Community banks win some, lose some

Mar 31, 2023

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The good news for community bankers? The White House heard their cries.

President Joe Biden told regulators on Thursday to get tough on regional lenders after the failure of Silicon Valley Bank set off two weeks of chaos in the financial sector. But while the White House is eager to roll back Trump-era rule changes that benefited those institutions, it’s not so keen on asking community banks to pay for the clean-up.

Treasury Secretary Janet Yellen and FDIC Chair Martin Gruenberg have already signaled that they were open to sparing smaller financial institutions from new assessments to plug a deposit insurance fund that’s projected to take a $23 billion hit from backstopping uninsured deposits at SVB and Signature Bank.

“Community banks play a really important role in a lot of communities, we think it’s important to preserve that model,” one White House official said, according to our Victoria Guida. “They were not to blame for the actions that resulted in the interventions.”

The Independent Community Bankers of America engaged in a full-court press to convince policymakers that their members would face undue harm from such a fee, a topic that came up repeatedly in recent congressional hearings. In a statement, ICBA President and CEO Rebeca Romero Rainey thanked the White House for its stance and said she looked forward to working with Gruenberg “to ensure Main Street community banks do not bear any financial responsibility for losses caused by larger and riskier entities.”

The bad news? CFPB Director Rohit Chopra wasn’t so sympathetic.

The powerful consumer watchdog dealt a blow to the ICBA when he finalized a new rule that will force banks – along with credit unions and online lenders – to collect and submit racial and demographic data on small business loan applicants. The long-awaited rule, which was required under the landmark 2010 Dodd-Frank law, will power a database that will help the CFPB and other banking regulators “detect and deter lending discrimination,” Chopra said in a speech.

Two hours later, Rainey blasted the consumer bureau for having “dramatically exceeded the clear letter of the law” and repeated her association’s earlier call to halt the rule’s effective date until the Supreme Court rules on the constitutionality of the bureau’s funding mechanism. A CFPB official shrugged off potential litigation threats to the rule in a call with reporters early Thursday afternoon.

Nevertheless, top Republicans are ready to heed those calls. House Financial Services Chair Patrick McHenry(R-N.C.) vowed to explore “all options—including the Congressional Review Act—to ensure it does not take effect.”

IT’S FRIDAY — In a devastating turn of events, your host’s San Francisco Giants were vanquished by his editor’s New York Yankees on Opening Day. More importantly, we made it to Friday morning without a bank failure or forced merger. Kudos all around. Send tips, suggestions and gossip to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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Driving The Day

The Commerce Department will release February PCE data at 8:30 a.m. … New York Fed President John Williams speaks at 3:05 p.m. … The Federal Reserve will release bank deposit data at 4:15 p.m. … Fed Gov. Lisa Cook will deliver remarks at the Midwest Economics Association’s annual meeting in Cleveland at 5:45 p.m. … Fed Gov. Christopher Waller will give a speech on the Phillips Curve in San Francisco at 10 p.m.

TRUMP INDICTED — Our Erica Orden and Meridith McGraw “A New York grand jury indicted former President Donald Trump on Thursday over his alleged role in a scheme to pay hush money to a porn actress during the 2016 presidential campaign.”

And DeSantis courts New York — Our Sally Goldenberg: “In meetings with other wealthy businessmen, DeSantis has been even more explicit, portraying himself as an obvious choice for anyone frustrated by former president Donald Trump’s legal troubles and antics.”

PCE — January’s hotter-than-expected inflation numbers helped convince Federal Reserve Chair Jerome Powell & co. to hike interest rates by a quarter of a percentage point earlier this month even amid fears of banking sector contagion. As those fears abate, don’t expect the Fed chair to to turn into a dove anytime soon.

