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General Category => General P2P Lending Discussion => Topic started by: JoeF on December 02, 2016, 04:52:30 PM

Title: OCC FinTech Charter
Post by: JoeF on December 02, 2016, 04:52:30 PM
OCC moving forward with limited purpose charter. Do P2P companies and/or investors care?  Maybe with FDIC insurance, they will become the credit union of the digital age.

https://occ.gov/news-issuances/news-releases/2016/nr-occ-2016-152.html
Title: Re: OCC FinTech Charter
Post by: Fred93 on December 02, 2016, 05:02:37 PM
I believe its a big thing for the P2P companies.  If it works out, they will be able to reduce the complexity of their compliance by avoiding state-by-state licensing and complex relationships with a bank.

For investors I don't think it matters.
Title: Re: OCC FinTech Charter
Post by: rawraw on December 03, 2016, 12:54:31 AM
I believe its a big thing for the P2P companies.  If it works out, they will be able to reduce the complexity of their compliance by avoiding state-by-state licensing and complex relationships with a bank.

For investors I don't think it matters.
It could matter if self funding takes preferences over crowd funding, given its much cheaper, stable, and easy to make money. I hope this enables hybrids to happen, which can improve platform viability and consistency

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Title: Re: OCC FinTech Charter
Post by: nonattender on December 03, 2016, 02:19:55 AM
Frankly, sounds like a wonderful way for a bunch of lobbyists on all sides to enrich themselves for the next few years, keep new entrants distracted in regulatory limbo, and allow the already established players to strengthen ties with "real" banks and capture market share - perhaps picking up a "real" bank or two, on the cheap, as their long-term valuations are diminished by the uncertainty of their necessity.

Maybe I'm just being cynical at the use of the term "credit union of the digital age" - it sounds like marketing copy, not a business model.

I am open to being enlightened, however.
Title: Re: OCC FinTech Charter
Post by: rawraw on December 03, 2016, 02:23:31 AM
Frankly, sounds like a wonderful way for a bunch of lobbyists on all sides to enrich themselves for the next few years, keep new entrants distracted in regulatory limbo, and allow the already established players to strengthen ties with "real" banks and capture market share - perhaps picking up a "real" bank or two, on the cheap, as their long-term valuations are diminished by the uncertainty of their necessity.

Maybe I'm just being cynical at the use of the term "credit union of the digital age" - it sounds like marketing copy, not a business model.

I am open to being enlightened, however.
What is the economic reason bank valuations would change?

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Title: Re: OCC FinTech Charter
Post by: nonattender on December 03, 2016, 02:30:43 AM
If I can spend a few hundred K on K street to make it look like I can be a bank without being a bank, I can reduce the asks / extract lower costs from the banks with whom I already have to deal - see CRB/WebBank - and perhaps scare other banks into acquisition/partnership.

ETA:  Of course, if I actually go through with / get away with that - and special charters issue - then I'll make more competition for myself - so, I'll hedge by taking a chunk of Cross River (just happened) - wait for OCC to gain steam - and buy up whatever else comes to market, knowing that at any moment I can stop funding the special charter initiative and have the market all back to myself again as dust settles.

Maybe I'm being *really* cynical...
Title: Re: OCC FinTech Charter
Post by: Fred on December 03, 2016, 02:39:13 AM
The requirements are quite high though:

Quote
Companies that seek a charter are evaluated to ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection, and strong capital and liquidity.

I'd say in RL's debacle, LC failed on the second one -- appropriate risk management.
Title: Re: OCC FinTech Charter
Post by: nonattender on December 03, 2016, 02:46:07 AM
The requirements are quite high though:

Quote
Companies that seek a charter are evaluated to ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection, and strong capital and liquidity.

I'd say in RL's debacle, LC failed on the second one -- appropriate risk management.

A CircleBack backed by FDIC (ie, you and me) is not something I'd want to see...
Title: Re: OCC FinTech Charter
Post by: rawraw on December 03, 2016, 02:59:21 AM
If I can spend a few hundred K on K street to make it look like I can be a bank without being a bank, I can reduce the asks / extract lower costs from the banks with whom I already have to deal - see CRB/WebBank - and perhaps scare other banks into acquisition/partnership.

ETA:  Of course, if I actually go through with / get away with that - and special charters issue - then I'll make more competition for myself - so, I'll hedge by taking a chunk of Cross River (just happened) - wait for OCC to gain steam - and buy up whatever else comes to market, knowing that at any moment I can stop funding the special charter initiative and have the market all back to myself again as dust settles.

