Welcome to our third issue of Promissory Notes of 2023. Promissory Notes is our Banking & Finance Insights e-newsletter where we highlight important news articles from the industry and explain why they are important.

We are sponsoring and participating in three upcoming conferences that you may find interesting. 

On May 1-2, the West Virginia Manufacturers Association is holding its WV Manufacturing Energy and Growth Summit. This regional, annual event brings together manufacturing and energy leaders, state and local officials, economic development professionals, and friends of industry and energy from West Virginia, Ohio, and Pennsylvania. Summit attendees will explore the broader intersections of manufacturing and energy from power generation to downstream manufacturing development through feedstocks by created oil & natural gas and rare earth extraction. Click here to learn more and register.

On May 3-5, DRI is hosting their 2023 Employment and Labor Law Seminar. Considered to be one of the nation’s best employment law seminars, it brings together leading management-side employment and labor attorneys, in-house counsel, human resources professionals, and EPLI representatives from throughout the U.S. and Canada. Always intensely practical and accompanied by helpful written materials, this seminar is indispensable for experienced practitioners as well as those who are just getting started in labor and employment law. Click here to learn more and register.

On May 15, DRI is hosting their 2023 Wind Energy Litigation Seminar. At this seminar, attendees will gain an in-depth understanding about the onshore and offshore wind sector from experienced attorneys and directly from the industry itself. Click here to learn more and register.

Thank you for reading.

Bryce J. Hunter - Member; Chair, Tax Credits Practice Group; Chair, Community Banking Group; Co-Chair, Banking and Finance Practice Group; and Editor of Promissory Notes

Joshua L. Jarrell - Member; Chair, Public & Project Finance Practice Group; Co-Chair, Banking and Finance Practice Group

“Only a structural change to the way Congress acts on financial regulation will prevent future losses.”

Why this is important: An old adage is that history will repeat itself. In other words, all of this has happened before, and it will all happen again. Another banking crisis is upon us following the familiar cycle of financial deregulation. The failures of Silvergate, Silicon Valley, and Signature Banks provide an opportunity to learn and to act.

From the early 1980s through the 1990s, Presidents and Congress worked together on “financial services modernization.” Loosened restraints led to the savings and loan crisis, speculative subprime mortgage lending, and a myriad of other abuses that caused the financial system be severely tested after Lehman Brothers collapsed. The Dodd-Frank Act was borne out of these dominoes falling to prevent a repeat of those abuses. A more recent President and Congress relaxed Dodd-Frank standards. One of the leading advocates (and beneficiaries) of the loosened standards was Silicon Valley Bank (“SVB”). SVB’s executives reportedly assured members of Congress that SVB had other robust risk management measures. As we have learned in the past couple of weeks, SVB did not have adequate risk management for most of last year. Elected officials, regardless of party affiliation, enjoy a “free vote” on these matters. Each of these rounds of ruinous financial deregulation looked like essentially free votes to members of Congress. 

True reformers now claim that only a structural change to the way Congress acts on financial regulation will prevent future losses and suggest that the budget process rules provide a guide. For over 40 years, the Congressional Budget Act has required the Congressional Budget Office to estimate the likely effects of major fiscal legislation. While this requirement has not halted deficit-increasing legislation, it has derailed some legislation and forced proponents of legislation to offset for new spending or tax cuts. More impressively, it resulted in major legislation, such as the Affordable Care Act and the 2022 Inflation Reduction Act, to pay for costs but also include major deficit reduction.

Financial regulatory legislation has more impact on the country’s finances than the vast majority of explicitly fiscal legislation. Poorly developed standards full of loopholes can lead to financial institutions taking on excessive risks that lead to significant losses and larger systemic problems. The recent bank failures show the major public expenditures for deposit insurance as well as subsidies to stabilize other financial institutions. 

Reformers and commentators wisely are citing the need for a CBO type review of financial regulatory legislation. They express hope for breaking out of this latest crisis to install reforms durable enough to have a chance to survive the money-induced amnesia that will inevitably follow…and lead to the next crisis. --- Bryce J. Hunter

“But even finance leaders with no ties to the failures are fielding worried calls from investors and shareholders, looking to confirm the lack of exposure and get feedback, CFO Dive previously reported.”

