BPInsights: March 23, 2024

The Monopoly in Your Pocket: DOJ Sues Apple Over Alleged Antitrust Violations

The U.S. Department of Justice sued Apple this week, accusing the iPhone maker of leveraging its monopoly power over smartphones to engage in anti-competitive practices. The lawsuit follows a series of antitrust actions against other Big Tech behemoths. The DOJ complaint accuses Apple of “imposing a series of shapeshifting rules and restrictions” on the App Store and on app developer agreements that allow Apple to “throttle competitive alternatives.”  Apple’s monopolistic conduct “not only limits competition in the smartphone market, but also reverberates through the industries that are affected by these restrictions, including financial services, fitness, gaming, social media, news media, entertainment, and more,” the DOJ said in the complaint.

  • Payments: Some of the monopolistic practices relate to financial services through Apple’s dominance in digital wallets. DOJ accused Apple of anticompetitive practices around its digital wallet and the near-field communication technology that powers it. “Apple uses its control over app creation and API access to selectively prohibit developers from accessing the near-field communication (NFC) hardware needed to provide tap-to-pay through a digital wallet app,” the complaint states.  As a result, Apple Wallet is the only app on the iPhone that can facilitate tap-to-pay, and Apple extracts a 0.15 percent commission from banks on credit card transactions made using Apple’s digital wallet.  The complaint asserts that “Apple predicts that it will collect nearly $1 billion in worldwide revenue on Apple Pay fees by 2025.” Apple also blocks banks, merchants and other parties from developing competitive payment products and services for iPhone users, according to the complaint.

Five Key Things

1. CFPB’s Chopra Takes Aim at Bank Mergers

In remarks this week at a Peterson Institute for International Economics event, CFPB Director Rohit Chopra, who is a member of the FDIC board of directors, discussed several features of the FDIC’s newly proposed policy statement on bank M&A and outlined his ideas for further reforms.  Here are some key takeaways from Chopra’s comments.

  • Consumer costs: Chopra asserted based on “third-party analysis” that “many of the purported efficiency gains are not passed through to customers” in bank mergers. “In fact, the cost of products often increases, and quality of service tends to erode following mergers,” he claimed, referring to higher credit card interest rates, difficulties accessing small business credit and other unverified factors.
  • A fictional subsidy: Multiple times in his speech, Chopra claimed that the largest banks benefit from a “too big to fail” subsidy – in other words, they access a lower funding cost because investors believe they will be bailed out in crisis. Research has shown that this is not the case.
  • Criticisms: Chopra criticized several aspects of past merger review activities among the DOJ and banking agencies in his remarks, including what he viewed as deficiencies in competitive analysis, lack of transparency around the reasons for non-approval of a merger, analysis of the “community” factor in ways “unmoored from the law,” and unnecessarily long review processes.
  • New FDIC policy statement: Chopra laid out various aspects of the FDIC’s proposed policy statement on bank M&A, including more prescriptive requirements for banks to affirmatively demonstrate that the merger will benefit the communities to be served.
  • Further recommendations: Chopra made several recommendations on how to further reform merger review. They included: broader adoption of size and growth caps, addressing the “chaos” consumers may face after a merger due to operational or compliance breakdowns, “fix[ing] the failing bank exception to existing merger prohibitions” (i.e., the provision that allowed JPMorgan to acquire First Republic) and reduce the alleged too-big-to-fail subsidy.

2. Fed’s Barr: Material Changes Likely Coming to Basel Proposal

Federal Reserve Vice Chair for Supervision Michael Barr said Friday that he expects “broad and material changes” to the Basel capital proposal, according to Bloomberg. Barr said that criteria related to operational, market and credit risks could be adjusted, the article reported. “I am working very closely with Chair Powell and other members of our Federal Reserve board to try to reach a broad consensus,” Barr said at an event. Barr’s language echoes statements by Chair Powell in Congressional testimony earlier this month.

3. BPI Responds to FDIC Proposal on M&A

BPI issued the following statement Thursday on the FDIC’s proposed statement of policy on M&A: “The FDIC’s proposal reinforces an alarming trend among federal policymakers of discouraging M&A activity. At a time when the costs of technology, marketing and compliance have the market demanding industry consolidation, the FDIC is inventing new obstacles to mergers that have no basis in statute, such as forward-looking representations and commitments around prices, fees, banking services or facility locations. Because these novel standards are almost wholly subjective, they inject a level of uncertainty that most firms — acquirer or target — will generally find unacceptable. Banks considering mergers – and their customers and employees — need a clear, transparent and predictable review process, and this policy statement would enshrine the opposite.  Not only should the FDIC allow healthy banks to combine and prosper, it should also let healthy banks acquire troubled banks, rather than let them slowly migrate towards failure and an FDIC-administered receivership — where the FDIC’s recent track record has been less than stellar, frankly.”

4. Quarles: Departure from Tailoring is a ‘Mistake’

At an American Bankers Association conference this week, former Federal Reserve supervision chief Randal Quarles decried the shift away from regulatory tailoring as a “mistake.” The trend is evident not only in the Basel capital proposal, but also in supervisory practices, Quarles said. “

  • Interchange: Quarles also said that on debit interchange fees, “there is absolutely no need to try to bring down the charges currently.” The Dodd-Frank Act allows the revision but “certainly does not require it, which is what the claim has been,” he said.
  • Consulting the dictionary: Quarles also weighed in on the tactic of litigation. “Suing the regulators is not a declaration of war,” Quarles said at the event. “In my view, it’s consulting the dictionary on a disputed Scrabble play.

