The Banking Dive Outlook on 2023

In predicting hot spots for the year ahead, sometimes it’s worth seeing what was written a year ago. While some of early 2022’s concerns — COVID-related ones, perhaps — seem of their time, others surprisingly grew legs. When Banking Dive included crypto on its list last year, the paramount concern seemed how to regulate it. That may still be true. But 2022 in action turned a hypothetical risk scenario into a very real numerical nightmare for some institutions.

Another 2022 trend, regulatory developments — particularly, the “who” involved — ran its course as the Biden administration staffed up the Federal Reserve board and gave the Federal Deposit Insurance Corp. a full-fledged figurehead. In that regard, 2023 presents a follow-up question: Now that the regulators are in place, what about the actual regulation? 

Here is a look at Banking Dive’s top trends for 2023.

CFPB leading on tougher penalties

Before 2022 ended, Consumer Financial Protection Bureau Director Rohit Chopra made good on his promise to crack down on institutions with a track record of consumer rights abuses. 

The regulator in December announced a record $3.7 billion settlement with Wells Fargo over a slew of consumer abuses related to auto loans, mortgages and deposit accounts.

Since taking the helm of the CFPB in 2021, Chopra has vowed to impose stricter penalties on repeat offenders.

“Wells Fargo’s rinse-repeat cycle of violating the law has harmed millions of American families,” Chopra said in a December statement.

Wells’ laundry list of consumer abuses, beginning with the bank’s 2016 fake-accounts scandal, has arguably made the bank an easy first target. 

But the formation of the bureau’s “repeat offender unit” likely means the CFPB in 2023 intends to ramp up efforts to rein in other large institutions with similar records.

“The Repeat Offender Unit will focus on ways to enhance the detection of repeat offenses, develop a process for rapid review and response designed to address the root cause of violations, and recommend corrective actions designed to stop recidivist behavior,” the agency wrote in a supervisory highlights report published in November. “This will include closer scrutiny of corporate compliance with orders to ensure that requirements are being met and any issues are addressed in a timely manner.”

In a March 2022 speech, Chopra called corporate recidivism a “vexing problem” facing regulators, and one that “undermines the promise of the financial sector and the entire market system.”

“We must forcefully address repeat lawbreakers to alter company behavior and ensure companies realize it is cheaper, and better for their bottom line, to obey the law than to break it,” Chopra said.

In his speech, Chopra listed JPMorgan Chase and Citi, in addition to Wells, among banks “guilty of crossing legal fault lines over and over again.”

And Wells may not be entirely out of the woods. 

Chopra called the bank’s agreement to refund billions of dollars to consumers “an important initial step for accountability.”

Where are the next cuts?

In 2022, it seemed mortgage lending — especially if you’re Wells Fargo, JPMorgan Chase or Citi — bore more of the right-sizing burden than other banking sectors. The justification, from a bottom-line perspective, appeared easy: The Federal Reserve steadily jacked interest rates, dwindling the demand for homebuying and refinancing. 

As banks brace for a potential recession in 2023, which sectors are next at high risk for reduction?

One strategy could be to watch early movers for clues. Goldman Sachs launched a cull in January thought to encompass 3,200 employees. The cuts come too late to be reflected in the bank’s fourth-quarter results, released Jan. 17. But the numbers may surface when Goldman holds its investor day Feb. 28. 

A better bet, in the short term, may be to look at Morgan Stanley, which let go of 1,600 employees in December.

Morgan Stanley also released its fourth-quarter financials Jan. 17, but headcount numbers — because reductions occurred before Dec. 31 — should be up to date. The bank has not yet offered a breakdown by unit, rather couching its reductions as “modest cuts all over the globe.”

Goldman, if we’re looking for clues further into the future, said more than one-third of its cuts will be from within the bank’s core trading and banking units.

The bank’s president, John Waldron, in late December, called the economic forecast “challenging.”

“We may be wrong, we may get a soft landing and we’ll staff up again,” he told the Financial Times.

