Talking Big Banks and Basel; Yellen's Plea for FSOC; Fintechs Fear Regulatory Onslaught
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The news was brisk this week. Lawmakers were looking to get out of town, but the House Financial Services Committee still found time to haul all five SEC commissioners up for a hearing. No surprise, the focus was Chair Gary Gensler’s agenda. The banking agencies, meanwhile, were struggling over the release of a scaled-back Basel endgame plan. We dug into the stalemate.
The Treasury secretary used a high-profile speech to offer a defense of the Financial Stability Oversight Council — and a warning about what might happen if Donald Trump retakes the White House. We also looked at some of the latest developments in bank regulation that are causing heartburn for financial technology firms. For our Friday interview, we spoke with the Washington point man for the biggest bank CEOs.
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Friday Q and A: During a recent talk at Georgetown University, Jamie Dimon poked at the commonplace notion that big banks are an all-powerful force in the nation’s capital. “Our lobbying efforts are teeny weeny,” he maintained, especially when compared to unions and other interest groups “with the biggest buildings next to” the White House. “I think there's 17,000 lobbying groups in Washington D.C.,” the JPMorgan Chase CEO said. “The banks have 10 or something.”
Dimon himself is a member of one of those, the Financial Services Forum (which, truth be told, is located a few blocks away from the White House). It’s a unique association, representing only the chief executives of the largest U.S. banks. The lenders run different businesses, but are bound together by their designation as “global systemically important banks,” or G-SIBs.
The forum has at times been lampooned as a D.C. social club for Wall Street’s most prominent executives, but during the Biden administration the coffee klatch has had a lot to talk about. Their firms, which along with JPMorgan include Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, State Street and Bank of New York Mellon, are the prime target of the heavily contested Basel endgame. And the capital rule is just one part of a regime involving liquidity requirements, stress tests, living wills and more that regulators have been looking to bulk up.
With Basel in the news yet again, we sat down this week with forum President Kevin Fromer, a former top congressional staffer who also ran the Treasury Department’s legislative affairs office during the 2008 financial crisis. After his time in government, Fromer worked in senior roles at HSBC and Legg Mason. Read on for his thoughts on the current state of the capital plan, how big banks are trying to bolster their image with policy makers and what it's like working for the titans of finance. What follows is our (lightly edited and condensed) conversation.
Capitol Account: Why is there a trade association for the heads of the eight largest U.S. banks?
Kevin Fromer: There was a need for an organization that was focused on their particular issues, concerns and image in Washington…It’s an interesting organization because the institutions are all different, there's diversity of activities and businesses across the institutions. And what they have in common is this designation by an international body.
CA: Most lobbying groups are for companies, what’s it like to represent the CEOs themselves?
KF: It's fruitful…They are all veterans of the industry. They've been either inside their institutions or similar institutions for quite some time. They have great experience as risk managers and as leaders…They bring that perspective.
CA: They obviously have a lot on their plates. How much attention do they pay to regulation?
KF: They engage on these [issues] with their management on a regular basis, and they engage with their supervisors and regulators on a regular basis. That is the nature of operating as a highly regulated institution in the United States. So they're quite familiar, and opinionated at times, about specific types of regulation.
CA: Your members have big personalities and views that span the political spectrum. How does that work when it comes to your efforts in Washington?
KF: The focus is on engaging with government such as it is. It's not a question of whether we're going to engage with one party or the other…These institutions have an intimate relationship with government. So while party control affects policy and personnel…I think the attitude of the CEOs is to engage energetically with the principals, regardless of party identification.
CA: How do they feel about the Biden regulators?
KF: I'll speak for the forum. We believe that, depending on the issue, the agenda has been broadly aggressive – for reasons that we don't always understand…There have been policies and proposals that…challenged our understanding of the work that our institutions are doing, and the way that they deal with their customers.
CA: That sounds like something you’ve said about the Basel endgame capital rule. Is that the forum’s top policy priority?