“Having worked with Chairman Powell, I’m very confident in the knowledge that he does not want to be Paul Volcker,” Kroll’s Chief Policy Strategist Chris Campbell, a former assistant Treasury secretary during the Trump administration, told MM

“A stop-and-start approach from the Federal Reserve on interest rates — or tightening and loosening at a time when there is not a clear path to a projection to their 2 percent target — sends a very weird set of signals to the market that can be very, very challenging,” he added.

The Commerce Department will release February inflation data today. The median forecast is for core inflation to land at 4.7 percent year-over-year — matching the January figure — and for monthly core inflation to land at 0.4 percent.

GO INSIDE THE 2023 MILKEN INSTITUTE GLOBAL CONFERENCE: POLITICO is proud to partner with the Milken Institute to produce a special edition "Global Insider" newsletter featuring exclusive coverage, insider nuggets and unparalleled insights from the 2023 Global Conference, which will convene leaders in health, finance, politics, philanthropy and entertainment from April 30-May 3. This year’s theme, Advancing a Thriving World, will challenge and inspire attendees to lean into building an optimistic coalition capable of tackling the issues and inequities we collectively face. Don’t miss a thing — subscribe today for a front row seat.

Talking Points

The Federal Reserve said it would shortly take comments on possible changes to an arcane capital requirement for big banks in early 2021. In early 2023, with Wall Street behemoths flooded with tens of billions of dollars in new deposits amid uncertainty at regional institutions, some big banks are wondering just how “shortly” the central bank might want to hear what they have to say.

That capital requirement, known as supplementary leverage ratio, makes it more expensive for large institutions to use customer deposits to buy and hold Treasury securities. Heavyweight commercial banks like JPMorgan Chase are key players in the Treasury market. And those institutions – along with their representatives in Washington — previously warned that the expiration of Covid-era emergency measures could make it harder for them to take deposits, which could add stress U.S. government debt markets.

That was before the failure of Silicon Valley Bank and Signature Bank triggered large inflows of deposits to large banks.

“In an environment where you have banks that are close to being bound by a risk-blind capital requirement – which has nothing to do with financial risk or systemic risk – that could limit the flexibility of the banking system in a way that's probably not helpful for the economy as a whole,” said Financial Services Forum Chief Economist and Head of Policy Research Sean Campbell in an interview. The Forum represents the executives of the largest U.S. banks.

But banks had ratios that were hovering less than a percentage point above the minimum ratio at the end of last year. While the recent influx of deposits across large banks is unlikely to knock them below that floor, “the market ramifications could be significant,” Campbell said.

In the markets

THE BIG APPLE’S HOLLOW CORE — Bloomberg’s Laura Nahmias:“New York’s mayor wants JPMorgan Chase & Co., Goldman Sachs Group Inc. and other major employers to come together and agree on ways to force more to return to the office as the city’s economy struggles to recover from the pandemic and new challenges.”

— Bloomberg’s Natalie Wong: “Manhattan’s office-vacancy rate is at a record high as new developments add even more space to the struggling market.”

— WSJ’s Alyssa Lukpat: “The average Wall Street bonus fell 26% last year, the biggest percentage drop since the financial crisis, as a slump in deal making cut into bankers’ compensation.”

LOUD LIMITED PARTNER — Bloomberg’s Dawn Lim: “New York State Comptroller Thomas DiNapoli pressed Blackstone Inc. for answers on how it plans to address what he called ‘abhorrent’ child labor violations at a cleaning contractor owned by the private equity firm.”

QUIETER LIMITED PARTNERS — NYT’s Jonathan Swan, Kate Kelly, Maggie Haberman and Mark Mazzetti: “Wealth funds in the United Arab Emirates and Qatar have invested hundreds of millions of dollars with Jared Kushner’s private equity firm, according to people with knowledge of the transactions.”

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Crypto

SOMEHOW, THIS WAS A LESS NEWSY INDICTMENT — Our Wesley Parnell: “Sam Bankman-Fried, the disgraced founder of the cryptocurrency platform FTX, pleaded not guilty on Thursday to additional charges alleging that he committed bank fraud and bribed Chinese officials.”

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