Maybe I'm being *really* cynical...
What's the difference between a bank with a charter and your fake bank with a charter? Is bank of the Internet a fake bank? Is usaa? Live oak?  I'm not sure I follow

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Title: Re: OCC FinTech Charter
Post by: nonattender on December 03, 2016, 03:07:13 AM
If I can spend a few hundred K on K street to make it look like I can be a bank without being a bank, I can reduce the asks / extract lower costs from the banks with whom I already have to deal - see CRB/WebBank - and perhaps scare other banks into acquisition/partnership.

ETA:  Of course, if I actually go through with / get away with that - and special charters issue - then I'll make more competition for myself - so, I'll hedge by taking a chunk of Cross River (just happened) - wait for OCC to gain steam - and buy up whatever else comes to market, knowing that at any moment I can stop funding the special charter initiative and have the market all back to myself again as dust settles.

Maybe I'm being *really* cynical...
What's the difference between a bank with a charter and your fake bank with a charter? Is bank of the Internet a fake bank? Is usaa? Live oak?  I'm not sure I follow

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No, I think you follow pretty well...  The question is really, aside from the buzzwords, what's "special" about doing banking functions over the internet - versus at a branch?  Ok, they're "limited" to 1/3 the function - alright, tie 3 "limiteds" together and, voila, a 'bank' - except without the same compliance rigor (unless there's something else 'special' that I'm missing in this equation).  What's special?
Title: Re: OCC FinTech Charter
Post by: rawraw on December 03, 2016, 03:15:23 AM
If I can spend a few hundred K on K street to make it look like I can be a bank without being a bank, I can reduce the asks / extract lower costs from the banks with whom I already have to deal - see CRB/WebBank - and perhaps scare other banks into acquisition/partnership.

ETA:  Of course, if I actually go through with / get away with that - and special charters issue - then I'll make more competition for myself - so, I'll hedge by taking a chunk of Cross River (just happened) - wait for OCC to gain steam - and buy up whatever else comes to market, knowing that at any moment I can stop funding the special charter initiative and have the market all back to myself again as dust settles.

Maybe I'm being *really* cynical...
What's the difference between a bank with a charter and your fake bank with a charter? Is bank of the Internet a fake bank? Is usaa? Live oak?  I'm not sure I follow

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No, I think you follow pretty well...  The question is really, aside from the buzzwords, what's "special" about doing banking functions over the internet - versus at a branch?  Ok, they're "limited" to 1/3 the function - alright, tie 3 "limiteds" together and, voila, a 'bank' - except without the same compliance rigor (unless there's something else 'special' that I'm missing in this equation).  What's special?
I'm not so sure about they have less rigor due to the charter. If you're only doing one third of banking activities, then lots of regulations do not apply to you because you don't engage in them.   I've always been different from the Fintech guys, but I think this is good for banks long term. I think these things are like the ATM. Structural changes in efficiency of the industry. The problem is if the regulatory barriers to entry get reduced too much, industry leading margins may be less protected. But I currently think the efficiency gains will be more beneficial than the reduction of regulatory moats. But I spend a lot of time trying to figure out where I'm wrong on this

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Title: Re: OCC FinTech Charter
Post by: nonattender on December 03, 2016, 03:56:35 AM
The problem is if the regulatory barriers to entry get reduced too much, industry leading margins may be less protected. But I currently think the efficiency gains will be more beneficial than the reduction of regulatory moats. But I spend a lot of time trying to figure out where I'm wrong on this

I think you just answered your earlier question to me about why I thought this intro'd economic reasons for bank valuations to change, gonna be big fight, knock down, drag out.

I see DFS/STI/GS acquiring and servicing customers via DM/online, already, current reg paradigm.  They are not doing retail note sales - that because they can't or that because they don't want to do so / don't have to do so?  Their costs of capital are as low as they go. ;)

See why fintech is jealous of that - do not see why fintech so special as to get exemptions;  not likely they pass efficiency to consumer.

Open to being shown error of my thinking on that, which is, currently "banks not charging orig fees are outcompeting fintech capcosts".

My Q:  Is OCC being asked to "level the playing field" or "pick winners and losers"?
Title: Re: OCC FinTech Charter
Post by: rawraw on December 03, 2016, 04:40:47 AM


I think you just answered your earlier question to me about why I thought this intro'd economic reasons for bank valuations to change, gonna be big fight, knock down, drag out.

I see DFS/STI/GS acquiring and servicing customers via DM/online, already, current reg paradigm.  They are not doing retail note sales - that because they can't or that because they don't want to do so / don't have to do so?  Their costs of capital are as low as they go. ;)

See why fintech is jealous of that - do not see why fintech so special as to get exemptions;  not likely they pass efficiency to consumer.

