Happy Sunday,

Rate hikes slow, but terminal rate increases. Inflation cools. FDIC closer to having full board. Senators push for more Fed transparency. California requires more overdraft transparency. SBF arrested. Walmart-backed ONE to add BNPL. Small banks may cut ties with Zelle over potential fraud costs. Figure-linked SPAC eyes mortgage lender. Checkout.com valuation comes back to earth.

A programming note: due to upcoming holidays, the next two issues of this newsletter will be published one day late, on Monday, Dec 26th, and Monday, Jan 2nd.

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Rate Hikes Slow, But Will Continue

The Fed hiked by another 50 bps at its meeting last week and plans to increase the rate at a slower pace for the next few months. According to its statement, the Fed expects rates to hit 5% – 5.5% in 2023. The Fed’s decision toslow the pace of hikes comes after the latest CPI report showed inflation at its lowest annualized rate since last December. Prices rose by “just” 7.1% in November from the year prior, down more than expected from October’s 7.7% increase. While the CPI shows signs that inflation is beginning to cool, some are concerned that ongoing tightness in the labor market could continue to fuel inflation.

Image: Wall Street Journal

FDIC Fills Top Posts

The FDIC is one step closer to finally having a full board. Last week, the Senate Banking Committee backed the nominees for the FDIC’s top posts. The committee voted in favor of confirming acting Chairman Martin Gruenberg as the permanent head. Meanwhile, Republican nominees Travis Hill and Jonathan McKernan passed the committee vote for their nominations as Vice Chair and member of the board, respectively.

The nominees will now advance to a full Senate vote, where all three are expected to be confirmed. The confirmations, if successful, would be a win for the Biden administration, which has struggled to confirm key financial regulatory positions.

Banks And Credit Unions To Disclose Revenue From Overdraft Fees

A new state law in California requires state chartered banks and credit unions to disclose how much revenue they earn from overdraft fees. Since 2015, banks with over $1Bn in assets have had to disclose this information to federal banking regulators. The new measure covers state-chartered banks below that threshold.

The regulatory requirement comes after increased scrutiny of overdraft fees, as research suggests these fees are disproportionately borne by lower-income consumers. The California Bankers Association took a neutral position on the measure. Governor Gavin Newsom signed the measure into law in September, and the California Department of Financial Protection and Innovation told institutions they have until March, 2023, to comply with the new requirement.

Fed To Have More Transparency

Last week, new legislation was introduced that would require the Fed to be more transparent. The bill would reclassify regional Feds as government agencies that would need to comply with Freedom of Information Act requests. Presently, regional Feds argue they are private entities that are separate from the Federal Reserve Board and say they work to comply with the “spirit” of the Freedom of Information Act.

According to Sen. Toomey (R-PA), the Fed and its regional banks often obstruct Congressional oversight by refusing to adhere to requests from both parties. With the need for more accountability and transparency, Toomey joins Sen. Warren (D-MA) in pursuit of this reform. If the Toomey-Warren Bill is passed, it could end the long standing dispute between the Fed and Congress.

Bankman-Fried In Custody as SDNY, SEC, CFTC File Cases

Last week, Sam Bankman-Fried, popularly known as “SBF,” was arrested in the Bahamas on charges of wire fraud and conspiracy. The U.S. attorney’s office for the Southern District of New York and the SEC filed a series of criminal charges and civil complaints. According to the SEC, Bankman-Fried diverted funds from his crypto exchange to Alameda Research and intentionally concealed these transfers from investors.

Bankman-Fried was scheduled to testify in front of the House Financial Services Committee, but couldn’t appear, as he was detained in the Bahamas. A leaked draft of his testimony showed he planned to reiterate his regret in agreeing to file for bankruptcy and criticize the team handling the matter. 

In addition to the cases brought by SDNY and the SEC, the CFTC is also getting in on the action. In a filing, it accused Bankman-Fried of manipulating the price of FTT, the exchange’s own token, and of front-running customer trades.

While Bankman-Fried is in custody in the Bahamas, it may be a while before he’s back in the United States. The U.S. is seeking to extradite him, but Bankman-Fried plans to fight the request.

