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Federal Financial Analytics, Inc.

MASKS OFF:

A NEW NATIONAL-BANK REGULATOR EMERGES

In just his first two days after taking office, Acting Comptroller Brooks set the OCC on a “move fast, break things” trajectory with lasting strategic implications.

It is already clear that Brian Brooks will make a significant difference for as long as he is acting head of the Office of the Comptroller of the Currency (OCC), the U.S. regulator of national banks, federal savings associations, and federal branches and agencies of foreign banks. His first acts were striking – a strong statement of purpose, immediate finalization of a controversial rule expanding the OCC’s interest-rate power and the affirmation of the Administration’s COVID-recovery strategy via a discussion of risks – including increased bank robberies – to banks if masks don’t quickly come off so the country can get back to work.

Although the OCC’s reach is both wide and strong, its power is not unlimited. The Fed’s power over parent companies and the payment system is a significant constraint as is the FDIC’s unilateral authority over which charters get federal deposit insurance. Even so, the OCC makes a material difference not only in the powers of federally-chartered companies – many the largest in the U.S. – but also over the structure of U.S. financial regulation. Near-term actions with both strategic and structural impact are likely to include:

• action attempting to sanction or at the least censure banks for eschewing lending and other services for fossil-fuel companies. Former Comptroller Otting called

In this report, we assess the financial policy implications of today’s Senate Banking hearing at which discussion also ranged over unemployment insurance, business liability protections, and other hotly-contested issues debated ahead of the next COVID-relief package.  During the hearing, Republicans led by Chairman Crapo (R-ID) and several senior Democrats again called for wider access to the Main Street Lending Program and Municipal Liquidity Facility at more favorable terms.  Democrats also demanded increased support for states and municipalities through direct grants, a demand to which Sen. Crapo is also open.  Saying that the pandemic has hit black and brown communities the hardest, Ranking Member Brown (D-OH) called on Congress to address systemic racism by remedying wealth inequality and ensuring that all Americans are treated fairly.

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

As promised in our last in-depth analysis, we turn now to another strategy-critical capital question:  the future of credit risk transfer (CRT).  FHFA has proposed an extraordinarily-complex CRT framework designed at once to reduce reliance on pool-insurance CRT and still favor it over like-kind structures under the U.S. banking rules.  The paradox of the NPR is that, after a lengthy description of all the hazards of CRT, FHFA still goes relatively easy on it.  Its preferred approach – equity financing – could be counter-cyclical, but the new framework still allows some CRTs and thus offers considerable scope for regulatory-capital arbitrage between CRT and equity increases and within the CRT and CRM frameworks.  The new approach seeks to buttress CRT against current risks resulting from highly-leveraged counterparties, but does not or indeed could not solve for ongoing capital and operational constraints that keep big banks out of the GSE-CRT arena.

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

We turn now to the impact of the FHFA capital proposal on the strategic value of MI and other forms of credit enhancement that are not credit risk transfer, which we will subsequently consider.  In very broad terms, credit enhancement has regained new luster because of the far stiffer approach proposed for current CRT constructs. Private MI is treated better than before, but still faces competition, possibly even for charter-level coverage.  The advanced internal-ratings based (A-IRB) calculation will generally set the terms on which GSEs acquire credit risk mitigation, further hurting MI but giving certain CRT forms a fighting chance.

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

Early this morning, I awakened to a first: an ad on Washington’s all-news station touting pawnbrokers. A surer sign of the times is harder to find, reaffirming the importance of providing stressed families with short-term financing alternatives. Relief has come in the wake of the new inter-agency statement on “responsible” payday lending analyzed earlier this week in an in-depth FedFin report. However, this guidance comes with a kicker: banks may make short-term, small dollar loans only with pricing that “reflects overall returns reasonably related to the financial institution’s product risks and costs.” This may seem a sensible bar to predatory pricing, but it’s also a precedent-setting intrusion by regulators into governing what “reasonable” is when it comes to profit.

The concept of “just pricing” is a time-honored one perhaps most effectively espoused by Pope Francis. It has also gotten considerable play as the “just capital” movement advanced. However, it’s more than unusual to see an express regulatory demand that banks earn not what they can, but what they should.

The overall construct of U.S. consumer-finance rules is premised principally on disclosures due to faith – often unfounded – that prices known are prices disciplined. Legislators from time to time have sought to restrict financial-product pricing, but even the most liberal regulators I know “democratized” finance not by setting prices, but instead by liberalizing rules and, in the case of the Clinton Administration’s agencies, rewriting the Community Reinvestment Act as a more than gentle prod. Instead of express pricing …

When FHFA Director Calabria took over the GSEs’ new capital construct, he made it clear that he wanted one comparable to U.S. GSIBs.  While the new NPR is considerably more comparable to the bank framework and, in some cases, also to the unique one governing GSIBs, it differs in many key respects.  As we noted in our first in-depth assessment, a final rule that retains these differences cements the GSEs’ place as go-to mortgage utilities.  The details of the rules change which sectors they will dominate, but dominate they still will.

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

Building on our initial, high-level analysis of the new FHFA capital proposal, we here go in depth into a critical part of FHFA’s structural redesign:  the relationship of the risk-based capital (RBC) weightings to the newly beefed-up leverage ratio (LR).  We do so before assessing the new definitions of capital, the capital-conservation and systemic buffers, and much more because knowing which rule is the binding constraint is a first-order conclusion before moving on to knowing which rule bites whom how.  If the LR triumphs — as it may no matter FHFA’s hope that it won’t – then the incentives built into the complex RBC paradigm will be of considerably less strategic import. GSEs will still be different post-conservatorship, but they’ll be differently different.

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