My Q:  Is OCC being asked to "level the playing field" or "pick winners and losers"?

Banking is already fiercely competitive, so that's not a new phenomenon. And unlike most countries, we have thousands of banks competing and not just a handful. I think this meaningfully impacts the competitive environment.

I think that mortgage is a good product through which to think about peer lending, at least starting off. Why do mortgage brokers exist when they rely on bank financing? Why do some banks choose to originate and sell mortgages while others portfolio them? While the 30 year duration is a huge difference, many of these dynamics take form in auto lending as well. I don't view it as a good proxy like mortgage because it's indirect, but both give clues.

So I disagree that efficiency doesn't get passed to consumer, given the number of competitors in the market place. And I think there are current bank examples of how it could look like (auto and mortgage).

Unique charters are nothing new. Savings banks, mutuals, trust banks, mortgage banks, correspondent banks, credit card banks, foreign banking offices, industrial charters all operate under different rules that vary based on their permissible activities and operations. I think OCC is helping add stability to the sector. I'm going to laugh when sofi opens a bank, after their inflated rhetoric on banks lol

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Title: Re: OCC FinTech Charter
Post by: nonattender on December 03, 2016, 02:51:43 PM
Don't think have to jump to not-yet-extant products like mortgage to see efficiency:  Consumers already benefit from the pressure placed on banks by "fintech" reintroduction of the personal loan.  Just happens that fintech - for a minute - was able to drive the rates down on a big chunk of those, forcing "banks" to meet/compete with those product offerings.  Tide has now turned and the bank response to fintech has been to begin offering personal loans at equal or lower rates *and without origination fees* - which is a huge win for consumers, but wouldn't have happened without the pressure placed on them to stay competitive with the new "fintech" players - who are now behind...

Don't get me wrong... I am willing to hear out both sides.  I just want to make sure some benefit accrues to the consumer from all of this, otherwise, I am (and so will regulators be) disinclined to act on the matter.  The "special" benefit to consumers needs a really good case.

Already, I suspect that if "fintech" gets access to a lower cost of capital, "fintech" will decide to further abandon retail investors - take the newfound spread that they make on capcost arb (to replace orig fee revenue) - and that nothing further changes.  On the flipside, fintech doesn't get access to lower capcosts (somehow), then the pressure on banks to compete at these 'lower' lending rates may dissipate.

So... I'm open... but not sold.  And I'm listening - as always.
Title: Re: OCC FinTech Charter
Post by: JoeF on December 05, 2016, 10:05:35 AM

No, I think you follow pretty well...  The question is really, aside from the buzzwords, what's "special" about doing banking functions over the internet - versus at a branch?  Ok, they're "limited" to 1/3 the function - alright, tie 3 "limiteds" together and, voila, a 'bank' - except without the same compliance rigor (unless there's something else 'special' that I'm missing in this equation).  What's special?

The first iteration of this charter will likely be subpar, but I give credit to the OCC for trying to "level the playing field" for fintechs.  Access to become a franchise in our public-private financial system* is currently very costly and laborious process, and as such a high barrier for entry.  Hopefully this is the first step to lowering that barrier. 

That being said, a charter won't be for everyone.  Decision will come down to what type of risk adjusted returns are your equity investors looking for.  Those comfortable with the returns playing at the fringe should not opt for the charter.  Therefore, I envision this charter really benefiting already established large scale tech companies such as Google, Amazon, Paypal, Facebook, etc.



* The Finance Franchise https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2820176 see Section VI for analysis of fintech
Title: Re: OCC FinTech Charter
Post by: SLCPaladin on December 05, 2016, 09:50:09 PM
Quote
Don't get me wrong... I am willing to hear out both sides.  I just want to make sure some benefit accrues to the consumer from all of this, otherwise, I am (and so will regulators be) disinclined to act on the matter.  The "special" benefit to consumers needs a really good case.

My feeling is that as long as FinTech companies allow retail investors access to the investment platform, it certainly does represent a special benefit. As soon as this retail segment is closed off, then I think the special benefit becomes less apparent. As a retail investor, investing in notes of this type is something I want continued access to, only I'd like more offerings from a larger variety of FinTech companies (I'm not yet an accredited investor, but getting close). This asset class has been helpful to me in a period of low interest rates.
Title: Re: OCC FinTech Charter
Post by: rawraw on December 06, 2016, 04:16:48 AM
I disagree that Fintech materially changed the rates on consumer loans. Maybe that's wrong, but their rates seem similar to what banks were already offering. The change Fintech brought was the availability, since unsecured lending is not extremely attractive to a bank. 

