Thursday, July 21, 2016
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What a difference a week can make! On June 17, 2016, bitcoin was trading at more than $750. Five days later, as polls showed the Brexit vote leaning heavily to “remain,” bitcoin dropped as low as $585. After the vote to leave the European Union became final, the British Pound, the Euro, the Chinese Yuan, and global stocks dropped precipitously. Bitcoin, on the other hand, spiked to more than $676. Could this mean bitcoin is being perceived as a new safe-haven asset?

A Brief Background on Bitcoin Generally

Bitcoin often is described as a “digital currency.” On a more technical level, bitcoin is a digital asset within a peer-to-peer computer network payment system created in 2008 by an anonymous cryptographer going by the pseudonym Satoshi Nakamoto. Because the computer network uses open-source, peer-to-peer software, no truly central authority administers and oversees transactions, and no government controls or backs the digital “currency.” Instead, users or “nodes” on the network verify transactions by solving complex computer algorithms. The verified transactions are then recorded on a public ledger (called the blockchain) for all to see. Because transactions employ lengthy key codes rather than traditional personally-identifiable information, users can trade bitcoin quasi-anonymously.

Because bitcoin lacks government or centralized control, conceptually it is accessible to anyone with an internet connection and eliminates many of the transaction costs associated with traditional currency trading. For the same reasons, however, it can be highly volatile. At the inception of the network in 2009 and through 2012, a single bitcoin was worth mere pennies. In 2013, amid a financial crisis and the seizure of bank accounts in Cyprus, holders of Cypriot accounts began buying massive amounts of bitcoin, which drove the price of bitcoin to more than $260 for the first time. By November 2013, the value of bitcoin peaked at $1,242. The price of bitcoin declined thereafter amid hacking scandals, the insolvency proceeding of Mt. Gox (bitcoin’s then largest exchange), and negative perceptions created by the high-profile criminal case involving the elicit online marketplace known as Silk Road. Despite its volatility over the last seven years, however, bitcoin has endured and shows no signs of disappearing.

Bitcoin as a Safe Haven?

Bitcoin’s sharp rise after the Brexit vote appears to evidence a new confidence in bitcoin as a safe haven. Investment professionals, however, have been extremely reluctant to give bitcoin such status. One recent research note observed that calling bitcoin a safe haven “obfuscates the fact that bitcoin is a high-risk and volatile investment” and ignores that “bitcoin’s correlation to other traditional safe-haven assets has fluctuated significantly.” Instead, bitcoin can be viewed as “something entirely different that does not fit into the normal buckets that investments are typically bracketed into.”

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Wednesday, July 20, 2016
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The Federal Reserve Bank of St. Louis just published a short summary of research by economists with the Federal Reserve Bank of Kansas City concluding that compliance costs weigh “quite a bit” more heavily on smaller banks than their larger counterparts in the community banking segment.  Looking specifically at banks under $10 billion in total assets (where additional Dodd-Frank-related burdens are triggered), the study found that the ratio of compliance costs as a percentage of total noninterest expenses were inversely correlated with the size of the bank.  While banks with total assets between $1 and $10 billion in total assets reported total compliance costs averaging 2.9% of their total noninterest expenses, banks between $100 million and $250 million reported total compliance costs averaging 5.9% and banks below $100 million reported average compliance costs of 8.7% of non-interest expenses.

While nominal compliance costs continued to increase as banks increased in size (from about $160 thousand in compliance expense annually for banks under $100 million to $1.8 million annually for banks between $1 and $10 billion), the banks were better able to absorb this expense in the larger banks.  Looked at another way, the marginal cost of maintaining a larger asset base, at least in the context of compliance costs, decreases as the asset base grows.

With over 1,663 commercial banks with total assets of less than $100 million in the United States as of March 31, 2016 (and 3,734 banks with between $100 million and $1 billion), barring significant regulatory relief for the smallest institutions, we believe we will continue to see a natural consolidation of banks.  While we continue to believe there is no minimum size that an institution must be, we also consistently hear from bankers in the industry that they could be more efficient if they are larger… and the research bears them out.

Tuesday, July 12, 2016

In today’s competitive environment, some bank directors may view an acquisition offer from another financial institution as a relief. With directors facing questions of how to gain scale in the face of heightened regulatory scrutiny, increased investor expectations, and general concerns about the future prospects of community banks, a bona fide offer to purchase the bank can change even the most entrenched positions around the board table.

So, how should directors evaluate an offer to sell the bank? A good starting place is to consider the institution’s strategic plan to identify the most meaningful aspects of the offer to the bank’s shareholders. The board can also use the strategic plan to provide a baseline for the institution’s future prospects on an independent basis. With the help of a financial advisor, the board can evaluate the institution’s projected performance should it remain independent and determine what premium to shareholders the purchase offer presents. Not all offers present either the premium or liquidity sought by shareholders, and the board may conclude that continued independent operation will present better opportunities to shareholders.

