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2019 Banking Landscape – Charter Types

Whenever discussing bank charter types, I’m reminded of a comparison made by Walt Moeling. Walt would always say that the bank charter choice is like choosing between a Ford and a Chevy truck. There are strong, die-hard advocates for the superiority of one over the other. But either one is functionally adequate, and will enable you to get from location a to b. Of course, neither is going to be confused for a Lamborghini or a Maserati either.

Looking at the breakdown of charters as of the beginning of 2019, while the majority of all U.S. banks are state, non-member banks (i.e. with primary federal supervision by the FDIC), each charter choice appears to continue to have its advocates.

The Office of the Comptroller of the Currency, the primary federal prudential regulator for national banks, has earned a reputation as the regulator of the largest banks, but the underlying data doesn’t necessarily support that viewpoint. While all of the four largest U.S. banks are national banks, in all asset classifications, there remains a variety of bank charter, showing that no one charter type is necessarily better based purely on asset size.

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The So-Called Rise of Credit Union Buyers

The increasing number of banks selling to credit unions has been a hot topic at investor conferences, within the trade press, amongst clients, at trade associations events, and in conversations with investment bankers. To that end, I’ll be on the main stage at BankDirector’s 2020 Acquire or Be Acquired Conference discussing the new players in the bank M&A game.

And the numbers would appear to support that conversation…

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2019 U.S. Bank Landscape

2019 U.S. Bank Landscape

September 23, 2019

Authored by: Robert Klingler

The landscape of the banking industry in the United States continues to be highly concentrated when looking at asset sizes, but with the vast majority of the depository institutions continuing to be smaller institutions. As of June 30, 2019, approximately 84% of the assets held by depository institutions are held by less than 3% of U.S. banks.

85% of the banks in the United States, or 4,511 institutions, have less than $1 billion in total assets. 73% (or 3,855 institutions) have less than $500 million in total assets. 53% (or 2,799 institutions) have less than $250 million in total assets. 23% (or 1,230 institutions) have less than $100 million in total assets.

The concepts reflected above aren’t new. We showed the same thing in our Landscapes as of the end of 2016 and the end of 2017. In both of those reports, we attempted to look at the historical trends of consolidation (and that trend certainly continues). But this year, we’re taking a different tack and trying to dig deeper into the FDIC data. All of the data presented is based on the underlying data in the FDIC’s Statistics on Depository Institutions as of June 30, 2019.

As with all statistical reports, I’m well aware that all statistics can be massaged, with relatively innocuous adjustments, to tell different stories. Certainly, extremes can disrupt averages and otherwise minimize the value of the outcomes (or suggest that median or modal outcomes are more important than mean outcomes). Even if you never took a statistics class or have blocked all statistics concepts from your mind, I encourage you to check out Planet Money’s Modal American episode. The modal U.S. bank would have total assets of between $100 million and $250 million, would be taxed as a C-corporation, have a holding company and be a state-chartered, non-member bank. By comparison, the “average” bank would be $3.4 billion and the media bank would be the $228 million Bank of the Lowcountry, in Walterboro, South Carolina.

I am also reminded that no bank desires to be “average,” nor are investors generally looking for an “average” return. That said, I believe there is value in understanding what average is, and recognizing that expectations should be different for different institutions.

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FDIC “Podcast” on the Financial and Banking Crisis

In December 2017, the FDIC published a written history of the financial crisis focusing on the agency’s response and lessons learned from its experience. Crisis and Response: An FDIC History, 2008–2013 reviews the experience of the FDIC during a period in which the agency was confronted with two interconnected and overlapping crises—first, the financial crisis in 2008 and 2009, and second, a banking crisis that began in 2008 and continued until 2013. The history examines the FDIC’s response, contributes to an understanding of what occurred, and shares lessons from the agency’s experience.

In April 2019, the FDIC followed up on the written summary with a “podcast” covering the same. While I am a huge fan of podcasts, as at least partially reflected in hosting The Bank Account, one of my pet peeves is when someone calls an audio download a podcast, without providing any convenient way to download that audio to a podcast application so that it can easily be listened to in the car, at the gym, or on a walk.

(Full disclosure: I listen to most podcasts, including banking podcasts, while running.  I certainly can’t say that discussions of banking law motivate me to run any faster or farther, but I do at least listen to them at 1.5x speed.)

Rather than just complain (or ignore it), I decided to take action and created an rss feed for the FDIC’s podcast. Anyone should now be able to paste/enter https://bankbclp.com/fdic-podcast.xml into their podcast app of choice to subscribe to the FDIC’s Crisis and Response podcast. I’ve also published additional instructions on how to subscribe to the FDIC podcast with particular podcast applications.

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Open Banking: A Practical API Licensing Primer

This post is the fourth and final in a series discussing Open Banking, its implementations, and its implications. The start of the series is here, and all of the posts in the series are available here.

