Nonbank online lenders are becoming more mainstream alternative providers of financing to small businesses. In 2018, nearly one-third of small business owners seeking credit reported having applied at a nonbank online lender. The industry’s growing reach has the potential to expand access to credit for small firms, but also raises concerns about how product costs and features are disclosed. The report’s analysis of a sampling of online content finds significant variation in the amount of upfront information provided, especially on costs. On some sites, descriptions feature little or no information about the actual products or about rates, fees, and repayment terms. Lenders that offer term loans are likely to show costs as an annual rate, while others convey costs using terminology that may be unfamiliar to prospective borrowers. Details on interest rates, if shown, are most often found in footnotes, fine print, or frequently asked questions.
The report’s findings build on prior work,
including two rounds of focus groups with small business owners who
reported challenges with the lack of standardization in product
descriptions and with understanding product terms and costs.
In addition, the report finds that a number of websites require prospective borrowers to furnish information about themselves and their businesses in order to obtain details about product costs and terms. Lenders’ policies permit any data provided by the small business owner to be used by the lender and other third parties to contact business owners, often leading to bothersome sales calls. Moreover, online lenders make frequent use of trackers to monitor visitors on their websites. Even when visitors do not share identifying information with the lender, embedded trackers may collect data on how they navigate the website as well as other sites visited.
The Federal Reserve Board and Federal Deposit Insurance Corporation announced Tuesday that they did not find any “deficiencies,” which are weaknesses that could result in additional prudential requirements if not corrected, in the resolution plans of the largest and most complex domestic banks. However, plans from six of the eight banks had “shortcomings,” which are weaknesses that raise questions about the feasibility of a firm’s plan, but are not as severe as a deficiency. Plans to address the shortcomings are due to the agencies by March 31, 2020.
Resolution plans, commonly known as living
wills, describe a bank’s strategy for rapid and orderly resolution
under bankruptcy in the event of material financial distress or failure.
In the plans of Bank of America, Bank of
New York Mellon, Citigroup, Morgan Stanley, State Street, and Wells
Fargo, the agencies found shortcomings related to the ability of the
firms to reliably produce, in stressed conditions, data needed to
execute their resolution strategy. Examples include measures of capital
and liquidity at relevant subsidiaries. The agencies did not find
shortcomings in the plans from Goldman Sachs and J.P. Morgan Chase.
The firms will receive feedback letters, which will be publicly available on the Board’s website.
For the six firms whose plans have shortcomings, the letter details the
specific weaknesses and the actions required. Overall, the letters note
that each firm made significant progress in enhancing its resolvability
and developing resolution-related capabilities but all firms will need
to continue to make progress in certain areas.
To that end, the letters confirm the
agencies expect to focus on testing the resolution capabilities of the
firms when reviewing their next plans. Resolving a large bank would be
challenging and unprecedented, and the agencies expect the firms to
remain vigilant as markets change and as firms’ activities, structures,
and risk profiles change.
The agencies also announced on Tuesday
that Bank of America, Goldman Sachs, Morgan Stanley, and Wells Fargo had
successfully addressed prior shortcomings identified by the agencies in
their December 2017 resolution plan review.
The US Consumer Financial Protection Bureau, Federal Reserve Board, and Office of the Comptroller of the Currency today announced that the threshold for exempting loans from special appraisal requirements for higher-priced mortgage loans during 2020 will increase from $26,700 to $27,200.
The threshold amount will be effective January 1, 2020, and is based
on the annual percentage increase in the Consumer Price Index for Urban
Wage Earners and Clerical Workers (CPI-W) as of June 1, 2019.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
amended the Truth in Lending Act to add special appraisal requirements
for higher-priced mortgage loans, including a requirement that creditors
obtain a written appraisal based on a physical visit to the home’s
interior before making a higher-priced mortgage loan. The rules
implementing these requirements contain an exemption for loans of
$25,000 or less and also provide that the exemption threshold will be
adjusted annually to reflect increases in the CPI-W. If there is no
annual percentage increase in the CPI-W, the agencies will not adjust
this exemption threshold from the prior year. However, in years
following a year in which the exemption threshold was not adjusted, the
threshold is calculated by applying the annual percentage change in
CPI-W to the dollar amount that would have resulted, after rounding, if
the decreases and any subsequent increases in the CPI-W had been taken
into account.
