KT Fintech Blog

The KT Fintech Blog provides insights into how the emergence of fintech is fundamentally changing virtually every aspect of the financial services landscape and how traditional businesses navigate this rapidly evolving industry.

Category: Banking

Posted on Thursday, November 30 2017 at 12:00 pm by
Federal Reserve Vice Chairman for Supervision Speaks About “Prudent Innovation in the Payment System”

Written by Eamonn K. Moran

Earlier today, Federal Reserve Board Vice Chairman for Supervision Randal Quarles delivered remarks at the 2017 Financial Stability and Fintech Conference sponsored by the Federal Reserve Bank of Cleveland, the Office of Financial Research, and the University of Maryland’s Robert H. Smith School of Business, Washington, D.C. His remarks focused on financial stability and fintech, along with financial innovation.

Quarles observed how new technologies have raised productivity and living standards and contributed to economic growth, along with bringing new conveniences to our lives. He noted that, “[n]ot surprisingly, both the banking industry and technology firms have also been seeking innovations in financial services that mirror and complement changes that have been made in other industries.” Such financial innovation includes changes to consumer lending, financial advice, and retail payments.

He noted that in his new role as vice chairman for supervision at the Federal Reserve, he views innovation “as something that can and should be fostered, but of course [he] must also scrutinize these innovations from a different perspective. That is to say, it is appropriate not only to evaluate the potential of innovations to improve on existing services, but also to judge their ramifications for the safety and soundness of the institutions we supervise and for financial stability.”

Quarles concentrated his remarks on the U.S. payment system, including the “necessary trust and confidence that the system requires, the tension between the need for financial stability and the need to innovate, and the challenges that digital currencies, in particular, present relative to the current system.” In his view, these considerations “highlight the need for a prudent approach to innovation in payment systems.” With respect to payment system innovation, he commented that “we should recognize that there can be a tension between the need for financial stability in the overall payment system and the need to innovate to keep up with the demands of modern technology and lifestyles,” but that this tension is “not necessarily troubling” since innovation does involve some amount of risk. He believes that this tension can be addressed by “balancing the benefits of innovation with the safe and reliable operation of systems and critical activities.” Noting that payment systems present unique challenges to managing the potential tension between financial innovation and stability, Quarles commented that the “essential problem is how to achieve scale and manage financial and technical risk at the same time,” which means that innovation in payment systems can take longer than in other industries.

Regarding private digital currencies, Quarles believes that the financial industry is increasingly recognizing the need to separate the concept of digital currencies from the new technologies – such as distributed ledgers – that the have been employed to transfer assets. He noted that the industry is taking a cautious approach to using new technologies in “limited production settings,” which “appears to reflect the weight of responsibility the financial industry bears for protecting both their customers and their reputations.” Because the “currency” or asset at the core of some digital currency systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in lending cases, is not the liability of any institution, he observed that the treatment and classification of this asset is complicated, especially as it relates to financial stability issues if more wide-scale usage occurs.

Quarles believes that the consideration of a central-bank-issued digital currency to the general public “would require extensive reviews and consultations about legal issues, as well as a long list of risk issues, including the potential deployment of unproven technology, money laundering, cybersecurity, and privacy,” among other issues. That said, he is supportive of continued research into digital currency issues, including highly liquid and secure limited-purpose digital currencies for use as a settlement asset for wholesale payment systems.

In his view, the alternative to privately issued digital currency in the United States is not necessarily a publicly issued digital currency. Rather, Quarles views the near-term alternative as building on the “trusted foundations of the existing payment system” and working to “improve private-sector payment services.” The focus of this appears to be enhancing and improving the banking system’s services. He noted that what the United States currently lacks is “the sort of ubiquitous, real-time payment system that would allow banks and their customers to make transfers and settlements of funds across the banking system instantly, conveniently, and securely all the time.” In closing, Quarles is optimistic that there is potential for a number of these desirable innovations to be offered using a variety of existing and new technologies without posing financial stability risk.

