Lockdowns, PPP, Citi's historic move: The year in banking (Part 1)

November 29, 2020 9:00 PM

Read also: The year in banking (Part 2)

Under normal circumstances, this would be the time of year when we would be showcasing our selections for Banker of the Year, Community Bankers of the Year and Lifetime Achievement.

But 2020 was disruptive in a profound and pervasive way, so we’re taking a break from tradition to reflect on the year that was, particularly how the industry responded to the coronavirus outbreak and the protests over racial equality. Rather than honor the achievements of a few individuals, we wanted to recognize the regulatory agencies, banks, credit unions and individuals who stepped up to help households and businesses weather the economic shocks of the pandemic and took meaningful action to help close the racial wealth gap.

We also wanted to highlight some of the year’s milestones — finally, a female CEO at a U.S.-based global bank — look ahead at how the year’s events could shape banking and banking policy in the future, and have a bit of fun. It’s a lot to pack into a single slide show, so we’re presenting in two parts over two days. Here’s part one.

Thickest glass ceiling in banking finally breaks

For decades it’s been one step forward, two steps back when it comes to gender diversity at the top in the banking industry, and Jane Fraser’s ascension to chief executive at Citigroup is no exception.

But what a step forward it is.

Fraser will be the first woman to lead one of the four largest U.S. banking companies when CEO Michael Corbat retires in February, a shattered glass ceiling that deserves celebration.

In some of her first public remarks since the announcement, Fraser shared her achievement with all women in banking. “This first is an accomplishment for us all,” she said. “And with the extraordinary cadre of women in our industry, I’m very certain it’s the first of many, many more to come.”

Skeptics might disagree. After all, while Fraser’s promotion has rightly been hailed, it comes as two of banking’s most prominent female leaders exit CEO roles. Former KeyCorp Chairman and CEO Beth Mooney, who was the first woman to lead a top 20 U.S. bank when she was appointed in 2011, was succeeded by Chris Gorman when she retired from the Cleveland-based company in April, while CIT Group’s Ellen Alemany will vacate the CEO role at her company when it completes a merger of equals with First Citizens BancShares in 2021. Frank Holding Jr., First Citizens’ chairman and CEO, will retain those roles at the combined company.

Fraser has been viewed as the heir apparent at Citi since her appointment to president in October 2019. Reports had said she won the job after Wells Fargo had tried to recruit her to be its CEO.

Since joining the $2.2 trillion-asset bank in 2004, Fraser has built an impressive resume as a fixer by taking on businesses in turmoil, including handling the mortgage operation in the wake of the financial crisis and overhauling operations and controls in Latin America following scandals at its Banamex unit. Lately she has been leading the company’s response to the coronavirus pandemic.

It was widely believed that Corbat would stay in the job for another few years, but he announced his pending departure just weeks after Citi accidentally paid $900 million to lenders of the cosmetics company Revlon and blamed human error. Citi officials have dismissed questions about the timing, saying Corbat always planned to retire in 2021.

But it has left some to wonder if Fraser is perched on what’s known as a “glass cliff,” referring to instances where women in business are promoted to leadership jobs at moments of crisis. If that is the case, though, it is hard to imagine anyone whose experience would have better prepared them for it than Fraser. — Allissa Kline

Employees work overtime to help small businesses

A centerpiece of the Coronavirus Aid, Relief and Economic Securities Act Congressed passed in March was the Paycheck Protection Program, and it fell on banks and credit unions to quickly get the hundreds of billions ofdollars in federal aid to small businesses that desperately needed the funds to ride out the pandemic.

Banks large and small needed all hands on deck first to get the program up and running and then to process what ended up being about 4.5 million loans totaling more than $500 billion. “It was around the clock,” recalled Bank of America's head of Small Business Sharon Miller, above.

The Herculean effort went beyond just the small-business team at many banks, including BofA, which made more than 345,000 PPP loans in a matter of weeks.

“It was 10,000 of our teammates coming together, redeployed to our space saying, ‘How can we help?’ ” Miller said. “Everyone was focused on this 24/7. That meant no Easter weekend, no Memorial Day, no weekends. … I didn’t hear any complaints either.”

