What can quarterly earnings tell us about the economy?
Marketplace talks with Karen Petrou
Listen here: https://www.marketplace.org/2024/10/14/what-can-quarterly-earnings-tell-us-about-the-economy/…
The FHFA has issued an advisory bulletin (AB) building on its 2023 over-arching plan for FHLB reform and bank-regulatory efforts to clarify and constrain FHLB lending to troubled IDIs which received considerable “lender-of-second-resort” FHLB funding during the 2023 crisis. FHFA says that this bulletin does nothing more than “memorialize” longstanding FHFA standards; in fact, it makes significant changes and is likely to require at least some Home Loan Banks to improve member-related credit-risk management by no longer solely counting on collateral and contacting an IDI’s primary regulator, the FDIC, or a Reserve Bank to confirm that ….
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Until this month, the Department of Justice hadn’t finalized the adoption of new bank merger policy guidelines since 1995. Given the banking industry’s rapid evolution during the last three decades, an update was certainly overdue. It unfortunately took the bank failures of 2023 to inspire action on a much-needed bank merger policy makeover, and regulators hastily charged ahead to propose sweeping reforms. Despite soliciting feedback from industry experts and policy analysts that revealed a swath of concerns, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency locked step with the DOJ to finalize their respective rewrites of bank merger criteria largely as proposed. This is not the bank merger makeover we needed. Banking regulators realize that allowing high-risk banks to make still-bigger bets by swallowing other banks can pave a swift path toward a systemic crisis. But, as I emphasized in a study submitted to the regulators, their new policies introduce other threats to the industry’s stability. Bank merger applicants now face heightened uncertainty and delays that are sure to deter the pursuit of sound deals, leaving the door wide open for those making last-gasp efforts to avoid failure. Scrupulous, modern and aggressive antitrust policy is necessary, but those who govern banks must recognize that midsize bank mergers aren’t monopoly rent-seeking. They are critical if we are to prevent more regional bank failures and stop more
Stunned by the impact of a recent fintech failure (Synapse) and growing risks in this arena, the FDIC is seeking comment on a proposal requiring IDIs doing business with third parties related to transaction-empowered deposit accounts to keep timely and daily reports of each deposit and its beneficial owner. The FDIC believes that this would prevent harm to third-party customers who believe funds given to the third party are FDIC-insured when these funds are in fact aggregated into a single account for which the third party is the beneficial owner and the arrangement is not covered by FDIC pass-through insurance….
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The Potential “Perverse” Consequences for Banks of New M&A Policies
Host Rob Blackwell
Karen Shaw Petrou, managing partner of Federal Financial Analytics, details how new guidelines by federal regulators to curb M&A could inadvertently increase the market power of the biggest banks and Big Tech.
In a final statement of stringent bank-merger policy, the FDIC has finalized a little-changed version of its March proposal to do so. It will make it difficult for all but the smallest and simplest transactions within its jurisdiction to have the clear prospect of regulatory action usually necessary in nonemergency transactions, subjecting other M&A applications to protracted review with a high likelihood of denial. Strategic alliances involving nonbanks and/or nonbank affiliates and BHCs with nonbank activities may also come under critical FDIC scrutiny, complicating transactions otherwise under the FRB or OCC’s review. Transactions over $100 billion would face the toughest scrutiny, but even small bank mergers could be denied if the FDIC is dissatisfied with the bank’s prior supervisory, enforcement, or community/consumer record…..
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Will regulators hit the gas or brakes on remaining post-Basel reforms?
By Kyle Campbell
For more than a year, a once ambitious bank regulatory reform agenda has largely been on hold as agencies deal with the fallout from last summer’s much maligned joint capital proposal. Now that the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency are in apparent agreement on a path forward for the so-called Basel III endgame, regulators are poised to work through their backlog of joint initiatives, including expanded long-term debt requirements and new liquidity standards….The Fed, the FDIC and the OCC have been eyeing a long-term debt expansion since 2022, when they issued what is known as an advanced notice of proposed rulemaking — a precursor to a formal rulemaking process — before issuing an official proposal last September. But finalizing that rule while risk-based capital changes are still pending could have significant unintended consequences, said Karen Petrou, managing partner of Federal Financial Analytics. The proposal would set long-term debt requirements at each impacted bank at the greater of 6% of total risk-weighted assets, 3.5% of average total consolidated assets or 2.5% of total leverage exposure if the bank is subject to the supplementary leverage ratio. Because the Basel III endgame proposal would realign the risk-weighting calculus, Petrou said neither banks nor regulators can know the impact of the long-term debt requirement until the capital rules are established. “The long-term debt rule can make no …
As anticipated as recently as yesterday, the next round of U.S. end-game capital proposals will include a significant win for bankers when it comes to residential mortgage origination. Where it comes out on other key mortgage topics is, though, yet to be revealed….
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Noting that the Basel process reminded him of the need for “humility,” FRB Vice Chair Barr today laid out next steps for the contentious end-game capital proposal. In short, it will be entirely re-proposed with many specific changes to the current proposal (see FSM Report CAPITAL230) and a request to commenters to argue for still more over the planned sixty-day comment period. The re-proposal as it now stands along with changes to the proposed GSIB surcharge (see FSM Report GSIB22) would cut the hike for GSIBs under the new standards by about half to nine percent and the impact for FBOs is now said to be minimal. The impact on covered regional banks is also considerably less, likely now…..
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Under strong pressure from the banking industry and even Members of Congress such as Sen. Mark Warner (D-VA), the Federal Reserve is seeking comments on how to address frictions and inefficiencies that slow or even stall discount-window and intraday liquidity flows from the central bank. The request for input (RFI) takes no stand on possible changes either to the discount window or to daylight-overdraft processes. Indeed, the RFI confines its preamble to descriptions of how the window and intraday credit work rather than highlighting any areas of particular concern. The RFI is also a cautious initial step with an extended comment period (see below), signaling that any procedural improvements are unlikely until at least mid-2025, with delays beyond that likely if the Fed decides to seek comment on specific options….
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