5. CFTC Commissioner Raises Concerns on Basel Proposal’s Derivatives Market Impact

CFTC Commissioner Summer Mersinger expressed concern this week about the Basel capital proposal’s impact on derivatives markets. The proposal “would diverge from (rather than harmonize with) the approach of our international colleagues, and would have a significant—and negative—impact on derivatives markets,” Mersinger said. The proposal would increase hedging costs; disincentivize banks from offering client clearing services to end users; diminish the number of providers of client clearing services; and create systemic risk. Ultimately, the impact would hit derivative end users, she said: “And these negative effects would be felt, first and foremost, by the end-users that our markets are supposed to serve—farmers, ranchers, energy producers, energy consumers, pension plans, endowments, and businesses both small and large.”

In Case You Missed It

Private Credit Default Recovery Rates Worse Than Banks

The private credit industry has become a prominent player in the corporate lending market. But private credit’s default recovery rates – what lenders expect to recover from borrowers who default – are lower than those of banks, according to a recent Bloomberg article citing a KBRA Direct Lending Deals analysis. The data shows that loans made by private credit firms to companies that defaulted over the last year were valued at an average of 48 cents on the dollar in the aftermath of the default, compared to an average of 55 cents a month after default for loans by bank-led syndicates.

  • One possible reason: Private credit lenders do not have the large workout groups that banks employ.
  • Big picture: Private credit firms would likely benefit from the capital increases on banks under the Basel capital proposal. Lending to companies with higher credit by nonbanks could weaken financial stability if the market share of private credit grows as a result of these regulatory cost pressures.

FSF Post Counters Assertions on Fed Independence

A recent post by the Financial Services Forum rebutted assertions by Wharton Professor Peter Conti-Brown about the Federal Reserve and the Basel capital proposal. The Federal Reserve is a consensus body and should remain so, the Forum post stated. 

  • Independence: The Federal Reserve is not an appendage of the current presidential administration, as Conti-Brown suggested, Campbell wrote. 
  • History of consensus: Consensus is the norm and historical precedent at the Federal Reserve Board, in contrast to Conti-Brown’s suggestion that the Board should operate on a simple-majority basis, the post said.
  • Evidence-based: Conti-Brown asserts that “setting the appropriate level of capital is a judgment call, a line-drawing exercise that depends largely on how one tolerates and interprets risk.  That very fact—that the right level of capital will not and cannot suddenly occur to all experts—means that we must resolve the question of bank capital through a political process.” This sentiment, Campbell wrote in the post, is “both extremely dangerous and completely misunderstands the approach that the Federal Reserve takes to executing its charge” – rather than simply deferring to the presidential administration, the Federal Reserve resolves policy questions through rigorous analysis and public feedback. “In the case of the Basel III Endgame proposal, a key concern is that the evidence, data, and transparency that has been provided to support the proposal is not in line with previous practice or the demands of such a sweeping reform,” Campbell wrote.

Gensler Flags Risk of Overreliance on Single Model

SEC Chair Gary Gensler discussed the risks surrounding artificial intelligence in the financial system in a recent POLITICO podcast interview. One key risk he identified: financial firms putting all their eggs in one basket when it comes to models and data. “We have set up a lot of our systems of oversight and rules around regulating individual entities or activities, whether it’s bank regulators, insurance regulators, securities regulators, commodities regulators,” Gensler said. “…Thinking about [AI] across all the entities — are they potentially all using the same base model or base data?…I would be quite surprised if in the next 10 or 20 years a financial crisis happens and there wasn’t somewhere in the mix some overreliance on one single data set or single base model somewhere.”

  • The bigger picture: These remarks pertained to AI, but they are relevant elsewhere in the financial regulatory landscape: for example, bank capital requirements. The U.S. Basel proposal has banned the use of banks’ internal models, which are more granular and bespoke than the banking agencies’ models. This step could present the same kind of risk that Gensler flags by forcing banks to use one-size-fits-all government models instead of models more sensitive to their individual portfolios and risk profiles.

The Crypto Ledger

Much support for a dollar CBDC is premised on the belief that CBDCs are a growing force elsewhere, particularly in China, and somehow represent a threat to dollar hegemony. Leaving aside numerous other problems with that theory, it has been suggested for some time that reports of the digital yuan’s birth are greatly exaggerated. See here one first-hand account. Here’s what else is new in crypto.

  • Legislation ‘close’: House Financial Services Committee Chair Patrick McHenry (R-NC) said lawmakers are “close” to agreement on stablecoin legislation, and would be able to secure passage if they had a legislative vehicle for it. “I am confident we can land the plane this year — but we need the broader context of Congress to give us that opening,” McHenry said. “We need a legislative vehicle.”
  • Genesis settles: Crypto exchange Gemini Trust reached a settlement with bankrupt crypto lender Genesis Global to return digital assets worth about $2 billion to thousands of Gemini customers.
  • SBF sentencing: Prosecutors are pressing for a prison sentence of 40-50 years for disgraced FTX founder Sam Bankman-Fried. John J. Ray III, the CEO overseeing the bankrupt crypto exchange, denounced Bankman-Fried’s “life of delusion” in a letter to the sentencing judge.

Citi Partnering with UNICEF to Support Critical Health Care in Ukraine

Citi has partnered with UNICEF to promote health care in Ukraine amid the country’s war against Russia. UNICEF, with support from Citi, has provided essential health care to the most vulnerable children and mothers in the country, including vaccine access and support for mothers and newborns.

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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.