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FTX Fallout Continues; PPI Shows Improvement; Bank Deposits Shrinking

By Cole Gottlieb

November 20, 2022

Happy Sunday,

The producer price index showed slowing price increases vs. September. Consumers still spending. Credit card balances growing. Bank deposits shrinking. Brainard says pace of rate hikes could slow. Custodia case against Fed can proceed. White House makes Gruenberg official. Prosperity pays PPP price. FTX fallout continues to reverberate.

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PPI Shows Glimmer of Hope on Inflation

The rate of price increases as measured by the supplier price index slowed in October, offering a glimmer of hope that inflation may be slowing. The PPI recorded an 8% increase year over year, down slightly from September’s 8.4% increase.

Despite consumers’ generally gloomy outlook on the economy, they’re still opening their wallets. U.S. retail sales rose 1.3% in October, as we head into the holiday shopping season. However, the data isn’t adjusted for inflation, meaning some of the growth is attributable to rising prices.

Shoppers seem to be putting more of those retail purchases on credit. Card balances rose 15% compared to a year ago, according to the latest NY Fed report. The latest data point marks three quarters of sequential increases in outstanding revolving balances. Delinquency levels, still low by historical standards, have also been on the rise, as consumers’ wages haven’t kept pace with rapidly increasing prices.

Image: American Banker

Those struggles help explain deposit outflows from the banking system. After facing an unprecedented surge in deposits during the pandemic, the trend is now beginning to reverse. Some banks are beginning to play defense, with online-only banks hiking rates in step with the Fed’s moves.

Fed’s Brainard: Rate Hikes Can Slow Soon

While it’s clear that inflation remains a problem, differences of opinion are beginning to emerge about the Fed’s course of action to address it. Fed Vice Chair Lael Brainard has signaled the Fed may slow its rate of interest rate increases beginning at its next meeting on December 13-14. An increase of 50 bps, rather than the 75 bp hikes we’ve seen lately, may be in the cards. Brainard has argued that previous and anticipated future rate hikes have yet to work their way through the economy.

Still, while the pace of rate hikes may slow, the general consensus is now that, overall, rates will stay higher for longer.

Judge Dismisses Some Claims, but Rules Custodia Suit Against Fed Can Proceed

A judge dismissed several of the claims that Custodia, a crypto-focused Wyoming bank organized under a special-purpose depository institution charter, made in its case against the Federal Reserve Bank of Kansas City and the Federal Reserve Board of Governors. The case stems from Custodia’s application for Federal Reserve master account access, and alleges that the Federal Reserve Bank and Board have unlawfully delayed its application. Specifically, the judge dismissed arguments that the Federal Reserve violated the separation-of-powers doctrine, due process, and appointments clause of the constitution. However, the court agreed that Custodia’s core complaint, that it has faced unreasonable delays, is a legitimate cause of action. As the case moves forward, the Fed could be compelled to turn over materials related to its master account deliberation process for Custodia, or grant Custodia a master account, both are outcomes the Fed has sought to avoid.

White House Moves to Make Gruenberg Official

Last week, the White House announced it would nominate Martin Gruenberg as Chair of the FDIC. Gruenberg has been in that role in an “acting” capacity since a power struggle on the board broke out earlier this year, leading to Trump-appointee Jelena McWilliams stepping down. If approved, this will mark Gruenberg’s third stint in the top role at the FDIC. Sen. Sherrod Brown (D-OH), who chairs the Senate Banking Committee, said he would seek to move Gruenberg’s nomination through the approval process “as quickly as possible.”

Prosperity Bank Pays First-Ever PPP Fraud Settlement

After the first-ever bank settlement related to PPP loan fraud, industry watchers are split on whether or not it’s the start of a trend. Prosperity Bank reached a settlement with federal prosecutors over a $213,400 loan it approved to a doctor that bank employees knew was facing criminal charges. The charges made the doctor ineligible for a PPP loan.

Prosperity agreed to a fine equal to the amount of the processing fee for the loan: $10,670. However, while the fine was small, experts point out the real costs often lie in the investigation and interactions with law enforcement and prosecutors. Given the sheer number of potential cases, especially for lenders that originated larger numbers of PPP loans, the costs could add up, should the DOJ decide to pursue such cases at scale.

FTX Fallout Continues to Reverberate

Fallout from FTX’s spectacular collapse continued to reverberate in the crypto ecosystem and beyond this week.

One area of reasoned speculation: why SBF, as Sam Bankman-Fried is known, and FTX “bailed out” numerous companies that ran into problems earlier this year stemming from the collapse of TerraLuna. At the time, FTX was described as “rescuing” firms like Voyager and BlockFi.

But now, some, including PeerIQ founder Ram Ahluwalia, are speculating that FTX “bailed out” these firms in order to absorb their liabilities, which included hundreds of millions in loans to FTX and affiliated trading shop Alameda Research. The moves, Ahluwalia suggests, would have prevented the forced selling of tokens Galaxy and BlockFi held, helping to stave off a collapse in their value and allow FTX and Alameda to delay the inevitable.

Unsurprisingly, the disaster has attracted regulatory (and law enforcement) scrutiny around the world. Fed Vice Chair for Supervision Michael Barr told the Senate Banking Committee he’s concerned about risks to financial stability that exist outside the banking system, including crypto. He argued that the Fed needs better data and transparency in order to understand what risks these non-bank activities could pose to the parts of the financial system it does regulate.

Meanwhile, in Washington, the FTX debacle has prompted calls from House Financial Services and Senate Banking Committee members, but has also put some legislative activity into jeopardy. SEC Chair Gensler came out against a crypto bill that was due for markup in the Senate Agriculture Committee. The committee ultimately scrapped plans to work on the bill. Further, the Department of Justice joined an ongoing SEC investigation examining whether the platform followed securities laws related to segregation of customer assets and trading against customers. The CFTC has also launched a separate probe into FTX’s activities.

Given the above and FTX’s bankruptcy, Visa pulling the plug on its partnership with the defunct crypto exchange is probably the least of its problems.

In the News:

FedNow’s Potential Pitfalls for B2B Payments (Tearsheet, 11/16/2022) FedNow will only run out to registered banks, adoption may take some time, and the initial credit limit may be too low for businesses.

CFPB Asks Supreme Court to Uphold Constitutionality of its Funding (American Banker, 11/15/2022) The CFPB asks the Supreme Court to overturn an appellate ruling declaring the agency's funding structure unconstitutional.

Senate Banking Committee Chair Brown Scrutinizes Banking Fees as Consumers Struggle with Inflation (CNBC, 11/15/2022) Comes weeks after the CFPB issued guidance to end surprise overdraft and bounced check fees.

As Crypto Investments Sputter, Payments get a Second Wind (American Banker, 11/11/2022) Crypto companies are teaming with payment firms to make a growth push.

Challenger Bank Dave Plans Upgrades to Cash Advance Underwriting Model (American Banker, 11/11/2022) CFO Beilman says the company is working on a "next-generation ExtraCash underwriting model.

Flight to Safety? Crypto-Friendly Banks Could Capitalize on FTX Meltdown. (American Banker, 11/15/2022) In the wake of the FTX meltdown, investors and crypto businesses are likely to want to work with more heavily regulated players like banks.

Banks Embrace ‘Earned Wage Access’ Pay Trend to Bolster Relationships (The Financial Brand, 11/16/2022) Citizens Financial, PNC, and U.S. Bank have hopped into the fray.

Lighter Fare:

Inside the Mexican City That Believes It’s Protected by Aliens (Vice, 11/16/2022) Legend has it that the cities of Madero and Tampico are protected from hurricanes by an alien base called Amupac.