BPInsights: April 20, 2024

The Credit Card Market is Not Even Close to Being Overly Concentrated

Some critics of the proposed merger between Capital One and Discover claim the credit card market is overly concentrated and the merger would harm competition - but the reality shows otherwise. A new BPI blog post illustrates the high level of competition and choice that consumers actually experience in this market.

• Measuring concentration: The Department of Justice uses the Herfindahl-Hirschman Index, or HHI, to measure concentration in a market when evaluating mergers and acquisitions. Looking at the credit card market narrowly - based on the top 50 general-purpose credit card issuers, and excluding credit unions - BPI finds the HHI of the market to be 1,010, far below the 1,800 HHI threshold that indicates a concentrated market.
• Credit union context: The largest credit unions, such as Navy Federal and Pentagon Federal, play an influential role in credit card competition. When including these credit unions in the analysis, the HHI drops to 950. Post-Capital One/Discover merger, the HHI would rise to 1,159 (or 1,235 if credit unions are omitted), still far below the 1,800 DOJ threshold that would raise concern.
• Comparing industries: Many other industries in the U.S. are far more concentrated than credit cards - from telecom carriers to breakfast cereal.
• Worth noting: It's important to consider markets beyond consumer credit cards that are affected by this merger. The proposed merger will strengthen competition among payment networks, a market that actually is concentrated right now. The proposed merger will create a firm better positioned to expand its market share in payment networks.
• Bottom line: Even using a narrow, restrictive definition of the consumer credit card market that disregards important sources of competition - such as credit unions and smaller credit card issuers - concentration in the credit card market is far below the DOJ threshold and will remain so after the merger.

Five Key Things

1. Current, Former Fed Governors Lay Out Basel Flaws

Federal Reserve Governor Michelle Bowman said at a SIFMA conference this week that widespread negative reactions to the Basel proposal came as no surprise. The surprise in the proposal came from its divergence from the intent of Basel III discussions. "Initially, the Basel III proposal or the discussions and negotiations were largely intended to be capital-neutral," she said. "It was a real surprise to see that when the proposal came out, it projected approximately 20 percent increases in total risk-weighted assets."

• End user pushback: The end users of bank products and services, such as derivatives, are expressing opposition to the proposal in a way that is unique for arcane capital rules, Bowman noted. In the proposal, regulators did not pay enough attention to end users, former Federal Reserve supervision chief Randy Quarles said at the same conference.
• Building without an architect: The data collection on the Basel capital proposal was out of sequence with the normal path for proposing regulations, Bowman observed. "[A]fter the proposal was introduced and passed by the Board, we committed to undertaking a data collection, but the timing was really unique on that," she said. "Usually that data collection happens before a proposal is issued. So it's a little bit like building a house without an architect or without having building plans to guide us in understanding how things would work together and become a final package."
• Stress test overlap: Randy Quarles said he is a "big defender of both" regular stress tests and through-the-cycle capital requirements, but "the system has to be considered as a whole to avoid unintended consequences."
• Mixed messages on diversification: Regulators should recognize how overcalibrating requirements can "work against safety and soundness" and undermine their own goals, Bowman said. One example: operational risk - "some firms' efforts to diversify business lines, which is something that supervisors have encouraged over time to ensure that less risky activities like generating fee income from wealth management activities, is better activity to diversify your risks … imposing higher capital charges on those kinds of activities doesn't seem to be in line with that diversification strategy." Quarles pointed out that this direction reverses course from an important post-Global Financial Crisis shift in banking business lines: "We created a set of capital incentives 15 years ago to move people to less risky businesses and now we are penalizing them for having done exactly that," he said.
• Less competition: Higher capital requirements for certain banking services could lead to increased concentration and less competition, Bowman noted. This concentration could intensify risks in the banking system. "Increasing concentration could not only lead to higher costs, but it could also lead to reduced resilience," she said. The more activities that are driven out of the banking system, the less transparency regulators have into potential risks to financial stability, she added.
• Reproposal: Bowman said she hopes the Basel capital rule will be reproposed. She said she is encouraged that the quantitative impact study will be published. Ultimately, she said, "I don't see that there are insurmountable obstacles to achieving a more effective or efficient set of Basel capital reforms here in the U.S., but I agree with the assessment that Chair Powell noted … the proposal as it stands now requires broad and material changes." Quarles said, "I don't think this proposal can be changed enough to make it workable, without it being changed enough to require reproposal under the Administrative Procedure Act."
• The big picture: Bowman said policymakers should look at the confluence of proposed rules in the pipeline as a whole, including the long-term debt proposal. "I think it's really dangerous for us to be thinking about each one of these in a silo," she said.
• Public interest: "These recalibrations should be made because they are in the public interest, not because they are in the banking industry's interest," Quarles said.

