Arezou

As we noted last week, a new study finds that stablecoins and other crypto payments use declined from 2022 to 2024 by about a third, now including less than two percent of U.S. households.  Further, these are disproportionately unbanked, with the only bit of growth in payment-stablecoin use coming from households with poor or very poor credit scores. Payee choice was the most important driver of decisions to use a payment stablecoin.  These jarring facts brings the trillions-of-trillions of dollars stablecoin dreamers back to earth with a hard thump.  They might still prevail, but only if banks don’t quickly counter with potent products and nonbanks also get the rules they want and the payees they need to redefine their problematic stablecoin value proposition.

One critical battle is already being waged.  Banks are fighting hard to prevent indirect payment of incentives that advantage stablecoin holders and thus undermine transaction-account alternatives.  This question is among the most important on which Treasury now seeks comment before it quickly starts writing rules.  The Senate Banking Committee might also revise the GENIUS Act at cost of bankers.

Despite the plethora of questions in Treasury’s recent request, another important issue is omitted: who may own a nonbank stablecoin issuer.  The Act as is contains a prohibition on ownership by publicly-traded nonfinancial companies, but Treasury can waive this ban if it and other regulators reach several findings that won’t be too hard to find if Treasury wants them unearthed. Pending changes in law and rule could also …

The Wall Street Journal last week described Bill Pulte’s recent mortgage-fraud allegations as ill-advised “political lawfare.”  Thus it is, but it’s also an unfortunate distraction from a high-priority decision within Mr. Pulte’s legal remit:  ending the GSEs’ conservatorship.  If FHFA and the Administration do not tread carefully, they will do a lot of damage not just to the mortgage market, but also to the President’s mid-term hopes and long-term legacy.

The GSEs matter this much not just because a liquid, affordable mortgage market matters so much.  It’s also because the GSEs issue $7.7 trillion in debt obligations, or almost a third of Treasury’s $29 trillion.  The type of federal backstop afforded to the GSEs or assumed by markets determines how much Fannie and Freddie must pay to attract investors.  How much the agencies pay also affects how much Treasury must pay to do the same.  Because Treasury obligations float the U.S. Government’s boat, the cost of agency debt matters even more.

As we noted in a FedFin report last week, the GSEs federal guarantee comes in four flavors:  explicit, “effective,” implicit, and none to speak of.  Privateers refer the last flavor, but markets will assume the GSEs still enjoy an implicit guarantee no matter what anyone says, so the real flavors on offer are only the first three.

Because the GSEs are in conservatorship, they now have what FHFA has long called the “effective” guarantee – i.e., they are almost as good as full-faith-and-credit USG obligations, but not quite that …

Following a talk last week, FedFin managing partner Karen Petrou was asked her thoughts about how different conservatorship-exit options affect the Treasury market and thereby the dollar’s reserve-currency status. This issue has yet to surface in public debate, but it is top-of-mind for Treasury and thus will govern what Pulte and the President are likely to do….

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

As we recently noted, bipartisan senators are readying an amendment authorizing almost-unlimited FDIC coverage for noninterest-bearing transaction accounts as long as the bank accepting them is smaller than $250 billion. Pressing for this, Sen. Warren said the new FDIC backing should only be available to smaller IDIs because, “The giant banks don’t need another subsidy.” Maybe, but this still leaves open a critical question: why should larger banks pay the premiums that back FDIC-insurance subsidies for their competitors? If this makes sense for FDIC insurance, then why stop here? Let’s have the biggest banks also pick up the tab for small-bank modernization, branch expansion, and maybe nicer signs.

If big banks need to nurse small ones along, then the small-bank business model needs a reboot, not de facto nationalization for smaller banks that can’t find their way. Many do. In fact, smaller banks with marketing acumen have long been able to attract deposits by paying a bit more for them. Further, it’s not as if smaller banks can’t get added coverage if they want more deposits. All that’s different is that smaller banks must pay for this themselves instead of sending the tab over to the rest of the industry and, down the road, to depositors and taxpayers.

As a recent note from the Federal Reserve Bank of Dallas pointed out, reciprocal deposits meet the needs of banks that want more FDIC coverage. All it takes is paying a fee for this privilege, and the $500-$600 million total annual cost …