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The State and Fate of Community Banking

February 26, 2015 Comments off

The State and Fate of Community Banking
Source: Harvard Kennedy School, Mossavar-Rahmani Center for Business & Government

This working paper focuses on the plight of community banks in the United States. It begins by examining different definitions of what constitutes a community bank, and goes on to review what makes these institutions unique and distinguishes them from larger regional or national peers. Our assessment of Federal Deposit Insurance Corporation data finds that community banks service a disproportionately large amount of key segments of the U.S. commercial bank lending market – specifically, agricultural, residential mortgage, and small business loans. However, community banks’ share of U.S. banking assets and lending markets has fallen from over 40 percent in 1994 to around 20 percent today. Interestingly, we find that community banks emerged from the financial crisis with a market share 6 percent lower, but since the second quarter of 2010 – around the time of the passage of the Dodd-Frank Act – their share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010. Particularly troubling is community banks’ declining market share in several key lending markets, their decline in small business lending volume, and the disproportionate losses being realized by particularly small community banks. We review studies on the impact of regulation, consumer trends and other factors on community banks, and examine the consequences of consolidation on U.S. lending markets. We conclude with a discussion of policies that could promote a more competitive and robust banking sector.

Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws

February 17, 2015 Comments off

Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws
Source: International Monetary Fund

Laws governing the foreclosure process can have direct consequences on the costs of foreclosure and could therefore affect lending decisions. We exploit the heterogeneity in the judicial requirements across U.S. states to examine their impact on banks’ lending decisions in a sample of urban areas straddling state borders. A key feature of our study is the way it exploits an exogenous cutoff in loan eligibility to GSE guarantees which shift the burden of foreclosure costs onto the GSEs. We find that judicial requirements reduce the supply of credit only for jumbo loans that are ineligible for GSE guarantees. These laws do not affect, however, the relative demand of jumbo loans. Our findings, which also hold using novel nonbinary measures of judicial requirements, illustrate the consequences of foreclosure laws on the supply of mortgage credit. They also shed light on a significant indirect cross-subsidy by the GSEs to borrower-friendly states that has been overlooked thus far.

CRS — Who Regulates Whom and How? An Overview of U.S. Financial Regulatory Policy for Banking and Securities Markets (January 30, 2015)

February 10, 2015 Comments off

Who Regulates Whom and How? An Overview of U.S. Financial Regulatory Policy for Banking and Securities Markets (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

Financial regulatory policies are of interest to Congress because firms, consumers, and governments fund many of their activities through banks and securities markets. Furthermore, financial instability can damage the broader economy. Financial regulation is intended to protect borrowers and investors that participate in financial markets and mitigate financial instability. This report provides an overview of the regulatory policies of the agencies that oversee banking and securities markets and explains which agencies are responsible for which institutions, activities, and markets. Some agencies regulate particular types of institutions for risky behavior or conflicts of interest, some agencies promulgate rules for certain financial transactions no matter what kind of institution engages in them, and other agencies enforce existing rules for some institutions, but not for others. These regulatory activities are not necessarily mutually exclusive.

Overdraft Frequency and Payday Borrowing

February 4, 2015 Comments off

Overdraft Frequency and Payday Borrowing
Source: Pew Charitable Trusts

According to an analysis of banks’ account data published by the Consumer Financial Protection Bureau in July 2014, “a relatively small number of account holders are responsible for most overdrafts.” (Specifically, the report found, 8.3 percent of account holders who overdraw more than 10 times per year are responsible for 73.7 percent of overdraft fees.1) A 2008 study by the Federal Deposit Insurance Corp. came to similar conclusions.2 This brief builds on this evidence base by analyzing Pew survey data from 2013 to compare the experiences and characteristics of “high-frequency” and “low-frequency” overdrafters, as well as the relationship of overdraft to use of payday loans.

Pew research has found that 10 percent of U.S. adults have overdrawn their checking accounts using their debit card in the preceding year.3 Approximately 6 percent are low-frequency overdrafters—those who paid one to three overdraft penalty fees using their debit/ATM card over that year—and 4 percent are high-frequency overdrafters, having paid four or more such fees in the same period.

