Happy Sunday,

GDP grew by 2.6% in Q4. Unemployment claims tick up. Bank regulators testify, hint at possible reforms in wake of bank crisis. Fed details why it turned down Custodia. European banks face tax dodge fallout. First Citizens acquires most of failed SVB. Apple Pay Later launches. EWS announces Paze wallet.

New here? Subscribe here to get our newsletter each Sunday. For even more updates, follow us on Linkedin (PeerIQ, a Cross River Company) and Twitter (@PeerIQAnalytics).

U.S. Economy Grew By 2.6% in Q4

GDP numbers released last week estimate the economy grew by an annualized 2.6% in Q4, slightly below the consensus estimate of 2.7%. Initial unemployment claims ticked up slightly to 198,000, suggesting some softening in the labor market.

Bank Regulators Outline Rules Updates In Congressional Testimony

Fed Vice Chair of Supervision Michael Barr and FDIC Chair Martin Gruenberg testified before Congressional committees last week about the turmoil roiling the banking sector, including the failures of SVB and Signature Bank. The hearings focused on what went wrong at the banks, regulators’ role in overseeing them, and potential changes to regulation to try to prevent a recurrence of the current situation. FDIC Chair Gruenberg said the recent failures demonstrate the implications that banks with over $100Bn in assets have for the overall stability of the financial system.

The Fed’s Barr anticipates the need to strengthen capital and liquidity requirements for banks with more than $100Bn in assets. Gruenberg echoed this, calling for “serious attention” to capital requirements for the securities portfolios of larger banks. Additional options on the table include enhanced stress tests, a requirement for “long-term debt” to help absorb losses in the case of a bank’s failure, and an exploration of liquidity rules. The FDIC also intends to lay out options for changes to deposit insurance coverage as part of its May 1st report.

Still, regulatory proposals for enhanced capital and liquidity requirements are likely to meet opposition from Republican lawmakers, who have largely blamed other factors, like inflation or inattentive regulators themselves, for the bank failures.

Fed Releases Details on Custodia Denial

The Fed released its full 86-page order (with some redactions) explaining its decision not to grant crypto-focused Custodia’s application for membership in the Federal Reserve system.

Custodia, which is chartered as a Wyoming Special Purpose Depository Institution, filed suit against the Fed for its lengthy delays in adjudicated Custodia’s application. The Fed revealed it had rejected its application nearly two months ago, but now we know the reasoning why.

The Fed supplied a laundry list of reasons, including that approving Custodia’s membership application would present a “safety and soundness” to the traditional banking system. The Fed also pointed to Custodia’s lack of deposit insurance and inadequate compliance with anti-money laundering requirements and Bank Secrecy Act requirements. The Fed also expressed skepticism about the thoroughness of Wyoming’s resolution requirements vs. what is typically required by the FDIC.

For its part, Custodia pushed back on the arguments, saying it included a number of factual inaccuracies and revealed the Fed’s bias against digital assets.

French Banks Face Fines of Over $1Bn; Senate Says Credit Suisse Violated Plea Deal

Last week, French authorities raided several major banks in the country, including SocGen and BNP Paribas, as part of a probe into tax fraud and money laundering. HSBC, Natixis, and Exane, a unit of BNP, are also part of the investigation, which began in December 2021. The focus of the probe is a dividend arbitrage strategy known as “cum-cum,” in which shareholders transfer a stock to investors abroad for a short period of time to avoid dividend tax. The shares are then returned to the original owner, with the tax savings split between the parties. The banks collectively face fines that could exceed USD $1Bn as a result of the investigation.

In other European bank news, a new Senate report says troubled Swiss bank Credit Suisse, which was just acquired by UBS, violated the terms of a 2014 criminal plea deal. The agreement stemmed from allegations Credit Suisse helped Americans hide assets from U.S. tax authorities. Now, the Senate report says the bank failed to report bank transfers in what may be an ongoing criminal tax conspiracy, involving more than $100Mn held by a family with dual citizenship in the U.S and Latin America.

First Citizens Acquires Most of SVB

First Citizens Bank reached an agreement with the FDIC to acquire the bulk of failed Silicon Valley Bank. The deal will see First Citizens take on $56Bn of SVB’s deposits and acquire $72Bn of its assets at a discount of $16.5Bn. That leaves $90Bn of SVB’s assets in the hands of the FDIC. Other terms of the deal include a 5-year, $35Bn loan from the FDIC to First Citizens and a $70Bn line of credit. For its troubles, the FDIC gets equity appreciation rights in First Citizens, capped at a max of $500Mn. The total cost to the deposit insurance fund as a result of SVB’s failure came out to some $20Bn, which the FDIC will recoup through a yet-to-be-determined special assessment on banks, as required by law.

