Another Proposed Fintech Acquisition of a Small Bank
Plus, more discussion about Basel thresholds
LevelField Financial Seeks to Become a Bank Holding Company
Yesterday morning LevelField Financial announced that it has reached an agreement to acquire Burling Bank, a $197 million asset bank based in Chicago.
LevelField Financial, a U.S. financial services firm seeking to unite traditional banking and digital asset products and services in one trusted platform, announced today that it is acquiring Burling Bank, an FDIC-insured, Illinois state-chartered bank providing business and personal banking services. Pending regulatory approval, LevelField will be the first full-service bank to offer fully compliant traditional banking and digital asset services, and LevelField will seek to expand these offerings nationwide.
Terms of the deal were not disclosed in the press release, but Marketwatch reported that the price was “about $50 million.”
Acquiring a bank has been LevelField’s started desired for a while. Last August, the company revealed it had hired PNC to advise it on a potential U.S. bank acquisition. CEO Gene Grant II said that the company was in talks with two different unnamed targets and expected to close the deal by “early 2023.” This was followed around a month later by an announcement from LevelField that it was launching a white label digital asset offering for banks. In that press release, LevelField reiterated that it was “looking to acquire a bank in Q1 2023 pending regulatory approvals.”
LevelField’s Current Business
To be up front about things, I actually had not heard of LevelField until they made their bank acquisition announcement yesterday. I say this not to in any way insult their business - it could be massively successful, or at least poised to be massively successful. But I thought it was best to include this caveat before going into the following summary of what I understand from the company’s website about its activities, just in case the summary winds up overstating (or understating) what the company is actually doing.
Existing Products and Services
The company currently offers a number of services that it says intend to “chang[e] the way you interact with digital assets.” These services include:
An “Easy Trade” tool for buying and selling digital assets: “Link your payment method, enter the amount you want to buy or how much you want to spend, and complete the transaction in a few simple steps.”
A “Leverage Trading” product that allows customers to “trade up to 5x long and 3x short”
“LevelField Earn,” described as “the oldest approach to earning yield brought to digital assets.” You can “choose your term length, loan your assets to LevelField, and earn interest in the currency of your choice.”
LevelField also in 2022 announced that it had reached an agreement to acquire Netshares Financial Services, LLC, “an SEC registered broker-dealer with crowdfunding portal capabilities.”
The company’s terms of service give a sense as to which entities within its corporate group currently do what, and with which bank the company currently partners.
Future Products and Services
LevelField’s website also touts a number of forthcoming products and services. These include:
Banking services, such as savings accounts, CDs, money market accounts, checking accounts, commercial loans and personal loans (in some cases collateralized by digital assets).
Cards, including:
LevelField Swipe: “Swipe dollars and get cash or digital assets back”
LevelField Unlock: “Spend and borrow USD without selling your bitcoin. Deposit a minimum of $20,000 in BTC/other currency as collateral, and spend up to 50% as a dynamic line of credit.”1
LevelField Unlock Black: Like LevelField Unlock, but “with a special APR reserved for customers who deposit $100,000 or more as collateral.”
High net worth and institutional offerings, including:
An OTC trading desk
Wealth management and advisory services
Custody of digital assets
Will this work?
If the services described on LevelField’s website accurately reflect what it currently does or what it plans to do, then I would be skeptical that all this would be found to be permissible by the FDIC and Illinois, to the extent it involves Burling Bank, or by the Federal Reserve, to the extent it involves LevelField and its non-bank affiliates. (Even assuming LevelField successfully makes an FHC election.)
I base this not only on the recent statements from the Federal Reserve Board and other banking regulators about what banks can do, but also on the experiences of companies like SoFi, which according to its SEC filings is being required by the Board to eventually discontinue certain crypto-related activities.
In connection with our approval as a bank holding company, the Board of Governors of the Federal Reserve (the “Federal Reserve”) determined that the activities of SoFi Digital Assets, LLC in providing members with the ability to buy or sell various digital currencies through SoFi Digital Assets, LLC's omnibus account with a third-party custodian is not a permissible activity under the Bank Holding Company Act and Regulation Y.