In the United States, “open banking” does not yet mean that bank account and transaction data can be freely accessed on standardized terms—though it may in the future. For now, those who allow financial data to be accessed through APIs can impose their own conditions on that access. As we have described in this blog series, without further regulatory invention, in the U.S. API access is principally a contractual matter. For these purposes, we will refer to “providers” as those making API data available and “users” as those intermediaries accessing that data in order to deliver services to consumers or other clients. Although bank partnerships are subject to established contract standards, we will focus in this post on key issues that arise specifically in the course of the API licensing and access process.

Image by mohamed Hassan from Pixabay

APIs made available for free may be provided pursuant to “licenses” or may alternatively be provided pursuant to a “terms of use” document that sets forth the conditions under which use is permitted. Under either approach, if the user refuses to accept the terms, then use is barred. APIs made available for a fee may also be governed by “terms of use” but these terms may be negotiated as a license or service agreement. There, traditional assumptions about bargaining power often play out, with the dominant players typically demanding conformity.

Gating Considerations for API Access Terms

Particularly when the API license is presented as a take-it-or-leave-it agreement, the terms are often written to protect the provider from any liability for an offering from which the provider derives no or limited direct financial benefit. Users that will be paying for access may do so on a “per transaction,” “per user,” or some other basis; when the user pays money, the user understandably has more leverage over other contract terms. Either way, prospective users need to consider at least the following:

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How is Open Banking Regulated?

How is Open Banking Regulated?

April 25, 2019

Authored by: Barry Hester and John Bush

In previous posts in our BankBCLP.com series on this topic, we’ve attempted to define “open banking” and the ways in which it is attracting increasing industry attention through open APIs.  As our series continues, we describe how open banking is or may be regulated, as well as its critical licensing and intellectual property implications in practice.

As we have previously described, at least in the United States, “open banking” is more of a sweeping term of art than a distinct practice or product.  As a result, its legal and regulatory implications are potentially wide-ranging.    

Image by mohamed Hassan from Pixabay

In the United Kingdom, “Open Banking” is a more precise legal term for a sharing framework that the Competition and Markets Authority (CMA) has introduced for the stated purposes of increasing competition and expanding customer control over financial data.  In 2017, the CMA began to implement this framework by requiring the nine largest banks and building societies in the U.K. to begin sharing certain customer information with registered third-party providers (with customer consent).  In its earliest stages, this data sharing requirement was limited to data specific to the institution, as opposed to its customers, such as branch and ATM locations.  Subsequent stages have focused on transaction histories and even payments APIs.  These stages provide an early look at some of the more tangible consumer-oriented use cases for open banking.  For example, third-party applications can facilitate real-time bank location or price comparison shopping.

Importantly, under Financial Conduct Authority (FCA) implementing rules, the providers to whom this access is granted must be approved as a form of payments business or specialty service provider in the U.K. or in another jurisdiction under certain passporting provisions.  In any case, this will subject the provider to direct supervision and examination by a U.K. or EU regulator.  This framework dovetails with the European Union’s revised Payment Services Directive (PSD2) data security regulation in that these registered providers must specifically demonstrate PSD2 compliance.  The CMA is touting Open Banking as a secure, transparent means of providing consumers with more control over their finances. 

Other jurisdictions are taking a similar, top-down approach to open banking.  Australia is mandating that its four largest banks make certain banking information available on a “read only” API basis beginning July 2019.  India’s Unified Payments Interface (introduced August 2016) is an open API-based platform for real-time payments.  It ties to the government’s policy goals of minimizing the use of cash, promoting digital identity, and leveraging mobile devices in a rapidly developing economy.  Hong Kong published an open API framework in July 2018.  On the other end of the spectrum, China and Singapore are taking a more industry-driven approach.  China’s extensively cashless and mobile economy is incorporating open banking as a market response, rather than by regulatory mandate.

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Board Cohesiveness During Merger Consideration Process

Bank merger activity is reducing the number of U.S. banks at a rate of about 5% per year. It’s unclear how long this pace of industry consolidation will continue. Investment bankers, who have an interest in the level of activity continuing, are often quick to counsel bank boards of directors that the merger market may never be better than it is right now. Each year, the boards of hundreds of banks decide to heed the advice of those suggesting it’s time to sell.

Image by Gerd Altmann from Pixabay

A decision to sell a bank is one of the two most important decisions a board addresses (the other being selection of the CEO in a succession process). The strength of a board lies in the manner in which it approaches such a decision. Some boards will have gone through a lengthy process of reaching consensus before exploring potential merger opportunities. Others will find themselves considering unexpected merger offers without first having reached consensus. Vigorous debate can be healthy and productive in the process of a board reaching the best decision for the bank and its shareholders. Regardless of the circumstances in which a potential sale or merger of a bank is being considered, it is critical that all board members have access to the same level of information and be able to provide input throughout the process.

When board members believe they have been kept out of the loop on information flow, or they haven’t been adequately involved in considering a course of action, the strength of a board is undercut. Decision making is often adversely impacted as a result. This is particularly true in connection with consideration of the sale of a bank. Throughout the process of a board investigating options and considering strategic alternatives, the board members should have confidence that they are privy to all communications of importance with both professional advisers and potential merger partners.

