Today is normally the time when I send out a note with the top ten articles to read this week. And this past week certainly didn't lack for news-from the horrific attempted assassination of former President Trump to his pick of Sen. J.D. Vance as his vice-presidential candidate and a concerted Democratic effort to remove President Biden from the ticket-there's been a lot going on.
But since you have plenty of ways to read those stories already, I thought instead I'd go behind the scenes on just one banking story that I think was overlooked.
Acting Comptroller of the Currency Michael Hsu on Wednesday gave a speech to the Exchequer Club in Washington, D.C. in which he said he was prepared to flex the agency's muscles when it came to the preemption of federal law over state law. Even though that's traditionally what the OCC does, it's unusual because Democrats have taken a very different line when it comes to preemption after the Great Financial Crisis of 2008, i.e. they generally haven't asserted authority because they don't want to preempt a tougher state consumer protection law.
But Hsu was worried about preemption when it came to two other contexts: the growing number of states that are deciding to legislate who banks can and should do business with and the rise of fintechs using state money-service charters to go beyond what Hsu believes those charters were designed for.
In the first instance, Hsu worried about the "weaponization of finance."
"Increasingly banks are being asked by states to pick a side in service of performative politics rather than deliberative policy," he said in his speech. "The OCC is a bulwark against this."
Hsu wants to "fortify and vigorously defend core preemption" when it comes to state laws that would dictate lending terms to banks. At the same time, Hsu suggests the OCC needs to be careful when it comes to consumer protection laws, while acknowledging that it needs to update its criteria for determining what statutes to preempt.
Hsu's speech is timely because the polarization issue is now one that banks are thinking more deeply about given the shifting politics in D.C. Not long ago, it was anyone's guess who would win the presidency and Congress this fall. Now, many political pundits and most in the banking industry believe a second Trump administration is all but assured, and with it Republican control of the House and Senate.
While the industry is mostly pleased with that prospect, what banks now fear is a populist streak (arguably embodied by Vance) that could tip things in the opposite direction for them. It was no surprise yesterday when the ABA put out a statement praising Hsu's speech:
"States imposing their own rules on national banks, no matter how well-intentioned, creates a patchwork of differing regulatory requirements across the country and undermines the longstanding efficiencies and economic benefits derived from our dual banking system," said Rob Nichols, head of ABA, and who attended the Exchequer Club lunch.
Rep. Andy Barr, a top Republican on the House Financial Services Committee who is vying to be its next chair, told Politico this week that banks are warming to the prospect of a federal law that sets a "fair access" rule to dictate with whom banks can do business. He may be right, at least based on private conversations I've had with bankers. After all, while preemption may help national banks, it doesn't do anything for the state-chartered banks, which make up the bulk of the system. And it's a lot easier to comply with a single federal law than 50 different blue and red state laws setting different parameters for how banks can do their business.
But it's less clear what policymakers want to do on Hsu's other instance of preemption. Hsu cited the bankruptcy of Synapse, which has resulted in many customers being unable to access their funds, wrongly believing they were FDIC insured. The OCC chief put the blame for this on fintechs using the MSB charter to effectively go rogue.
"Fintechs have been able to play fast and loose with how they market their services and their relationship to FDIC insurance, which does not cover their failures," he said in the speech.
In his speech, he added: "As the recent bankruptcy of Synapse has shown, the line between where a bank ends and where a nonbank begins is increasingly hard for consumers, regulators, and market participants to discern. This makes it challenging to know who is responsible for what-a challenge that is playing out tragically for the millions of consumers and end users caught up in the Synapse bankruptcy."
Later, at the Q&A: "The Synapse issue is going to be a bigger and bigger issue."
Unlike the polarization argument, where the OCC's authorities are more defined, it's not exactly clear how the agency could use preemption to solve this problem. Hsu called for "tailored federal payments regulation and supervision," an answer so broad that it could mean any number of things.
In his Q&A, Hsu said that the MSB charter was built for a different time, saying it's no longer just Western Union sending money from point A to Point B. There should be "modern banking and payments. We don't have that. We need that… That gap needs to be filled." But who is going to fill this gap, and how?
No matter who wins the election, it's worth keeping an eye on the two issues being flagged here. The battle over a "fair access" law is just starting and could heat up in a Republican-dominated D.C. But Synapse isn't going away either as regulators attempt to address a problem that lacks an easy solution.
Here are other stories to read this week:
"6 Ways the CFPB Wants to Keep its Eyes on Fintech Middlemen"
CFPB Director Rohit Chopra said the agency's open banking rule - designed to make it easier for consumers to share deposit account and credit card data with fintechs - will be finalized by October. In a speech largely devoted to cracking down on fintechs, Chopra also described what he expects to be the impact of the Supreme Court's rejection of the Chevron doctrine. "You're going to see a lot more things being litigated in the courts," he said. "There's going to be more split opinions and less finality to what the rules of the road are."
"Report: Trump Wouldn't Fire Fed's Powell if Reelected"
Former President Trump told Bloomberg this week that he would let Jay Powell finish his term as Fed chairman, which ends in May 2026. The GOP's presidential nominee also said the Fed should not cut interest rates in September and mused about selecting JPMorgan Chase CEO Jamie Dimon as his Treasury Secretary.
"House Weighs Bank AI Legislation in Bipartisan Report"
The House Financial Services Committee's task force on artificial intelligence released its first report this week, which is largely a summary of the information it has gathered since the task force was formed in January.
"FedNow Zooms Past RTP Participation in Inaugural Year"
In its first year of operation, with 800 banks and credit unions, FedNow has surpassed the number of financial institutions on the private real-time system known as RTP, which has 652 participants.
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Rob Blackwell
Chief Content Officer and Head of External Affairs
IntraFi
Arlington, VA
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