KF: It's been a huge focus for us. And I would say, we've treated it not just as an arcane bank regulatory matter, but as a matter of significant public policy, given the scope of the proposal here in the U.S. in particular.
CA: Bank capital isn’t an issue that often rises to that level.
KF: Basel III was, and is, a very technical set of changes. The ultimate objective was to even out the way certain assets are measured for purposes of their riskiness. And more broadly, from a global standpoint, to get some of the other jurisdictions up to the capital levels and requirements that we have here in the United States, which are greater than the other jurisdictions.
CA: That does sound boring. What happened?
KF: It became, for reasons that we don't understand, much more of an effort to raise overall capital.
CA: After the regional banking crisis hit last year, the Fed chairman, the Treasury secretary and other officials were all publicly emphasizing how well-capitalized the system was. What was your reaction when the Basel plan came out a few months later?
KF: There was cognitive dissonance between…the performance of the largest banks through the pandemic, and then most recently in March of 2023…Compare that with a 20 to 25 percent increase in capital requirements. It doesn't add up.
CA: The proposal also drew a lot of pushback, and not just from banks.
KF: This issue has been interesting in the sense that the commentary was so broad. The other parts of the economy, if you will, that decided to file comments. And bipartisan concerns came from the Congress. The high percentage of comments…were either against the proposal entirely or against certain parts…That was a significant statement [and] unusual to see in the formation of capital rules…(Friday)
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Yellen Lays Down a Marker: The Financial Stability Oversight Council has always been an odd creature. Set up 14 years ago in the wake of the financial crisis, its members include the Treasury secretary and the head of the Federal Reserve – some of the most powerful people in government. Yet its influence is hard to quantify.
The group confers in secret, save for heavily-lawyered public pronouncements and a handful of scripted public meetings. When it does speak out about risks to the financial system, there’s a persistent question: What can FSOC actually do about it? (Toward that end, the first head of the council, Timothy Geithner, used to privately refer to it as a book club. He was perhaps half-joking, sources recall.)
On Thursday, the fourth Treasury Secretary to lead the group, Janet Yellen, offered a public answer to its critics – and, for good measure, took on what she sees as the neutering of the uber-regulatory body during the Trump years. “The council was severely weakened during the prior administration,” she stressed. “So, we rebuilt FSOC.”
Yellen’s speech, delivered at the New York Fed’s U.S. Treasury Market Conference, served as both a closing argument for the Biden administration’s financial regulatory efforts and as a sort of pre-buttal to a potential second Trump term – which she clearly anticipates would herald a return of a feckless FSOC. The council, Yellen argued, fills a crucial gap in spotting potential risks, and it deserves attention and resources.
FSOC was created in the 2010 Dodd-Frank law, and its members include all the main financial regulators. It has two primary powers: Designating “systemically important” financial companies like insurers, hedge funds and private equity firms for stricter, bank-like regulation, and the much more amorphous bully pulpit. Wall Street, not surprisingly, is focused on – and extremely worried about – the former.
As it geared up in the Obama administration, the council moved to flex its muscles, tagging three insurance companies as SIFIs: AIG, Prudential and MetLife. It flirted with more designations, reviewing Berkshire Hathaway, BlackRock and Fidelity, but never pulled the trigger.
Those early actions had limited durability. A federal judge threw out the MetLife designation in 2016, and the AIG and Prudential findings were rescinded soon after (though in AIG’s case, the company had been massively restructured). No firm has been singled out since.
And when the Trump administration took over in 2016, the council’s new leader, Steven Mnuchin, soon shifted the focus to deregulation.
In Yellen’s telling, FSOC was effectively allowed to wither on the vine:
“When I took office, the number of council staff had been cut to single digits. The council’s analysis team at Treasury, which monitors systemic risks, had been eliminated. The infrastructure supporting interagency engagement and coordination had been significantly scaled back. Put simply, we were without crucial tools to identify and help respond to risks to financial stability. This meant we faced an increased likelihood that risks would materialize into negative impacts on American households and businesses.”