The Fed chair Jerome Powell said after the decision ” We don’t see a recession, we’re not expecting a recession, but are are making monetary policy more accommodative”, saying it is a mistake to hold onto your firepower until a downturn has gathered moment. This was seen by the market as “hawkish”, much to Trump’s annoyance! The US dollar was stronger after the announcement.
Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.
In determining the timing and size of future adjustments to the
target range for the federal funds rate, the Committee will assess
realized and expected economic conditions relative to its maximum
employment objective and its symmetric 2 percent inflation objective.
This assessment will take into account a wide range of information,
including measures of labor market conditions, indicators of inflation
pressures and inflation expectations, and readings on financial and
international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.
The approval by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) of the newly updated Volcker rule will ease compliance with the requirements that prevent banks from engaging in proprietary trading, and, in doing so, would enhance their role as market makers and aid market liquidity, according to Fitch Ratings.
The revamped Volcker rule — or Volcker 2.0 — reduces the onus on banks to prove that their trading activities are not proprietary in nature. In addition, and consistent with the aim to tailor regulatory rules, banks with between $1.0 billion and $20.0 billion in trading assets would be subject to a simplified compliance program, while community banks, defined as banks under $10.0 billion in assets with minimal trading assets and liabilities (under 5% of total assets) were already exempted from the Volker rule as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act.
While
most recent regulatory easing initiatives have been aimed at the
smaller banks, Fitch views this change as more impactful for the larger
banks. Relaxing the Volcker rule does not help smaller banks as they
generally do not engage in the type of trading activities the
regulations restrict.
The final rule changed in one important
aspect from the original proposal. Under the initial proposal, the rule
would have encompassed all of a bank’s fair-valued trading assets and
liabilities — the so-called “accounting prong”. However, the final rule
did not retain this test, which would have been more restrictive for
banks and would have scoped-into over $400 billion of available-for-sale
assets. Instead, the rule continues to define a trading account based
on a modified version of the existing rule — as to whether there is a
short-term trading intent — which is more subjective than the
accounting-based test. The new rule also eliminates the presumption that
trading positions held for 60 days or less constitutes prop trading,
thereby freeing up some of the compliance burden associated with
short-tenor trades.
Volcker 2.0 also provides more leeway for
banks to effectively self-police their compliance with the rule as they
will not be required to automatically notify supervisors when internal
risk limits are exceeded. Previously, the rule required banks to
promptly report limit breaches or increases to the regulators.
“Under
the prior rule, banks were presumed guilty unless proven innocent. With
Volcker 2.0, banks are more generally presumed to be innocent unless
proven guilty” said Christopher Wolfe, Managing Director at Fitch
Ratings.
The new rule also modifies the liquidity management
exclusion from the proprietary trading restrictions, permitting banks to
use a broader range of financial instruments to manage liquidity. It
adds new exclusions for error trades, offsetting swap transactions,
certain customer-driven swaps, hedges of mortgage servicing rights, and
purchases or sales of instruments that do not meet the definition of
trading assets/liabilities. It also eliminates the extra-territoriality
reach of the rule for foreign banking entities covered fund activities,
where the risk occurs and remains outside of the U.S.
The
relaxation of the compliance burden potentially opens up some avenues
for banks to engage in what can be viewed as proprietary trading, under
the guise of legitimate market making or liquidity management. The
original rule barred the execution of bank algorithmic trading
strategies that only trade when market factors are favorable to the
strategy’s objectives, or otherwise not qualify for the market-making
exception. In Fitch’s view, the new rule could allow banks to re-engage
in some algorithmic trading that previously did not comply and to some
degree, more effectively compete in market-making activities against
high frequency trading firms (HFTs).
