BPInsights: September 24, 2022

Stories Driving the Week

Capital, Climate, M&A: Bank CEOs on the Hill

CEOs of the seven largest U.S. consumer-facing banks testified on Capitol Hill this week in hearings before the House Financial Services Committee and the Senate Banking Committee. Here are key takeaways from their testimony.

• Capital: A key theme of the hearings was that capital requirements, which may soon increase, are holding banks back from lending to households and businesses. That dampening effect could end up being procyclical in a downturn, PNC CEO Bill Demchak warned at the Senate hearing.
• Zelle: Both House and Senate hearings featured questions about fraud and scams on Zelle. The CEOs noted that their banks invest significant resources in fraud prevention and consumer education to combat scammers. If fraud occurs outside the banking system on nonbank P2P platforms, banks have no visibility into it, and therefore can do very little to combat it, Demchak noted. He also added that other P2P platforms have “15 times the number of disputes coming into our company.” (See below for additional data on P2P platforms.)
• Inside or outside the banking system: Wells Fargo CEO Charles Scharf noted at the House hearing several regulatory factors that have led to banks’ diminished share of the mortgage market. “Regulations are inconsistent between banks and nonbanks,” he said. “And cost structures are different. And the nonbanks have taken an increasingly larger share of the market, as we have continued to try to focus on providing home lending products.”
• Climate: Lawmakers discussed climate risk and energy financing during the hearings. Rep. Frank Lucas (R-OK) asked JPMorgan CEO Jamie Dimon at the House hearing for his view on the argument “that the Fed should tie climate risk with increased capital requirements.” Dimon responded that “we do 100 stress tests a week,” including on natural disasters, but “to the extent it’s for social public purposes to have banks do something different” on financing oil and gas, “absolutely not.” To meet global energy needs for the next decade, proper investment in oil and gas is required, and that investment will ultimately decrease CO2 as part of a transition away from coal, Dimon said in a separate exchange. “Investing in the oil and gas complex is good for reducing CO2 … because of the high price of oil and gas, particularly for the rest of the world … you’ve seen everyone going back to coal, not just poor nations like India and China, Indonesia and Vietnam, but wealthy nations like Germany, France and the Netherlands.”
• M&A: Bank merger review standards have been under scrutiny from policymakers recently, and the topic also came up at the House hearing. In response to Rep. Barry Loudermilk (R-GA), Truist CEO William Rogers noted that cybersecurity was one of the reasons behind the SunTrust-BB&T merger. “One of the reasons we merged was to create a stronger shield for our clients,” he said. The merger that formed Truist has enhanced the bank’s capacity and ability to recruit talent, Rogers said.
• Financial inclusion: At both hearings, the CEOs discussed their support for MDIs and CDFIs and for underserved low-income and minority communities. At the House hearing, Dimon noted his bank’s participation in the Project REACh and Bank On programs to advance financial inclusion. In advance of the hearing, BPI coauthored an American Banker op-ed with the National Bankers Association that offered recommendations for how banks and regulators can help close the racial wealth gap. (See below.)
• Cyber: The CEOs emphasized that cybersecurity is a significant focus of resources and attention at their banks. “It requires coordination among the banks, regulators and the government, and we’re working hard on it,” U.S. Bank’s Andy Cecere said at the House hearing.
• Social issues: Lawmakers at both hearings, particularly Senate Banking Committee Ranking Member Pat Toomey (R-PA), pressed the bank CEOs on taking stances on social issues, such as guns and abortion. Lawmakers also questioned the CEOs about new MCC codes for credit card transactions involving gun sales.
• Economic outlook: Some questions centered on the overall economic outlook as the U.S. grapples with inflation and heads toward a potential recession. “We’re fortunate to have had the consumer in good health entering into this, but we do expect we’re going to be in for tougher times ahead,” Citi CEO Jane Fraser said at the House hearing.
• Geopolitics: Several questions at the House hearing focused on business ties with China and Russia amid U.S. tensions with the two nations. The CEOs emphasized that their banks comply with U.S. sanctions and would continue to follow U.S. government guidance.

