JPMorgan is reported to be stepping up its mortgage, auto loan and credit card securitization programs – ahead of the Federal Reserve increasing the amount of regulatory capital that banks need to hold.
Leveling the Playing Field
These regulatory capital increases work to level the playing field between banks and fintechs in lending – where the raw input cost (funding for those loans to customers) becomes more equal for banks and non-bank lenders.
The Bank Funding Advantage
When tapping the securitization markets for funding mortgages, consumer loans or other assets, fintechs and banks face relatively similar funding costs. In cases in which it is more economical for banks to hold these loans on their balance sheets funded by deposits or wholesale funds – fintechs might find it hard to match bank pricing. These cheap deposits and wholesale funds at banks largely come from implicit and explicit government guarantees, as well as banking being a licensed activity.
The Fed Steps In
Regulatory capital requirements are the other side of the equation for the government – helping to reduce the risk of the guarantees the government provides (for example avoiding SVB failure-type situations), and to create the best market structure for consumers and the wider economy (for example increasing competition and improving loan/savings pricing for consumers).
Under Federal Reserve proposals in July, bank regulatory capital charges would increase by 2% of risk-weighted assets (RWA). This would materially reduce the profitability of holding loans funded by deposits or wholesale markets on bank balance sheets – which is why we are reportedly seeing JPMorgan stepping up its securitization.
The Time For Fintech
Fintechs that can innovate to reduce operational costs of lending (such as using technology to improve the efficiency of underwriting and servicing without legacy costs), that have more efficient customer acquisition, or that create innovative lending products might now find themselves in a position in which they can compete for a much bigger share of the market and will find themselves growing rapidly.
