Talking Bank Supervision; SEC Still Getting Sued; Why Banks Held Back on Stablecoins
Capitol Account: Free Weekly Edition
It was difficult to keep up with the flood of financial regulation news this week, but Capitol Account did its best. Comptroller Jonathan Gould, who is kicking off his tenure with aggressive moves against debanking, gave his first lengthy public talk. Tellingly, it was delivered at a crypto conference. We also continued to cover the saga over the teetering CFTC chairman nomination. It took a highly unusual turn when Brian Quintenz spoke out on social media, assuring the president of his loyalty and firing back at his influential critics.
On Capitol Hill, lawmakers held hearings on proxy advisors and deposit insurance, while testimony from the Fincen director buoyed hopes for reforming anti-money laundering rules. Banks, meanwhile, are now lobbying to fix what they see as a gaping loophole in the new stablecoin law, and a private meeting with Senate Republican staff helps explain the belated campaign.
The SEC chairman, on his first overseas trip, used the occasion to blast Europe’s ESG disclosure rules. Back at home, the agency was sued over its accredited investor rule, a sign that the flood of litigation spurred by Gary Gensler may not recede as expected. For our Friday interview, we spoke with a trade association president about the industry’s recently launched campaign to fix bank supervision.
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Friday Q and A: Over the last four years, banks largely held their own against the Biden administration’s regulatory onslaught. They even managed to get a few big wins, scuttling the Basel endgame and convincing the Fed to scale back its annual stress tests. But now, with Republicans in charge, the industry has bigger goals.
This week we sat down with Greg Baer, president of the Bank Policy Institute. The trade group has just launched a campaign on reforming bank supervision – a longtime industry goal that has traditionally been seen as a formidable, perhaps impossible task. That’s because examiners are scattered across three federal agencies and dozens of regional offices — and they’re often resistant to taking orders from Washington. It’s also a tough issue to lobby on: supervisory actions are confidential and can’t be legally discussed.
The new climate in Washington, however, has given Baer and his members an opening – and they plan to take full advantage. “We're going to run this as long as it takes,” he says of the new “Bank Supervision is Broken” effort. "We'll spend whatever it takes.” Read on to get Baer’s thoughts on other pressing topics as well, including open banking, independent agencies and anti-money laundering rules. What follows is our (lightly edited and condensed) conversation.
Capitol Account: How did bank supervision rise to the top of BPI’s agenda?
Greg Baer: It’s been front and center for us for almost two years now, because as we talked to our banks, what we heard uniformly was that the supervisory environment had just become intolerable…When we first started talking about this issue with lawyers and policy makers outside the banking system, they couldn’t believe what we were telling them. They didn’t know there were thousands of government examiners, that they operated in secret [or] that there was effectively no appeal from their mandates. Their surprise surprised us.
CA: Does the confidentiality surrounding bank supervision make it more difficult for you to advocate on the issue?
GB: It’s not something you can easily explain because the agencies actually prohibit you from describing what the examination environment is like. But we think the more transparency here – and it’s always going to be limited – the better the case for reform.
CA: How do you explain it?
GB: It’s like a water polo game where everything’s going on underneath the waterline and occasionally some blood bubbles up to the surface. When you see banks that can’t do any M&A for five years and [you] wonder why. Well, it’s because they got a secret rating that prevented them from doing that. We’re trying to give this more visibility.
CA: But it’s not easy building evidence to make your case?
GB: One has to proceed from word of mouth. We got a boost when the Fed disclosed – I think to its, as well as everyone else’s embarrassment – that two-thirds of large U.S. banks were rated in unsatisfactory condition last year. No one believes that to be the truth, including the Fed…That was sort of a rare public example of what was going on privately.
CA: What are the consequences of excessive supervision?
GB: Restricting banks from expanding in ways that don’t make any sense. But then also, which is even harder to convey, just the sheer deadweight cost…of compliance people checking things and rechecking things that don’t add any value and don’t make the bank any safer and sounder.
CA: Like what?
GB: We’ve actually done some surveys to show that more than half the time of cybersecurity professionals at banks is spent documenting the procedures for examiners. Probably the greatest deterrent to banks defending themselves well against cyber attack is the examination regime.
CA: With the Trump administration’s push to downsize the federal workforce, the banking agencies have lost a lot of supervision staff. Have your members seen that?
GB: No. I talked to a banker the other day who had a kickoff exam on some issue and had 17 examiners show up. Though I do think it varies bank to bank [and] that is actually sort of the problem.
CA: How so?
GB: One of the concerns here is just how much variation you see. I will confess that I talk to banks – not a lot of banks, but some banks – that actually believe their examination regime is good. I talk to others that have very, very different experiences. What we want to do is bring all examinations up to the same level, where all examiners are focused on material risks.
CA: What specific policy changes does the industry want to see?
GB: The Fed has taken the first step, which is to reform what they call their LFI [large financial institution] ratings system, which looks at capital, liquidity and governance and controls – basically management...A parallel change needs to be made with regard to the CAMELs rating system, where effectively the [management] component is given undue emphasis.
