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Demand for Fed's discount window spikes

Borrowings from the Federal Reserve's discount window surged in the first quarter as banks tapped alternative funding sources following the expiry of the Bank Term Funding Program (BTFP) earlier this year.

The BTFP, established as an emergency lending tool by the Fed on March 12, 2023, after the failures of Silicon Valley Bank and Signature Bank, expired on March 11. The usage of the facility peaked at $167.77 billion on Jan. 24, but fell to $132.81 billion, as of March 27 and further down to $109.01 billion in the week ended May 22.

On the other hand, discount window borrowing, the Fed's traditional lending facility, jumped nearly 244% over two weeks following the end of the BTFP program — from $1.83 billion since the week ended March 13 to $6.27 billion March 27. Borrowings under the primary credit facility further increased to $8.56 billion as of April 17 before declining to $6.66 billion in the week ended May 22.

Bank regulators have been working toward eliminating the stigma associated with banks utilizing the discount window. In January, acting Comptroller of the Currency Michael Hsu suggested one way of doing that would be to give banks credit for their discount window borrowing capacity and add discount window borrowing to banks' liquidity requirements. In a recent speech, Fed Vice Chair for Supervision Michael Barr said the central bank is considering requiring some banks to be prepared to borrow from the facility by maintaining at least a certain amount of quickly available liquidity with reserves and pre-positioned collateral.

Source: S&P Global Market Intelligence

CFPB launches review of mortgage closing fees

The Consumer Financial Protection Bureau launched a public inquiry into what is driving an increase in mortgage closing costs. 

According to a CFPB analysis, the median total loan costs for home mortgages rose by more than 36% from 2021 to 2023. 

The CFPB’s request for information seeks feedback from borrowers and lenders on: 

• How mortgage closing costs may be inflated and constraining the mortgage lending market. 
• Why closing costs such as credit reporting and title insurance are increasing and how costs for borrowers and lenders could be lowered. 

Comments on the RFI are due by Aug. 2. ICBA is reviewing the RFI and plans to comment. 

The CFPB announced the RFI as part of its “junk fees” campaign—which has thus far targeted overdraft and credit card late fees—though the “junk fees” verbiage does not appear in the RFI itself.

Source: ICBA

Trade groups slam fee rule

The Federal Reserve's plan to limit banks' debit card interchange fee income would inhibit banks' ability to invest in fraud prevention, banks and trade groups told the central bank in comment letters.



US banks and trade groups said the rule will hurt banks' fee income, rendering them incapable of sufficiently funding debit card fraud prevention.

"This may discourage covered issuers from investing in sophisticated fraud detection and prevention tools, posing risks to consumers, smaller financial institutions, and the payments and banking systems generally," Salt Lake City-based Zions Bancorp. NA Chairman Harris Simmons wrote.

Banks say the Fed did not adequately consider fraud costs when drafting the rule, even though the central bank proposed increasing the fee cap for fraud prevention.

Source: S&P Global Market Intelligence

Reg E wire transfer exemption doesn’t apply to online transactions

The Consumer Financial Protection Bureau argued in a court filing that online-initiated wire transfers are subject to the Electronic Fund Transfer Act and Regulation E, even though the law exempts transfers made by banks “by means of” a wire service. 

As the CFPB noted in a new blog post: 

• The state of New York is suing Citibank for not fully reimbursing customers who told the bank that scammers had stolen money by initiating wire transfers from the consumers’ accounts online. 
• Citibank has argued that the EFTA doesn’t apply because the scammers used a wire transfer to take the money and the law exempts transfers made by banks “by means of” a wire service. 
• The EFTA limits consumers’ liability for losses to $50 so long as they promptly notify their bank that access to their account has been stolen. 
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In a friend-of-the-court brief, the CFPB said: 

• The EFTA excludes only bank-to-bank wire transfers. 
• When banks connect wire transfer capabilities to consumer-facing online banking platforms, an online-initiated wire transaction meets the definition of an “electronic fund transfer.” 
• Thus, only the bank-to-bank wire portion of that transaction is excluded from EFTA and Reg E.

Source: CFPB

Community bank net income rises

Community bank net income rose 6.1% in the first quarter but remained down 13.9% from a year ago, according to the FDIC’s latest Quarterly Banking Profile.  

Community banks booked a securities gain of $47.3 million, up from a loss of $322.3 million in the previous quarter. In addition, a 1.7% decrease in noninterest expense and a 28.9% decrease in provision expense more than exceeded a 1.6% decrease in noninterest income and a 2.1% decline in net interest income. 

For the first quarter, community banks reported: 

• The pretax return on assets ratio increased 6 basis points from the previous quarter but was down 14 basis points from a year ago to 1.13%. 
• The net interest margin declined from the last quarter to 3.23% and was down 26 basis points from a year ago. 
• Net operating revenue decreased 2.0% due to lower net interest income. 
• Total assets increased 0.8% from the fourth quarter and 4.0% from the previous year. 
• Loan and lease balances increased from the prior quarter across all major portfolios except construction and development loans and agricultural production loans and increased 7.1% from the previous year. 
• Deposits increased 1.0% from the previous quarter and were up 2.9% from a year ago. 
• The share of noncurrent loans and leases increased 5 basis points from the previous quarter, while the net charge-off rate decreased 7 basis points. 
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The overall banking industry reported a 79.5% increase in net income from the previous quarter due to a large decline in noninterest expense. 

The DIF balance increased $3.5 billion to $125.3 billion on higher assessment revenue, while the reserve ratio increased 2 basis points during the quarter to 1.17%. 

During the quarter, the total number of FDIC-insured institutions declined by 19 to 4,568. One bank opened, four banks did not file a call report, and 16 institutions merged.

Source: ICBA

FDIC's 'problem bank list' spikes to highest level since 2022

The Federal Deposit Insurance Corp. reported that total assets on its "problem bank list" rose by $15.8 billion to $82.1 billion in the first quarter.

The number of banks on the list rose to 63 from 52 during the same period. Still, problem banks make up 1.4% of total banks, which the agency said is "within the normal range for non-crisis periods" of 1% to 2%.

The total assets and number of banks on the list have been growing for the past three quarters now.

"We still have a historically high level of unrealized losses across the banking industry" in securities portfolios, Chairman Martin Gruenberg told reporters May 29. Supervisors are also focused on loans on banks' balance sheets and concentrations, he added.

The FDIC places a bank on the "problem bank" list if it has a CAMELS composite rating of 4 or 5. The CAMELS scale evaluates a bank's capital adequacy, asset quality, management, earnings, liquidity and sensitivity. The scale goes from 1 to 5, with 5 representing the worst status.

It is becoming much harder to receive a 1 rating as regulators zero in on capital, commercial real estate and governance, Jonathan Hightower, partner at Fenimore Kay Harrison LLP, said at S&P Global Market Intelligence's recent Community Bankers Conference.

Source: S&P Global Market Intelligence

FDIC publishes 2024 Risk Review

Economic conditions remained strong in 2023 and financial market conditions improved toward the end of the year, according to the 2024 Risk Review. The report—which summarizes conditions in the U.S. economy, financial markets, and banking industry—noted that economic growth exceeded expectations despite higher interest rates and the Treasury yield curve remaining inverted.

Source: FDIC

New addition to In-Sites, ACB's Information Resource Center

Check-out the latest reference material available through ACB's In-Sites: Information Resource Center from the Barret School of Banking Library: Books for Community Bankers. These publications are available at no-charge for ACB members.

Source: ACB; Barret School of Banking