In predicting hot spots for the year ahead, sometimes it’s worth seeing what was written a year ago. While some of early 2022’s concerns — COVID-related ones, perhaps — seem of their time, others surprisingly grew legs. When Banking Dive included crypto on its list last year, the paramount concern seemed how to regulate it. That may still be true. But 2022 in action turned a hypothetical risk scenario into a very real numerical nightmare for some institutions.
Another 2022 trend, regulatory developments — particularly, the “who” involved — ran its course as the Biden administration staffed up the Federal Reserve board and gave the Federal Deposit Insurance Corp. (FDIC) a full-fledged figurehead. In that regard, 2023 presents a follow-up question: Now that the regulators are in place, what about the actual regulation?
Here is a look at Banking Dive’s top trends for the year ahead.
CFPB leading on tougher penalties
Before 2022 ended, Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra made good on his promise to crack down on institutions with a track record of consumer rights abuses.
The regulator in December announced a record $3.7 billion settlement with Wells Fargo over a slew of consumer abuses related to auto loans, mortgages and deposit accounts.
Since taking the helm of the CFPB in 2021, Chopra has vowed to impose stricter penalties on repeat offenders.
“Wells Fargo’s rinse-repeat cycle of violating the law has harmed millions of American families,” Chopra said in a statement last month.
Wells’ laundry list of consumer abuses, beginning with the bank’s 2016 fake-accounts scandal, has arguably made the bank an easy first target.
But the formation of the bureau’s “repeat offender unit” likely means the CFPB in 2023 intends to ramp up efforts to rein in other large institutions with similar records.
“The Repeat Offender Unit will focus on ways to enhance the detection of repeat offenses, develop a process for rapid review and response designed to address the root cause of violations, and recommend corrective actions designed to stop recidivist behavior,” the agency wrote in a supervisory highlights report published in November. “This will include closer scrutiny of corporate compliance with orders to ensure that requirements are being met and any issues are addressed in a timely manner.”
In a March 2022 speech, Chopra called corporate recidivism a “vexing problem” facing regulators, and one that “undermines the promise of the financial sector and the entire market system.”
“We must forcefully address repeat lawbreakers to alter company behavior and ensure companies realize it is cheaper, and better for their bottom line, to obey the law than to break it,” Chopra said.
In his speech, Chopra listed JPMorgan Chase and Citi, in addition to Wells, among banks “guilty of crossing legal fault lines over and over again.”
And Wells may not be entirely out of the woods.
Chopra called the bank’s agreement to refund billions of dollars to consumers “an important initial step for accountability.”
Where are the next cuts?
In 2022, it seemed mortgage lending — especially if you’re Wells Fargo, JPMorgan Chase or Citi — bore more of the right-sizing burden than other banking sectors. The justification, from a bottom-line perspective, appeared easy: The Federal Reserve steadily jacked interest rates, dwindling the demand for homebuying and refinancing.
As banks brace for a potential recession in 2023, which sectors are next at high risk for reduction?
One strategy could be to watch early movers for clues. Goldman Sachs is set to launch a cull this week encompassing 3,200 employees. The cuts come too late to be reflected in the bank’s fourth-quarter results, to be released Jan. 17. But the numbers may surface next month when Goldman holds its investor day.
A better bet, in the short term, maybe to look at Morgan Stanley, which let go of 1,600 employees in December, or Credit Suisse, which was set to cut loose 2,700 last quarter. Credit Suisse’s report comes Feb. 9.
Like Goldman, Morgan Stanley also releases its fourth-quarter financials Jan. 17, but headcount numbers — because reductions occurred before Dec. 31 — should be up to date. The bank has not yet offered a breakdown by unit, rather couching its reductions as “modest cuts all over the globe.”
Goldman, if we’re looking for clues further into the future, said more than one-third of its cuts will be from within the bank’s core trading and banking units.
The bank’s president, John Waldron, in late December, called the economic forecast “challenging.”