It sounds, however, like LevelField now plans to make changes to its business model and its future plans. The American Banker reports:
LevelField currently offers trading and custody services to digital asset holders. In September, it announced plans to market a turnkey service to banks that would enable them to offer trading, custody and other digital services to their customers. Now, in light of the deal with Burling, LevelField expects to suspend its white-label efforts until the acquisition closes. "Then we'll provide it as a bank-to-bank service," Grant said. […]
"We've taken everything out of the business plan" that might give regulators pause, Grant said. "There is nothing novel. There is nothing particularly interesting. We've read everything that's been published on digital assets to make sure we fit within the box. We have no interest, today or at any point in time, taking any principal positions. We are [strictly] customer facilitation."
Grant and other members of LevelField’s management team have significant experience in financial services, and I am sure they have excellent advisors as well. I am also sure they and their advisors have thought much longer and much harder about this than I have — again, I admit I only heard about this company yesterday. LevelField and Burling Bank also likely have had preliminary, heads-up type discussions with the banking regulators.
Even so, at least based on precedent, I think I would take the over on the statement in the press release that the transaction will “close later this year.”
A Proud Associate Member
As an aside, LevelField’s About Us page also currently includes the below image.
This is a true statement, but still I wonder how those in the general public who visit the LevelField website interpret this, especially given that the image appears on the same page as a headline statement saying “Modern banking backed by traditional values.”
Would an ordinary person understand that ABA Associate Members are not banks, but are “[c]ompanies whose products and services help banks carry out their mission”?
More on a Key Area of Likely Debate in the Forthcoming Basel Proposal
As previously discussed, in addition to what the newly revised U.S. capital rules actually say, one key question about the forthcoming proposal is to whom the new rules will apply. The regulators have not made definitive pronouncements on this, saying in September that the revised framework will apply to “large banking organizations,” a term of art that has meant different things in different contexts.
I highlighted a few weeks ago a policy paper from Better Markets calling on the regulators to apply the new rules to all firms with $250 billion or more in total assets.
This would mean, in regulatory parlance, that the rules would apply to Category I firms (U.S. G-SIBs), Category II firms (organizations with $700 billion or more in total assets or $75 billion or more in cross-jurisdictional activities) and Category III firms (from a U.S. perspective, large regionals like Truist, PNC, etc.2 with $250 or more in total assets). Category IV firms (from a U.S. perspective, slightly smaller organizations like Huntington or Regions) would be excluded.
BPI this week offered a helpfully technical and even handed look at some things the agencies will need to think through in determining the scope of application of the updated rules.
The case for applying the rules narrowly:
One approach would be for regulators to apply the Basel Finalization revisions only to firms in Categories I and II, as we discussed. Regardless of the structure chosen, however, the key implication for all other firms outside these categories would be the continued calculation of their RWAs using the current U.S. standardized approach, with no explicit operational risk and CVA charges.
Narrowly scoping application in this way would require the fewest firms to revise their capital planning and compliance processes, while maintaining U.S. compliance with the Basel framework. However, it would mean that the capital standards applicable to unaffected banks would not reflect those aspects of the Basel Finalization package that improve the risk sensitivity of certain standardized risk weights. It is also possible that such a narrow approach to implementation might perpetuate and/or exacerbate differences in the capital charges faced by U.S. banks of different sizes for the same activities or businesses.
The case for applying the rules (in whole or in part) more broadly:
Alternatively, U.S. regulators could effectively extend implementation of Basel Finalization to a broader set of banks by incorporating some or all of the revisions included in that package into the standardized stack that applies to them. This would further unify the capital standards applicable to a broader range of U.S. banks. But, as we noted, it could both carry high implementation costs and significantly increase the capital requirements applicable to some of the relevant banks.
Whether and to what extent any expanded application of the Basel Finalization package would do so will depend on precisely which Basel Finalization revisions were introduced. Some are likely to increase capital requirements (e.g., the introduction of a standardized capital charge of operational risk), while others are likely to decrease those requirements (e.g., greater risk sensitivity in corporate risk weights). Again, several permutations are possible in resolving such questions. Each involves different tradeoffs in terms of overall impact on capital requirements, risk sensitivity of the framework, compliance burdens and variation/consistency in requirements among different bank cohorts.
The whole thing is worth reading, including a discussion of potential complications as a result of the Collins Amendment which I am omitting here.
In any case, it appears likely that the forthcoming Basel proposal, like the Board/FDIC ANPR on resolvability, will be another occasion for people to debate just how risky (or not) banks that are large but not systemically important on a global scale truly are.
Thanks for reading! Thoughts, challenges, criticisms are always welcome at bankregblog@gmail.com
This offering includes the caveat, “subject to price volatility.”