Banks that make the most money, and the least, on credit card loans

January 30, 2015 Comments off

Banks that make the most money, and the least, on credit card loans
Source: CreditCards.com

The most lucrative card companies are ones you probably never heard of — but whose cards you just might carry.

Store-card issuers Comenity Bank and Synchrony Financial, formerly called GE Capital, reaped the most interest and fees from their cardholders among 12 major card issuers, an analysis by CreditCards.com found.

Banks that issue credit cards are enjoying high profits these days, buoyed by low defaults and cheap funding costs. But some card banks are better off than others, thanks to cardholders who shell out more interest and fees. Creditcards.com analyzed financial reports filed by 1,300 U.S. banks to see who made the most — and the least — from their card business in 2013.

The analysis found a wide spread in card income — with some big banks collecting three times as much from cardholders as their competitors. The industry generated an average yield of 12.4 cents on each dollar of card balances last year, before losses and other costs. Among the top dozen issuers, yields ranged from a high of 28.4 cents to a low of 8.4 cents per dollar of card loans.

January 2015 Quarterly Report to Congress on the Status of TARP

January 29, 2015 Comments off

January 2015 Quarterly Report to Congress on the Status of TARP (PDF)
Source: Special Inspector General for the Troubled Asset Relief Program

Long-lasting recovery from the financial crisis requires important efforts on many fronts, including investigating and preventing fraud, waste, and abuse related to the Government’s rescue efforts. Fraud prevention and law enforcement is at the heart of the Office of the Special Inspector General for the Troubled Asset Relief Program’s (‘SIGTARP”) audits, general oversight, and investigations. Uncovering and combating bailout-related crime is neither fast, nor easy, but it is necessary for justice, accountability, deterrence, and lasting recovery. SIGTARP has ramped up our law enforcement efforts to uncover and combat bailout-related crime. In the last two years:
• The number of defendants charged with a crime SIGTARP investigated nearly doubled to 222;
• We supported prosecutors at 6 trials including 5 criminal fraud schemes investigated by SIGTARP;
• The number of defendants convicted of a crime investigated by SIGTARP nearly doubled to 160;
• The number of defendants we investigated who were sentenced to prison increased 160% to 91;
• Prison sentences for crime investigated by SIGTARP are nearly double the national average for white collar crime, reflecting the complexity and seriousness of the criminal schemes; and
• SIGTARP investigations have already brought back $1.258 billion to the Government and $224 million to other victims, a nearly eightfold increase since 2012.

SIGTARP has much more to do in the fight against bailout-related crime – crime that is opportunistic in the most reprehensible way. We expect an escalation in results from SIGTARP investigations:
• 45 convicted defendants investigated by SIGTARP await sentencing by a court; and
• 61 defendants already charged with a crime investigated by SIGTARP await trial.

Phishing in Smooth Waters: The State of Banking Certificates in the US

January 26, 2015 Comments off

Phishing in Smooth Waters: The State of Banking Certificates in the US
Source: Social Science Research Network

A critical component of the solution to online masquerade attacks, in which criminals create false web pages to obtain financial information, is the hierarchy of public key certificates. Masquerade attacks include phishing, pharming, and man-in-the-middle attacks. Public key certificates ideally authenticate the website to the person, before the person authenticates to the website. Public key certificates are typically issued by certificate authorities (CAs).

Banks are the most common target of phishing attacks, so we implemented an empirical study of certificates for depository institutions insured by the Federal Depository Insurance Corporation (FDIC) and compared them to general purpose, non-banking certificates. Our study of websites of FDIC-insured banks found that the current configuration fails to support website authentication. The most common failure is an absence of certificates, meaning that a false certificate would be the only valid-named certificate for that institution. Certificates with incorrect names, incorrectly structured certificates, and shared certificates all plague online banking. The vast majority of banks, especially smaller banks, apparently lack the expertise, support, or incentive to implement certificates correctly.

We document the current state of bank certificates. We compare these with general-purpose certificates (e.g., the top one million websites). We survey the various proposals for the certificate market writ large, including pinning and notaries. We identify how those fit and fail to fit the unique problem of banking certificates. We close with policy and technical recommendations to alter the use of certificates so that these can be a valid basis for consumer trust.

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