CA: How do you think this campaign will resonate with the new slate of Republican regulators?
GB: We’re fortunate now that we have some experienced people in these agencies who have seen it before, both in agency service and then in some cases in industry service. They actually know what we’re talking about, and that’s a godsend…I think now is a good time, talking to people who have reform in mind and actually want the economy to grow and want banks to be better able to lend, to say: `Can we remove some of these deadweight costs and can we get banks to be more efficient and more customer friendly?’
CA: Bank trade groups haven’t shied away from suing regulators in recent years. Is that an option here?
GB: It does seem like reform is in the cards currently, so that’s not really something we’re thinking about right now…We have confidence that the agencies are looking at this with a fresh eye [and] have learned from experience over the last few years…(Friday)
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Back to Court: The lawsuit, filed in a Texas federal court this week, repeated a familiar refrain. The SEC regulation was “arbitrary and capricious.” The agency “failed to engage in reasoned decision-making,” neglected to “consider and address relevant comments” and didn’t “provide good reasons for changing policy positions.”
The arguments (and choice of venue) are all too familiar to close followers of the SEC’s legal travails in recent years. Yet this latest case is landing in the lap of Paul Atkins, the new chairman who is more ideologically aligned with the business and conservative groups that have routinely taken the commission to court. Gensler may have left the building, but it seems the flurry of litigation he spurred may be here to stay.
The new challenge is aimed at the SEC’s accredited investor rule and its restrictions on who can invest in private assets. It is spearheaded by the free-market oriented Investor Choice Advocates Network, an organization that couldn’t have been happier when Atkins took over. Still, that didn’t stop the non-profit law firm from turning to the same successful playbook that was used to overturn a number of Gensler’s high-profile regulations.
“We used as a model the other recent challenges of SEC rules,” says Nick Morgan, ICAN’s founder and president. “This is a pretty well-established path.” (So well trodden, in fact, that the accredited investor case is being heard by the same judge who vacated the Democratic chair’s dealer rule last year.)
Morgan is representing two clients: Emily Kapszukiewicz, an executive who works in the healthcare industry, and a venture capital company called Healthcare Shares. Kapszukiewicz wanted to invest in one of the firms’ funds, but was prohibited because her net worth was about $850,000 – just under the $1 million that the SEC regulation requires. She also failed to meet another of the rule’s tests because her annual income over the last two years was below $200,000.
The lawsuit contends that the regulation “uses wealth as a proxy for sophistication without sufficient justification,” in violation of the Administrative Procedure Act. Kapszukiewicz, the complaint notes, has a master of science degree in applied economics and “extensive” experience working in the same sector where she wants to invest.
In an unusual twist…(Thursday)
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Holding Fire: As the Senate gears up to pass a crypto market structure bill, the bank lobby is pushing lawmakers to close what it says is a gaping loophole in the stablecoin legislation signed into law several months ago. The campaign, still in its early stages, has also provoked pointed questions about the industry’s strategy for taking on digital upstarts: Why is one of the more powerful forces in Washington apparently fighting the last war?
The belated maneuvering has put a spotlight on what was, by most accounts, banks’ unified decision not to firmly oppose the GENIUS Act. That call was made despite worries that stablecoins could threaten lenders by draining their deposits. And the fear wasn’t just speculative: Even before the bill passed, companies like Coinbase had begun offering “rewards” to lure customers to park their cash in tokens rather than checking or savings accounts.
The new law only partially neutralized the threat, which was fine with the crypto crowd. But surprisingly, banks didn’t make a big stink.
Sources on multiple sides of the issue offered several reasons for the tepid pushback. One is that lenders, especially the largest ones, don’t see the tokens as a major threat – in fact, many are moving into the business themselves. More important, though, was a bit of realpolitik. Executives were simply unwilling to oppose Republican leaders who saw the bill as must-pass. For a highly regulated industry with a long list of Washington priorities, outright opposition could have big reverberations.
And that point, several sources say, was driven home directly in a March meeting with a top staffer to Senate Banking Chairman Tim Scott. The gist of the message, at least to some: if banks don’t play nice, the GENIUS Act could very well end up including a provision targeting interchange fees – an enormous source of revenue produced by debit and credit card transactions.
On the video call – one of many that committee staffers held with lobbyists around the bill’s Senate markup – staff director Catherine Fuchs asked the assembled trade group representatives asked the assembled trade group representatives to take a proactive approach, sources say. She also emphasized the need to keep extraneous measures out of the bill, specifically mentioning the Credit Card Competition Act. The merchant-friendly legislation from Sens. Richard Durbin and Roger Marshall seeks to reduce swipe fees and is hotly opposed by banks.
While there were differing opinions, several sources took the reference as a thinly veiled ultimatum: Go hard against the stablecoin bill and face the elevated risk of the credit card legislation being added. A committee spokesperson, however, disputed that characterization.…(Monday)
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