American Banker, Friday, December 22, 2006
Basel II Robs Attention From Crucial Risk Plan
By Steven Sloan
While the cursed Basel II capital proposal has stolen the spotlight, a separate plan to better assess a bank’s market risks is cruising toward completion. The plan would force a large bank to move more of its trading positions to its banking book, which in turn would drive up capital requirements. The trading book, which holds financial instruments banks expect to trade quickly, requires much less capital than the banking book, which will be governed by Basel II’s rules on credit risk capital. Most observers expect the market risk proposal to lead to higher regulatory capital levels. “I would expect for most banks, these rules would be a net capital cost,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc. “It ends arbitrage, and to the degree that things are moved to the banking book, there’s no offsetting benefit.”
American Banker, Wednesday, December 6, 2006
Small Banks Gain a Bit in Basel IA Plan
By Steven Sloan
WASHINGTON – Proposed risk-based capital standards released Tuesday provide some concessions to small-bank critics but fall short of providing them parity with large banks. On the one hand, regulators agreed to make the new standards voluntary, and they dropped plans to impose a capital surcharge on all alternative mortgages and commercial real estate portfolios. Industry representatives said that they were still looking at the long-delayed plan, but that they were at least pleased to have a proposal they could begin studying. Karen Shaw Petrou, the managing partner of Federal Financial Analytics, said she expects only banks with low risk profiles to shift to Basel IA. Riskier, subprime lenders likely would stay with Basel I, which would offer better treatment, she said. As a result, regulators may find themselves supervising banks under three different systems: Basel I, Basel IA, and Basel II. “It’s going to put regulators in a tricky position,” Ms. Petrou said.
American Banker, Wednesday, November 22, 2006
European Panel Backs Leverage Ratio
By Steven Sloan
WASHINGTON – Though U.S. banks continue to complain about regulators’ insistence on keeping the leverage ratio intact once Basel II capital standards are adopted, the basic capital-to-assets standard appears to be gaining some traction in Europe. The European Shadow Financial Regulatory Committee released a statement this week recommending that the European Union require member countries to adopt a minimum leverage ratio for financial institutions. If the EU adopts the committee’s recommendation, it could derail a key argument advanced by U.S. banks that Basel II would put them at a competitive disadvantage to their foreign counterparts. “That would go a long way toward narrowing the gap between regulations,” said Andrew Kuritzkes, the managing director of Mercer Oliver Wyman. “That would make a material difference.” But other observers doubt that competitive concerns will vanish soon. Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc., said that despite the committee’s recommendation, European regulators are highly unlikely to adopt the standard. “The banks and regulators have zero intent of ever taking up a leverage ratio,” she said. Moreover, the committee’s recommendation is not binding, and Ms. Petrou said the group does not have the same influence as regulators.
American Banker, Tuesday, October 10, 2006
Why Big Banks’ Basel Tactics May Not Work
By Steven Sloan
Large banking companies are ripping a page from their smaller rivals’ playbook as they anxiously attempt to shape the Basel II capital rules. Four large domestic players are arguing that the coming international standard will give foreign banks and domestic investment banks a competitive advantage. If that sounds like a familiar argument, it is. When testing showed Basel II would gut the regulatory capital requirements for some of the nation’s largest banks, small banks howled that the rule would put them at a competitive disadvantage. They took their case to the regulatory agencies and to Congress – and scored two huge victories. The line between commercial and investment banking has been blurring for nearly 20 years, and the largest financial services companies, regardless of their charter, compete head to head on many fronts. “There is no difference in any substantive way,” said Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc. “Most [investment banks] have major retail financial services operations. Conversely, look at all the big commercial banking companies. All of them have huge securities operations.”
National Mortgage News, Tuesday, October 2, 2006
Regulators Ready Guidance on “Exotic” Loans
By Brian Collins
Federal banking regulators were set to release their long-awaited guidance on nontraditional mortgages with analysts debating what impact – if any – it would have on the “exotic” market. Federal Financial Analytics managing partners Karen Shaw Petrou and Basil Petrou believe the guidance will force some banks and thrifts to reduce their originations of interest-only and payment-option ARMs. Ms. Petrou predicted the guidance could lead to more business for Fannie Mae and Freddie Mac because lenders might be forced back into the conventional market. At a conference sponsored by Bank of America she said that the new guidance also frowns on risk layering and piggyback mortgages, “especially when the second [lien] is layered into a high risk mortgage produce.”
Daily Report for Executives, Friday, July 21, 2006
Banks, State Regulators Seek Changes To Implementing Rules for Basel II Accord
By R. Christian Bruce
Four large financial institutions have asked federal regulators for a major change in the U.S. architecture of the Basel II capital standards, saying they–like their overseas competitors–should have the choice of adopting a simpler and less costly version of the international capital accord. Industry analysts said the letter’s recommendations–which were endorsed and seconded by a key trade group as well as New York’s top bank regulator–signals even more disruption, and perhaps more delay, in the already turbulent process of implementing the Basel II accord. “This could throw a major monkey wrench into the Basel II process,” Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc., a Washington, D.C., financial services consulting firm, told BNA July 20.
