Bank leaders should keep current on developments in Washington to help ensure their institutions meet compliance obligations and remain well-positioned for the future. not merely that they were approved, it’s that the analyses the agencies used were comparable to analyses used in the past — which should be the case because the statute is the same. Is there an asset threshold where regulators won’t approve a deal? I don’t know if regulators will say there is one, and they should be cautious because Congress has acted twice on this issue — first in the mid-1990s, then with Dodd-Frank. The tests were not in terms of absolute dollars, but in the percentage of nationwide deposits in the first case and nationwide liabilities in the second. I think a percentage test makes more sense. Regulators have signaled more scrutiny of bank-fintech relationships. What are they looking for? It depends on the type of fintech. Several banks have suffered significant losses from their relationships with crypto companies. When you look at the most recent release from the agencies, their attitude seems to be “unsafe at any speed.” So with regard to crypto fintechs, the message is clear: it’s a red light. With the more traditional fintechs, it’s a cautionary yellow light. The concern is that some fintechs are engaging in improper or illegal practices, particularly in the context of consumer protection. Some worry banks are a transmission vehicle for fintechs to get into questionable consumer and small-business products and services. Regulators are telling banks they’re going to hold them responsible under their vendor-management obligations if those products and services violate laws and regulations. Most analysts believe Fed Vice Chair Michael Barr is going to raise capital requirements, but they don’t know the levers he’s going to pull to do it. How do you see this playing out? I do think the Federal Reserve is going to raise the requirements. This Federal Reserve has made it clear it no longer considers capital neutrality a goal, and that suggests it won’t be met. This isn’t because capital requirements are going down, it’s because they’re going up. There are many levers to pull, and more than one will be pulled. For instance, at many large banks, the stress-test process is the most capital-constraining, and it doesn’t take much to change it. You can change the economic assumptions to assume more of a market correction, higher unemployment, or any number of economic factors. Most important are the assumptions on whole categories of loan losses. Take a category of loans that represent, say, 20% of a bank’s loan portfolio, increase the percentage losses by 25% over a time horizon, and capital requirements will increase proportionately. To listen to the full conversation, visit https://www.intrafi.com/press-insights/podcasts/. Issue 1 • 2023 17
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