Jennifer Roberts, the chief executive of business banking at JPMorgan Chase, said PPP applications hit her bank like a tidal wave. On the program’s first day, April 3, Chase rolled out an online form to collect basic information from borrowers. Within an hour, more than 75,000 had completed it, Roberts said.

The $27.5 billion-asset Flagstar Bancorp handled more than 3,000 PPP applications totaling $400 million, a level of volume Executive Vice President Brian Dunn called an avalanche. “It was so overwhelming,” yet there was no griping about long hours or weekend work, Dunn said.

“This program was helping our friends, our neighbors, our communities get a paycheck during the dark days in April and May,” he said. “It demonstrated our ability and the entire banking industry’s ability to be there for our customers and communities when we were needed most.” — John Reosti

The Fed uses its entire toolkit to get the economy through the pandemic …

The Federal Reserve’s first big move in response to the coronavirus outbreak came on March 3, when it announced its first emergency interest rate cut since 2007.

Days later, even before the outbreak was officially declared a pandemic, the Fed cut rates even further, to zero, and urged banks to use its discount window and even dip into capital reserves to access funds they might need to make emergency loans to customers.

It then began purchasing record amounts of Treasury securities and mortgage-backed securities, helped to buoy those markets, and would go on to deploy nearly a dozen emergency lending facilities under section 13(3) of the Federal Reserve Act, which included dusting off financial crisis-era programs like the Commercial Paper Funding Facility and the Term Asset-Backed Securities Loan Facility.

Chairman Jerome Powell, above, emerged as the public face of the crisis response effort, making rare appearances on “The Today Show” and “60 Minutes” to explain the Fed’s actions.

The Fed’s response, ultimately, went beyond what the markets needed and in November Treasury Secretary Steven Mnuchin ordered the central bank to return to the Treasury any emergency funds that went unused by Dec. 31.

And while the Fed still has more tools in its toolkit, Powell has become increasingly vocal in urging Congress provide more relief to struggling businesses and households.

“Even if policy actions ultimately prove to be greater than needed, they will not go to waste,” Powell said in October. “The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.” — Hannah Lang

… But one Fed stimulus effort falls short

While the Paycheck Protection Program was designed to help companies with fewer than 500 employees, the Fed's $600 billion Main Street Lending Program, which rolled out over the summer, was intended to provide a lifeline to companies with fewer than 15,000 employees or less than $5 billion in annual revenue.

But unlike the PPP — which ran out of funds so quickly in its first go-round in April that Congress had to allot another $310 billion — the Main Street Lending Program has drawn little interest from borrowers or lenders. Main Street loans also have to be paid back, whereas PPP loans don't if borrowers meet certain requirements.

The minimum loan amount, which the Fed has already twice lowered, is $250,000, and many smaller businesses don't qualify for a loan of that size, bankers have reported. And larger companies that do qualify have to contend with restrictions on dividends and bonus payments if they choose to accept a loan, which many have said is a nonstarter.

The program, which is being funded through the Federal Reserve and Treasury Department through congressional appropriations in the CARES Act, also isn't available to certain asset-based borrowers in dire need of cash, including commercial real estate firms.

Banks, meanwhile, have been scared off by the terms. The Fed, through a special-purpose vehicle, purchases 95% of a loan made under the Main Street terms, but banks remain on the hook for the other 5% of the loan, making some lenders apprehensive.

In fact, a recent Fed survey found that bankers do not expect lending through the middle-market business rescue program to pick up anytime soon. As of early November, the Fed had purchased just $3.95 billion worth of loans. — Hannah Lang

Square (finally) gets a bank charter

After a two-year-plus pursuit of an industrial bank charter, which included having to withdraw and reapply, the payment processor Square finally secured approval this past spring from the Federal Deposit Insurance Corp. It was quite a hurdle to clear. The last time the FDIC had signed off on an industrial loan company was June 2008. The success of Square, which got a green light along with the student loan servicer Nelnet, could emerge as a road map for other likeminded fintechs trying to enter the banking system.

Square's road to approval was long and bumpy. Ever since the company filed its first application, in 2017, Square's bid drew fierce opposition, particularly from community banks. FDIC board member Martin Gruenberg, who dissented from the agency's approval, cited Square's limited profitability as a possible safety and soundness risk for the new bank. But those concerns weren't enough to convince FDIC staff. Still, it's an open question whether the FDIC will continue to approve industrial bank applications in the years to come. The agency may take each pending and future bid on a case-by-case basis. But controversial or not, the ILC charter may be fintechs' most viable route to bankhood of all the options.

