Compliance in banking

Banks that operate banking-as-a-service programs are facing heightened scrutiny from bank regulators, as examiners scramble to get a handle on the size and scale of lenders’ partnerships with fintechs, said Konrad Alt, a partner at financial services advisory and investment firm Klaros Group.

Alt, who advises banks and fintechs, said he is noticing an uptick in regulators’ scrutiny of firms that offer BaaS, and expects enforcement actions against firms that provide the underlying banking services for fintechs will be forthcoming. 

“A lot of the enforcement activity, I think, is still in the pipeline, but I've been in touch with several other advisory firms that also work with [BaaS] banks, and it's clear that they are all getting this message. There are quite a few banks that are already under enforcement actions,” Alt said.

This increased pressure follows this spring’s banking crisis, which saw the collapse of three regional lenders that were all closely bound to the fintech sector.

Silicon Valley Bank and First Republic Bank both catered heavily to the VC and startup space, while Signature Bank was known as a crypto-friendly firm. Those lenders’ close ties to technology haven’t escaped the attention of regulators, Alt says. 

“While all banks need to expect heightened regulatory attention to interest rate risk and solvency, fintech partner banks must prepare for a particularly hard scrub,” he said.

Banks are already feeling the heat.

"For banks that are in the BaaS space today that haven't gone through an exam in a while, they are going to be in a shell shock for what's coming there," BankProv COO Joseph Mancini told S&P Global Market Intelligence in May.

Mancini said his bank has noticed increased scrutiny from regulators looking into whether the firm is taking ownership of actively managing its fintech tie-ups. 

Alt said the heightened scrutiny comes as regulators attempt to recalibrate their supervision of banks that operate BaaS programs.

Banks that partner with fintechs tend to have smaller balance sheets, meaning they don’t necessarily fall under regulators’ lists of firms that deserve heightened scrutiny, Alt said.

“But they have a great deal more operational complexity, and I think this went largely unnoticed by the supervisory community for a long time,” he said. “[Regulators] have begun to realize they’ve been a little bit behind the curve in their own efforts to figure out how to supervise, and so they're responding to that by exerting a lot of scrutiny during the examination process.”

In recent months, several firms have been hit with enforcement actions related to shortcomings in their BaaS programs.

The Office of the Comptroller of the Currency in September 2022 ordered Blue Ridge Bank to improve its oversight of third-party fintech partnerships. Under the order, the Charlottesville, Virginia-based lender must obtain the OCC’s non-objection before entering into any new contracts with fintech partners or adding new products in cooperation with existing partners.

Since the order, the bank’s CEO resigned, and the firm’s new chief executive has said it is taking a step back from its emphasis on BaaS to refocus on community banking.

"Blue Ridge grew very quickly," CEO Billy Beale told S&P Global in August. "There were some mistakes made along the way, and so I'm here to fix those mistakes. That's my priority."

As part of the wind-down, the $3.2 billion-asset bank is helping fintech partners migrate to other firms as contracts expire, Beale said.

Cross River, another BaaS powerhouse based in Fort Lee, New Jersey, was hit with its own enforcement action by the Federal Deposit Insurance Corp. 

The $9 billion-asset firm, which provides the technology infrastructure for a deep portfolio of payments, fintech and crypto firms, engaged in “unsafe and unsound” practices related to fair lending laws and regulations, the FDIC claimed. 

The bank, which neither admitted nor denied the charges, is not allowed to enter into any new partnerships with third parties or offer new credit products without the FDIC’s approval, according to the order. 

The order came a day after Cross River CEO Gilles Gade said he expected regulators would step up their oversight of firms that serve fintechs amid the recent volatility in the banking sector.

“Regulatory scrutiny on banks in general is increasing and the events with SVB will only expand those efforts with a specific focus on banks that support fintech,” he said in a statement.

Unlike Blue Ridge, however, Cross River hasn’t announced any plans to pare its BaaS program.

In a statement sent to Banking Dive in May, a bank spokesperson said the FDIC order places no limitations on the firm’s existing fintech partnerships or the credit products it currently offers in partnership with them. 

“We don’t expect that the order will have any meaningful impact on our growth trajectory,” the spokesperson said.

Middleware under the microscope

While operating a BaaS program allows banks to grow their assets, often on a national scale, the arrangement creates a layer between traditional banks and deposit holders, as fintechs like neobanks take on the front-facing aspect of the client relationship.

