Long Take: FDIC consent order vs. $3B banking-as-a-service champion Cross River Bank
Results from an investigation from 2021, strangely timed into a banking crisis
Gm Fintech Architects —
Today we are diving into the following topics:
Summary: We continue to develop our view on the unfolding situation in American banking, including the collapse of First Republic. We explore the incentives of regulators like the FDIC and OCC during “war time”, and highlight the types of companies that seem to be in the regulatory cross hairs to preserve systemic stability — whether for the right or wrong reasons. Further, we focus on Cross River bank, its API-first banking-as-a-service strategy, and its competitors. Then we look at the FDIC consent order targeted at the company, and the types of remedies it has to make in order to remain compliant. Will the USDC-backing bank be able to survive?
Topics: banking, regulation, crypto, stablecoins, financial crisis
Tags: FDIC, Cross River Bank, First Republic, Evolve Bank, Celtic, Sutton Bank, Lincoln Savings, The Bancorp, Green Dot
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Long Take
There are more banks
Earlier this week in a Short Take, we covered the acquisition of First Republic bank by JP Morgan Chase.
Here’s one of the better visualizations of the unusual nature of the current situation.
It is hard to believe that those tiny little circle local bank dots aren’t coming next.
The reason they might not be is because the cause for collapse isn’t a failure of an asset class on the balance sheet (i.e., subprime mortgages that everyone holds are worse than expected), but a failure of duration mismatch and liquidity (i.e., depositors running on the bank because depositors are distressed). So, you would have to believe, that the correlation isn’t the holding of treasuries, but the demand for banking from tech, fintech, and crypto companies.
That the collapse of those companies is a consequence of inflation and interest rates — the flipside of treasuries as an asset class, we will leave for the reader to untangle.
If you are a banking regulator, however, you look at $17 trillion of US bank deposits, of which apparently $7 trillion are uninsured, the system might seem a bit unstable. Having to chase around fintech lending, crypto dollars, and venture-exposed sectors is stressful and expensive. Seizing banks, capitalizing them, and putting them up for sale — while avoiding the impression that there’s real economic trouble — is a razor’s edge.
Worst of all, the banks that are falling apart are sort of not all bad banks? Like Credit Suisse was a fancy bank. And Silicon Valley Bank was a respected bank. And Wall Street was trying to save First Republic because it was a “good bank”, printing $6 billion in revenue with a reasonable underwriting quality and a HNW wealth management practice.
This isn’t just the cowboys going off the rails.
So if you, the regulator, get really stressed out trying to just hold-all-this-together, you probably don’t want people doing things like creating backdoors into the OCC for stablecoins, or subscale fintech companies launching new banking services without your permission.
You might be totally happy with Apple offering Goldman Sachs bank accounts, but that’s just the big banks working with big tech, and you know that if you want to fine them or subpoena their data, there’s someone with whom you can negotiate. But a platform that is used by lots of third party start-ups, including crypto companies, to offer banking and lending services — that’s a bit of a risk.
Cross River Bank
Beautiful, isn’t it.