First Mutual CEO: Volcker Rule changes “get us a seat” at the fintech table

By Rebekah Tunstead | 4 September 2019

Community banks are set to reap the benefits of amendments to the Volcker Rule with increased fintech investment, according to Tom Fraser, the chief executive officer (CEO) of First Mutual Holding Company.

“[The changes to the Volcker Rule] does get us a seat at the table, so it is an important development,” says Fraser. “One of the by-products of making an investment in a fintech company is that it opens up opportunities to have a seat at the table to other discussions with fintech companies and other venture capital firms that are searching out opportunities as well.”

On August 20, the Federal Deposit Insurance Corporation (FDIC) announced amendments to the Volcker Rule: previously, banks were prevented from acquiring or retaining an ownership interest in or having certain relationships with hedge funds or private equity funds – many of which have holdings in financial technology firms. The proposed changes will exempt certain community banks from the rule altogether.

On August 11, 2017, Fraser, then CEO of Federal First Lakewood outlined to American Banker concerns around the “unintended consequences” the rule had on community bank’s investment in fintech. However, a short time later on August 24, 2017 Thomas Hoenig, then vice chairman of the FDIC wrote an article in the same publication stating that the Volcker Rule “neither favours or disfavours community banks.”

“Contrary to recent criticism that the Volcker Rule allegedly hinders community bank investment in fintech, the fact is that any bank can lend or invest directly in such a company, similar to recently publicised actions taken by larger US banks. While it is true that smaller banks, because of their size might have fewer options to invest, the Volcker Rule is certainly not the cause of the competitive disparities between large and small banks,” wrote Hoenig.

But Fraser still holds onto the views he expressed in 2017.

“The Volcker Rule had impacted our ability to hold a larger stake in a fintech company. We made an investment in an online lending company called Numerated Growth Technologies and they have about 30 banks as their customers, but it limited our investment to 4.9%, so it did have an impact and we would have possibly invested more,” says Fraser.

Now is the time for community banks to start searching out fintech investment opportunities, he says.

“We would encourage other community banks to have holdings in fintech startups through their holding companies,” he says. “We know that in the past couple of weeks this has spurred some conversations with other investors as a result of doing that.”

But there is only a small sub-set of community banks that are active in terms of searching out fintech opportunities says Fraser, and a lack of experience in finding such opportunities is holding the banks back.

“If I was to estimate, I am guessing that probably only about 10 percent of community banks in the US would consider such an investment,” he says.

“It is inevitable, the survivor community banks are going to need innovation and technology, and one way to drive innovation is have an ownership stake in a company. Community bankers in the US have done a pretty good job since the credit crisis of managing their affairs and traditional credit risk, liquidity risk and the like, but my sense is that there is not a great deal of expertise on how we would go about making investment, searching out those opportunities. So, I think it is about not having that skillset in the management teams which is probably one of those barriers.”

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