2022 was an eventful year for community bankers.
Worsening economic conditions marked by rising interest rates and high inflation continued to raise recessionary fears even as the country continued to emerge from the depths of the pandemic. Though the overall M&A market was down from 2021, numerous credit union-bank buys were announced. Overdrafts remained a hot-button issue, and the crypto market suffered numerous implosions and sustained a major credibility hit as regulators provided more clarity for banks looking to service the industry.
With a toast to 2022, BankBeat.biz has compiled the five stories that especially captivated the industry during the previous 12 months:
- Recession fears abound as Fed aggressively hikes rates
Recession fears were top of mind for community bankers. The Federal Reserve raised interest rates from near-zero at the start of 2022 to between 4.25 percent and 4.5 percent in December as it sought to cool the overheated economy. The annual Inflation rate increased from 7.5 percent in January to 9.1 percent in June before falling back to 7.1 percent by November.
In an IntraFi survey of 388 U.S. banks last summer, bankers were evenly split with 48 percent saying a recession would hit by the end of 2022 and another 48 percent saying recession would come in 2023. According to an American Bankers Association credit report in October, bank economists expected credit conditions to worsen over the next six months as the economy weakens. High inflation continued to outpace wage growth, leading to the personal savings rate falling to its lowest point in more than a decade.
Despite negative economic indicators, the size of bank balance sheets remained stable in 2022. A November report from the Federal Reserve Bank of Kansas City found that banking conditions remained strong in the third quarter even as bankers shifted their holdings to account for more unrealized losses. District commercial real estate, and commercial and land development concentration levels increased to 172 percent and 54 percent of Tier 1 capital and allowance, respectively, according to the Fed.
- M&A down even as credit unions continue buying banks
Bank M&A dropped in 2022 following a record-setting 2021 as the Federal Reserve raised interest rates to combat inflation, which led to volatility in the equities market and increased acquisition financing costs, according to S&P Global. As of the end of October, 139 total deals had taken place, down from 176 during the same period in 2021.
Credit unions still acquired a record number of banks following a spike of activity in the final weeks of the year. According to S&P Global, the total assets of bank targets involved in CU deals reached $5.49 billion in 2022, well above the previous record of $3.92 billion in 2019. The total average assets of the selling banks was $392.2 million, another record high.
Those deals took place even as tension remained between credit unions and state regulators. Last spring, the Minnesota Department of Commerce rejected a proposal from Eau Claire, Wis.-based Royal Credit Union to buy Lindstrom, Minn.-based Lake Area Bank, finding that a state-chartered bank could not “transfer its assets and liabilities to a credit union for the purpose of consolidating or merging out of existence.” Minnesota’s Department of Commerce was the sixth state bank regulator to find that state statutes do not allow state banks to transfer their assets and liabilities to a credit union. State regulators in Colorado, Iowa, Tennessee, Mississippi and Nebraska have said the same.
The deal, which closed months later, was eventually changed so that Royal Credit Union only acquired Lake Area Bank locations in Hugo, Minn., Stillwater, Minn., and White Bear Lake, Minn., as well as Lake Area Mortgage in Arden Hills, Minn.
- Split Congress a reality for next two years
Congress will be divided for the next two years following November’s midterm elections in which Republicans won control of the House of Representatives and Democrats secured a Senate majority. Republicans did not achieve the “wave” of election victories they had hoped for. The results were considered a surprise by many, given sagging economic conditions and Republican attempts to attribute the downturn to President Joe Biden’s policies. The party of the incumbent president often suffers major losses during the following midterm elections.
Still, Congressional Republicans pledge to use their power to scrutinize the regulatory authority of the FDIC, Consumer Financial Protection Bureau, and the Securities and Exchange Commission during the next two years. Republicans, including House Financial Services Committee Chair Patrick McHenry of North Carolina, will try to limit the CFPB’s proposed 1071 legislation, which requires financial institutions to collect and report data on credit applications from minority-owned and small businesses. McHenry argued the current proposal would make small business lending more difficult.