Once the board has a framework for evaluating the offer, it should consider the financial aspects of the offer. The form of the merger consideration—be it all stock, all cash, or a mix of stock and cash—can dictate the level of due diligence into the business of the buyer that should be conducted by the selling institution.

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Thursday, June 30, 2016
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In a blow to banks and the marketplace lending industry, on June 27, 2016, the U.S. Supreme Court denied the petition by Midland Funding to hear the case Midland Funding, LLC v. Madden (No. 15-610).  That case involves a debt-collection firm that bought charged-off credit card debt from a national bank.  The borrower’s legal team argued that a buyer of the debt was subject to New York interest rate caps even though the seller of the debt, a national bank, was exempt from those state law rate caps due to preemption under Section 85 the National Bank Act.  The borrower won on this startling argument and the debt collector appealed to the Supreme Court.  The Office of the Comptroller of the Currency (the regulator for national banks), the U.S. Solicitor General and various stakeholders in the banking and lending industries vigorously argued that the 2nd Circuit’s decision contravened established law.  The fear was that, if preemption strips loans of their usury-exempt status when the loans are sold, then banks’ ability to sell consumer loans, including the common practice of banks originating and quickly selling those loans to investors and marketplace lenders, would be significantly limited, if not curtailed.

The Supreme Court denied the debt collector’s appeal without explanation, which means the 2nd Circuit’s ruling is binding law in that Circuit, which includes New York, Connecticut and Vermont.  However, the 2nd Circuit’s ruling is not the law outside of the 2nd Circuit.

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Monday, June 27, 2016
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The CFPB recently issued its newest edition of Supervisory Highlights Mortgage Serving Special Edition, Issue 11 (June 2016).

From a litigator’s perspective, the Supervisory Highlights do more than summarize recent supervisory findings, they also shine a light on future examination and putative class action risks that are emerging. The CFPB is providing key insights into what it believes should be industry standards. Banks and mortgage servicers should read carefully both the specific findings summarized and slightly more subtle clues to evolving future CFPB requirements.  Here are three takeaways on the Highlights from a financial services class action litigator’s perspective:

  1. ECOA & Special Servicing Populations Continue to be a Strong CFPB focus.

In section 2, “Our approach to mortgage servicing examinations,” the CFPB uses a fair amount of real estate to highlight ECOA requirements. In fact, the report states clearly “…Supervision will be conducting more comprehensive ECOA Targeted Reviews of mortgage servicers in 2016.” (See Supervisory Highlights, p.5).  The report specifically indicates that the ECOA Baseline Modules in the CFPB Supervision and Examination Manual will be a tool used by CFPB examination teams. Banks and servicers would do well, if you are not already, to consider the modules and how your data may be viewed. The CFPB specifically flags Module IV fair lending risks related to servicing including staff training, monitoring and “servicing those customers with Limited English Proficiency.” (See Supervisory Highlights, p.5, and ECOA Examination Modules). Among the module’s areas of inquiry are: whether personnel who are available for limited English speaking customers receive the same training and have the same authority as do other personnel, and the level(s) of discretion that servicing personnel may have in making loss mitigation decisions and referrals for customers with limited English (including controls to monitor such discretion usage).  The Highlights appear to signal that the CFPB will increase focus on these areas in the coming months. Banks and servicers may wish to re-evaluate their progress and operations capabilities in these areas. As always, the plaintiff’s consumer bar may be watching CFPB pronouncements and enforcement, and may initiate consumer class action(s) asserting such claims.
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Friday, June 24, 2016
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We have all woken up on June 24th to the surprising news that the UK has voted to leave the European Union following a contentious referendum.  The vote was very close, with 52% voting to leave and 48% voting to remain.  Markets are reacting with volatility, as might be expected, and British Pound Sterling values have sunk overnight to a historic 30 year low against the dollar.  To add to the turmoil, David Cameron, the British Prime Minister, has announced that he will be stepping down with his successor to be in place by the October Conservative Party conference.

That said, nothing is going to happen immediately.  There is a very specific legal process for Brexit and the timeline is hardly swift.  As the first step, the UK has to give notice to leave under Article 50 of the Lisbon Treaty.  Based on the Prime Minister’s announcement this morning and questions surrounding who might lead the negotiations on the terms of the UK’s exit from the EU, that notice may not be given for many weeks, if not months. That notice is also just the commencement of the process. Once notice has been given, there is then a two year period in which to negotiate the terms of an exit Treaty.

Our colleagues have posted more details on the Brexit process on Bryan Cave’s EU & Competition blog.

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Monday, June 6, 2016
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On June 2, 2016, the CFPB released its long-awaited proposed regulations for payday loans, vehicle title and certain high-cost installment loans.  Comments on the proposed rules must be received on or before September 14, 2016.

While most payday lenders would need to make significant changes to their products and practices under the proposed rules, the final rules could well be delayed though legal challenges in court.  The scope of the proposal is extraordinary, even requiring a new credit reporting system, that would need to be built, to facilitate the ability-to-repay requirements of the proposal.  The CFPB is relying on its authority under the Dodd-Frank UDAAP provisions to issue the rules, which is admittedly very broad, but even that might not be enough to support this ambitious proposal.