We have seen far too many instances in which a director, on his or her own initiative and without authorization from the board as a whole, embarks on private outreach to potential merger partners. These directors usually feel justified in such action as a result of frustration with the pace at which the full board is moving or a sense that the CEO is resistant to the idea of selling the bank. Whatever the driving force, such independent action by a director can result in a breakdown in trust among the board and rarely results in a successful merger transaction.

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Open Banking: What are Open APIs?

Open Banking: What are Open APIs?

April 11, 2019

Authored by: John Bush and Barry Hester

This post is the second in a series discussing Open Banking, its implementations, and its implications.  Part 1 is here.

APIs or “Application Programming Interfaces” are everywhere in ecommerce, and they provide the building blocks in the primordial soup of innovations that may stem from open banking. 

Image by mohamed Hassan from Pixabay

Among other roles, APIs provide a protocol allowing one computer system to talk with another.  For example, The Weather Channel (“TWC”) has invested heavily in providing detailed meteorological information and forecasts by region.  TWC could conceivably require people to visit its website as the exclusive way to access this information.  Instead, however, TWC permits some of its information to be accessed automatically across apps, websites, and services and in ways third-party developers can predictably map (e.g., certain tagged data reflects values like “75°F” or “Partly Cloudy”).  TWC has determined such use advances the TWC business plan.  Conversely, the developers of apps, websites, and services have determined using the TWC API is superior to reinventing what TWC has accomplished—or not offering weather information at all. 

Without an API, a third party could create a bot to visit the TWC website and automatically “scrape” the information, but such an approach poses risks.  First, even a slight change to the TWC website could cause the bot to misunderstand which data it is supposed to scrape.  Second, such an approach raises contractual and copyright risks.  See, e.g., Ticketmaster L.L.C. v. RMG Technologies, Inc., 507 F. Supp.2d 1096 (C.D. Cal. 2007) (granting injunctive relief on grounds that defendant infringed copyright and terms of use through automated screen-scraping of Ticketmaster’s site in order to facilitate its own large-volume ticket brokerage).  Third, this conversion step fails to capture the richer, more reliable, and more on-point data TWC is willing to make available via its API. 

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What is Open Banking, and What are its Implications?

This post is the first in a series discussing open banking, its implementations, and its implications. 

“Open banking” is a phrase that has been coined to capture a current theme in financial sector innovation – one that some say is going to revolutionize banking.  For years, banks have given their customers increasing access to account information.  Now, with open banking, the access is opening to the point where customers can potentially obtain financial services in entirely novel ways, and the customer’s expectations of their bank may shift. 

Image by mohamed Hassan from Pixabay

The push to open consumers’ financial data goes back decades.  In the 1990s and 2000s, financial institutions began giving customers online access to their accounts—and instantaneous access to information previously reserved for monthly statements. Card-based transactions gradually shifted away from signed papers with carbon copy receipts to electronic devices.  With rapid access to financial information, debit cards that could immediately draw on bank accounts became more feasible.  Meanwhile, third-party vendors, such as Intuit, Microsoft, and Checkfree, were among the providers who encouraged institutions to go even further by making financial data available in a format that could be imported into their software; their work led to the promulgation of the Open Financial Exchange (“OFX”) data stream format, among others. 

In the past 10 years, the priorities in data exchange have incorporated the agenda of government proponents.  Notably, in 2016, a U.K. regulatory authority required the country’s nine largest banks to allow certain registered third-party developers to access certain customer data.  In 2018, the European Economic Area began implementing the Second Payment Services Directive (“PSD2”), including its goal to provide financial data through a central register.  In the United States, the Consumer Financial Protection Bureau has expressed its view that consumers should have timely, secure, and transparent access to their financial account information and to data sharing opportunities.  During this same time, digitization has accelerated to unprecedented levels in all facets of life and commerce, and data privacy risk awareness and regulation has emerged. 

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In Memoriam: Walter G. Moeling, IV, 1943-2019

It is with a very heavy heart that I write to report that our longtime friend and retired Partner, Walt Moeling, passed away peacefully on Monday night. Walt was at home and surrounded by family, including his wife Nell who has become a friend to many throughout the firm. Nell was Walt’s lifelong best friend and true companion, and is almost as well-known as Walt within the banking community in the Southeast for always being by his side and helping to grow his practice. Walt was important to our group, to the firm and to every person whose path he crossed. He was an incredible mentor to many, including our entire banking team.

Walt spent his entire legal career with our firm, starting out in the late 1960s with Powell Goldstein, an Atlanta-based firm that merged with Bryan Cave in 2009. In Walt’s near 50 years of active practice, he represented banks, thrifts, insurance companies and securities firms nationwide. In recent years he was nicknamed “the Godfather of Banking in the South” by a very prominent banking industry commentator.

Walt was widely recognized for his accomplishments as a leader in the legal field and banking industry and appeared in Who’s Who in America, in the South; American Law; Business and Finance; and as one of America’s Leading Business Lawyers by Chambers and Partners.

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