That indicates a flexible view of staffing. Trimming the ranks of investment bankers, in Goldman’s case, is not a long-term strategy.

Squeezing more productivity out of them might be, though. Data from Coalition Greenwich showed that even though a set of 12 large banks counted the same number of “front office producers” in each time frame, banks took in $4.2 million per person in 2021, compared with less than $3 million per person in 2019. 

At the same time, though, income has jumped 40%. Some of that can be attributed to staffing up in tech.

Tech generally had been thought of as relatively safe from cuts, as few may want to risk falling behind in that arena. But as Capital One’s recent cuts show, there are always exceptions.

Some tech — namely, crypto — appears markedly less safe. Silvergate Capital cut 40% of its staff after the collapse of crypto exchange FTX triggered a run that gouged the bank’s digital-asset deposits.

Banks will see voluntary departures, too. The executive leading State Street’s crypto push left the bank to dive further into the space at a fintech. Meanwhile, one of the four executives Morgan Stanley had tapped as a potential successor to CEO James Gorman is leaving the bank as of Jan. 31.

Banks individually, no doubt, will debate whether to fill voluntary departures right away, do more with less, or wait to see what talent becomes available.

But the window for experimental growth — be it crypto pursuits or Goldman’s consumer bank — may be closing.

Banks distance themselves from crypto

The volatility plaguing the crypto world since last spring has prompted banks to think twice before dipping into its muddy waters.

Many banks’ crypto curiosity “went away” in 2022 as the value of tokens took a tumble, Michael Hsu, acting chief of the Office of the Comptroller of the Currency told Bloomberg in December. Hsu said he’d be “astounded” if banks started expressing interest in the asset class now.

What’s more, banks with longstanding crypto presence are also backing out: Early adopter Metropolitan Commercial Bank, which backed well-known firms including Voyager Digital and Coinbase, announced this week it would be exiting the sector following “recent developments in the crypto-asset industry.”

Signature Bank, meanwhile, is offloading $8 billion to $10 billion in digital-asset deposits in a move that shrinks its crypto component to encompass less than 15% of total deposits.

“We’re not just a crypto bank, and we want that to come across loud and clear,” Signature Bank CEO Eric Howell said at a December conference.

Banks’ moves to distance themselves from might surprise some. But once bitten, twice shy: Metropolitan had to return $270 million in customer funds when Voyager went bankrupt; and Signature has exposure to the bankruptcies of both Celsius and FTX — because they were customers.

Was the instability of one of crypto’s most prominent stablecoins, Terra, and its May ecosystem collapse on anybody’s 2022 bingo card? What about the collapse of crypto exchange FTX and the arrest of crypto’s onetime white knight Sam Bankman-Fried not long after his company bailed out Voyager Digital with a (now-defunct) $1.4 billion acquisition and BlockFi with a $250 million loan? 

Looking ahead into 2023, last year’s crypto roller-coaster of 2022 serves as a cautionary tale. Regulators know it, which is why the Fed, OCC, and FDIC issued a joint warning on the risks of bank-crypto ties, and why the Basel Committee on Banking Supervision unveiled guidelines for banks playing in the digital-asset space.

Lawmakers, too: While it’s unlikely that the Digital Commodities Consumer Protection Act, which would have granted crypto regulatory powers to the Commodity Futures Trading Commission, will make any further moves — it was supported by Bankman-Fried, and it suffered by association — regulation may come for stablecoins, courtesy of now-former Sen. Pat Toomey, R-PA.

The bill would require all stablecoins to be fully backed by liquid assets; authorize several types of regulated entities to issue stablecoins; and put regulatory power into the hands of the OCC.

While regulators continue to duke it out over who gets to call the shots on crypto, bankruptcy proceedings for Celsius and BlockFi will continue, and fallout from the FTX collapse will continue to unfold. Bankman-Fried, meanwhile, is set to be tried in October on eight counts, including wire fraud and conspiracy to commit campaign finance violations.

