About Arezou Rafikian

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So far Arezou Rafikian has created 1988 blog entries.
17 06, 2024

Karen Petrou: Why Synthetic CRT Isn’t the Crisis It’s Cracked Up to Be

2024-06-17T09:24:46-04:00June 17th, 2024|The Vault|

Last week, several press reports slammed synthetic credit risk transfers (CRTs) on grounds that the biggest U.S. bank in this sector which is of course the biggest global bank ever – JPMorgan – is creating new and serious risks when it scores SCRTs.  It’s easy to assume that anything “synthetic” is more dangerous than the “natural” way a bank absorbs credit risk, but this is simply not the case as a whole lot of financial crises make all too clear.  SCRTs are a rare example of a complex structured deal that gives the issuing bank a safe, sound way to reduce its capital requirements.  Regulatory arbitrage, yes, regulatory evasion, no.  The real risk SCRTs actually pose lies in the way some banks are using “natural” credit – i.e., loans – to lever up SCRT investors in ways dangerous to everyone but the SCRT issuer.

Let me explain.  FedFin laid out how SCRTs work in a September 2023 report following conditional FRB approval of the first of these deals since the great financial crisis.  One of the hard-learned GFC lessons was that structured financial instruments can be toxic due to opacity to regulators, counterparties, and even bank sponsors.  Given this, the regulator’s SCRT okay has several significant strings attached.

Most importantly, the bank making use of the credit-linked notes (CLNs) usual in these deals must issue the notes via a bankruptcy-remote vehicle and get cash or like-kind collateral to enjoy any regulatory-capital offset.  In short – and this is very short …

12 06, 2024

FedFin on: AI Implementation

2024-06-12T14:46:06-04:00June 12th, 2024|The Vault|

Although pressed by Congress to reach conclusions about AI’s risk in the financial sectors, Treasury is following up the worries in the most recent FSOC report with only a request for information (RFI) from the public.  The RFI follows an Executive Order (EO) from President Biden in 2023 instituting a “whole-of-government” program to identify best-use and high-problem aspects of AI from both a private- and -public sector perspective….

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

10 06, 2024

Karen Petrou: Private Capital Goes Retail

2024-06-10T09:27:24-04:00June 10th, 2024|The Vault|

Jamie Dimon recently said that there will be “hell to pay” when private credit gets the comeuppance common to businesses engaged in a race to the bottom.  But, who’ll pay it?  If the $1.7 trillion sector isn’t as systemic as many fear, then hell will be paid by institutional investors and, downstream, the policy-holders and pensioners who depend on them.  But, there’s more.  Typically, Wall Street opens high-return products to retail investors only when there’s so much to go around that pricing no longer reflects risk.  As smart money stands back, retail investors are enticed in order to, as one bank CEO memorably said in 2008, keep dancing until the music stops.  As we learned yet again the hard way in 2020, hell paid by retail investors can quickly turn into hell paid by taxpayers.

Last week’s news brought an announcement that one large adviser has opened a new fund for higher net-worth clients able to put $100,000 in funds comprised largely of private-credit assets.  So far, this is just one group of funds, but so far isn’t all that long and it’s very likely that growing fears about private-credit risk among institutional investors will open the retail spigot for private-equity lenders which still have loads of high-risk they hope to move into the waiting hands of a sector less learned about opacity and manifold conflicts of interest.

Despite growing alarm about private credit from both global regulators and institutional investors, the Fed’s most recent financial stability report essentially ignores …

6 06, 2024

FedFin on: Consumer-Finance Contractual Terms

2024-06-06T16:22:58-04:00June 6th, 2024|The Vault|

Deciding against finalizing a proposal to require a registry from nonbanks of their contractual terms,  the CFPB has instead issued a circular – i.e., a de facto rulemaking – telling both banks and nonbanks and their service providers that contractual terms and conditions may not require consumers to waive rights to which they are entitled under applicable state or federal law or which the Bureau believes likely to be “unenforceable.”  The scope of Bureau actions remains to be seen, but it has established a ….