In some cases, an additional platform sits between the bank and fintech, providing the middleware that helps connect the two parties. These partnerships are also coming under increased scrutiny from regulators, as the dynamic creates an additional layer of risk, Alt said.

“It puts a distance between the banks and the fintechs and complicates questions about knowing who you’re dealing with,” Alt said. “I think [middleware providers] are probably even less well understood by the regulators than the fintech sector generally, because they're not consumer facing in any way.”

While third-party BaaS providers can help bridge the connectivity gap between fintechs and their banking partners, a fintech will often opt for a direct partnership with its BaaS bank once it reaches a certain level of maturity, Alt said.

A recent move by one neobank to transition to a direct relationship with its partner bank has reportedly come at a significant cost to its middleware provider.

Synapse initiated layoffs after its largest client, neobank Mercury, informed the firm it would not be renewing its contract, Fintech Business Weekly publisher Jason Mikula reported. 

According to a Synapse statement sent to TechCrunch, the firm laid off 86 employees, which represents 40% of its workforce.

Mercury confirmed to Banking Dive it decided to end its relationship with Synapse and work with its partner institution, Evolve Bank & Trust, directly.

“More robust, larger and mature fintechs are generally going to think they're better off minimizing the number of players in their banking relationship,” said Alt, speaking broadly about the relationship between fintechs and their middleware providers. “It’s better to have direct dialogue with your bank than to have that intermediated by some platform, even if the platform's pretty good.”

TD executives knew as early as November 2022 — six months before the bank’s $13.4 billion proposed acquisition of First Horizon was terminated — that multiple U.S. agencies, including the Justice Department, had found anti-money laundering deficiencies serious enough to put the deal at risk of rejection, the Capitol Forum reported in January, citing two sources familiar with the matter.

Investors have waited months for TD to give further details surrounding the AML woes that had been rumored as the catalyst behind the deal’s collapse since the week of the termination itself.

TD disclosed in its August earnings report that it is cooperating with a DOJ investigation into the bank’s compliance with AML measures but has given little assurance since.

“The bank anticipates monetary and/or non-monetary penalties to be imposed” as a result of the AML matter, TD said in the earnings report, adding that it is “pursuing efforts to enhance” its Bank Secrecy Act compliance program.

When pressed during the accompanying earnings call, TD CEO Bharat Masrani told analysts the bank is “working hard to enhance our programs.” 

Masrani added that he could not comment on regulatory matters but that the bank would update shareholders when more concrete figures arise.

Other TD executives, meanwhile, refused to tip their hand.

TD is “ensuring that we’ve got a strong control platform to be able to operate,” Leo Salom, the bank’s U.S. CEO, said on the same call. “Governance and control is one of our important elements and pillars of our overall investment process.”

At a conference the following month, Salom called the DOJ investigation a “manageable item,” adding that “in the fullness of time we will be able to resolve [it].”

When asked more recently for an update, Lisa Hodgins, a TD spokesperson, told The Globe and Mail the bank “has rigorous processes in place to ensure disclosure of information consistent with our disclosure and contractual obligations.”

“Our public statements updated the market as matters evolved,” Hodgins told the publication. “At all times, TD acts in the best interests of the bank and our shareholders.”

Some investors on the other side of the foiled transaction have been less patient with TD. The Arbitrage Fund, a First Horizon shareholder, sued TD in May, alleging the Canadian lender made a series of misleading statements regarding its AML practices and the projected timeline for completion of the deal, while downplayed regulators’ resistance to the proposed tie-up. 

TD, in response, leaned in to the narrative that its “public disclosures are accurate.”

The lawsuit cited reporting from The Wall Street Journal that found TD had flagged just 28 customer transactions as suspicious “in recent years” — and asserted that the bank’s handling of suspicious customer transactions spurred the Office of the Comptroller of the Currency and the Federal Reserve’s delays in giving the First Horizon deal a green light.

As for the report that TD executives may have known of AML probes long before the First Horizon deal’s collapse, it would not be the first time the Capitol Forum has been cast as a spoiler for the Canadian bank.

In urging the OCC to block the First Horizon deal in June 2022, Sen. Elizabeth Warren, D-MA, cited a Capitol Forum report that alleged TD incentivized its employees to enroll customers in new accounts and services like overdraft protection without their consent. 

The OCC investigated TD’s practices after Wells Fargo’s 2016 fake-accounts scandal surfaces, the Capitol Forum reported at the time. Warren, however, alleged the regulator “swept it under the rug” under the leadership of Trump appointee Keith Noreika. 