The deal is First Citizens’ fifth acquisition of a failed bank. Post-SVB, First Citizens now has $219Bn in assets, making it a top 25 bank.

Some Banks Step Up to Serve Crypto After Silvergate, Signature Fail

The abrupt failure of Silvergate and Signature Bank have been a major blow to the crypto ecosystem. With increasing skepticism from banking regulators, some are describing banks’ pullback from working with crypto clients as a sort of “Operation Chokepoint 2.0.”

But some smaller and regional banks still see an opportunity. Customers Bancorp, Fifth-Third, Western Alliance, and Cross River have selectively picked up crypto clients forced to find new bank partners or that are looking to diversify their banking relationships. Circle, which operates the USDC stablecoin, selected Cross River as a partner for the automated settlement of its stablecoin after the collapse of a previous partner, Signature Bank.

Apple (Finally) Launches Apple Pay Later

After lengthy delays, Apple is finally launching its BNPL offering, Apple Pay Later. The feature will enable users to apply for financing from $50 – $1,000, which they can then use via Apple Pay to spread a purchase over six weeks with no fees or interest. Unlike Apple Card, in which partner Goldman Sachs’ handles the underwriting, servicing, and financing, for Apple Pay Later, Apple will handle these components itself. It does still rely on Goldman for connectivity to card network Mastercard, which supports the feature through its Mastercard Installment capability.

EWS Announces Apple, Google Pay Competitor Paze

Big banks might be late to the digital wallet party, but they bring with them substantial resources and potential competitive advantages. Early Warning Services, a consortium owned by the country’s largest banks, announced “Paze” last week and will begin piloting the digital wallet this June. For end customers of the seven largest banks that own EWS, Paze will pop up within a window on websites of participating merchants, allowing users to checkout by entering their payment card details. EWS hopes to extend Paze 150Mn Visa and Mastercard accounts by fall.

In the News:

Bank Failures Breathe New Life into Executive Compensation Rule (American Banker, 3/24/2023) An incomplete section of Dodd-Frank, Section 956 could be revived to curb compensation plans that encourage banking/finance execs from taking excessive/reckless risks.

Lawmakers Cast Fresh Doubts on SBA Fintech Plans (American Banker, 3/27/2023) Some want to stop plans to end the cap on nondepository small business lending companies licensed to participate in 7(a).

Binance CEO CZ, Crypto’s Top Man, Faces More Than ‘FUD’ in CFTC Suit (Bloomberg, 3/27/2023) The CFTC has sued CZ, Binance for alleged violations of derivatives regulations.

UBS Brings Back Former CEO Sergio Ermotti After Credit Suisse Deal (Wall Street Journal, 3/29/2023) Ermotti previously served as CEO of UBS for nine years, and is credited with restoring the bank to health after a 2008 government bailout.

US Mulls More Support for Banks While Giving First Republic Time (Bloomberg, 3/25/2023) U.S. authorities consider expanding an emergency lending facility for banks.

First Republic Bank Founder Earned a Big Payday—as Did His Family Members (Wall Street Journal, 3/24/2023) First Republic founder’s family made millions consulting on interest rates and risk, some of the same issues the bank currently faces.

Deutsche Bank Bounces as Analysts Reassure on Financial Health (Bloomberg, 3/27/2023) Deutsche Bank rebounds after the stock had sunk and CDS spreads jumped on banking contagion fears.

Banking Crisis Raises Concerns About Hidden Leverage in the System (Bloomberg, 3/27/2023) Some are concerned that private equity and other firms loaded up on cheap loans, without enough oversight into how the debt could be interconnected.

How Interest Rate Risk Sneaked up on Dozens of Community Banks (American Bankers, 3/27/2023) In contrast to SVB, most community bank deposits are under $250,000.

Bank Borrowing from Fed Facilities Stabilizes (American Banker, 3/24/2023) Banks borrowed just under $164Bn from the discount window, down $800Bn from last week.

Lenders Find More Uses for Alternative Credit Data (American Banker, 3/24/2023) Lenders are increasingly using alternative consumer credit data to strengthen programs for “second-look financing” and lending into underserved markets.

As Interest Rates Rose, Banks Did a Balance-Sheet Switcheroo (Wall Street Journal, 3/29/2023) The WSJ found 6 banks that together switched classifications on more than $500Bn of their bond investments from “available-for-sale” to “held-to-maturity”.

Lighter Fare:

Hidden Water Source on the Moon Found Locked in Glass Beads, Chinese Probe Reveals (Space, 3/28/2023) The new study suggests that the glass beads could serve as a hidden reservoir, from which water is readily released into the dried-out surface soil during the cool and dark lunar night.