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

5 06, 2024

FedFin on: Closing In on Closing Costs

2024-06-05T11:21:39-04:00June 5th, 2024|The Vault|

As anticipated, the CFPB has advanced its campaign to quell mortgage closing costs.  But, unlike our forecast, the usually-aggressive agency is sliding into this debate with only a request for information (RFI) asking lots of questions we though the CFPB had already answered to its own satisfaction given a prior study and much ancillary “junk fee” commentary from Director Chopra and even the White House NEC Director.

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

3 06, 2024

FedFin on: Discount-Window Modernization

2024-06-03T17:00:38-04:00June 3rd, 2024|The Vault|

In addition to controversial provisions affecting bank-merger applications and stress-test transparency, legislation recently approved by the House Financial Services Committee includes a less-contentious provision forcing the Federal Reserve to reckon with longstanding problems affecting the use of its discount window, especially under stress conditions.  These problems were on costly evidence in March of 2023, when both Silicon Valley Bank and Signature Bank had extraordinary difficulty accessing the discount window due in part to ill-segregated collateral and early Fedwire closing….

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

3 06, 2024

Karen Petrou: Important Lessons in Regulatory Impact

2024-06-03T17:00:05-04:00June 3rd, 2024|The Vault|

With battle lines deeply dug in over so many recent rules, two new studies are important, timely reminders that rewriting rules doesn’t always mean eviscerating rules.  Sometimes, it’s a vital corrective to unintended consequences all too evident as proposals turn into rules that turn into a new, destructive market dynamic.  It might seem to make nothing more than common sense to recognize that rules need reconsideration, but as the occasional victim of diatribes following what I thought were just pragmatic recommendations, it’s reassuring to see a study from one of the current rules’ architects, Daniel Tarullo, and another from the Fed lay out the need for meaningful revisions to two high-impact rules:  big-bank stress tests and – just in time for still more of them – liquidity rules.

First to Mr. Tarullo’s paper.  In addition to being the instigator of much in the Dodd-Frank Act and the rules thereafter, Mr. Tarullo inaugurated big-bank stress tests in 2009.  Banks then denounced them, but they weren’t exactly in the best of bargaining positions after the 2008 great financial crisis.  So, stress tests began as an urgent reality check.  But, proving the regulatory-rewrite point, over a decade later they took on a new purpose in concert with still more importance by virtue of the new stress capital buffer inexorably and often ineffectively linking stress testing to the bank regulatory requirements that barely existed in 2009.

In 2009, we needed stress tests because capital rules were essentially toothless.  Capital rules are now fanged …

20 05, 2024

FedFin on: Pledging the Public Good

2024-05-21T16:30:39-04:00May 20th, 2024|The Vault|

As our in-depth analysis earlier today makes clear, FHFA’s RFI on FHLB mission compliance outlines a regulatory rewrite intended to handcuff Home Loan Banks not just to the housing mission expressly set in law, but also to a broader vision of the public good the agency believes the System’s taxpayer benefits are meant to serve.  Home Loan Banks don’t exactly see it that way, but their hand is weak unless or until the election gives them new allies….

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

20 05, 2024

FedFin on: FHLB Mission

2024-05-21T16:31:07-04:00May 20th, 2024|The Vault|

FHFA is now advancing an in-depth 2023 report on the Federal Home Loan Banks (FHLBs) with an RFI intended to lay the foundation for regulatory revisions tightening the FHLBs’ mission and thus the extent to which members benefit from low-cost advances without also disbursing these benefits to promote affordable housing and the public interest.  Although the RFI does not take a position on key changes, the questions it poses and the preamble explaining them make it clear that….

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


13 05, 2024

FedFin on: FSOC’s Analytical Methodology

2024-05-13T16:52:29-04:00May 13th, 2024|The Vault|

Never Mind…

When FSOC released its systemic-designation methodology last year, the Council made it clear that nonbank mortgage companies faced top-down federal regulation.  Never mind.  As with so many other FSOC-declared systemic risks – see, for example, stablecoins – federal regulators have decided not to use the prudential tools they have in favor of asking for statutory change they know they won’t get.

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


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