Congress will likely also consider expanding the Durbin amendment to include credit cards. Currently, it only applies to debit cards. The amendment essentially requires retailers to offer more than one network option for the processing of debit transactions.
The midterms reinforced the uncertainty many bankers face in serving the cannabis industry, even in states where the drug is legal. Voters in Maryland and Missouri approved recreational marijuana use for adults in statewide referendums, while North Dakota, South Dakota and Arkansas voters rejected similar proposals. The SAFE Banking Act would prohibit federal regulators from disciplining depository institutions that provide banking services to government-licensed cannabis-related businesses. Though speculation abounded that the measure would pass late this year, Congress didn’t include SAFE Banking in the final version of the 2023 National Defense Authorization Act.
- Crypto market falters as banks receive guidance
To say 2022 was a rough year for cryptocurrencies would be an understatement. The industry’s ongoing challenges in protecting consumer investments was spotlighted in November with the implosion of the now-bankrupt crypto exchange and hedge fund FTX Trading. The company’s founder and former owner, Sam Bankman-Fried, has been charged with numerous felonies after he allegedly defrauded investors of both FTX and its sister firm Alameda Research. Bankman-Fried was extradited earlier this month from The Bahamas to New York City.
FTX is only the most prominent example of the industry’s meltdown this year. The blockchain payment platform Terra, crypto platform Voyager Digital, and crypto hedge fund Three Arrows Capital also imploded during the last 12 months. As reported by CNBC, the crypto market has lost a little more than $2 trillion this year and popular digital coins have fallen well below their record highs.
As the crypto market cratered, regulatory expectations became clearer for banks looking to serve the industry. In August, the Federal Reserve released a supervisory letter stating that board-supervised banks looking to undertake crypto-related activities should ensure doing so is legal and have “adequate systems and controls in place.”
Speaking in October before a roundtable on institutional investors, Acting Comptroller of the Currency Michael Hsu advised policymakers, regulators and bankers to take “a careful and cautious approach” to the crypto sector. Hsu advised banks looking to undertake “novel and riskier” crypto activities to accept tighter regulatory controls.
“Banks seeking to engage in crypto activities may want to carefully consider the scope of what they want to do, start with what can be most readily risk managed, and impose gates, through limits and other controls, to prevent uncontrolled expansion and growth into higher risk activities,” he added.
- Overdrafts remain on the hot seat
Lawmakers and regulators continued to place bank overdraft practices in the hot seat as multiple bills limiting their use were introduced.
The House Financial Services Committee passed a bill last summer restricting the number of overdraft charges banks can issue. The bill, sponsored by Rep. Carolyn Maloney (D-N.Y.) would amend the Truth in Lending Act and prohibit banks from charging customers multiple overdraft fees in a month and more than six in a year, regardless of whether a customer opts in. The fate of the legislation was left in doubt after Maloney was defeated in August during a primary election. A separate bill introduced by Sen. Cory Booker (D-N.J.) and Sen. Elizabeth Warren (D-Mass.) would ban overdraft fees on debit transactions and ATM withdrawals, and limit overdraft fees for checks and recurring bill payments.
The CFPB announced last summer that it was examining overdraft fee practices at 20 unidentified banks “for further examination and review.” The agency also recently launched an initiative to reduce what it calls “exploitative junk fees” charged by banks and financial companies. Director Rohit Chopra has pledged to take a stronger stand against bank overdraft and non-sufficient fund fees by enhancing supervisory and enforcement scrutiny of financial institutions “that are heavily dependent on overdraft fees.”
Despite those developments, industry experts say the odds of Congress passing overdraft legislation appear low for 2023. JMFA Executive Vice President of Compliance Review Cheryl Lawson said in the fall that she doesn’t expect Congress to pass any overdraft legislation during the coming year, adding that changes in overdraft policies are more likely to occur by presidential action.