Nevertheless, because we cannot predict how courts would ultimately rule on the CFPB’s authority, it’s important to understand the proposed rules, prepare comments, and consider what business model changes might be needed.   This article therefore summarizes the key provisions of the proposal.

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Tuesday, May 10, 2016
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Atlanta Partner Jonathan Hightower authored a BankThink piece in the American Banker on May 9, 2016 titled “Don’t Ignore This FDIC ‘Request for Comment.’”  The discusses FDIC Financial Institution Letter FIL-32-2016,  which asks for comment on the agency’s plan to explore the economic inclusion potential of mobile financial services.

Jonathan notes “banks’ focus on mobile products not only provides innovative benefits to underserved consumers who may lack branch access, but in light of regulators’ interest in the potential for mobile technology to expand economic inclusion, this focus may also help institutions overcome regulatory and community-based challenges to mergers.”

Click here to read the whole article.

Monday, April 11, 2016
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Everyone has been in a movie theater when one of the actors approaches that door to the basement behind which strange noises are coming. They reach out to turn the knob and in unison the audience is thinking “Fool, haven’t you ever been to the movies? Don’t you know that the zombies or ghouls or some other equally disgusting creature are waiting for you behind that door. Don’t do it!” They of course open the door, blissfully unaware of the grisly fate waiting for them.

I get the same sort of feeling when I read about cybersecurity lapses at banks. Think about the following:

  • “Someone dropped a thumb drive, I think I’ll just plug it into my computer at work and see what is on it. Surely nothing bad will happen. If nothing else, I’ll give it to one of my kids, they can use it on the home computer.”
  • “My good friend, the one who sends me those emails asking me to pass them along to three of my closet friends, just sent me an email with an adorable cat video. I just love cat videos, I’ll open it on my computer at work and see what is on it. Surely nothing bad will happen. Doesn’t the FBI monitor the internet keeping us safe from bad people?”
  • “Someone from a small European country that I have never heard of has sent me an email telling me that I might be the recipient of an inheritance. I always knew I was destined for better things in life, I’ll just click on the attachment and follow the instructions. Surely nothing bad will happen.”
  • “My good customer Bob just sent me an email telling me that he is stuck in jail in South America. He needs me to wire money to post his bail. I didn’t know that Bob was traveling, I am pretty sure I just saw him in the bank a couple of days ago. I probably won’t try and call his house or wife or his cell phone to doublecheck, I’m sure his email is legitimate.”

If you were in the movie theater you’d be yelling out “Don’t do it!” If this were a movie you would see the green glowing blob patiently waiting to silently flow into the office computer. The blob just sits there though, waiting for the bank officer to hit that keystroke that opens the file. Now we see it watching as the person sits down at the computer and logs in, types in a password and initiates a wire transfer. The blob silently memorizes both the log in ID and the password. Weeks can go by as the suspense builds. The ominous music begins to swell in the background, we know that something is going to happen when as fast as lightning, the blob springs to life initiating wire transfers for tens of millions of dollars.

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Monday, April 4, 2016
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Two recent federal banking agency reports show very different pictures of the banking environment for community banks.  In “Too Small to Succeed? – Community Banks in a New Regulatory Environment,” the Federal Reserve Bank of Dallas lays out the “apparent” rising regulatory burden confronting banks today.  In contract, “Financial Performance and Management Structure of Small, Closely Held Banks,” published in the FDIC Quarterly, provides an empirical analysis of the success of closely held community banks in the FDIC Kansas City, Dallas and Chicago regions.

Lots of Community Banks Remain

As a reminder (which often seems forgotten in these discussions), the U.S. banking industry is still full of community banks.  As of December 31, 2015 (the latest data available), there were 6,182 insured depository institutions in the United States (banks and thrifts, exclusive of credit unions).  Only 107 of those institutions had more than $10 billion in assets; 595 institutions had between $1 and $10 billion, 3,792 had between $100 million and $1 billion, and 1,688 had less than $100 million in assets.  (That’s not to say there isn’t significant concentration; the 110 institutions over $10 billion in assets hold over 81% of the assets in the industry.)

As indicated by the otherwise down-beat Federal Reserve paper, community banks (measured as having less than $10 billion in this analysis) have still maintained 55% of all small-business loans and 75% of all agricultural loans (and banks under $1 billion in total assets still provide 54% of all agricultural loans).  As pointed out by the Federal Reserve paper, community banks accounted for 64% of the $4.6 trillion of total banking assets in 1992, but accounted for only 19% of $15.9 trillion of banking assets in 2015.  While we have certainly had consolidation (both fewer banks, and larger banks), the community bank’s aggregate market ownership has, based on the Federal Reserve’s percentages and totals, actually gone up slightly from $2.9 trillion to $3.0 trillion.

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