After staffing up, the Yellen-led FSOC sought to use its convening authority to get regulators working together. Her list of accomplishments starts with Treasury market reforms, including boosting central clearing and making more market data public. But Yellen also underscored that the FSOC was useful in a long list of areas: non-bank mortgage lending, stablecoins and digital assets, hedge fund leverage, private credit and “cross-cutting risks” like cybersecurity, climate change and artificial intelligence.
Yellen argued that the Biden administration has made progress in each of these areas, though she acknowledged it may be hard to measure. When it comes to keeping the financial system safe, she said, “successes can be hard to fully appreciate because they often entail having avoided counterfactuals.”…(Thursday)
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Fintech Fears: President Joe Biden’s financial overseers have taken a lot of heat over their inflexible stance toward digital assets. But a series of recent rule proposals and enforcement activity aimed at banks that partner with fintech companies is starting to stoke unrest in a different part of the technology world – and deepening a perception in some quarters that the administration is using regulation to stifle innovation.
Unlike the crypto complaints, which are mainly directed at the SEC, the latest ire is trained on the banking agencies and the CFPB. The leaders of the effort – Martin Gruenberg, Rohit Chopra and Michael Hsu – argue that they are moving decisively to close gaps in consumer protections after some high-profile fintech collapses. Their critics see something else: a push to keep banks out of the business of teaming up with start-ups to offer novel consumer products.
The actions “suggest a regulatory system that is deeply uncomfortable with the pace of change,” says Jonah Crane, who served in the Obama Treasury Department and is now partner at financial services advisory firm Klaros Group. Borrowing a phrase from the late conservative intellectual William F. Buckley Jr., Crane describes the regulators as “standing athwart the transformation underway in banking – and shouting, ‘Stop.’”
The Biden appointees say their goal is simply to create a level playing field. A lot of fintech firms “want all the benefits of being a bank, but often to eschew all of the responsibilities,” Chopra emphasized at last week’s FDIC board meeting, where directors issued a proposal to more closely police bank-fintech deposit arrangements. The CFPB chief likened the growing trend of pair-ups to “rent-a-bank” schemes that payday lenders have used to try to get around state usury laws.
The issue is just one piece of a broader election-year debate about the proper government approach to new technologies. The Biden administration’s policies on crypto, artificial intelligence, mergers and taxes have already driven at least a few Silicon Valley leaders into the Trump camp. Kamala Harris, in turn, has been dropping hints that she would pursue a different tack (more on that below).
In financial services, the regulatory pincer has targeted what’s known as “banking as a service.” It’s an idea that grew, in part, from a simple reality: More innovation is happening outside the banking sector than within it. As start-ups push into offerings traditionally handled by banks, such as loans or deposit accounts, they often find it’s easier to partner with a bank than become one.
For banks, especially small ones, the arrangements have offered the chance at bringing on new customers and revenue with relatively little effort – at least at first. The current crackdown, however, has changed the calculus. Jason Mikula, head of industry at fintech firm Taktile and author of a newsletter on the industry, counts at least ten enforcement actions since 2021 targeting banks that partner with fintechs.
The result, perhaps intended, is that fintech firms have fewer banks to hook up with. In one example, Blue Ridge Bank received two OCC enforcement actions in August 2022 and January 2024, taking it to task for lax anti-money laundering controls and failing to manage risks from third-party relationships. (The Virginia lender, not surprisingly, has pulled back its fintech business to focus on what it calls “fundamental strengths.”)
Nor is Blue Ridge alone. Just last week, Martin Birmingham, CEO of New York state-based Five Star Bank, announced a retreat from banking-as-a-service. “The regulatory and risk-management goalposts keep moving for U.S. financial institutions in this business,” he said in a statement.
In addition to the pointed questions from their supervisors, bank executives are also reacting to rulemaking…(Monday)
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