January 2017 Newsletters

Quarterly Legislative Update


Fintech: Foe or Frenemy To Banks?


Quarterly Legislative Update

This is the last quarter for the 114th Congress, so not much is happening in the lame duck session. Many of the bills introduced in the last year have died with the new congress being sworn in. Below are some highlights on legislative action in the last quarter:

H.R. 6392: Systematic Risk Designation Improvement
Amends the Dodd-Frank Act to specify when bank holding companies may be subject to certain enhanced supervision in addition to some other select purposes. Under the current rule, the Financial Stability Oversight Council’s (FSOC) procedure automatically subjects bank holding companies with total consolidated assets of $50 billion or more to enhanced supervision and prudential standards. The bill amends the provision to allow the FSOC to subject a bank holding company to enhanced supervision and prudential standards if the FSOC makes a final determination that the material financial distress at the holding company could threaten the financial stability of the United States.

In plain English, it removes the hard $50 billion asset threshold for designated a holding company as a GSIB, “Global Systematically Important Bank,” and gives the FSOC board more discretion on which financial institutions should be labeled as such.

The bill also amends the Federal Reserve Board’s authority over bank holding company acquisitions restrictions from the current $50 billion threshold to institutions subject to the FSOC’s designation.

Community Bank Impact: Low-to-Medium (primarily impacts larger holding companies).
Passed the House on December 1, 2016. Sponsored by Blain Luetkemeyer (R), Representative for Missouri’s 3rd congressional district and sponsored by Bill Posey (R), Representative for Florida’s 8th congressional district.

S. 3404: A bill to amend the Federal Deposit Insurance Act to require the appropriate Federal banking agencies to treat certain municipal obligations as level 2B liquid assets, and for other purposes.
Fairly obvious from the title; the bill would change the treatment of certain municipal obligations held by financial institutions as level 2B liquid assets. This will impact the liquidity coverage ratio (LCR) for the bank. Currently, municipal are not considered a High Quality Liquid Asset (HQLA), and this bill would change that so banks can include municipal obligations in the LCR ratio. Note that the LCR rule only applies to all banking institutions with $10 million or more in on-balance sheet foreign exposure and subsidiary depository institutions with $10 billion or more in assets. Additionally, the ratio applies to all banking institutions with $250 billion or more in total consolidated assets. In other words, this helps the big banks out with their LCR coverage.

Community Bank Impact: Low
Introduced on September 27, 2016 and sponsored by Mike Rounds (R),  Junior Senator from South Dakota.

H.R. 2726: Apollo 50th Anniversary Commemorative Coin Act
Directs the Department of the Treasury to mint and issue gold, silver, half-dollar clad, and proof silver coins in recognition of the 50th anniversary of the first moon landing. The surcharge for the coins will be $35 for gold coins, $10 for silver, $5 for half-dollar clad, and $50 for proof silver coins. Look for news from the US Mint if your bank offers gold and silver coins to customers. You can also direct interested customers to contact the mint directly at www.usmint.gov

Community Bank Impact: Very Low
Enacted on December 16, 2016.

Lastly, one bill that hasn’t had movement in the last quarter but banks should keep an eye on going forward is the Financial CHOICE Act. The bill has stalled over the last couple of years, but the bill is expected to come back to life given the new administration and Republican control of both the house and senate.  The bill aims to repeal, amend and replace much of Dodd-Frank and Basel III. The executive summary can be found here: http://financialservices.house.gov/uploadedfiles/financial_choice_act-_executive_summary.pdf

For questions regarding this article, you can contact us here at info@compliancealliance.com – and click on The Compliance Minute to catch up with our new consumer and regulatory compliance video series.

Fintech: Foe or Frenemy To Banks?

Banking has historically been an industry that is one of the most resistant to disruption by technology. However, with the OCC’s recent announcement that their agency will move forward in considering applications from financial technologies (fintech) companies to become special purpose national banks, they have become a hot topic of conversation with the beginning of the New Year. While the rapidly growing fintech market may be viewed as a competitive threat to traditional banks and financial services, it may also represent a profound opportunity.

Fintech firms have moved into direct competition with banks for loans, payment products, investment management and other services. In comparison to traditional banks, fintechs have generally demonstrated their ability to innovate in more creative ways. For example, fintech firms have developed loan origination platforms that pull information directly from customer tax records and other financial service providers, making the process faster, less burdensome and usually cheaper than the traditional loan process in banks. Generally, it is harder for banks to accomplish such advancements because their systems, processes and culture are bound by tradition and regulation.

On the other hand, banks have their own built-in advantages in strong balance sheet capacity and funding sources, established global payment networks, well-developed brands and stable capital bases. The mere fact that banks have been around for a very, very long time is one thing that fintech firms just cannot compete with. Another advantage that banks have over fintech firms is their infrastructure for customer service i.e. the ability for customers to speak to a real person. The fundamental principle of face-to-face customer service leaves a huge gap in the data that is available to fintech firms. Without this intel, fintech firms will likely continue to lag behind banks in being able to identify customers that may be ready for new products or services to expand their market or to mitigate and underwrite risk in innovative ways.

So the main question is this: Can these foes become frenemies? There is a solid argument that fintechs and banks could mutually benefit from partnership agreements or even acquisitions. Each could capitalize on their respective advantages and capabilities in order to serve their own customers better, improve risk management systems and grow market share. However, the glaring challenge for these partnership arrangements between fintechs and banks is the fact that each has substantially different risk tolerances. Since private equity and other investors help fund many fintech firms, they have higher risk tolerances than banks. But partnerships where fintech firms underwrite to a bank’s standards can receive the benefit of more stable, cheaper funding. This sense of stability from banks can be particularly valuable during periods of market and/or credit uncertainty, when private equity firms pull back from the market. Ultimately, these two financial players could combine their unique strengths in order to create more value than the individual firms could produce on their own.

For questions regarding this article, you can contact us here at info@compliancealliance.com  – and to catch up with our new Compliance Minute consumer and regulatory compliance video series click here.