2. Washington Post Editorial: Regulators Are Overlooking Shadow Bank Risks

Regulators proposing large capital increases for banks are missing a key source of risk: the nonbank sector, according to a recent Washington Post editorial. The editorial calls for raising bank capital requirements "a bit," but says "it would probably be safe to increase them less than regulatory agencies … proposed last summer." In their final rule, regulators should come up with a compromise, the editorial says.

• Looking backward: One problem with the proposal is that it looks backward to risks that are no longer compelling concerns, the editorial notes. "The financial world has changed dramatically in the past 15 years, but the [Basel] III endgame looks backward to problems like those that precipitated the 2008 crisis instead of focusing forward to new sources of risk," the editorial says.
• Wrong risks in focus: The new rules emphasize operational risk at banks rather than the risk areas that caused Silicon Valley Bank's collapse, such as interest rate risk, the editorial says. It goes on to say that "regulators are still not paying enough attention to the big players in the financial system that are not banks." Roughly half of global assets are now held in mutual funds, insurers, hedge funds and microfinance firms, according to the article. The Basel proposal "does essentially nothing to address" the risk that shadow banks experience large unexpected losses in a downturn, the editorial says.
• Diverting attention: The debate over the Basel proposal has taken policymakers' attention off the issues surrounding nonbank finance, according to the editorial.
• Bottom line: "More than a decade and a half ago, the behavior of big banks was indeed central to the global financial crisis…Today, however, the big banks have a point that this is a risk of which everyone is well aware and against which their balance sheets are largely protected," the editorial says. "A brand-new form of financial crisis seems likelier than a repeat of the last one. In that sense, Basel III endgame's main shortcoming is failure of imagination."

3. BPI Survey Finds FinCEN Significantly Underestimates SAR Filing Demands

New survey data released this week by BPI finds that the Financial Crimes Enforcement Network significantly underestimates the time required for a bank to file a suspicious activity report. The survey, published as part of a submission to FinCEN, found that banks spend 21.41 hours for every SAR filed. These findings are more than 10 times the estimate - 1.98 hours - produced by FinCEN as part of its obligations under the Paperwork Reduction Act.

What we're saying: Greg Baer, BPI President and CEO, stated: "These findings show that SAR filings require significantly more resources than government estimates. While these resources might be manageable if the filings were effective, examiners at the federal banking agencies continue to push banks to investigate irrelevant matters, diverting time and resources from more effective methods of detecting and reporting illegal activity."

What is a SAR?
Banks are legally required to file SARs with FinCEN, a bureau of the U.S. Department of the Treasury, under the Bank Secrecy Act. SARs are not reflections of guilt or a legal judgment that a crime has taken place. Instead, they offer information to law enforcement and national security to help identify and prevent crime.