Since the TD-First Horizon tie-up collapsed, each of the lenders has laid out plans to expand in the Southeast U.S.

First Horizon CEO Bryan Jordan said in June his bank aims to “build a banking franchise in the South that is going to be unparalleled,” adding that the Memphis, Tennessee-based lender has “hit the ground running.”

TD, meanwhile, wants to open 150 new U.S. branches by 2027 but is specifically targeting markets such as South Florida, Atlanta and North Carolina. 

The Justice Department in October charged former TD employee Oscar Marcelo Nunez-Flores with allegedly helping to create shell companies and issuing dozens of debit cards, allowing individuals in Colombia to withdraw laundered money. However, it is unclear whether the case is related to the DOJ AML probe TD disclosed in August.

“In respect of the recent charges of a TD branch employee in New Jersey, TD is cooperating fully with the law enforcement and this employee has been terminated,” Hodgins said in October in a statement to The Globe and Mail.

Binance.US, the American affiliate of global crypto giant Binance, named Lesley O’Neill chief compliance officer in January.

O’Neill joins Binance.US from digital identity fintech Prove Identity, where she worked for five years and served as chief compliance officer for two. Prior to Prove, she worked in traditional finance.

Now at Binance.US, she’ll head the firm’s know-your-customer, anti-money laundering and sanctions programs. She replaces Tammy Weinrib, who, according to LinkedIn, left Binance.US in November after nearly two years.

“Lesley is an expert in the fraud and identity space with a proven track record of developing and overseeing robust compliance and legal functions,” interim CEO Norman Reed said in a prepared statement. “Her experience partnering with crypto companies to enhance their AML and KYC processes at Prove, as well as her work in traditional financial services at Ernst & Young, will be exceptionally valuable as we continue to uphold the highest standards of compliance, safety, and security on our platform.”

O’Neill said she looks forward to “earning and maintaining the trust of our customers and regulators by building upon the company’s strong foundation of compliance and deepening its commitment to accountability and transparency.”

Binance.US, along with its global affiliate Binance and founder Changpeng Zhao, is currently subject to a Securities and Exchange Committee enforcement action for allegedly selling unregistered securities. The SEC filed its action in June, at which time Zhao was still CEO of Binance, further alleging that he held control over Binance.US despite insisting it operated separately.

Zhao stepped down from his post in November and pleaded guilty to an anti-money laundering violation, agreeing then to pay $50 million in fines. Binance, as a company, paid $4.3 billion to the Justice Department, the Treasury Department, the Commodity Futures Trading Commission and the Office of Foreign Assets Control.

Binance is now led by Richard Teng, who was previously the global head of regional markets.

Binance.US has lost other executives in recent months — most notably, its CEO. Brian Shroder left the crypto exchange after 2½ years in September. Though he left without explanation, his departure coincided with the layoffs of one-third of Binance.US’s staff.

Reed, Binance.US’s former chief legal officer and general counsel, as well as a former regulator with the SEC, has been interim CEO since September.

Separately, the firm’s chief risk officer, Sidney Majalya, departed in November, according to LinkedIn; as did Krishna Juvvadi, head of legal, according to LinkedIn.

Binance.US did not return a request for comment on when the Majalya and Juvvadi’s positions would be filled.

Discover Financial Services’ compliance and risk management spending for 2023 was nearing $500 million, CFO John Greene said in December, adding that the card issuer expects to spend that amount in 2024, although it “could be more than that, certainly.”

As it’s grappled with regulatory scrutiny, Riverwoods, Illinois-based Discover has put in “a lot of work” to address compliance issues, Greene said Dec. 5 during the Goldman Sachs U.S. Financial Services Conference in New York. The company has increased compliance and risk management spending by $300 million since 2019.

“We’re going to continue to invest whatever we have to invest in order to get the compliance issues behind us,” Greene said. “We’ll hopefully have dealt with most of the major issues in terms of identification and then remediation by the midpoint of 2024.”

Discover’s compliance spending this year has soared as the company faced increased attention from regulators over multiple issues. In August, Greene said the company was set to spend about $260 million on compliance throughout 2023. Then, during Discover’s third-quarter earnings call in October, interim CEO John Owen said the company was on track to spend about $460 million. 

Ultimately, the card company is focused on creating a sustainable compliance management process and systems to meet regulators’ expectations, Greene said Dec. 5.

Discover reached a consent agreement with the Federal Deposit Insurance Corp. in September in connection with a consumer compliance probe at its subsidiary, Discover Bank. Discover also disclosed a card misclassification issue in July that affected merchants and merchant acquirers, and the Securities and Exchange Commission is investigating that issue.