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Title: Re: OCC FinTech Charter
Post by: nonattender on December 08, 2016, 09:12:56 PM

No, I think you follow pretty well...  The question is really, aside from the buzzwords, what's "special" about doing banking functions over the internet - versus at a branch?  Ok, they're "limited" to 1/3 the function - alright, tie 3 "limiteds" together and, voila, a 'bank' - except without the same compliance rigor (unless there's something else 'special' that I'm missing in this equation).  What's special?

The first iteration of this charter will likely be subpar, but I give credit to the OCC for trying to "level the playing field" for fintechs.

What are the disadvantages from which they suffer, aside from higher cost of capital and, if not bank partnered, state by state reg? Seeing the first get addressed in a few instances, indirectly, by some banks doing more "risk retention" (ie, lessening capital costs).

Quote
Access to become a franchise in our public-private financial system* is currently very costly and laborious process, and as such a high barrier for entry.

Sure, but those walls were built for very good reasons.  What's "special" case for tearing 'em down?  I guess we are about to find out - though I'm not sure that simply "disaggregation" of services (when the gameplan seems to be to reg arb / daisy-chain aggregates back together, making them, effectively, "banks" again - but without the - pick your poison - "compliance rigor"/"barriers to entry") = "smart".

Quote
That being said, a charter won't be for everyone.  Decision will come down to what type of risk adjusted returns are your equity investors looking for.  Those comfortable with the returns playing at the fringe should not opt for the charter.  Therefore, I envision this charter really benefiting already established large scale tech companies such as Google, Amazon, Paypal, Facebook, etc.

Those guys don't seem to have much trouble accessing banking rails/systems, under current reg paradigm - but they have to partner, usually, for a lot of things, with a "well regulated militia" of chartered/compliant institutions.  They - or their VC arms - seem to be in a little bit of a bank-buying spree, lately - and banks are in a bit of a tech-buying spree lately, too - does that require new regulation or already happening?  I think the latter.  But I do see where it'd be nice to have Goog pay Izzy to lobby OCC, rather than foot that bill! :)

Quote
* The Finance Franchise https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2820176 see Section VI for analysis of fintech

Oof.  Academic writing alert.  Rhetorical snoozeville and attempts at reframing --- footnoted all the way through with "news" articles.

Don't do that to me, Joe --- there's a finite amt of that stuff that one can read in one's lifetime without just going completely crazy. :)
Title: Re: OCC FinTech Charter
Post by: SLCPaladin on December 09, 2016, 10:51:47 PM
Quote

Don't do that to me, Joe --- there's a finite amt of that stuff that one can read in one's lifetime without just going completely crazy. :)

That's some real wisdom there Nonattender. I once heard a man--can't recall who--being interviewed on NPR who was getting on in years. He said this: "The older I get, the more inclined I am to take the approach to only do something if it is (1) really important or (2) really fun." I've adopted that as my personal motto. Life's too short to read uninspiring stuff.
Title: Re: OCC FinTech Charter
Post by: JoeF on December 12, 2016, 10:14:53 AM
What are the disadvantages from which they suffer, aside from higher cost of capital and, if not bank partnered, state by state reg? Seeing the first get addressed in a few instances, indirectly, by some banks doing more "risk retention" (ie, lessening capital costs).

Not just cost of funds, but stability of funding and liquidity, especially in times of need.

Quote
Sure, but those walls were built for very good reasons.  What's "special" case for tearing 'em down?  I guess we are about to find out - though I'm not sure that simply "disaggregation" of services (when the gameplan seems to be to reg arb / daisy-chain aggregates back together, making them, effectively, "banks" again - but without the - pick your poison - "compliance rigor"/"barriers to entry") = "smart".

The walls were built to separate "banking" activities from other commerce.  Fintech companies provide "banking" services, thereby inherently suffer from the same risks chartered banks face.  If they are not part of the banking system, they become customers of chartered banks, because all money, except for physical cash, sits in banks.  Pretty much every financial crisis starts outside the banking system, when large customers fail, and kicks of a chain reaction that puts banks at risk.  So it appears the OCC is being proactive in trying to bring them in the circle so systemic risks can be monitoring.  I do, however, question the effectiveness of the current supervisory system even for banks, but that's another debate.   


Quote
Those guys don't seem to have much trouble accessing banking rails/systems, under current reg paradigm - but they have to partner, usually, for a lot of things, with a "well regulated militia" of chartered/compliant institutions.  They - or their VC arms - seem to be in a little bit of a bank-buying spree, lately - and banks are in a bit of a tech-buying spree lately, too - does that require new regulation or already happening?  I think the latter.  But I do see where it'd be nice to have Goog pay Izzy to lobby OCC, rather than foot that bill! :)

No trouble accessing, but I gather that access is coming at a cost that the "disruptors" feel they can cut.  Silicon Valley loves to preach the "your margin is my opportunity" mantra. 