Square's industrial bank, headquartered in Salt Lake City, is expected to launch sometime in 2021. It will focus primarily on making small-business loans to customers on behalf of Square Capital, the company's commercial lending subsidiary.

Square is well positioned for further growth. Even though the pandemic reduced foot traffic for small businesses using Square's payments service, its peer-to-peer Cash App has helped pick up the slack. — Brendan Pedersen

Stress-testing for climate change gets real

As if a global pandemic wasn't enough to contend with, bankers received intensified warnings this year about another risk confronting their businesses: climate change.
Increasingly frequent and severe weather events can pose a serious threat to the stability of the U.S. financial system, government officials and outside experts warned on multiple occasions. It was the beginning of a drumbeat for stress-testing balance sheets for climate-related risks.

Recent years have seen large tracts of the United States devastated by wildfires, hurricanes and flooding, with losses running well into the hundreds of billions of dollars. So, the rationale goes, banks should perform risk analyses that account for the financial exposure tied to serious climate events and from an abrupt transition away from fossil fuels.

The results could ultimately lead banks to set aside more capital for certain types of loans, work with commercial clients to minimize their own environmental impact or even exit certain businesses altogether.

Central bankers abroad have already embraced the idea of stress-testing for climate risk, but it's been a tougher sell here. Some U.S. bank regulators have voiced their concerns about climate risk, but they had largely stopped short of calling for stress-testing.

That began to change in 2020. Early in the year, some lawmakers pressed federal regulators over climate risk to the financial system. Then, in a nearly 200-page report issued in September, a subcommittee of the Commodity Futures Trading Commission outlined what a climate stress-test pilot should look like. It argued that banking regulators already have the authority to mandate such stress tests.

The New York State Department of Financial Services appeared to take its advice. Shortly after the CFTC's report, the department issued guidance that directed state-chartered banks and credit unions to start factoring in the financial risks linked to serious climate events, adjusting their capital and credit mixes and keeping investors fully informed.

Bankers might also reflect on the events of the past year and ask themselves whether a year or two ago they had seriously considered a global pandemic among their risks.

The CFTC report made a point that may resonate with pandemic-weary bankers: "Science clearly indicates that the cost of delay in responding to the risk can be devastating." — Laura Alix

Pandemic upends bank M&A

Merger and acquisition activity proved robust in 2019, as buyers searched for scale and efficiencies. Banks announced 257 deals, driving one of the liveliest years of the past decade.

Expectations ran high early in 2020 for another banner run as buyers announced 17 deals in January alone. But then the pandemic arrived in March and "brought almost everything to a standstill — M&A included," said Jacob Thompson, a managing director of investment banking at SAMCO Capital Markets.

Deal activity has yet to recover — a few notable deals aside — and may not do so until deep into 2021, Thompson and others say.

Several deals announced late last year or early this year have been called off and many would-be buyers are staying on the sidelines because they say it's simply too difficult to assess what troubles could be lurking in sellers' loan portfolios. Banks made clear in third-quarter earnings calls that they did not know how the health crisis would affect credit quality because there was no telling how long it would last.

"We could see the worst of the impact on banks next year," said Jon Winick, chief executive of Clark Street Capital.

Winick and others say that once clarity returns, bank M&A is bound to return to the pace of 2019 — or perhaps exceed it because of pent-up demand. The principal motivators for M&A, scale and cost savings, have only become more important amid the economic malaise of 2020.

The few deals announced this year touted those benefits. The $489 million merger of Bridge Bancorp in Bridgehampton, N.Y., and Dime Community Bancshares in Brooklyn, N.Y., announced in July, is a case in point. The combined company would instantly double its assets, to more than $12 billion, and the plan is to carve out more than $30 million in overlapping expenses.

"Increased size and scale cannot be scoffed at," Kevin O'Connor, Bridge's president and CEO, said shortly after announcing the deal. "We'd be able to use the scale to invest in some revenue-generating areas." — Jim Dobbs

Calls for postal banking get louder

For years, progressives have been advocating for the U.S. Postal Services to make financial offerings available in local post offices as a way to meet the needs of underserved consumers.

