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As we noted yesterday, the draft Democratic presidential-campaign platform again calls for what some have characterized as a third, racial-equity mandate for the Federal Reserve. The platform is actually far more rhetorical than prescriptive about what has become a controversial recommendation that, some argue, could lead to politicized monetary policy and undue favoritism. However, the Fed has long had a racial-equity mandate implicit in its overall instructions from Congress to ensure that the nation as a whole enjoys prosperity, not just ebullient financial markets.  If the Fed actually lived up to its full statutory mandate, it would long have understood that employment isn’t “maximum” when millions are un- or under-employed, that price stability is meaningless if the middle class can’t make ends meet, and that interest rates – yes, there’s a mandate for them – aren’t “moderate” when they hover barely above the zero lower bound.

Specifically, the Employment Act of 1946 reinforced by changes to the Federal Reserve Act in 1977 states that, “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”  In short, the Fed has a triple mandate, not the dual one it always cites. 

Why the missing mandate?  In 2007, a Fed governor explained the complete disregard of this third mandate on …

As promised by Acting Comptroller Brooks, the OCC has quickly followed up its controversial valid-when-made rule with a proposal defining “true lender” to facilitate the partnerships between banking organizations and other financial companies sometimes called “rent-a-bank” charters.  Perhaps due to FDIC Chair McWilliams’ concerns about the use of banks to “evade” state restrictions, the FDIC has finalized a comparable valid-when-made rule for state-chartered banks, but has yet to follow the OCC’s lead with its own true-lender proposal.

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

Building on its 2017 climate-change disclosure work, the FSB today issued what it describes as a “stocktake” – i.e., a survey combined with next steps – in this increasingly critical area.  The FSB remains focused only on its broad financial-stability mandate in its climate-change work, but this report for the first time also addresses supervisory considerations.  As detailed, the survey shows that about three-quarters of respondent supervisory agencies believe climate change is an important financial-stability consideration, with most focusing on asset prices and credit quality in the banking and insurance sectors.  A detailed discussion of stress-testing and related methodologies analyzes an array of challenges suggesting, but not expressly concluding, that many analytical challenges remain before climate-change testing would prove practicable.  One may also infer from these discussions that establishing capital charges for “brown risk” as the BIS recently proposed (see Client Report GREEN)  also faces significant analytical challenges.  The FSB paper mentions individual nations only to the extent necessary to describe relevant initiatives and research.

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

Federal Financial Analytics, Inc.

A SHOCK TO THE SYSTEMIC:

NEW STANDARDS FOR THE SECONDARY MORTGAGE MARKET

Systemic standards for institutions and activities across the U.S. secondary mortgage market will determine winners and losers for the foreseeable future.

The analytics below are based on in-depth reports provided to FedFin clients.
To learn more, contact us at info@fedfin.com

On July 14, the Financial Stability Oversight Council (FSOC) chaired by Treasury Secretary Mnuchin announced a systemic review of the secondary mortgage market. Zero details were provided about who or what will be reviewed, but a statement at the same time from the head of the Federal Housing Finance Agency (FHFA) signaled a structural overhaul that might well redefine not just Fannie Mae and Freddie Mac, but also key mortgage-market providers and products. Karen Petrou’s client memo on this game-changer illustrates the complexities of this new construct along with its strategic impact.

FSOC’s deliberations will follow the course laid out in the systemic standards FSOC issued late last year. These shift from the Obama Administration’s process of designating specific nonbanking companies as systemically-important financial institutions (SIFIs) to the activity-and-practice option. FSOC has tried this only once on money-market funds with, from its perspective and that of the Fed, very mixed results. Now, as FSOC has reconstituted activity-and-practice regulation, it could well prove considerably more formidable.

As FedFin detailed in an analysis of the scope and scale of this systemic consideration, process will set policy as much as personnel on these critical …

A new Federal Reserve Bank of New York staff paper sheds timely light on the impact of foreclosure-mitigation efforts on long-term housing markets and household wealth. Providing compelling empirical evidence to back up longstanding economic expectations, the study finds that California’s foreclosure-mitigation and neighborhood-preservation efforts during the great financial crisis salvaged $300 billion in American wealth in just one state, preserving employment along the way.

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

In this report, we assess the financial policy implications of today’s wide-ranging House Small Business Committee hearing with Treasury Secretary Mnuchin and SBA Administrator Carranza.  Doubtless reflecting strong industry advocacy, Treasury Secretary Mnuchin now says that Congress should consider providing automatic forgiveness for smaller PPP loans.  However, he stressed that there should not be a “blank check” for PPP loans under $150,000, saying that appropriate fraud protections must apply without elaborating on what these could entail.  Mr. Mnuchin also said that the next COVID-relief package should use a revenue test to target the PPP to hardest-hit companies that should be eligible for second loans.  In response to a demand from Chairwoman Velázquez (D-NY), Mr. Mnuchin and Ms. Carranza also supported dedicated PPP funds for small minority-owned businesses.

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

When FSOC announced earlier this week that it is studying the secondary mortgage market’s systemic risks, it reopened questions many thought the Trump Administration buried: who or what is systemic and what then is to be done about it? FSOC was as transparent as always – not – and provided absolutely no information about which activities are on the griddle or whether individual firms – most notably Fannie and Freddie – are in the dock for potential SIFI designation. However, it’s clear that a new regulatory construct for residential-mortgage finance will be wrought before the GSEs are allowed to leave conservatorship. What’s in store will determine the next generation of mortgage-market winners and losers, making it important at the outset to ensure that FSOC’s conclusions are founded on a sound understanding of what constitutes systemic risk and then how best to mitigate it.

Since the question of what’s systemic burst into our consciousness in 2008, academic and regulatory thinking has come up with an array of systemic-risk signifiers. As a 2018 meta-analysis of systemic-risk research describes, model-builders have had a field day with various network-effect and value-at-risk models with scant application to real-world finance on a forward-looking basis. However, regulators have heeded at least some of this advice, using proxies for 2008-style contagion risk to craft a set of systemic-risk indicators. In its own stab at defining systemic risk for the GSEs, FHFA proposes a systemic surcharge based on a market-share indicator. In contrast, the GSIB indicators are multi-faceted, with …