The Data Shows that Zelle Is the Safest Way for Consumers to Move Their Money

Zelle, the bank-owned peer-to-peer payment platform, has a lower share of disputed transactions than its nonbank P2P competitors such as PayPal, Venmo and Cash App. Disputed transactions, including allegations of fraud, make up 0.06% of Zelle transactions on average, based on 2022 survey data from eight of the largest U.S. consumer banks. This share is the lowest across the major P2P payments platforms, contrary to misconceptions circulated in some media reports. For this purpose, a “disputed transaction” is one in which the bank’s customer contacts the bank to claim the P2P transaction was fraudulent or unauthorized during the first half of 2022.

• The share of disputed transactions made using PayPal is 3x higher than those on Zelle.
• The share made via Cash App is 6x higher relative to Zelle.

“Banks know their customers, and this data should come as no surprise to anyone familiar with banks’ rigorous security standards and screening processes,” said BPI CEO Greg Baer. “Banks provide the safest route for moving money from point A to point B without sacrificing speed and convenience. This data reaffirms why customers trust banks to protect them from fraud.”

How banks keep payments safe: Zelle requires that customers already have a bank account, so banks’ know-your-customer requirements apply. In contrast, apps like Cash App allow customers to set up accounts without going through all the screening processes that banks deploy. Nonbank apps make it easier for fraudsters to set up accounts that look like legitimate sellers or merchants.

• Banks are also more likely to kick fraudsters off the Zelle network. Banks report incidents of suspected fraud into the Zelle network and other banks can make use of that information.
• Banks have no direct link to third-party customers of nonbank P2P apps, so they have no effective way to report fraud incidents to a nonbank P2P platform or ensure that information is shared with other banks.

As a result, bank customers express high rates of satisfaction with their banks’ handling of fraud. According to a Morning Consult survey conducted in August, almost 9 out of 10 adults who have been victims of fraud were satisfied with their bank’s response (89%).

What could be done? The primary focus of policymakers should be to reduce fraud, not to reallocate the resulting losses while fraudsters keep their gains.  To mitigate fraud risk among nonbank payment platforms, regulators should reduce fraud by subjecting firms like data aggregators that store and use consumer financial data to more stringent data security and consumer privacy protections consistent with those applicable to banks. Federal regulators should work together to crack down on phone “spoofing,” in which fraudsters trick consumers by making calls appear to be from a legitimate institution like a bank or government agency. Customers are understandably fooled when a telephone call shows that the caller is their bank, but banks are powerless to prevent this trick; it is up to the federal authorities and the telecommunications companies to do so.  Lastly, regulators should coordinate with law enforcement and other government agencies, community groups and the industry to root out criminals exploiting these platforms for fraud.

NBA, BPI Lay Out How Large Banks, Regulators Can Help Close Racial Wealth Gap

The CEOs of BPI and the National Bankers Association published a joint op-ed this week in American Banker highlighting large banks’ support for MDIs and CDFIs. The op-ed called on policymakers to take steps to equip MDIs and CDFIs to meet the needs of their communities. “To close the racial wealth gap, banks should deepen partnerships with minority-led banks, and policymakers should eliminate regulatory barriers that prevent these banks from reaching their full potential,” NBA’s Nicole Elam and BPI’s Greg Baer wrote in the piece.

Bank On: An Engine for Financial Inclusion 

Uptake in the Bank On program, which offers a framework for low-cost bank accounts aimed at expanding financial inclusion, has been particularly strong in neighborhoods with predominantly minority and low-income populations. The program has experienced consistently strong growth across states and metro areas during 2020. A new BPI post updates earlier research on take-up and usage of Bank On accounts in relation to the demographics of local areas.

The details: Data shows:

• High relative take-up rates for Bank On accounts during 2020 in areas with predominantly low- or moderate-income (LMI) populations
• High relative take-up rates for Bank On accounts in neighborhoods with predominantly minority populations
• Take-up rates for Bank On accounts were more moderate in areas with high unemployment rates during 2020, but still considerable

Bottom line: The data shows that Bank On is effective in expanding financial inclusion, particularly in minority and low-income communities.