The company’s student loans business is another area that’s run into regulatory trouble. Discover said in November that it’s pursuing a sale of its $10.4 billion student loan portfolio. That business has “had perennial issues in our ability to service that portfolio,” Greene said.

Greene pointed to the Consumer Financial Protection Bureau’s 2015 consent order, which alleged Discover misstated minimum amounts due on billing statements for student loans; misstated tax information required for certain tax benefits; and engaged in illegal debt collection. In 2020, Discover signed another consent order with the CFPB and agreed to pay $35 million after the company violated the prior order. 

September’s consent agreement with the FDIC “also contained some elements” related to the company’s student loan business, Greene added.

“We found that our internal systems capabilities weren’t on par with what a professional servicing organization could do for this portfolio,” Greene said.

The company weighed keeping and fixing the business unit — “we ruled that out,” Greene said — or outsourcing servicing and retaining the portfolio, but “the economics of that decision relative to a full exit weren’t equal,” the CFO said. 

The company is targeting the midpoint of 2024 to exit the student loan business, Greene said. When it comes to a buyer, Discover aims to “choose a bonafide servicer that has dealt with loans of this nature, and it also had dealt with loans that are subject [to] consent order, and we believe we’re pretty close to finding one,” he said. 

Fully exiting the business presents an opportunity “to execute a gain on sale in that portfolio and actually create $1.5 billion to $2 billion worth of capital that we can invest in the business” or return to shareholders, he said. He also mentioned $900 million in reserves for that business that will be released.

As far as further financial impact from the sale, “the aspects are certainly our resources, and our ability to kind of resize the organization,” Greene said. 

He added that the company’s first priority “will be to take resources and redeploy those into open positions,” and then “we’re going to size it and work to be what I’ll say (is) fiscally astute in terms of kind of managing the cost profile of the business.” 

A Discover spokesperson declined to comment when asked for more detail on Greene’s remarks or how many employees work in Discover’s student loans unit. Discover had 20,200 employees as of the end of 2022, according to its annual filing with the SEC. 

Federal Reserve officials will allow the public to comment on impact data the central bank is gathering in relation to a contentious July capital-requirements proposal, Michael Barr, the Fed’s vice chair for supervision, indicated in January.

"We want to make sure that the rule supports a vibrant economy that supports low- and moderate-income communities, that gets the calibration right upon things like mortgages," Barr told Reuters. "So the public comment that we're getting on this is really critical for us getting it right. We take it very, very seriously."

Under the proposed rule, the U.S.’s eight global systemically important banks would see a roughly 19% increase in the amount of capital they’d have to hold. Meanwhile, banks with between $250 billion and $1 trillion in assets face about a 10% uptick, and banks with $100 billion to $250 billion would see a 5% jump in the holdings.

But Republican lawmakers in September blasted the proposal for incorporating “paltry” impact analysis — at least, in proportion to its 1,089-page heft — and for leaning on data that isn’t publicly available.

The Fed in October extended, until Jan. 16, its comment period on the proposal. At the same time, it launched an initiative to collect more data from banks affected by the proposal. That drew further blowback — this time, from banking trade groups, which said “collecting such data during, rather than before, the comment period is … legally improper.” 

“The purpose of the comment period is for the public to review the agency’s proposal, including any supporting evidence, not for the agency to finish doing work that should have been completed before issuing the proposal,” the Bank Policy Institute and five other groups wrote. “The agencies cannot fill in the blanks in the final rule.”

Barr explained the comment-period changes in January.

"What we decided to do is, in addition to that information that has already been collected [ahead of the July proposal], is to do a second quantitative impact study as part of this proposal, to make sure, first of all, that we had up-to-date information from the banks, based on their current balance sheet," Barr said, according to American Banker.

It’s upon that second data analysis that the Fed will seek commentary from the broader public, American Banker reported.

“We'll give people a chance to comment, in effect, on the impact itself," Barr said in January. "It will feed into how we develop the final proposal."

Todd Phillips, a law professor at Georgia State University, said the unusual call for public feedback may have been done with legal ramifications in mind.

"What seems to have happened is they intended for this data collection to be a part of the rulemaking process and somehow it got outside of the rulemaking process, and now they are trying to dot all the i's and cross all the t's to make sure everything is legally appropriate,” Phillips told American Banker.