ESG battle ramps up

A December hearing held by the Texas Senate Committee on State Affairs that featured testimony from executives of BlackRock and State Street Global Advisors should put to rest any doubt that the ideological war over financial institutions’ environmental, social and governance investments is heating up.

The hearing’s setting may have been remote — Marshall, Texas, was purportedly chosen because it’s in the district represented by the committee’s chair, Bryan Hughes.

But Marshall is also home to the U.S. District Court for the Eastern District of Texas — a court known as unfriendly territory to banks. Since 2020, Wells Fargo and PNC have each been ordered by a judge there to pay USAA hundreds of millions of dollars in penalties for patent infringement. USAA last summer also sued Truist in that court. 

So if the BlackRock-State Street hearing felt like a trial, that atmosphere may not have been accidental.

Texas and West Virginia both took steps last year to restrict certain institutions they deemed hostile to the financing of fossil fuels. Texas ordered state pension funds to divest their holdings in BlackRock and several foreign-owned banks but stopped short of penalizing U.S. banks. 

At the hearing, Hughes equated the financing fight to no less than a matter of “national security.”

“When there’s no funding for energy projects, energy projects don’t get done, energy costs go up, jobs go away and the cost of everything we buy goes up,” he said. “This is real. This is family security. This is national security.”

A BlackRock executive, for her part, sought to assure the panel it doesn’t discriminate against energy companies. 

“We have one bias: to get the best risk-adjusted returns for our clients,”  BlackRock’s head of external affairs, Dalia Blass, said at the hearing. 

There are a few ways the ESG debate could gain momentum. Nineteen Republican attorneys general wrote BlackRock in August with concerns over its investment strategy. The next salvo has already come from another of those states. Kentucky issued a divestment list that, unlike Texas, includes big U.S. banks (Citi and JPMorgan Chase) in addition to BlackRock. More state-level action can be expected.

BlackRock isn’t just feeling pressure from the right. New York City’s Democratic comptroller, Brad Lander, accused the asset manager of “backtracking on its climate commitments” in defending itself against potential divestments.

Given the amplification of tactics, expect to see BlackRock CEO Larry Fink take a stance — however measured — in his annual letter to stakeholders, which usually surfaces in March.

Fintechs (and partnerships) under the microscope

Several developments in the final months of 2022 could set the stage for what may be a tough year for fintechs looking to win favor from regulators and lawmakers. 

A November report from the Treasury Department called for more oversight of the sector to protect consumers and enable sustainable competition.

“While non-bank firms’ entrance into core consumer finance markets has increased competition and innovation, it has not come without additional risks to consumer protection and market integrity,” Treasury Secretary Janet Yellen said.

A House report in December cast the sector in a further tough light. The House Select Subcommittee on the Coronavirus Crisis concluded several fintechs that facilitated loans through the $800 billion Paycheck Protection Program had lax anti-fraud standards that hampered their abilities to stop “obvious and preventable fraud.”

Bank trade groups said the House report is a strong argument against allowing fintech firms to participate in the Small Business Administration’s flagship 7(a) lending program.

Many banks will welcome regulator and lawmaker promises of more scrutiny of fintechs. Traditional finance firms have long called for regulators to even the playing field by holding nonbanks to the same regulatory standards as chartered institutions.

But that means banks, too, will be subject to some of that glare, as bank-fintech partnerships come under the microscope in 2023.

Acting Comptroller Michael Hsu has indicated the OCC intends to step up oversight of bank-fintech partnerships —  tie-ups he said could put the financial system at risk of a crisis if not properly supervised.

Hsu said the regulator is working to subdivide bank-fintech arrangements into cohorts with similar safety and soundness risk profiles and attributes.

The OCC also plans to open its Office of Financial Technology this year. 

As the new year begins, it’s natural to look at the environmental, social and governance policy debate and anticipate how the players would escalate their arguments. 

In August, 19 Republican attorneys general wrote perennial ESG punching bag BlackRock with concerns over the asset manager’s strategy. 

Several of the same AGs, two months later, launched investigations into whether the nation’s six largest banks, through their ESG practices, were blocking credit to oil companies.