Walmart To Make BNPL An Inside Job

According to reporting in The Information last week, Walmart-backed neobank ONE is planning its own BNPL offering. The startup, technically independent but majority-owned by Walmart, currently offers a pretty typical feature set that includes checking and savings accounts and a debit card. The most notable feature is 2% cashback on purchases at Walmart.

The addition of BNPL would be the most significant net-new feature since ONE was acquired. It’s unclear if the BNPL offering would consist of 0% “split pay,” longer-term interest-bearing loans, or both. Also unclear is how the new feature may impact Walmart’s existing relationship with Affirm.

Fraud Costs May Force Small Banks To Cut Ties With Zelle

The big banks that own Early Warning Services, which operates Zelle, are in the process of standardizing how fraud disputes and refunds will be handled by banks. However, these reimbursements could disproportionately affect smaller banks, trade organizations for smaller banks argue.

Instant payment services like Zelle are table stakes these days. But smaller financial institutions could find themselves facing expensive reimbursement requirements that would eat into already small profit margins, compared to those of larger banks. Community banks and credit unions could decide to end support for Zelle altogether if required to reimburse. Credit unions and smaller banks comprise 90% of financial institutions on Zelle’s network. If a significant number decide to drop Zelle, it could impact the network’s coverage and thus its usefulness to end consumers.

Figure-Affiliated SPAC to Merge With Mortgage Bank

A SPAC sponsored by the management of Figure Technologies has signed a nonbinding letter of intent to merge with a bank holding company and warehouse lender. The identity of the acquisition target isn’t known at this point, but it is in the $3-to-$5Bn asset range. The idea is for the newly public company to leverage Figure’s blockchain platform, potentially using it to originate loans as “digital assets” that can be traded as tokens.

Checkout.com Adjusts “Internal” Valuation

At the beginning of the year, payments processor Checkout.com was riding high. The company raised a monster $1Bn Series D, which valued the company at a whopping $40Bn. Obviously, market conditions have changed since then. High-growth technology and fintech stocks on the public market have been particularly hard hit, with many companies seeing valuations drop by more than 50%. While private markets are less transparent and have been slower to re-price, there is broad understanding that valuations companies claimed in 2021 or early 2022 are no longer viable.

Checkout.com acknowledged this reality as it adjusted its “internal” valuation from $40Bn down to $11Bn. The adjustment isn’t the result of a priced round, but rather sets the strike price for options awards to employees.

In the News:

Glass Half Full? Bankers Expect a Recession, but Not a Severe One (American Banker, 12/12/2022) Nearly half of bankers surveyed believe a recession will last at least two quarters.

SEC Set to Propose Rules That Would Squeeze Stock-Market Middlemen (Wall Street Journal, 12/14/2022) The SEC is preparing to vote on four proposals that aim to give small investors better prices on their trades and reduce some advantages of HFT firms.

CFPB Plans to Create Registry of Nonbank ‘Lawbreakers’ (American Banker, 12/12/2022) The proposed rule would require nonbanks to report state and local court orders or judgements involving consumer financial products to the CFPB.

Exclusive: U.S. Justice Dept is Split Over Charging Binance as Crypto World Falters, Sources Say (Reuters, 12/12/2022) The investigation began in 2018, focused on Binance’s compliance with U.S. AML laws and sanctions.

Microsoft Buys Near 4% Stake in London Stock Exchange as Part of 10-Year Cloud Deal (CNBC, 12/12/2022) The partnership will include a new data infrastructure for the LSE.

Are Banking-as-a-Service Vendors Partly to Blame for Banks’ Fintech Problems? (American Banker, 12/13/2022) Regulators say some partnership agreements were made with insufficient due diligence around the fintechs’ business models and their ability to comply with existing rules.

Binance Temporarily Halted Withdrawals of Stablecoin USDC as Investor Concerns Mount After FTX Collapse (CNBC, 12/13/2022) Withdrawals were resumed ~8 hours after the pause was first announced.

Lighter Fare:

Mars Rover Captures 1st Sound of Dust Devil on Red Planet (Bloomberg, 12/13/2022) What’s a dust devil sound like on Mars?