Who was surveyed?
The findings are based on survey data from fifteen BPI member banks, all with $100 billion or more in assets. Combined, these institutions are responsible for filing over 550,000 SARs in a year. The survey…

• Includes time dedicated to producing and reviewing a SAR, overseeing the process of filing a SAR and the actual filing of a SAR, not just the mechanical process of generating, submitting, and storing the SAR;
• Does not include any time dedicated to the basic design, development and maintenance of an institution's SAR program (e.g., policies, IT architecture, etc.);
• Pertains to anti-money laundering SARs rather than those exclusively related to fraud, which are typically handled by other business lines outside of firms' AML/BSA compliance groups; and
• Includes only SARs filed by institutions physically located within the United States.

A study conducted by BPI found that banks filed more than 640,000 SARs in 2017; however, only about 4 percent of those SARs resulted in any follow-up from law enforcement. The Anti-Money Laundering Act of 2020 sought to enhance the efficiency and effectiveness of these efforts by encouraging innovation and promoting the adoption of technology. Many key aspects of AMLA have yet to be implemented by the U.S. government.

4. BPI's Baer on NPR's 'Indicator' Podcast: The Costs of Higher Capital Requirements Are Clear

BPI President and CEO Greg Baer joined NPR's The Indicator podcast for a recent interview to discuss the implications of the Basel capital proposal. "The evidence is fairly strong, and I think you can see that from the reactions of bank borrowers and others … there's a pretty widespread recognition that higher capital requirements end up with higher-priced loans or fewer loans," Baer said. The podcast cited a review from the Bank for International Settlements that shows most studies find that higher capital requirements lead to higher interest rates on mortgages or car loans. The podcast hosts also noted that the proposal may be overhauled. "Basel III Endgame is not over yet," co-host Darian Woods said.

5. CFPB Updates How the Agency Designates a Nonbank for Supervision

The CFPB this week announced changes to how it designates fintech and other nonbank firms for supervision. The agency attributed these revisions in part to a planned reorganization of its supervision and enforcement unit. The changes came in the form of a final rule governing the Bureau's supervisory designation proceedings - a power the agency can use to exert direct examination oversight over individual nonbank financial firms.

• Streamlined: The rule aims to streamline the process by eliminating a phase that preceded a final decision by the CFPB director, establishing a word limit for proceeding filings and other steps meant to increase efficiency.
• Reorg: The CFPB said it will ultimately split the supervision and enforcement unit into two separate divisions, each led by a director.

In Case You Missed It

Questions Being Raised About FedNow

The Federal Reserve last year launched its highly anticipated payments network - but so far, its debut year has inspired several skeptical questions, including those as existential as "what problem does this network solve?" and "who is actually using it?". See here for more details.

The Crypto Ledger

Here's what's new in crypto.

• Legislative movements: Sens. Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) released their stablecoin bill, which would set up a new structure for regulating stablecoins and require issuers to maintain one-to-one reserves. Meanwhile, Senate Banking Committee Chair Sherrod Brown (D-OH) has raised the prospect of a bill to expand the Treasury Department's power to target crypto in illicit financing.
• Treasury warning: Deputy Treasury Secretary Wally Adeyemo warned recently in Senate testimony that terrorists will increase their abuse of digital currency unless Congress takes action to provide Treasury with "necessary tools" to address it. Hamas, al Qaeda and other malign groups are using crypto to launder money and finance terrorism, he said.
• Class action revived: The U.S. Court of Appeals for the Second Circuit revived a proposed class action accusing Coinbase of selling unregistered securities. A lower court judge had scrapped the case last year. The dispute centered on ambiguity between competing Coinbase user contracts, which left it open to interpretation who exactly was selling tokens trading on the exchange. Second Circuit said there was more than one agreement in use during the relevant period, and that a 2019 agreement indicated users were buying tokens directly from Coinbase.

Regions Launches Philanthropic Solutions Group

Regions Bank this week announced the launch of its Philanthropic Solutions group, a team within the bank's Wealth Management division that will support clients' asset management, mission and charitable giving priorities. This step will enable charitable organizations, foundations, nonprofits, individuals and families to access expanded resources and solutions from dedicated advisors.