A handful of states — West Virginia, Texas and Kentucky come to mind — have either barred financial institutions they deem hostile toward fossil fuels from accessing new state contracts — or have asked state pension funds to divest their holdings from such companies.

It would be business-as-usual, perhaps, if more states were to do the same. But, strategically speaking, how is that taking the fight up a notch? It seems a group of 21 Republican attorneys general have found a way to do so: Go after the companies banks hire to influence shareholder voting.

The 21 AGs wrote Institutional Shareholder Services and Glass Lewis in January, demanding the proxy advisers stop making shareholder voting recommendations — particularly on climate and board diversity — that the officials say contradict the advisers’ duty to get investors the best possible financial results.

The AGs argue that ISS, for one, has been pushing the finance industry to “play a central and catalytic role in the global transition to a low-carbon economy” because governments that have agreed to work toward net-zero emissions by 2050 haven’t codified that into law.

“The technology required to get to net zero by 2050 does not exist,” the attorneys general wrote, citing a 2021 International Energy Agency report. Reaching net zero by 2050 would mean an 8% decrease in energy demand while the global economy grows to twice its size, they noted. And energy efficiency must improve by an average of 4% per year through 2030 — triple the average rate from the past two decades, according to IEA figures.

“In other words, it is far from certain that any of this will occur,” the AGs wrote. “A rational company acting in the best interests of its shareholders would not voluntarily incur the massive expense [of a net-zero effort unless] in response to a government-imposed mandate.”

Wait, Taiwan?

Further, the AGs assert that ISS and Glass Lewis have a “limited ability” to affect emissions from China, which outpace those of the U.S., European Union and Japan combined, according to The New York Times. Adhering to net zero, the AGs wrote, would weaken the U.S. economy in comparison and leave the country reliant on China for “clean energy metals.” The AGs argue China could use that trade money — and the gains China has made by not adhering to net zero — to fund an invasion of Taiwan.

The AGs also argue ISS and Glass Lewis have a conflict of interest regarding ESG. “Each of you offers a substantial number of services related to ESG investing,” the AGs wrote. “The value of these services would be undermined if you were to admit … that ESG factors are not material to a firm’s financial performance.”

On diversity, the AGs said ISS and Glass Lewis “pledged to recommend votes against certain directors on boards that you view as having insufficient racial, ethnic, or sex-based diversity under arbitrary quotas.” The AGs question whether the quotas materially increase the economic value of a company, and allege that by encouraging adherence to quotas, ISS and Glass Lewis are pushing companies to violate state anti-discrimination laws.

The attorneys general asked ISS and Glass Lewis to justify their positions on net zero, board diversity, and yes, Taiwan by Jan. 31.

Not always a lock

However, companies have shown that just because proxy advisers recommend something — even when a majority of shareholders vote that way — it doesn’t mean it will become policy. Last year, ISS and Glass Lewis recommended JPMorgan Chase shareholders reject a one-time $52 million pay incentive to CEO Jamie Dimon. It garnered 31% support from shareholders. Yet it stood.

In the same vein, a proposal doesn’t have to get a majority vote to propel a bank to action. Citi in 2021 agreed to undergo a racial-equity audit after a resolution filed by SOC Investment Group received 38% support.

The escalation, for attorneys general, may be an attempt at a lawsuit. If ISS or Glass Lewis’ responses prop up an argument that board diversity quotas run afoul of state laws, the threat of legal action could work. Coinbase, for example, scrapped a high-yield product ahead of a scheduled launch in 2021, weeks after the Securities and Exchange Commission threatened to sue.

‘Personal’ attacks

A December hearing in Texas, featuring testimony from BlackRock and State Street executives, gave the air of a legal proceeding. Dalia Blass, BlackRock’s head of external affairs, sought to assure the Texas Senate Committee on State Affairs that the asset manager it doesn’t discriminate against energy companies. 

“We have one bias: to get the best risk-adjusted returns for our clients,” she said.