Quote
Oof.  Academic writing alert.  Rhetorical snoozeville and attempts at reframing --- footnoted all the way through with "news" articles.

Don't do that to me, Joe --- there's a finite amt of that stuff that one can read in one's lifetime without just going completely crazy. :)

Different strokes.  I thought the paper was great because it is the most straight-forward description of the way finance actually works in our monetary system.  Most academic teaching on finance and banking is so disjointed from reality and has been driving economic policy for the last 40 years.  This paper cuts through the BS and delivers an accurate description of how the financial system works in reality.  TBF, there are more than just news articles referenced.  Where there are news articles, is to provide additional background information on topics one might not be familiar with, like bitcoin, p2p lending, etc.
Title: Re: OCC FinTech Charter
Post by: JoeF on December 12, 2016, 10:28:47 AM
Quote

Don't do that to me, Joe --- there's a finite amt of that stuff that one can read in one's lifetime without just going completely crazy. :)

That's some real wisdom there Nonattender. I once heard a man--can't recall who--being interviewed on NPR who was getting on in years. He said this: "The older I get, the more inclined I am to take the approach to only do something if it is (1) really important or (2) really fun." I've adopted that as my personal motto. Life's too short to read uninspiring stuff.

Good quote, but what is really important or really fun is subjective.  I presented the link to provide context to my response.  Don't think you can truly discuss "what should/could be" (Fintech charter) if you don't understand "what is" (operational reality of current financial system".  To me that meets criteria #1,  really important.  But I follow this blog to understand the ecosystem of these business models and the banking system in general, not as a retail investor in anyone of the platforms, so to each his own, I guess.

Title: Re: OCC FinTech Charter
Post by: nonattender on December 12, 2016, 11:05:17 AM
Quote

Don't do that to me, Joe --- there's a finite amt of that stuff that one can read in one's lifetime without just going completely crazy. :)

That's some real wisdom there Nonattender. I once heard a man--can't recall who--being interviewed on NPR who was getting on in years. He said this: "The older I get, the more inclined I am to take the approach to only do something if it is (1) really important or (2) really fun." I've adopted that as my personal motto. Life's too short to read uninspiring stuff.

Good quote, but what is really important or really fun is subjective.  I presented the link to provide context to my response.  Don't think you can truly discuss "what should/could be" (Fintech charter) if you don't understand "what is" (operational reality of current financial system".  To me that meets criteria #1,  really important.  But I follow this blog to understand the ecosystem of these business models and the banking system in general, not as a retail investor in anyone of the platforms, so to each his own, I guess.

Rhetoric translation:  "If you disagree with me, you don't understand the banking/financial system or the business models involved.  Also, you're probably just a small-time retail investor in p2p/mpl notes - and I follow the industry and truly understand, objectively."

Ok, Joe - we'll see how that goes.
Title: Re: OCC FinTech Charter
Post by: SLCPaladin on December 12, 2016, 07:18:51 PM
Quote
Good quote, but what is really important or really fun is subjective.  I presented the link to provide context to my response.  Don't think you can truly discuss "what should/could be" (Fintech charter) if you don't understand "what is" (operational reality of current financial system".  To me that meets criteria #1,  really important.  But I follow this blog to understand the ecosystem of these business models and the banking system in general, not as a retail investor in anyone of the platforms, so to each his own, I guess.

I agree, importance and fun are subjective, but maybe only to a point. There are things that large swaths of individuals agree are universally important, and then there are things that are only important to a handful of enthusiasts. Everything can be interesting, and therefore stoke the curiosity of someone. I actually didn't read the paper, but I would if I had unlimited time. I appreciate the distilled comments and the application of it that you think it provides your argument. I'm invested in FinTech platforms because this is an important asset class for me, so obviously the evolution of how the industry is important to me. I am agnostic as to whether a OCC charter will be beneficial or not, but I enjoy hearing arguments for and against.
Title: Re: OCC FinTech Charter
Post by: nonattender on December 12, 2016, 07:31:23 PM
I'm invested in FinTech platforms because this is an important asset class for me, so obviously the evolution of how the industry is important to me. I am agnostic as to whether a OCC charter will be beneficial or not, but I enjoy hearing arguments for and against.