But the Fed has received pushback, too, from atypical sources. Goldman Sachs’ 10,000 Small Business Voices initiative announced a campaign in October to encourage the Fed to abandon the proposal.

The nonprofit Center Forward funded an ad that aired on a Sunday Night Football broadcast detailing what it saw as trickle-down consequences from the rule that would hurt small businesses and make homebuying more difficult.

It may be no accident, then, that the organization to which Barr spoke in January was the housing-focused Women in Housing and Finance.

Consensus, conditions and shade(?)

Also atypical for the capital-requirements proposal is the reported lack of consensus, upon its release, among Fed board members themselves. The rule advanced by a 4-2 margin, spurring dissent from Republicans Michelle Bowman and Christopher Waller. Approval from the Fed board’s other Republican, Chair Jerome Powell, came with three reservations — and added that meeting those conditions was “a difficult balance to strike” but would “require public input and thoughtful deliberation.”

“There is no precedent that we can recall of a significant regulatory matter that has had this level of disagreement at the Fed,” Ian Katz, a financial policy analyst at Capital Alpha Partners, told Bloomberg. “I don’t think they will pass a final rule without Powell’s support, so he will need to do some things to appease Powell.”

Response to the capital-requirements proposal may have even come with a measure of shade from one of Barr’s colleagues.

Barr, weeks ahead of issuing the proposal, spoke about his holistic review of capital at large banks, saying he “approached the task with humility.”

Bowman, in perhaps a months-delayed callback, told the South Carolina Bankers Association at a conference last week: "My sincere hope for 2024 is that policymakers have the humility to acknowledge the intended and unintended consequences of these and upcoming regulatory reform efforts, and the courage to change course, when necessary, to mitigate and minimize these consequences.”

The Consumer Financial Protection Bureau in October unveiled its long-awaited open banking proposal, a rule it says will give consumers greater control over their financial data by requiring banks to share such data with third parties like fintechs. 

The rule, an authority Congress granted the bureau more than a decade ago under Section 1033 of the Dodd-Frank Act, forbids financial institutions from “hoarding a person’s data,” making it easier for consumers to break up with banks that provide bad service, the CFPB said.

The proposed rule gives consumers the right to grant third parties access to information associated with credit card, checking, prepaid and digital wallet accounts. 

To comply with the rule, banks would be required to make personal financial data available at no charge to consumers through “safe, secure, and reliable” digital interfaces, the CFPB said.

“This will make it much easier to switch [banks],” CFPB Director Rohit Chopra said on a call with reporters. “You won't lose your transaction history, which essentially serves as your life ledger. You won't have to start over with a new firm that has less history with you and that is less likely to offer you better deals.” 

The proposal seeks to move the market away from screen scraping, a “risky data collection practice” which often requires consumers to share their usernames and passwords with third parties, the CFPB said.

Under the proposal, data providers cannot rely on screen scraping to comply with the obligation to make data available to an authorized third party accessing on the consumer’s behalf, senior CFPB and administration officials told reporters.

Tiered compliance dates

The CFPB said it recognizes several factors hinder smaller institutions from building interfaces in compliance with the rule, such as size, technological sophistication and reliance on third-party service providers.

As a result, the requirements of the rule would be implemented in phases, the CFPB said.

The rule’s tiered compliance dates start at six months for the largest banks and fintechs, and extend to four years for the smallest firms, senior CFPB and administration officials said.

Community banks and credit unions that have no digital interface with their customers would be exempt from the rule’s requirements, the CFPB said.

Chopra said the rule makes clear that companies receiving data can only use it to provide the product the consumer is asking for “and for nothing else.”

“When a consumer permits their data to be used by a company for a specific purpose, it is not a free pass for that company to exploit the data for other uses,” he said.

Firms will not be able to hold on to consumers’ personal financial data indefinitely, Chopra said.

“If a consumer chooses to end the relationship, the firm would have to stop collecting and using the consumer’s data, as well as delete the data it already possesses,” he said.

Chopra said the rule will help accelerate the U.S.’s shift to open banking, aligning the nation more closely with guidelines in place or under consideration in major jurisdictions around the world.

The bureau is interested in covering additional product types in future rulemaking, such as mortgage, auto loans and student loans, senior CFPB and administration officials said.

The proposal comes as the White House in 2021 urged the bureau to launch the open banking rulemaking process, tying the initiative to President Joe Biden’s efforts to boost competition in several sectors, including healthcare, technology and transportation. Chopra spoke at 2022’s Money20/20 conference in Las Vegas to give an expected timeline for action on open banking.