The panel’s chairman, Bryan Hughes, equated the fight over energy financing to no less than a matter of “national security.”

“When there’s no funding for energy projects, energy projects don’t get done, energy costs go up, jobs go away and the cost of everything we buy goes up,” he said. “This is real. This is family security. This is national security.”

Bringing family into the debate may personalize it more than money. BlackRock CEO Larry Fink indicated as much this week in an interview with Bloomberg.

“For the first time in my professional career, attacks are now personal,” he said. “It’s not business anymore. … They’re trying to demonize the issues.”

Fink called the narrative “ugly,” and said his recent annual letters have focused on a transition that emphasizes working with energy companies rather than against them. Fink said this year’s letter, due in March, will center on a concept of hope.

“BlackRock is a firm that tries to sell hope because why would anybody put something into a 30-year obligation unless you believe something is better in 30 years?” Fink said.

Still, hope isn’t always enough for climate activists. A study released this week by the French nonprofit Reclaim Finance blasted Citi and Bank of America — each a member of the Net Zero Banking Alliance — for lending or underwriting roughly $53 billion since April 2021 to oil, gas and coal companies whose operations are growing. Reclaim Finance said not enough data was available to distinguish how much of that went toward new fossil-fuel projects. Rather, the report highlights outflows to companies with expansion plans.

Layoffs abound in the crypto world, as they have since early May. The year switched anew on the calendar, yet the sector gets no “new year, new me” shift: More than 26,000 jobs were lost in crypto in 2022. By press time, the 2023 tally had numbered no less than 1,900.

It's hard to predict when the layoff trend will subside, but one exchange is bucking it: Binance. After hiring 5,000 workers last year, CEO Changpeng Zhao told the Crypto Finance Conference in Switzerland in January that he hopes to increase Binance’s workforce by 15% to 30% in 2023.

“We will continue to build and hopefully we will ramp up again before the next bull market,” he said.

That could be a while. The average crypto winter lasts four years, according to Forbes. And given that mysterious Bitcoin inventor Satoshi Nakamoto only released it 14 years ago, that’s no small amount of time. The last crypto winter lasted for three — from late 2017 to late 2020 — before coin prices skyrocketed to historical highs by November 2021.

In traditional securities, bear markets occur when a market index drops by 20%. And although there’s no official definition for the industry’s analog crypto winter, 2022 was icy cold. In May, one of the most prominent stablecoins depegged from the U.S. dollar, causing market tumult. Throughout the year, many of the most prominent exchanges — Celsius, Voyager Digital, FTX and BlockFi — went belly up. The price of Bitcoin dropped, at least temporarily, by 77%.

But in recent weeks, Bitcoin has made a small recovery. It sat above $23,000 in January for the first time since August.

Bradley Duke, co-CEO of ETC Group, said the Bitcoin jump was driven mainly by “some macro fears ... subsiding with positive economic data in the US, including lower inflation stats and strong job growth numbers.”

Indeed, the consumer price index posted its most significant drop since the early COVID-19 era. However, bank CEOs have stuck to their recession predictions from the fall. Bank of America CEO Brian Moynihan told investors in January that he’s preparing for a “mild recession,” and the bank is instituting a partial hiring freeze.

Goldman buy-in

Goldman Sachs, meanwhile, named Bitcoin the top performing asset of 2023 in January, with 27% in total returns and a risk-adjusted ratio of 3:1. The previous month, it was revealed that the bank planned to spend tens of millions of dollars to purchase or invest in crypto companies following the collapse of FTX.

Mathew McDermott, Goldman’s head of digital assets, told Reuters the collapse “heightened the need for more trustworthy, regulated cryptocurrency players, and that big banks see an opportunity to pick up business.”

In his December op-ed in The Wall Street Journal, CEO David Solomon reflected the sentiment, at least for the technology that drives crypto. The benefit of having regulated financial institutions develop blockchain applications, he said, is that they’re “accustomed to high standards of regulatory oversight ... [and] can work with regulators and policy makers to find the right balance between regulation and innovation.”