One of the things at stake here is that if the platforms (currently) offering retail access to the p2p asset class get themselves a window cost of capital, your retail access (which is more expensive - and more expensive to build to service and to service) may just go away. ;(

Lots of twists and turns to follow, here... anyway, we'll see...
Title: Re: OCC FinTech Charter
Post by: JoeF on December 12, 2016, 11:24:59 PM
Quote

Don't do that to me, Joe --- there's a finite amt of that stuff that one can read in one's lifetime without just going completely crazy. :)

That's some real wisdom there Nonattender. I once heard a man--can't recall who--being interviewed on NPR who was getting on in years. He said this: "The older I get, the more inclined I am to take the approach to only do something if it is (1) really important or (2) really fun." I've adopted that as my personal motto. Life's too short to read uninspiring stuff.

Good quote, but what is really important or really fun is subjective.  I presented the link to provide context to my response.  Don't think you can truly discuss "what should/could be" (Fintech charter) if you don't understand "what is" (operational reality of current financial system".  To me that meets criteria #1,  really important.  But I follow this blog to understand the ecosystem of these business models and the banking system in general, not as a retail investor in anyone of the platforms, so to each his own, I guess.

Rhetoric translation:  "If you disagree with me, you don't understand the banking/financial system or the business models involved.  Also, you're probably just a small-time retail investor in p2p/mpl notes - and I follow the industry and truly understand, objectively."

Ok, Joe - we'll see how that goes.
Apples and Pineapples...some readers may only be interested in asset side, what's being originated and what is available to them as an investor.  They may not care about the liability side, because it doesn't matter to them, they are committed to allocating a portion to their savings to this asset, so long as the platforms will accept them.  If that's the case, then I was just confirming your point that there is no need to get into the weeds of safety and soundness of the financial system.

I was coming at it from a different point of view, which was not an attempt to be superior to anyone else's view.   
Title: Re: OCC FinTech Charter
Post by: JoeF on December 12, 2016, 11:59:50 PM
I'm invested in FinTech platforms because this is an important asset class for me, so obviously the evolution of how the industry is important to me. I am agnostic as to whether a OCC charter will be beneficial or not, but I enjoy hearing arguments for and against.

One of the things at stake here is that if the platforms (currently) offering retail access to the p2p asset class get themselves a window cost of capital, your retail access (which is more expensive - and more expensive to build to service and to service) may just go away. ;(

Maybe not.  I truly believe a pure p2p lender with access to emergency liquidity at the Fed would be the safest bank around in terms of "risk to the financial system".  This whole OCC thing isn't about insured deposits, they aren't cheap, banks compete like crazy for them and have tons of overhead costs to attract and maintain them.  And then you got to insure them, which costs a hefty "tribute" to the FDIC.  And now because you're leveraging the credit of the people of the US, you've got to be supervised, you know, in case you end up blowing the whole place up. 

No, give me emergency access to borrow from the Fed for liquidity in times where money is tight, but I'll lend with 100% "equity".  Sure it's not true equity, but it is sticky/maturity matched (you invested in a 60 month loan, so your money is parked for 60 months).  Losses are absorbed by the investors, no risk to the DI fund, with the Fed as a backstop when things get tight, and I should have that backstop because I provide credit to Americans to move the economy forward (public purpose).  Sure, they'll be supervision tied to that access, but it will be focused on asset quality, which is cool, because that's how I compete to attract investors anyway.  That'll get me a nice ROE that banks only dream of, be a shame to pass that up.
Title: Re: OCC FinTech Charter
Post by: SLCPaladin on December 13, 2016, 03:30:02 PM
Quote

Apples and Pineapples...some readers may only be interested in asset side, what's being originated and what is available to them as an investor.  They may not care about the liability side, because it doesn't matter to them, they are committed to allocating a portion to their savings to this asset, so long as the platforms will accept them.  If that's the case, then I was just confirming your point that there is no need to get into the weeds of safety and soundness of the financial system.

I was coming at it from a different point of view, which was not an attempt to be superior to anyone else's view.

As an investor, I care mostly about the soundness of the notes and the borrowers I am lending to. That said, I still am invested in the platform stability because, hey, "platform risk." I think everyone was nervous when the Renault LaPlanche info hit the fan and how that would impact the platform. I was among those who were clamoring for LC to draw up a Bankruptcy Remove Vehicle (like the one Prosper has), because we want to protect ourselves against "platform risk." If an OCC charter performs some functions similar to FDIC insurance insomuch as it calms the jitters and makes things run more smoothly when there is liquidity crisis, then I'm all for that. But if it means retail capital gets squeezed off the platform, then obviously that is not something I would welcome. I suppose the devil is in the details and how the exactly it gets executed and drawn up.
Title: Re: OCC FinTech Charter
Post by: rawraw on December 13, 2016, 03:48:18 PM
Not sure where Joef is coming from. Insured deposits are most certainly cheap. And a Fintech charter isn't likely to be funded by a branch network.  FDIC insurance fees are minimal and for well rated institutes, they can pay nothing.  And there is no requirement for a bank to be highly levered or blow up.

