risks.

GAO: Fintech Poses Risks for Underserved Customers

Fintech products’ risks to underserved customers warrant a closer look, according to a new GAO report. In particular, the report recommends the CFPB clarify whether earned wage access products – which target low-income workers by allowing them to access their paychecks early – fall under the Truth in Lending Act’s definition of “credit.” The CFPB issued an advisory opinion in 2020 saying that certain earned wage access products are not considered credit under that law, but specified that other such products may be considered credit if they do not meet certain characteristics. GAO expressed concern that the costs of earned wage access products may not be transparent.

  • Deposits: The report also warns about potential risks in fintech digital deposit accounts. Consumers may be confused about how to obtain their deposits if the fintech goes out of business, or about whether their funds are FDIC-insured.
  • Credit builder cards: Fintech loan products, marketed as credit-builder cards, aimed at helping customers build or rebuild credit may also pose risks, the report said – data on whether they actually improve credit scores is limited.
  • Small-dollar loans: Fintech small-dollar loans may also pose risks, such as offering interest rates higher than state caps or fair-lending risks through alternative credit data.
  • Bottom line: Fintech products may present risks for underserved consumers, and more clarity is necessary, the report says.

BPI’s Greg Baer Speaks at CBDC Event 

BPI CEO Greg Baer participated this week in a Cato Institute panel discussion on central bank digital currency. Other participants included Rep. Tom Emmer (R-MN), the Wharton School’s Christina Parajon Skinner, Sustany Capital’s Christian Kameir, and Cato’s Nicholas Anthony and Norbert Michel. Rep. Emmer delivered a keynote touting crypto as an innovation that needs to embody U.S. values of individual freedom and privacy and decrying CBDC as a potential surveillance tool. Participants discussed different forms of public or private money, use cases for CBDC (or lack thereof) and the different kinds of CBDC that global central banks are contemplating. CBDC would sap activity out of the economy – every CBDC is “lost lending” that cannot fund a loan to a business or household as a regular bank deposit does, Baer noted. If the Fed wants to issue a CBDC, it would have to have authorization from Congress, Baer and Skinner said. A tokenized bearer instrument CBDC – a cash-like version – would be popular among criminals looking to launder money and evade sanctions, Baer asserted, highlighting that as a reason why central banks are not considering a CBDC in that form. He also discussed the destabilizing flight-to-quality risk of a CBDC.

WSJ: Why Would the SEC Want to Read Your Personal Texts?

A recent Wall Street Journal op-ed by former SEC Chairman Harvey L. Pitt examines the privacy implications of the SEC’s probes of employees’ personal phones over alleged record-keeping violations. These devices may contain sensitive personal information, which raises questions about employees’ rights to privacy, Pitt writes. “How important is this investigation anyway, other than as a publicity and fundraising endeavor?” he writes. “Are texts on WeChat or WhatsApp more like written communications or oral discussions—telephonic or otherwise—for which there is no requirement of retention? Even if they are, technically, the equivalent of written communications, how important is the issue? It’s one thing when an investigation involves two firms and communications are produced by one firm pursuant to a subpoena but not by the other. Then, there may be a reasonable basis to look at the processes and procedures at the nondisclosing firm. But in the ordinary course, is it worth a separate investigation and the inevitable invasions of personal privacy? Again, doesn’t the SEC have more important fish to fry?”

M&T Bank Unveils Harlem Multicultural Small Business Innovation Lab

M&T Bank this week announced its Harlem Multicultural Small Business Innovation Lab, a six-week program designed to support local entrepreneurs from diverse backgrounds with guidance and resources to help them start and grow businesses. The program is held in collaboration with Carver Federal Savings Bank.

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Disclaimer:

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.