“We may be wrong, we may get a soft landing and we’ll staff up again,” he told the Financial Times.
That indicates a flexible view of staffing. Trimming the ranks of investment bankers, in Goldman’s case, is not a long-term strategy.
Squeezing more productivity out of them might be, though. Data from Coalition Greenwich showed that even though a set of 12 large banks counted the same number of “front office producers” in each time frame, banks took in $4.2 million per person in 2021, compared with less than $3 million per person in 2019.
At the same time, though, income has jumped 40%. Some of that can be attributed to staffing up in tech. That may be an area that’s relatively safe from cuts. Few would admit to willingly advocating falling behind in that arena.
Unless that tech is crypto, perhaps. Silvergate Capital, for one, cut 40% of its staff last week after the collapse of crypto exchange FTX triggered a run that gouged the bank’s digital-asset deposits.
Banks will see voluntary departures, too. The executive leading State Street’s crypto push left the bank to dive further into the space at a fintech. Meanwhile, one of the four executives Morgan Stanley had tapped as a potential successor to CEO James Gorman is leaving the bank at the end of this month.
Banks individually, no doubt, will debate whether to fill voluntary departures right away, do more with less, or wait to see what talent becomes available.
But the window for experimental growth — be it crypto pursuits or Goldman’s consumer bank — may be closing.
Banks distance themselves from crypto
The volatility plaguing the crypto world since last spring has prompted banks to think twice before dipping into its muddy waters.
Many banks’ crypto curiosity “went away” in 2022 as the value of tokens took a tumble, Michael Hsu, acting chief of the Office of the Comptroller of the Currency (OCC) told Bloomberg in December. Hsu said he’d be “astounded” if banks started expressing interest in the asset class now.
What’s more, banks with longstanding crypto presence are also backing out: Early adopter Metropolitan Commercial Bank, which backed well-known firms including Voyager Digital and Coinbase, announced this week it would be exiting the sector following “recent developments in the crypto-asset industry.”
Signature Bank, meanwhile, is offloading $8 billion to $10 billion in digital-asset deposits in a move that shrinks its crypto component to encompass less than 15% of total deposits.
“We’re not just a crypto bank, and we want that to come across loud and clear,” Signature Bank CEO Eric Howell said at a December conference.
Banks’ moves to distance themselves from might surprise some. But once bitten, twice shy: Metropolitan had to return $270 million in customer funds when Voyager went bankrupt; and Signature has exposure to the bankruptcies of both Celsius and FTX — because they were customers.
Was the instability of one of crypto’s most prominent stablecoins, Terra, and its May ecosystem collapse on anybody’s 2022 bingo card? What about the collapse of crypto exchange FTX and the arrest of crypto’s onetime white knight Sam Bankman-Fried not long after his company bailed out Voyager Digital with a (now-defunct) $1.4 billion acquisition and BlockFi with a $250 million loan?
Looking ahead into 2023, last year’s crypto roller-coaster of 2022 serves as a cautionary tale. Regulators know it, which is why the Fed, OCC, and FDIC issued a joint warning last week on the risks of bank-crypto ties, and why the Basel Committee on Banking Supervision (BCBS) unveiled guidelines last month for banks playing in the digital-asset space.
Lawmakers, too: While it’s unlikely that the Digital Commodities Consumer Protection Act, which would have granted crypto regulatory powers to the Commodity Futures Trading Commission, will make any further moves — it was supported by Bankman-Fried, and it suffered by association — regulation may come for stablecoins, courtesy of now-former Sen. Pat Toomey, R-PA.
The bill would require all stablecoins to be fully backed by liquid assets; authorize several types of regulated entities to issue stablecoins; and put regulatory power into the hands of the OCC.
While regulators continue to duke it out over who gets to call the shots on crypto, bankruptcy proceedings for Celsius and BlockFi will continue, and fallout from the FTX collapse will continue to unfold. Bankman-Fried, meanwhile, is set to be tried in October on eight counts, including wire fraud and conspiracy to commit campaign finance violations.