How will you get ROE banks dream of without leverage? Leverage is what makes many of these products attractive.

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Title: Re: OCC FinTech Charter
Post by: JoeF on December 14, 2016, 10:28:54 AM
Not sure where Joef is coming from. Insured deposits are most certainly cheap. And a Fintech charter isn't likely to be funded by a branch network.  FDIC insurance fees are minimal and for well rated institutes, they can pay nothing.  And there is no requirement for a bank to be highly levered or blow up.

How will you get ROE banks dream of without leverage? Leverage is what makes many of these products attractive.

Sent from my SAMSUNG-SM-G935A using Tapatalk

Insured deposits are cheap, attracting them is not.  The current problem with small banks is that their cost of funds is too high. Currently the true marginal cost of funds for small banks is probably at least 2% over the fed funds rate.

The primary reason for the high cost of funds is the requirement for funding to be a percentage of the ‘retail deposits’. This causes all the banks to compete for these types of deposits. While, operationally, loans create deposits and there are always exactly enough deposits to fund all loans, there are some leakages. These leakages include cash in circulation, the fact that some banks, particularly large money center banks, have excess retail deposits, and a few other ‘operating factors.’ This causes small banks to bid up the price of retail deposits in the broker CD markets and raise the cost of funds for all of them, with any bank considered even remotely ‘weak’ paying even higher rates, even though its deposits are fully FDIC insured.

Additionally, small banks are driven to open expensive branches that can add over 1% to a bank’s true marginal cost of funds, to attempt to attract retail deposits. So by driving small banks to compete for a relatively difficult to access source of funding, the regulators have effectively raised their cost of funds.

If p2p platforms became chartered insured institutions, they would face the same challenge as small banks.

Regarding ROE, p2p lenders are leveraged more than any regulated institution could be.  100% of their loans are funded by debt.  That debt is perfectly duration matched and won't(can't) run (though it can stop investing in future loans, which is liquidity risk).  A bank needs equity to grow their loan book.   P2p lenders can grow their "balance sheets" all they want. They are not banks. So they're not subject to banking regulation, which, paradoxically, means that it can do a core function of banking much more efficiently than an actual bank can.  Hence the need, IMO, for a more modern regulatory framework and charter.
Title: Re: OCC FinTech Charter
Post by: rawraw on December 14, 2016, 10:41:14 AM
Thanks for the detailed reply! 

Quote
Insured deposits are cheap, attracting them is not.  The current problem with small banks is that their cost of funds is too high. Currently the true marginal cost of funds for small banks is probably at least 2% over the fed funds rate.

The primary reason for the high cost of funds is the requirement for funding to be a percentage of the ‘retail deposits’. This causes all the banks to compete for these types of deposits. While, operationally, loans create deposits and there are always exactly enough deposits to fund all loans, there are some leakages. These leakages include cash in circulation, the fact that some banks, particularly large money center banks, have excess retail deposits, and a few other ‘operating factors.’ This causes small banks to bid up the price of retail deposits in the broker CD markets and raise the cost of funds for all of them, with any bank considered even remotely ‘weak’ paying even higher rates, even though its deposits are fully FDIC insured.

Additionally, small banks are driven to open expensive branches that can add over 1% to a bank’s true marginal cost of funds, to attempt to attract retail deposits. So by driving small banks to compete for a relatively difficult to access source of funding, the regulators have effectively raised their cost of funds.
I disagree almost 100%.  While your statements of fact are almost 100% true, I think you are misapplying them.  My disagreements in bullet form

1) There is no requirement that a bank must have retail deposits.  There is also no requirement that a bank must use a branch network to attract retail deposits.  You cannot take "typical" bank operating models and assume that's how all banks must operate.  Almost no industrial charters behave the way you suggest.  Almost no credit card banks behave the way you suggest.  And certainly there are plenty of banks that behave very differently from this.

2) I've seen no evidence of "bidding up" brokered or listing service deposits.  I just pulled up a brokered curve and see rates ~2% for 5 year funding.  I'm unsure what you think the brokered rate should actually be.

3)  What is the obsession on small banks?

4) I'd be curious if you could show me fintech lenders that has economic debt (not how accountants treat it like in LC's case, but actual debt) in excess of the leverage of a bank.  No one talks about mortgage originators having balance sheet leverage, so I am really unsure what your actually analyzing.  What balance sheet lender is out there operating with zero equity like you suggest?