“One of the competition problems we see in the sector is it is often really daunting for a consumer to switch banks in part because it's difficult to take financial transaction history data to a new bank,” Lael Brainard, director of the White House’s National Economic Council and a former Federal Reserve vice chair, told reporters in October. “Today's rule will help ensure financial companies compete based on service quality and pricing, deter junk fees and other confusing practices that consumers distrust and put in place key privacy provisions to ensure companies can't misuse customer data.”

‘A win for consumers’

Fintech stakeholders, meanwhile, praised the CFPB’s efforts to craft policies around open banking.

“The [Electronic Transactions Association] applauds the CFPB for creating a policy framework around open banking,” said Scott Talbott, who heads the group’s government affairs. “Open banking benefits banks, fintechs and, most importantly, consumers by strengthening their understanding of their financial picture.”

Penny Lee, CEO of the Financial Technology Association, called the proposal “a win for consumers.”

“We look forward to the CFPB creating strong rules of the road that guarantee people’s right to use the digital financial tools they want, regardless of where they bank,” she said. “Looking ahead, we urge the CFPB to implement open banking in a way that prevents anti-competitive behavior from incumbent financial institutions, safeguards consumer data privacy, and fosters innovation in the marketplace.”

Plaid, a fintech that has data sharing agreements with more than 6,500 financial institutions, said it is encouraged by the CFPB’s commitment to consumer data rights and emphasis on promoting competition. 

“This rule will help provide more consistent rights and experiences for consumers so that no matter where they bank, they can use the apps and services that they want,” a Plaid spokesperson told Banking Dive. “With this guidance, we’re hopeful that banks can now close the final mile on moving to [application programming interfaces] and commit to supporting the ability for their customers to share their data.”

In an October statement, American Bankers Association CEO Rob Nichols said the group welcomes the agency’s “contemplated move” away from screen scraping and its clarification around nonbanks' obligations to protect consumer privacy.

Nichols, however, urged the CFPB to right-size the scope of the rule pertaining to the types of accounts involved and the information that data providers are required to share, as well as address liability and implementation costs.

The CFPB said it aims to finalize the rule by the fall of 2024.

Large banks that failed to correct “persistent weaknesses” might be required to reduce their operations, divest subsidiaries, or exit from one or more lines of business, the Office of the Comptroller of the Currency said in May.

The update of the agency’s policies and procedures manual on bank enforcement actions revealed a new set of guardrails targeting complex banks.

“This revised policy promotes strong management by making clear that a bank’s inability to correct persistent weaknesses will result in proportionate, fair, and appropriate consequences, including growth restrictions and divestitures when warranted,” Acting Comptroller Michael Hsu said in a statement.

The new guidelines can be applied to any OCC-regulated financial institutions that are highly complex or risky, considering the bank’s size, risk profile, the complexity of products and services offered, and operations.

The OCC will be focusing on banks that receive a management component rating of 3 or worse, or receive poor risk management assessment for more than three years. The agency will also look at failures by banks to implement all of the corrective actions required by a formal enforcement action promptly and those that have been subject to multiple enforcement actions during a three-year period.

“These guardrails are especially important today, as banks grow to better serve their communities, improve their competitiveness, and achieve economies of scale. Well-managed banks provide invaluable support to our economy, and this revised policy promotes this result,” Hsu said in the statement. 

The agency said it would apply severe penalties to banks showing continued shortcomings, including demands to boost risk management and restrictions on growth.

In a speech in January 2023, Hsu said banks that are found to be too big to address internal weaknesses and comply with regulations might be broken up. He added that the size and complexity of such “too-big-to-manage” banks can cause risk management breakdowns.

“It is the size and complexity of the bank that is the core problem that needs to be solved, not the weaknesses of its systems and processes or the unwillingness or incompetence of its senior leaders,” Hsu said.

The collapse of several banks since mid-March has heightened scrutiny of financial institutions and brought regulation into the spotlight. 

The OCC, the Federal Deposit Insurance Corp. and the Federal Reserve are reviewing their merger guidelines, according to Bloomberg Law.

In recent hearings and a report, the Fed blamed supervisory failures and poor bank management for Silicon Valley Bank’s collapse. Michael Barr, the central bank’s vice chair for supervision, said SVB failed due to a “textbook case of mismanagement” since the bank leadership failed to manage basic interest rate and liquidity risk.

