Banking News Roundup – Week of December 9
Bank earnings, moves in Washington D.C., the CFPB, cryptocurrency, M&A, and balance sheet restructuring transactions, in a five minute read.
Happy holidays, readers! This will be my last news roundup of the year. I’ll return after the first full week of January. I might drop a post or two in the “Practicals” or “Closer Looks” sections of this blog during the break, depending on how my busy schedule of holiday traffic and festive soirees unfolds. TBD.
If you have a burning question on current events that just can’t wait until 2025, feel free to find me on LinkedIn or DM me. I’m responsive to messages, and I’m happy to answer questions if I have the info you’re looking for or the bandwidth to go find it.
Earnings
Net income for the banking industry declined 8.6% in the third quarter of 2024, but the headline sounds worse than the reality. Second-quarter earnings were boosted by $10 billion in one-time gains on equity sales (largely JPMorgan’s $7.9 billion gain on the sale of its Visa Inc. shares) and a $4.9 billion gain on a divestiture. Adjusting for these one-time items, net income was actually up $8.7 billion. Community banks, in particular, saw a 6.7% increase in net income despite higher noninterest and provision expenses. Unrealized losses on securities portfolios dropped significantly from $364 billion to $149 billion. Asset quality metrics remained favorable despite continued weaknesses in credit card, auto, CRE, and multifamily housing portfolios.
Overall, the results point to good news: deposits and loans increased across the system, and banks were resilient despite some problematic asset classes. That said, the number of troubled banks rose by two, with assets tied to these banks increasing from $83.4 billion to $87 billion. There are currently 68 banks with a CAMELS composite rating of “4” or “5.”
Washington D.C.
Representative J. French Hill will become the next chair of the House Financial Services Committee. The Arkansas congressman and former bank CEO has pledged to “Make Community Banking Great Again.” In November, he outlined a broad set of principles, covering everything from how the U.S. engages in intergovernmental regulatory discussions to efforts to modernize Call Report data.
The Wall Street Journal reports that DOGE (the newly minted Department of Government Efficiency) is participating in interviews of candidates for key banking regulatory roles. One topic of discussion? Whether it’s possible to abolish the FDIC. Once you get over the shock of an assault on banking’s most sacred cow, it’s a fascinating question. Per the WSJ article, advisers have inquired whether deposit insurance could be absorbed into the Treasury Department. Fun fact: the FDIC is self-funded. Their budget is approved by the FDIC board of directors. The Department of the Treasury’s budget, however, goes through the congressional appropriations process. Another fun fact: the FDIC borrowed from the Fed at a penalty rate to fund the 2023 bank failures, rather than using the Deposit Insurance Fund (DIF), because the Treasury was reluctant to redeem the FDIC’s securities due to “sensitivities related to the debt ceiling.”
There are good reasons to consider streamlining the U.S. financial regulatory framework (the fact that it’s inexplicable to the American public is one of those reasons). But there’s a whole lot to think about before we disembowel one of the most successful pieces of financial legislation ever passed in the United States. Allen Puwalski, CIO of Cyboint Capital, has an interesting proposal that consolidates all supervisory duties under the OCC, and preserves the FDIC as a deposit insurer and, effectively, as an auditor over the OCC’s bank examinations. It’s just one alternative, but a bit more confidence inspiring than blindly hacking away at whichever regulator has most recently displeased the cryptocurrency industry.
Consumer Financial Protection Bureau (CFPB)
Speaking of disfavored financial regulators, the CFPB is working hard to make sure the hatchet falls their way first. The agency finalized its controversial rule to cap overdraft fees this week. As it stands, banks will be required to either: (a) charge a flat $5 for overdrafts, (b) set a fee equal to the amount of their costs and losses, or (c) charge whatever fee they like, but disclose the APY of the fee as if it were an interest rate on a loan. If the rule is not overturned by the incoming administration, banks will need to comply by October 1, 2025.
American Banker reports that the CFPB has been collecting information from consumers who file complaints, asking whether they requested information from their bank in an attempt to resolve the complaint themselves. Industry watchers believe that the info is being collected to pursue banks that charge fees for those information requests (e.g., copying charges, platform time, etc.). Consumer responses to these questions are not viewable in the public version of the CFPB Consumer Complaint Database, so the precise exposure is unknown, but the article warns that the agency may start pursuing enforcement actions.
CFPB Director Rohit Chopra told the Senate Banking Committee that he won’t resign when President Trump takes office, but will leave if dismissed. He also advised that the CFPB will continue to engage in rulemaking activity ahead of the inauguration.
Digital Assets (aka Cryptocurrency)
The Wall Street Journal reports on the growing conversation around “de-banking,” with the crypto industry hopeful for a reprieve under the new administration. One thing seems clear: banks aren’t jumping in just yet. The first obstacle is existing regulatory guidance, including the FDIC’s April 2022 requirement that banks provide notice if they engage in business related to cryptocurrency, and joint guidance from January 2023 warning banks that certain activities and business models might be “inconsistent with safe and sound banking practices.” Don’t be surprised if new guidance emerges shortly after the inauguration.
Multiple sources report that the New York State Department of Financial Services (NYSDFS) approved Ripple’s stablecoin, RLUSD. Ripple bills itself a digital asset infrastructure provider and is closely linked to the XRP token, which is administered by XRP Foundation. XRP is the 4th largest cryptocurrency by market capitalization, per CoinMarketCap, and it was once included on the NYSDFS Greenlist for virtual currencies. XRP was removed from the Greenlist (along with several other tokens) when the regulator changed its policies in September 2023. RLUSD will be pegged to the value of the U.S. dollar, will be fully collateralized, and aims to reach a $2 trillion market capitalization by 2028.
Mergers & Acquisitions
Rockland Trust Co., which is owned by Independent Bank Corp, will acquire Enterprise Bancorp in a $562 million cash-and-stock deal. The two Massachusetts entities will combine to form a $24.1 billion asset bank.
The Wall Street Journal reports that Berkshire Hills Bancorp and Brookline Bancorp are in negotiations to combine. Both Boston-based banks hold approximately $12 billion in assets.
Patriot National Bancorp disclosed that it engaged Performance Trust Capital Partners to advise it on its strategic options, including a potential sale. The $974 million-asset Connecticut-based bank has struggled with asset quality issues and profitability in the past couple of years, and was previously forced to call off its 2021 deal to combine with American Challenger Development Corp. due to regulatory obstacles.
Balance Sheet Restructurings
First Hawaiian sold $293 million of available-for-sale debt securities with a weighted average yield of 1.92% and a weighted average duration of 3.2 years. The proceeds were used to acquire an equal amount of debt securities with a weighted average yield of 5.01%, and a weighted average duration of 4.1 years.
Vermont-based Union Bancshares sold $38.8 million of available-for-sale debt securities, and will use the proceeds to acquire higher yielding bonds and to fund loan growth. The $1.5 billion-asset bank projects that the changes will yield 341 basis points more than the assets it divested.