Why this is important: A recent survey conducted by Gartner, which polled 250 finance leaders Monday, March 13 following the collapse of Silicon Valley Bank and Signature Bank, found that approximately 85 percent of the CFOs polled were concerned about the impact of bank failures on their businesses. Approximately 38 percent of the CFOs said they are assessing risk and the viability of their funding sources, and 39 percent said they are educating their board of directors on exposure and risk. Nearly a third of those who responded said they are planning to diversify their deposits across more banks. Some speculated that the impact of the bank failures may be felt harder by community and regional banks as business leaders move their funds to larger banks. Gartner, which conducted the poll, supports the efforts of CFOs to be proactive in their education about exposure, but recommends that CFOs avoid “shifting deposits too quickly away from banks that are not at risk of failure and harming their relationship, rates and terms.” --- Brienne T. Marco

“A coalition of midsize banks is asking the FDIC to insure all deposits for at least two years, Bloomberg reported.”

Why this is important: The Federal Deposit Insurance Corporation (“FDIC”) guarantees bank deposits of up to $250,000. Following the failure of two banks in recent weeks, regulators created some confusion among the industry and the public when they guaranteed customer deposits above this limit claiming that doing so was necessary to stem serious systemic risk to the financial system. Subsequently, lawmakers, financial industry professionals and other commentators are examining whether the FDIC limit, which has not been raised since 2008, needs to be increased or abolished altogether.

The confused puzzle works like this: On one hand, regulators’ actions send the message that deposits of more than $250,000 at an important-enough bank are safe. However, most depositors (and many lenders) believe the limit still exists and uninsured deposits remain uninsured. Finally, the third piece of the confusion puzzle is that it is unclear what makes a bank important-enough: First Republic Bank, Silicon Valley Bank's (“SVB”) similarly sized peer, continues to experience withdrawals of uninsured deposits after SVB's rescue by the FDIC and subsequent sale to First Citizens Bank.

The deposit limit was created on the theory that everyday Americans are low-information lenders. We deposit our money into a bank, unsecured, without performing due diligence on the bank's finances to make sure it is safe and sound. Knowing that deposits are backed by the FDIC’s deposit limit obviates the need for every person to become a bank analyst. One would think that larger and wealthier depositors would be more sophisticated to take the risks of losing deposits. Why should average depositors under the deposit limit care? Because bank runs by these larger and wealthier depositors impacts the small depositor. As we have seen this month, payrolls become imperiled and other banks start to falter. Opponents of raising the deposit limit or eliminating it have long argued that insuring all deposits would give banks too much license to take risky bets with depositor money, but the bottom line is that when trouble begins as it has in recent weeks, everyone starts paying more attention to the mundane subject of FDIC insurance. --- Bryce J. Hunter

By Bryce J. Hunter and Joshua L. Jarrell

Originally published in West Virginia Banker

With plaintiff attorneys seeing potential large dollar settlements and verdicts, along with increased regulatory scrutiny, banks need to review their overdraft practices.

As noted by the American Bankers Association, banks resolve most customer inquiries and disputes informally, with a phone call or through digital channels. Banks are incentivized in today’s hyper-competitive marketplace to do so to maintain customer satisfaction. When situations arise that require a more formal dispute resolution mechanism, many banks use arbitration because it is fair and more consumer-friendly than litigation. Historically, courts have recognized arbitration’s benefits as being less expensive than litigation with simpler rules, less hostile and intimidating for consumers, not disruptive to dealings among the parties, and more convenient and flexible in scheduling and location.

Click here to read the entire article.

“The providers would be required to conduct annual reviews of the effectiveness of the policies and make disclosures to the SEC about significant cybersecurity incidents.”

Why this is important: On March 15, 2023, the Securities and Exchange Commission issued proposed rules to bolster the ability of broker-dealers, clearing agencies, and other financial services providers to repel cyberattacks. The proposed rules would require these financial institutions to annually review the effectiveness of their cybersecurity policies and procedures. In the event of a significant data breach, these financial institutions would be required to not only inform the SEC, but also disclose the incident to investors. Additionally, financial institutions will be required to disclose cybersecurity risks to investors as well. The purpose of the new rule making is an attempt by the SEC to bolster the industry’s cybersecurity preparedness in light of the increase in ransomware and software supply chain attacks. This is necessary because of the increasing interconnectivity of the financial industry and reliance on technology to conduct business. However, not everyone at the SEC agreed with the need to issue these new rules. While everyone agreed that robust cybersecurity is important, some, like Commissioner Hester Pierce, believe that the proposed changes constitute an overreach. A 60-day public comment period will open after the regulations are published. Additionally, the SEC has reopened the public comments for cybersecurity risk and disclosure changes involving investment advisors and business development firms. --- Alexander L. Turner