Title: Re: OCC FinTech Charter
Post by: JoeF on December 14, 2016, 01:21:07 PM
Thanks for the detailed reply! 

I disagree almost 100%.  While your statements of fact are almost 100% true, I think you are misapplying them.  My disagreements in bullet form

1) There is no requirement that a bank must have retail deposits.  There is also no requirement that a bank must use a branch network to attract retail deposits.  You cannot take "typical" bank operating models and assume that's how all banks must operate.  Almost no industrial charters behave the way you suggest.  Almost no credit card banks behave the way you suggest.  And certainly there are plenty of banks that behave very differently from this.

2) I've seen no evidence of "bidding up" brokered or listing service deposits.  I just pulled up a brokered curve and see rates ~2% for 5 year funding.  I'm unsure what you think the brokered rate should actually be.

3)  What is the obsession on small banks?

4) I'd be curious if you could show me fintech lenders that has economic debt (not how accountants treat it like in LC's case, but actual debt) in excess of the leverage of a bank.  No one talks about mortgage originators having balance sheet leverage, so I am really unsure what your actually analyzing.  What balance sheet lender is out there operating with zero equity like you suggest?

First let me clarify a mistake, retail deposits are being bid up in listing services and other non-brokered channels.  This makes brokered deposits cheaper than retail deposits.  And yes, branch network not required, but most effective in attracting retail deposits.  That being said the Fed is willing to lend at .25-.50%, so a bank's cost of funds should be around that target rate.

Now in response to your first point, there is a problem with brokered deposits:

The FDIC has mounted a campaign to discourage bankers from accepting brokered deposits.  The justification for limiting brokered deposits was that they had contributed to bank failures by allowing banks to greatly accelerate growth, and that such deposits have less franchise value than "core deposits."  Using this pretext, the FDIC is limiting wholesale funding, imposing higher FDIC assessments and downgrading liquidity ratings when a bank is considered too dependent on wholesale funding.

To your point about industrial charters and credit card banks, they are exactly the types of institutions being affected by the FDIC.  Yes they rely heavily on brokered deposits, and almost every industrial charter/specialty bank, that likely converted to a commercial bank during the crisis or formed after, is under a Capital and Liquidity Maintenance Agreement that is very strict in terms of leverage.  Here's an excerpt from Ally's (fka GMAC bank)
    (A)    On the date of this Agreement and continuously thereafter, the Holding Companies and the Bank, will maintain sufficient capital in the Bank such that the Bank’s Tier I Leverage ratio is at least 15 percent, as calculated under 12 C.F.R. § 325.2(m), or any successor regulation.

 
     (B)    If at any time the Bank’s capital level falls below the level specified above, the Holding Companies and the Bank shall immediately restore the Bank’s capital to the required level. Any capital contributions to the Bank must be in the form of cash, short-term US Treasury securities, or other assets acceptable to the FDIC.


Regarding point 3, a small bank/limited purpose bank is a better proxy for a potentially chartered p2p lender than large universal money center bank.
Title: Re: OCC FinTech Charter
Post by: rawraw on December 14, 2016, 01:44:58 PM
So we agree that small banks are a better proxy than money center banks.  Where we seem to disagree is that I do not view small banks as homogenous and there are several 'niche' type of banks within the 6,000 or so banks that fall under this small bank label.

We disagree that a bank's cost of funds should be around the discount rate.  That ultimately depends on the business model of the bank.  I wouldn't expect a bank match funding 3 year loans with 3 year liabilities to have a federal funds rate.  Perhaps it is a better proxy for savings / mmda / checking, but then again these are broad categories (much like small banks) that mask extremely different customer types (and ultimate behaviors).

We also disagree about regulatory treatment of (lets say) unique banks.  You are correct that when things go wrong, the hammer hits harder on a bank that is unique.  But I disagree that all unique banks are under orders, like you've suggested.  I've been exposed to dozens of these sort of banks (both public and private) and the majority are well rated and under no orders.  As you know, Ally had more going on than a reliance on hot money that got it in trouble and under scrutiny.

There is certainly a regulatory preference for retail funding.  But in the case of niche banks, the common playbook does not typically apply.  And by nature, the fintech charter is a niche bank.

But even excluding brokered markets, it does not take much infrastructure to run national CD specials and to fund operations that way. Or any other funding mechanisms available to banks.  According to the OCC's canary report, there are ~22 banks with more than 70% of funding from wholesale sources (which is amazingly high, industry average is 8%).  This doesn't even capture banks like Beal Bank, who of course I'd argue have zero retail funding.  The majority of these banks have persisted at these levels, because it is part of how the business model works.  My point is that there is a lot of diversity in this sector and just looking at averages or the typical community bank is misleading.