But conservatives, as well as banking and credit union executives, have repeatedly scoffed at the idea, arguing that banks and credit unions already have the infrastructure in place to serve underbanked households and that the agency responsible for delivering mail to U.S. citizens is simply not equipped to offer financial services. Leave banking to bankers, bankers say.

In the era of COVID-19, though, the idea of postal banking appears to be gaining traction.

It started early in the pandemic when Congress passed legislation to give many individuals earning less than $75,000 a year up to $1,200 in federal aid. Many Americans with bank accounts received their payments quickly through direct deposit, but millions more without bank accounts waited much longer to receive their checks in the mail.

So Sen. Sherrod Brown of Ohio, the top Democrat on the Senate Banking Committee, proposed offering government-backed FedAccount digital wallets to individuals. The bank accounts would have no account fees or minimum balance requirements and would be opened at local banks and post offices. Americans would be able to receive government stimulus funds quickly and inexpensively through FedAccounts.

Postal banking has also been endorsed by former Vice President Joe Biden, a Democrat who is now the president-elect. Biden's unity task force with Sen. Bernie Sanders, I-Vt., recommended implementing a postal banking system as a way to expand access to physical banking locations at a time when the number of branches is shrinking, creating more so-called banking deserts.

Meanwhile, another postal banking idea is starting to gain some acceptance, even among banks and credit unions. It was reported over the summer that JPMorgan Chase had held preliminary discussions with the USPS to offer ATMs and other banking services at post office locations, and while those talks didn't get far, the idea of some sort of public/private partnership has piqued the industry's interest. Some bankers have said they would be open to such partnerships as long as there's a competitive bidding process. — Neil Haggerty

Drive-through banking makes a comeback

Drive-through teller windows were a ubiquitous feature at branches for decades, but their popularity waned as digital banking became more sophisticated and customers no longer had to leave home to deposit a check.

Though some survived, many ended up being converted into drive-through ATMs.

This year, drive-through windows are back.

Particularly at the beginning of the pandemic, customers who would typically visit branch lobbies flocked to drive-throughs, getting an extra layer of protection from human contact. Drive-ups were also better for spontaneous visits when banks required appointments to enter the lobby.

"In March and April, customers were lining up around the corner," said Jim DeLapa, general manager of Kiran Analytics, part of the customer engagement company Verint.

Banks that were set to close their drive-throughs put those plans on hold. Fifth Third Bancorp, for one, plans to keep drive-up windows in its new branches or even add walk-up windows to inner-city branches.

Still, there are doubts about the long-term viability of these services. Some customers who were resistant to digital banking before the pandemic have gotten the hang of depositing checks and doing other tasks from their smartphones.

So the renewed surge may not translate into a full comeback in a post-pandemic future.

"I don't think the banks that don't have them will start looking," DeLapa said. — Miriam Cross

As consumers curtail spending, coin supply dwindles

When banking executives scrambled to overhaul their business for a socially distanced world, so much emphasis was put on — and so many congratulations shared over — electronic payments.

It was at that moment that old money bit back.

As small businesses struggled to stay afloat while consumers stayed home, about $40 billion in change went dormant in American households, cutting coin circulation to a trickle. Suddenly, takeout restaurants and retailers couldn't make change, and laundromat users were out of luck.

Banking industry representatives and government officials led by the Federal Reserve and the U.S. Mint assembled over the summer to develop a plan while new coin deliveries were rationed. Major retailers like Kroger and 7-Eleven, along with many banks, started awareness campaigns and offered cash incentives and even Slurpees to anyone who brought in their coins.

The Fed's coin inventories were at their lowest in June, a spokesperson for the central bank said. Coin allocations to financial institutions have increased steadily since local economies began to reopen, but order limits remained in place on banks late in the year. The Fed spokesperson said coins were rotating more quickly through the economy, though not as fast as usual.

"It is actually better for us" than earlier in the year, said Chris Nichols, director of capital markets at South State in Winter Haven, Fla. "We have been able to order and receive a little more from the Fed. We are not back to normal, but getting there."

"No one saw this coming," Nichols added, "but it now should be in every bank's pandemic plan." — Jon Prior