ESG battle ramps up
A December hearing held by the Texas Senate Committee on State Affairs that featured testimony from executives of BlackRock and State Street Global Advisors should put to rest any doubt that the ideological war over financial institutions’ environmental, social and governance (ESG) investments is heating up.
The hearing’s setting may have been remote — Marshall, Texas, was purportedly chosen because it’s in the district represented by the committee’s chair, Bryan Hughes.
But Marshall is also home to the U.S. District Court for the Eastern District of Texas — a court known as unfriendly territory to banks. Since 2020, Wells Fargo and PNC have each been ordered by a judge there to pay USAA hundreds of millions of dollars in penalties for patent infringement. USAA this summer also sued Truist in that court.
So if the BlackRock-State Street hearing felt like a trial, that atmosphere may not have been accidental.
Texas and West Virginia both took steps last year to restrict certain institutions they deemed hostile to the financing of fossil fuels. Texas ordered state pension funds to divest their holdings in BlackRock and several foreign-owned banks but stopped short of penalizing U.S. banks.
At the hearing, Hughes equated the financing fight to no less than a matter of “national security.”
“When there’s no funding for energy projects, energy projects don’t get done, energy costs go up, jobs go away and the cost of everything we buy goes up,” he said. “This is real. This is family security. This is national security.”
A BlackRock executive, for her part, sought to assure the panel it doesn’t discriminate against energy companies.
“We have one bias: to get the best risk-adjusted returns for our clients,” BlackRock’s head of external affairs, Dalia Blass, said at the hearing.
There are a few ways the ESG debate could gain momentum. Nineteen Republican attorneys general wrote BlackRock in August with concerns over its investment strategy. The next salvo has already come from another of those states. Kentucky last week issued a divestment list that, unlike Texas, includes big U.S. banks (Citi and JPMorgan Chase) in addition to BlackRock. More state-level action can be expected.
BlackRock isn’t just feeling pressure from the right. New York City’s Democratic comptroller, Brad Lander, accused the asset manager of “backtracking on its climate commitments” in defending itself against potential divestments.
Given the amplification of tactics, expect to see BlackRock CEO Larry Fink take a stance — however measured — in his annual letter to stakeholders, which usually surfaces in March.
Fintechs (and partnerships) under the microscope
Several developments in the final months of 2022 could set the stage for what may be a tough year for fintechs looking to win favor from regulators and lawmakers.
A November report from the Treasury Department called for more oversight of the sector to protect consumers and enable sustainable competition.
“While non-bank firms’ entrance into core consumer finance markets has increased competition and innovation, it has not come without additional risks to consumer protection and market integrity,” Treasury Secretary Janet Yellen said.
A House report in December cast the sector in a further tough light. The House Select Subcommittee on the Coronavirus Crisis concluded several fintechs that facilitated loans through the $800 billion Paycheck Protection Program (PPP) had lax anti-fraud standards that hampered their abilities to stop “obvious and preventable fraud.”
Bank trade groups said the House report is a strong argument against allowing fintech firms to participate in the Small Business Administration’s flagship 7(a) lending program.
Many banks will welcome regulator and lawmaker promises of more scrutiny of fintechs. Traditional finance firms have long called for regulators to even the playing field by holding nonbanks to the same regulatory standards as chartered institutions.
But that means banks, too, will be subject to some of that glare, as bank-fintech partnerships come under the microscope in 2023.
Acting Comptroller Michael Hsu has indicated the OCC intends to step up oversight of bank-fintech partnerships — tie-ups he said could put the financial system at risk of a crisis if not properly supervised.
Hsu said the regulator is working to subdivide bank-fintech arrangements into cohorts with similar safety and soundness risk profiles and attributes.
The OCC also plans to open its Office of Financial Technology this year.