“The Federal Reserve did not appreciate the seriousness of critical deficiencies in the [SVB]’s governance, liquidity, and interest rate risk management,” Fed officials said in the 102-page report in April. “These judgments meant that Silicon Valley Bank remained well-rated, even as conditions deteriorated and significant risk to the firm’s safety and soundness emerged.”

Western Alliance’s chief legal officer, Randall Theisen, has postponed his move to a newly created role as head of corporate affairs by three months “given the market dynamics” in the banking space, the bank’s general counsel, Jessica Jarvi, said in an email to Bloomberg Law in May.

Theisen was set to step down as legal chief — with Jarvi taking up the role — in the first quarter of 2023, the bank said in a statement in September 2022.

Phoenix, Arizona-based Western Alliance has been one of the most closely watched — and seen as one of the most at-risk — regional banks since the failures of Signature, Silicon Valley Bank and First Republic prompted a crisis of confidence among investors.

The $65 billion-asset bank issued a statement in May refuting a Financial Times report claiming it engaged outside counsel from Sullivan & Cromwell to explore options including a sale.

“There is no truth to this,” Stephanie Whitlow, Western Alliance’s chief marketing officer, told Bloomberg following the report.

The bank told the wire service it neither hired an adviser nor considered options for sale, but that it was “considering all of our legal options in response to the story.”

Western Alliance has issued two updates on its deposit strength in the first 10 days after First Republic failed. The first, dated May 3, disclosed that deposits had increased to $48.8 billion from $48.2 billion, on the day after the Federal Deposit Insurance Corp. sold First Republic to JPMorgan Chase. More than 74% of Western Alliance’s total deposits are insured, the bank said. That percentage increases to 88% for the bank’s 20 largest depositors, Western Alliance added.

In a second update May 11, Western Alliance said its total deposits had risen to $49.4 billion — a $1.8 billion increase from March 31, and that insured deposits jumped to 79%. 

As head of corporate affairs, Theisen would oversee Western Alliance’s corporate communications, marketing, government relations and community relations functions. As it stands, Theisen is performing both roles, according to a proxy filing. 

Theisen joined Western Alliance in 2006, and has roughly 40 years of experience representing financial institutions in banking, corporate and financial services law, according to the bank.

Jarvi joined in 2007 as a senior vice president and became deputy general counsel in 2013, overseeing the bank’s legal function and spearheading the company’s Community Reinvestment Act; environmental, social and governance initiatives and and executive-led diversity and inclusion efforts. 

Tupelo, Mississippi-based Cadence Bank received an overall “outstanding” rating from the Federal Deposit Insurance Corp. for its performance in relation to the Community Reinvestment Act, the bank reported in June.

Without context, that alone might not be enough to warrant coverage. Fewer than 10% of banks achieve CRA’s highest score, consultant Ken Thomas told American Banker. But that would still encompass hundreds of banks.

Consider, however, Cadence agreed in August 2021 to pay more than $8.5 million to resolve a Justice Department investigation alleging the bank avoided mortgage lending in predominantly Black and Hispanic neighborhoods in Houston between 2013 and 2017.

That settlement, which included a $3 million penalty from the Office of the Comptroller of the Currency, was the last redlining-related resolution before the DOJ, OCC and Consumer Financial Protection Bureau teamed up two months later in a joint effort focused on rooting out discriminatory lending.

An FDIC spokesperson told American Banker the agency's evaluation did not take the OCC’s 2021 penalty into account. Rather, the structure of a merger that year that combined Cadence and BancorpSouth may have helped make the “outstanding” possible. As part of the transaction, BancorpSouth was the surviving entity, but it operates under the Cadence name.

The FDIC spokesperson, indeed, said the 2021 consent order involved a bank that no longer exists, adding that the evaluation period was later than the 2013-17 time frame for which Cadence was penalized.

This is not to say BancorpSouth’s record is spotless. It, too, paid the DOJ, along with the CFPB, to settle allegations of redlining — this time, in Memphis, Tennessee. The $10.6 million settlement came in 2016. The bank’s overall CRA rating fell from "satisfactory" to "needs to improve” shortly after the settlement, but bounced back to "satisfactory" in 2018 and received the same rating two years later.

“This recognition from the regulators is a testament to our unwavering dedication to promoting economic growth and advancing financial inclusion, particularly in low- and moderate-income areas within the communities we serve,” Cadence CEO Dan Rollins said in his June statement. “Serving these communities is a privilege, and these evaluation results exemplify the profound impact our team members make each day.”

Rollins credited Cadence’s CRA rating, in part, to the work BancorpSouth put in.