The downfall of FTX and its ensuing contagion “shouldn’t distract us from the opportunity at hand,” Solomon wrote. “Investors large and small stand to gain with blockchain innovations that are guided by established, experienced institutions.”

Other support?

Is Solomon’s support enough to keep other banks interested in crypto, despite the challenges of the past year? JPMorgan Chase CEO Jamie Dimon’s not sold. But then again, he never really was. (They do have that crypto wallet trademark, though.)

Metropolitan Community Bank announced its exit from the crypto space in January; and crypto-friendly Signature Bank is in the middle of offloading $8 to $10 billion in digital assets to significantly shrink its crypto portfolio.

Acting Comptroller of the Currency Michael Hsu told Bloomberg in December that most banks’ crypto curiosity “went away” in 2022 as the value of tokens took a tumble and that he’d be “astounded” if banks started expressing interest in the asset class now.

Yet BNY Mellon CEO Robin Vince said in a January earnings call that since launching crypto custody services in October, digital assets have been and will remain a focus for the bank.

In a December Financial Times op-ed, Vince emphasized the importance of developing a regulatory framework for digital assets such as crypto, noting that “much of the underpinning already exists and can be extended from the regulation of traditional assets.”

“We should embrace digital asset innovation, and align it to established rules and measured regulatory principles in order to protect customers and promote resiliency,” Vince wrote. “In so doing, we also protect the most precious asset of all — confidence in our financial system.”

Regulation prospects

Crypto regulation was a hot topic before FTX faltered. The now-bankrupt exchange’s founder, Sam Bankman-Fried, testified before Congress in 2021, tweeting afterward that he was “excited” to engage the powers that be in the refining of the regulatory landscape. Though any regulatory-building legislation associated with him is almost surely a no-go at this point, now, lawmakers and consumers want crypto regulation more than ever.

Without offering anything hard and fast, regulators of late have offered plenty of guidance. The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. in January issued a joint warning on the risks of bank-crypto ties. The Basel Committee on Banking Supervision unveiled guidelines around the same time for banks playing in the digital-asset space. The New York Department of Financial Services announced in December that any banks it supervises must ask for prior approval before engaging in any crypto-related activities, and those already engaged must contact the regulator immediately.

NYDFS Superintendent Adrienne Harris said the new guidance “is critical to ensuring that consumers’ hard-earned money is protected, that New York-regulated banking organizations remain resilient and competitive, and that the expectations are clear for those that wish to submit proposals for virtual currency-related activity.”

Regulators continue to disagree, however, over who gets to call the shots in crypto, perhaps contributing to delays in it happening. Hester Peirce, a commissioner with the Securities and Exchange Commission, said in January the SEC should regulate digital assets like crypto through rulemaking.

"If we continued with our regulation-by-enforcement approach at our current pace, we would approach 400 years before we got through the tokens that are allegedly securities," she told a conference at Duke University, according to Pensions & Investments. "By contrast, an SEC rule would have universal — albeit not retroactive — coverage as soon as it took effect."

Also at Duke, Kristin Johnson, a commissioner with the Commodity Futures Trading Commission, implored Congress to include in any new legislation “statutory authority for the CFTC to conduct effective due diligence” on businesses, including crypto firms, that want to acquire CFTC-regulated entities.

No matter what else happens in 2023, fallout from 2022 will be addressed, bit by bit. Bankruptcy hearings for the FTX case are scheduled through April. Claims against Celsius, which received court approval to grant some customer withdrawals and also has scheduled court dates, must be filed by early February.

New York Attorney General Letitia James’ lawsuit against former Celsius CEO Alex Mashinsky over alleged fraud will play out.

And in October, barring a plea deal, Bankman-Fried will go to trial in federal court on charges including wire fraud and conspiracy to commit money laundering. Former FTX executives Caroline Ellison, Gary Wang and Nishad Singh are all cooperating with authorities in the case against Bankman-Fried. Bankman-Fried pleaded not guilty on eight counts.