Bank Examiner Preferences Are Obstructing Monetary Policy

Federal Reserve bank examiners’ preferences are undermining the central bank’s effort to get smaller, a new BPI post explains.

Context: The Fed is shrinking its portfolio of assets, and it must also shrink its liabilities – particularly, banks’ deposits at the Fed (reserve balances). However, the Fed’s own examiners encourage banks to hold reserves in massive amounts and prefer reserves over highly liquid Treasury securities when evaluating banks’ liquidity. Examiners also discourage or mandate against any liquidity contingency planning that includes any borrowing from the Fed, which forces banks to hold even more reserves, despite Board policies being designed to make banks more willing to borrow. These preferences frustrate the Fed’s effort to shrink its balance sheet. Banks are also reluctant to borrow from the Fed and risk examiner pushback – another factor boosting banks’ demand for reserves.

Why it matters: Such dynamics inhibit the Fed from getting smaller, which would be healthier for the financial markets, and banks from supporting the economy with more lending.

Steps that could help:

• The Fed could follow the Bank of England’s plan to shrink its balance sheet until reserves become sufficiently scarce that banks will borrow regularly from the central bank’s lending facilities.
• Also like the BoE, the Fed could instruct examiners and educate the public and Congress that bank borrowing from the discount window – at an above-market rate and overcollateralized – is not a bailout. The Fed can also allow banks to plan to use the Standing Repo Facility in their liquidity stress tests.
• The Fed’s assessments of banks’ liquidity conditions need to recognize the liquidity benefit of being able to borrow from the Fed against over $1 trillion in prepositioned collateral. The Fed can do so in a structured way where banks pay the Fed for a line of credit, a method already recognized by the international standard for liquidity regulations.

Bottom line: If the Fed took such steps, it would be able not only to get much smaller but would also enable banks to lend more to businesses and households, fostering economic growth.

In Case You Missed It

Biden Unveils GOP FDIC Nominees

President Biden this week announced his intent to nominate two Republicans, Travis Hill and Jonathan McKernan, to the FDIC board. Hill previously served as a senior advisor to former FDIC Chairman Jelena McWilliams. He also worked as a senior counsel for the Senate Banking Committee. McKernan serves as a senior counsel at the Federal Housing Finance Agency, and is currently on detail to the Senate Banking Committee. The FDIC board currently has three members, all Democrats: Acting Chairman Marty Gruenberg, CFPB Director Rohit Chopra and Acting Comptroller Michael Hsu. Senate Banking Committee Chairman Sherrod Brown (D-OH) said in a POLITICO interview this week that he wanted to see a Democratic nominee for FDIC chair before holding a nomination hearing. He added that “I don’t want to leave them hanging forever.”

The Crypto Ledger

A stablecoin bill discussion draft is taking shape in the House. Here’s what else is new in crypto.

• Crypto scams: The Financial Times this week published a longform piece on the “lawless world of crypto scams,” centered on the UK.
• Binance bid: Concerns about U.S. government national-security scrutiny have complicated Binance’s effort to buy Voyager Digital’s assets through a bankruptcy auction, CoinDesk recently reported. Binance CEO Changpeng Zhao was born in China but holds Canadian citizenship. A Binance spokesperson described it as an “international company.”
• Another DeFi hack: Crypto market maker Wintermute lost $160 million in a hack of its decentralized finance unit, according to Bloomberg.
• Kraken CEO steps down: Kraken CEO Jesse Powell will step down and become chairman of the board. He will be succeeded by COO Dave Ripley. The company is allegedly under U.S. investigation for suspected sanctions violations.
• Ripple’s argument: Crypto firm Ripple Labs claimed in an SEC lawsuit that its XRP token is not a security under the agency’s purview because there is no “investment contract” granting investors rights or requiring the issuer to act in their interests. SEC Chairman Gary Gensler has repeatedly said that most crypto tokens are securities.

BNP Paribas Uses Blockchain Tech to Serve Customers

BNP Paribas has partnered with Swiss crypto firm Metaco to make processes like bond interest payments, stock and bond issuance and private placements more efficient, according to POLITICO. The bank has already used the technology to issue a digital bond for Électricité de France, a major utility.