"My experience with the regulators is, they look to the acquiring institution,” Rollins told American Banker. "And they obviously were pleased with what we were doing, or they wouldn't have let the merger go through.”

Cadence, for its part, agreed to a five-year, $20.7 billion community benefits plan with the National Community Reinvestment Coalition — a deal Rollins said did not factor into its June CRA rating. As part of the plan, the bank promised $11.8 billion in mortgages to low- and moderate-income borrowers and people of color.

The full report of the FDIC's evaluation of Cadence had been expected to surface over the summer.

"There's nothing in [Cadence’s community benefits plan] that we weren't already doing," Rollins told American Banker. "This is a team sport, and if the whole team is not doing what they need to be doing, then you won't get an outstanding rating.”

The Catawba Indian Nation passed a banking code in April as part of the tribe’s effort to attract traditional and emerging financial activity to its 600-acre reservation in South Carolina. 

The project is headed by the Catawba Digital Economic Zone, a legal entity formed in February 2022 to help spur economic development in the area.

“This is an example of a tribe moving beyond simply governing the gaming space, cannabis or payday lending, but being a full-service governing body for businesses in their jurisdiction,” said CDEZ CEO Joe McKinney, who has been spearheading the tribe’s economic development efforts for several years.

By passing the code, the CDEZ hopes to eventually gain regulatory approval for de novo banks to receive charters under the laws of the Catawba reservation’s federally recognized land, he said.

The code is modeled after existing financial codes in South Dakota, North Dakota and Wyoming — states whose financial frameworks demonstrate a commitment to regulating innovative financial activity, McKinney said.

The bulk of the CDEZ’s bank code is mirrored after South Dakota’s, he said.

“One of the best jurisdictions for banking, arguably, in terms of assets under management, is the South Dakota code,” McKinney said. 

Wyoming’s embrace of crypto, through its special-purpose depository institutions, and North Dakota’s status as the only state with a government-run bank, also served as inspiration for the Catawba Indian Nation’s bank code, McKinney said.

Under the U.S. Constitution, tribal governments have the same status as states in regards to commercial law and business regulations, McKinney said.

“We can do, basically, everything that a state can do,” McKinney said, arguing the zone’s “more nimble” five-person commission would help it compete with states like Wyoming, South Dakota, North Dakota and even Delaware.

“One of our taglines is ‘disrupt Delaware,’” he said, referencing the state’s unique tax benefits and business-friendly climate that have enticed some of the country’s largest firms to incorporate there. 

Like North Dakota’s state-run bank, the CDEZ aims to charter a public bank. The public bank would serve as a regulator for its bank charters and facilitate access to capital for banks and Catawba citizens.

The CDEZ is working on establishing a banking commission, which would be responsible for reviewing charters and conducting bank examinations, McKinney said.

The zone also plans to work with federal bank regulators to make sure it gets services that are available to other state-chartered institutions, such as Federal Deposit Insurance Corp. deposit insurance and federal payment access, McKinney said.

McKinney said he thinks the zone’s bank charters could be an attractive option for both de novo banks and fintechs.

“Maybe some of the high-quality neobanks that have best practices and quality teams, that can pass our vetting through our charter system, could be banks themselves,” he said.

The reservation’s proximity to the nation’s second-largest banking hub could also make it a draw for burgeoning financial firms, McKinney added.

Located in York County, South Carolina, the Catawba Indian Nation is just 30 miles south of Charlotte, North Carolina, home to Bank of America and Truist.

“A lot of partnerships, still, are begotten regionally, or in person. So, it certainly helps,” he said.

More banks needed

“Our goal is to provide best-in-class banking and provide responsible innovation,” McKinney said. “The goal is not to circumvent or to provide an alternative, but to integrate within the existing federal financial system in a way that's built for the 21st century.”

The failures of Signature, First Republic and Silicon Valley Bank demonstrate a need for more banking charters, McKinney said.

“We think [the code] actually addresses many of the problems that have led to this moment,” he said. 

McKinney pointed to an April speech by Michelle Bowman, in which the Federal Reserve governor highlighted the decline in bank charters and a reduction in bank branches. The trend, Bowman said, has led to an increase in banking concentration in local markets.

“As a consequence, you have this sort of effect, where if one bank starts to make some bad decision, then that effect is felt throughout the entirety of the banking system,” McKinney said. “The nature of business always leads to the possibility of failures. It's better to have more of these banks around than having these failures concentrated in a few of the largest banks.”