Posted on Tuesday, November 28 2017 at 9:00 am by
Showdown Over CFPB Leadership Continues

Written by Eamonn Moran

In an interesting turn of events over Thanksgiving weekend, outgoing Consumer Financial Protection Bureau (CFPB) Director Richard Cordray promoted CFPB Chief of Staff Leandra English to the position of CFPB deputy director on November 24, 2017. This move was intended to allow Ms. English to take advantage of a provision of the Dodd-Frank Act that allows the deputy director of the CFPB to “serve as acting Director in the absence or unavailability of the Director.” The deputy director is appointed by the director, and does not need Senate confirmation. Later on Friday, President Trump announced that he is designating Office of Management and Budget (OMB) Director Mick Mulvaney as acting director of the CFPB, a position he would serve in until a permanent director is nominated and confirmed.

Late Sunday evening, Deputy Director English filed a lawsuit in the U.S. District Court for the District of Columbia seeking to halt President Trump’s appointment of Mulvaney, who is also named in the lawsuit. The Justice Department was expecting to file an order last night responding to the lawsuit. Judge Timothy Kelly, a Trump-appointed judge who was confirmed by the Senate in September, said he would review the Justice Department’s filing and decide on the next steps in the case after that.

The core legal question is whether the President has the authority under the Federal Vacancies Reform Act (FVRA) to designate Mulvaney as the acting director of the CFPB following the resignation of Cordray as of midnight, Friday, November 24, 2017, even if the deputy director otherwise could act under 12 U.S.C. § 5491 (b)(5) [the Dodd-Frank Act]. Mary McLeod, the CFPB’s General Counsel, issued a written memo to CFPB staff on Saturday confirming her oral advice to the CFPB’s senior leadership team that the answer is “yes.” She advised all CFPB personnel “to act consistently with the understanding that Director Mulvaney is the Acting Director of the CFPB.” Her reasoning was based on statutory language, legislative history, precedent from the Office of Legal Counsel at the Justice Department, and case law, which in her view, “all point to the conclusion that the President may use the Vacancies Reform Act to designate an acting official, even when there is a succession statute under which another official may serve as acting.” As General Counsel for the CFPB, it is McLeod’s legal opinion “that the President possesses the authority to designate an Acting Director for the Bureau under the FVRA, notwithstanding § 5491(b)(5).” The Justice Department’s Office of Legal Counsel supports this position as well, noting that the President “may designate an Acting Director of the CFPB under 5 U.S.C. § 3345 (a)(2) or (3), because both the [Federal] Vacancies Reform Act and the office-specific statute are available to fill a vacancy in that office on an acting basis.”

Mulvaney addressed reporters yesterday afternoon, where he announced a 30-day hiring freeze effective immediately and a 30-day “immediate freeze on any new rules, regulations and guidance.” This could stall, at least temporarily, the CFPB’s debt collection rulemaking, among other projects.

Both Mulvaney and English were present at the CFPB yesterday morning. According to the White House, Mulvaney was given full access to the CFPB director’s office with “full cooperation” from its staff. However, both English and Mulvaney issued dueling emails to staff yesterday morning, and both emails were signed “acting director.” Mulvaney’s email asked CFPB staff to disregard English’s instructions and to inform the CFPB’s general counsel of any communications from her related to Bureau duties. A protest is planned at the CFPB today, and Senator Elizabeth Warren (D-MA) is expected to make remarks. In what appears to be somewhat of an internal resolution, the CFPB’s website currently has Mulvaney listed as Acting Director.

Stay tuned for further updates as additional developments occur!

Posted on Wednesday, November 8 2017 at 9:00 am by
Acting Comptroller Explores the Separation of Banking and Commerce

Written By Eamonn Moran

On November 8, Acting Comptroller of the Currency Keith A. Noreika explored how the separation of banking and commerce evolved in the United States and called for a broader discussion of whether the separation continues to serve the best interest of the nation’s banking system and economy today. He provided these remarks at The Clearing House Annual Conference in New York City.