Fitch views the general
prohibition against proprietary trading as a positive from a ratings
perspective. Thus, while there are no immediate rating impacts from
these changes to the Volcker rule, we would negatively view any bank
that increases directional trading activities that can be construed as
proprietary trading or fails to self-police their trading activities
appropriately. Moreover, given still heightened capital and liquidity
standards, potentially including the finalised Basel Market Risk (FRTB)
standard and compressed margins in trading businesses, any increase in
perceived proprietary trading may not generate adequate returns on
capital nor be reflected in better stock valuation.
“The
regulators have opened the door for the larger U.S. banks to engage in
selective risk taking, potentially with an eye toward enhancing market
liquidity and levelling the playing field against HFTs” said Monsur
Hussain, Senior Director at Fitch Ratings.
The Federal Reserve appears to be bailing out the president. From The US Conversation.The central bank is essentially signaling it’s now the administration’s insurer of last resort.
The cut sends a message to financial markets and households that the
Fed stands ready to give the economy a boost should it slow further.
Given that it’s forced to do so by Trump’s own policies, the central
bank is essentially signaling it’s now the administration’s insurer of
last resort.
As an expert on monetary policy
and a former Fed economist, I believe the bank’s embrace of this role
is bad for the economy. It could embolden Trump and other politicians to
pursue policies that are even more reckless – the kind intended more to
benefit narrow constituencies and help win their re-election than
support the broader national interest.
The message matters
Judging the merits of a rate cut usually can only be done in
hindsight. But the case for one seems to be more about what it signals
than directly boosting growth.
By itself, a single quarter-point reduction in the overnight
borrowing rate – the rate most directly affected by the Fed – will
likely do little to alter directly the economic decisions made by
consumers and companies. Virtually no households, and very few businesses, borrow money for such a short term.
Most mortgages, for example, are of the 30-year, fixed-rate type. And
while the Fed’s short-term “target” does eventually affect other
interest rates in the economy, long-term borrowing costs typically react
less to modest changes in monetary policy, especially if these changes
are “one-off.”
Rather, it’s the message that matters. Stoking expectations that the
Fed stands ready to provide additional monetary easing if necessary is a
powerful tool. And although rates are historically low,
the central bank still has another 2 percentage points it can cut to
stimulate the economy, as well as similar tools like so-called quantitative easing.
The Fed’s ‘insurance’ policy
Furthermore, although the economy has slowed slightly, it’s still growing. Some argue that the “insurance” of a rate cut – and the signal it provides that the Fed stands ready to do more – will help maintain that positive growth.
But the very reason the Fed feels the need to do this is because of the government’s own policies. Most economists agree that the current round of tariffs and the resulting disruptions to supply chains have been harmful.
Normally, economic conditions play
a big role in presidential elections. And as the political and economic
costs of a bad policy mount, a president would be forced to switch
course to avoid doing more harm – not to mention damaging his
re-election chances.
Therein lies the problem of the Fed’s rate cut. Its commitment to
reducing rates to stimulate the economy regardless of the source of the
slowdown insulates the administration from the consequences of its
actions, potentially leading to even more misadventures.
Not only that, cutting rates drives up the prices of risky assets – which could metastasize into something harmful, as we saw ahead of the 2008 financial collapse
– and masks other structural problems in the economy. Furthermore, rate
cuts tend to primarily benefit the upper middle class and the wealthy –
the group that owns most of the financial assets in the economy.
Americans experienced something similar in the 1970s.
AP Photo
Cuts have costs
History shows that this kind of central bank insurance is not free.
In the 1970s, President Richard Nixon pressured Fed Chair Arthur Burns
to keep interest rates low in order to help him win re-election in
1972. Ultimately, Burns acquiesced, Nixon won re-election, the Vietnam
War continued for three more years, and the U.S. economy suffered high
and disruptive inflation throughout most of the decade.
Something similar could happen if the Trump administration provides even more fiscal stimulus to bolster its 2020 election chances. Fed rate cuts in conjunction with additional fiscal stimulus could result in higher inflation – which could spook markets and lead to a nasty unwinding.
Author: Rodney Ramcharan, Associate Professor of Finance and Business Economics, University of Southern California