Daily Report for Executives, Friday, July 21, 2006
Administration Officials Indicate Flexibility In Reaching Agreement on GSE Legislation
By Richard Cowden
Comments by Bush administration officials in recent days suggesting a tilt toward flexible legislative language in a proposal to reform operations at the government-sponsored housing finance enterprises (GSEs) may suggest the outline of a compromise that could take shape before year’s end. Karen Shaw Petrou, managing partner at Federal Financial Analytics, Inc., said July 20 that Greenspan and a series of Bush administration officials have sought repeatedly to distance themselves from the allegation that the GSE reform legislation would be used as a means of imposing a specific cap on Freddie’s and Fannie’s holdings. “They have already disavowed the hard cap over and over,” Shaw said. The administration and supporters of S. 190 have tried to take a hard line on their demand for strong portfolio limits, Petrou said, “But now they have to offset the impression that they have a secret agenda.”
American Banker, Tuesday, June 27, 2006
Brickbats Fly But FHFB May Stick to Guns
By Patrick Rucker
The Federal Home Loan banks, industry representatives, and member institutions are hoping a rare united front against a Federal Housing Finance Board plan to raise retained earnings will persuade the agency to reconsider its proposal. With a little over two weeks left for comment, the March 15 proposal has garnered 436 letters, the vast majority of which say the Finance Board should scrap the plan and rework it. Still, the agency has been resolute in the past, observers said. Karen Shaw Petrou, the managing partner with Federal Financial Analytics, said there was a similar battle two years ago when many Home Loan banks and financial institutions fought a proposal to force the banks to register with the Securities and Exchange Commission. “The FHFB then held firm, in part due to deep concerns at the White House and Fed over the Home Loan banks,” Ms. Petrou said. “I would guess the FHFB will again stand by its proposal, but changes to the details are likely.”
American Banker Friday, June 23, 2006
Can’t Recall Last Bank Failure? Here’s Why
By Joe Adler
Despite a housing slowdown, the flat yield curve, and the lingering effects of last year’s hurricanes, Sunday will be the second anniversary of the last bank failure. The 730-day run is unprecedented in the Federal Deposit Insurance Corp.’s history. The closest competitor is a 609-day streak that ended with the closure of August County Bank in September 1946. Why this current streak has lasted so long, how long it will continue, and what factors could hasten its end remain on the minds of bankers and industry observers. “It’s a milestone, but in some respects it’s eerie,” said Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc. “To go two years without a single failure makes one worry that more could be coming up. The law of averages will pertain here. That there weren’t any doesn’t mean that there won’t be any.” Banks learned to prepare for crisis after the Sept. 11 attacks, in which “institutions both big and small had a forcible reminder of how badly things can go,” Ms. Petrou said.
American Banker Thursday, May 18, 2006
FHLBs Split On Individual Debt Issuance
By Patrick Rucker
A regulatory ruling allowing the Federal Home Loan Bank of Chicago to issue its own nonconsolidated debt has touched off a debate in the system about whether its other banks should be allowed to follow suit. The Federal Housing Finance Board argues that the Chicago move was unique, and that it cannot legally allow the other 11 banks to offer something similar. But many observers say the agency could change its mind, and a few Home Loan banks are quietly mulling if such an offering would give them a better way to reduce their excess stock and fund their mortgage purchase programs. Some observers are not convinced the Finance Board is correct to say subordinated debt should not count as capital under the new system. They said the board could reinterpret the law later. “The regulator is ‘right’ until someone takes it to court or it changes its mind,” said Karen Shaw Petrou, a managing partner with Federal Financial Analytics.
American Banker, Thursday, May 11, 2005
How Sale of Golden West May Impact the FHLBs
Dallas already facing BankUnited loss; the case for consolidation
By Patrick Rucker
In an article about Wachovia Corp.’s planned purchase of Golden West Financial Corp. and how it might hurt the business of two Federal Home Loan banks and help push the system toward consolidation, Karen Shaw Petrou, managing partner of Federal Financial Analytics, wrote in a recent client letter that the Federal Home Loan Bank System is “already struggling to find a profitable mission in the face of member consolidation, shrinking mortgage markets and regulatory pressure.” The loss of a big member like World Savings would add pressure on the banks to “find new members, new businesses, or both,” she said.
The Wall Street Journal, Monday, January 9, 2006
Banks Might Widen Real-Estate Role; In Development-Rule Shift, PNC, Bank of America Get Clearance for Big Projects
By Michael Schroeder
Two major banks received the green light from regulators to develop and own large hotel and office properties, potentially opening the door wider for banks to the commercial real-estate business beyond their traditional role as lenders. Some banking consultants and lawyers say the rulings could have significant import. “Big national banks are potentially major players in the commercial real-estate market based on the powers the OCC has just granted,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc., a Washington consulting firm. She add that the Federal Reserve has taken a much tougher stand against allowing the state-chartered banks it regulates to move more broadly into commercial real-estate development.