In response to the Great Depression, Noreika observed how Congress enacted the Glass-Steagall Act and the Banking Act of 1933, which further separated commercial and investment banking. While he noted that “popular history tells us Glass-Steagall was enacted to eliminate a persistent problem in banking that contributed to the Great Depression,” some more recent research shows, however, that banks that combined deposit and investment banking performed better under stress during the depression than deposit banks without affiliates, and they issued higher quality securities than independent investment banks. Noting that rules and laws “are enacted by people and affected by their personal interests at the time,” Noreika stated that “we must question whether the reasons for decisions made decades ago continue to support the public interest today.”

Noreika also briefly reviewed more recent limits imposed to separate banking from commerce and investing. Though structured differently, Noreika highlighted how the Bank Holding Company Act and the Gramm-Leach-Bliley Act have both allowed certain grandfathered companies to mix banking and commerce by permitting the affiliation of banks and commercial enterprises through a holding company structure. As a result, he observed, “these laws continue to give grandfathered companies advantages not allowed to others.” Furthermore, he pointed to other provisions of federal law, such as section 4(o) of the Bank Holding Company Act, which provide similar exceptions for some firms to mix banking and commerce more freely. “In practice, then, a general prohibition on the mixing of banking and commerce has resulted in the very sort of things the prohibition was set up to prevent: advantaging and aggrandizing a few at the expense of the many,” he stated.

Noreika suggested that a thoughtful response to these special exceptions is to look to the grandfathered companies that continued to commingle banking and commerce, and the companies that have accumulated exceptions, as a means to assess whether these companies perform better or worse than their separated kin. Such an assessment “would provide for a more informed decision on whether continuing to separate banking and commerce still makes sense,” he stated. Noreika pointed to a study of the savings and loan crisis of the 1980s and 1990s that “found no evidence suggesting that limited commingling of banking and commerce poses undue risks to the federal financial safety net.,” and also argued that the recent financial crisis demonstrated that “there is nothing inherently safer about separating banking and commerce or traditional banking and investment banking,” since both banks and commercial investment firms not regulated as banks (Bear Stearns and Lehman Brothers) faltered and contributed to the economic downturn. In his view, “[r]einstating Glass-Steagall or continuing to look for ways to separate banking and commerce even more will not make the system any safer because mixing the two did not weaken the system in the first place.”

Along with providing an historical perspective and overview of why the separation exists in the first place, Noreika focused on whether the separation has any usefulness for today’s economy.

He argued that, in smaller communities, fewer restrictions against mixing banking and commerce “could allow for greater use of local capital, and support growth and business activity locally,” while also helping smaller community banks “grow and take advantage of benefits previously only available to grandfathered companies and banks that are big and sophisticated enough to convince the Federal Reserve to grant them an exception.” Furthermore, he commented that meaningful competition could have a number of other positive effects, such as making more U.S. banks globally competitive and promoting economic opportunity and growth domestically. For banking customers, particularly those underserved by traditional banks, Noreika highlighted how increased competition could result in better banking services, greater availability, and better pricing. “If a commercial company can deliver banking services better than existing banks, we hurt consumers by making it hard for them to do so,” he stated.

While suggesting that the main takeaway from some recent studies is that mixing banking and commerce “can generate efficiencies that deliver more value to customers and can improve bank and commercial company performance with little additional risk,” Noreika cautioned that regulators need to closely watch markets to avoid too much concentration and not enough competition, and also “match any increased complexity in the institutions they oversee with added sophistication and capabilities.” He called for fresh research that looks at banking and commerce in a post-Dodd-Frank world.

We expect that these questions will spark some interesting and informative discussion, with potential ramifications for fintech companies interested in exploring bank charter opportunities or other bank partnership possibilities.