FedFin on: Public-Interest Regulation
In conjunction with releasing its new fair-housing rule, FHFA yesterday also created a new office of “Public Interest Examination.” In short, Fannie, Freddie, and the Home Loan Banks are henceforth – at least for the tenure of this President and FHFA director – to be held to standards that cement their role as public utilities, not privately-owned enterprises. This is neither unexpected nor unjustified – after all, the regulated entities enjoy manifold taxpayer benefits and two are in conservatorship. Still, it continues to make it even harder to turn the clock back on Fannie and Freddie or to return the Home Loan Banks to the quiet corners in which they and members enjoyed so many advantages.
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FedFin Assessment: Index-Fund Passivity Debate Could Touch Broader Control Questions
As we noted, the FDIC board late last week faced the unusual and perhaps unprecedented situation of a staff resolution supported by its Chair and one Democratic Director that was countered by a different proposal from Republican Directors, with both options finally tabled due to objections from the Acting Comptroller. Both proposals address the extent to which index-fund managers can hold what would otherwise be controlling stakes in banking organizations exempted by virtue of passivity commitments that have come under fire from all sides. We expect the next move will be…
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Karen Petrou: The Inexorable, Inadvertent Inequality Vise
Last week, we sent you an analysis of a new Fed study reinforcing previous research, my own included, finding that U.S. economic inequality exacerbates financial instability. Notably, this paper added an important, novel element: the extent to which economic inequality increases the role of NBFIs and thus heightens systemic risk even more than was the case when banks ran the financial show. But does economic inequality lead to greater NBFI reliance and resulting risk or do NBFIs on their own have a still more pernicious inequality effect that makes the risk of financial crisis still more acute? In short, yes – this is a potent negative-feedback loop of prodigious power.
What makes this feedback loop reverberate so dangerously? More research is essential, but breaking down the income and wealth components of economic inequality into the key drivers of systemic risk along with the regulatory and monetary-policy determinants of financial-sector competitiveness suggests a causal connection between more inequality leading to more NBFIs and more risk leading to more inequality and still more NBFIs and then heightened financial risk and consequential inequality.
In super-short, income inequality is determined in part by wage/salary and capital (i.e., investment) income. The more income from whatever source, the better for buying what one needs and wants unless recessions, progressive taxation, or other personal or policy actions prevent the cumulative increases in income that power up spending and, still more importantly, generate wealth.
Wealth equality is judged by net worth – that is, how much you have versus how much you owe. Here, as Thomas Piketty also showed, some wealth drives more wealth unless something such as a financial-market crash, natural disaster, profligate ancestors, or steep inheritance taxation takes it away.
Translated into the NBFI question, these components of economic inequality and their cumulative effect mean that financial products that offer […]
FedFin on: Fed Systemic-Risk Assessment: Some Worries, No Troubles
The latest Federal Reserve financial-stability assessment continues the Fed’s practice of detailing vulnerabilities without drawing bottom-line conclusions; the Board once did so, but ceased this practice after opining that the financial system’s risk was “moderate” shortly before the 2020 crash. The Board’s report now also says that it assesses vulnerabilities, not the likelihood of near-term shock. Survey respondents do make this assessment, with this report showing a striking increase in concerns about policy uncertainty in light of continuing inflation and the higher-for-longer rate outlook…
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Karen Petrou: Credit-Card Surcharges: One Inflationary Culprit the CFPB Could Catch
One could go on – indeed many do – about whether inflation is showing enough signs of a slow-down to warrant lower interest rates. I’ve said before that lower rates won’t have the housing-affordability benefits advocates expect, but this doesn’t address the underlying issue of just how hot inflation may be running. I’m not sure if anyone – including the Fed – really knows, but battles on my neighborhood listserv validated by growing data make clear that federal data overlook one hidden price hike driving more and more Americans flat-out crazy: credit-card surcharges that are nothing but shadow price hikes of as much as four percent.
In fact, card surcharges are the epitome of the “junk” fees the CFPB has vowed to quash. The credit-card late fees the Bureau lambasts are due to consumer sins of omission or commission – i.e., consumers have the ability – I would say obligation – to keep their card debt within amounts they can honor as well as the choice to pay on time. How much should be charged for paying late is obviously a point of discussion, but that consumers have a duty to pay on time is indisputable.
In sharp contrast, card surcharges are often unavoidable and ill-disclosed. The neighborhood listserv is something of a group rant, but it does include interesting illustrations of hidden credit-card surcharges that are often – think car-repair shops – meaningful and material add-on prices discovered only after the fix, quite literally, is in.
D.C. is an area where card surcharges are hitting a particularly raw nerve because a local ordinance requires restaurants to pay minimum wages, leading many to add a card surcharge – again, often hidden – in hopes of making up some of this added cost of doing business. This is a local issue, but restaurants around […]
Karen Petrou: The FDIC Plan to End Too-Big-to-Fail Brings Promise of More Bailouts
In 2013, the FDIC issued a short, unilluminating paper purporting to show how the agency would implement one aspect of the orderly-liquidation authority (OLA) Congress granted in 2010 to prevent the profligate bailouts that blighted the great financial crisis. I was unconvinced by the 2013 paper and even more perplexed when years passed and the utterance on single-point-of-entry (SPOE) resolutions was all the FDIC deigned to pronounce. After all, if big banks and systemic nonbanks can’t be closed without bailouts, then moral hazard triumphs and crashes become still more frequent and pernicious. Last week, mountains moved and Chair Gruenberg said that anything big will not be bailed out. Would this were true, but it’s not.
Despite the agency’s failure last year to find a solution other than a bailout for high-risk regional banks and an Inspector-General report finding the FDIC most OLA-unready, the FDIC now is confident that it can handle even the biggest blow-out at U.S. global systemically-important banks. This derives from untested faith in SPOE, the FRB’s TLAC rule, GSIB living wills, and what it calls legal certainty pertaining to qualified financial contracts (QFCs).
Maybe so re GSIBs, but this sangfroid is still more puzzling when one reads on and finds that the FDIC thinks so well of its GSIB OLA capabilities that it says that it’s also ready to deploy them for foreign-GSIB operations in the U.S., any regional bank that hits a systemic bump, and even nonbank SIFIs. Nothing is said about the fact that QFC contractual commitments are unlikely to work under many of these stress scenarios, some big banks prefer multiple point of entry, foreign regulators may well differ with the FDIC’s blithe assertion that they’ll support U.S. operations in their jurisdictions, and – no technicality – many potentially systemic nonbank entities do not fall […]