fedfin

In this report, we build on our initial alert to assess the financial policy provisions of the “HEROES Act” (H.R. 6800), sweeping legislation that passed the House Friday evening on a surprisingly tight 208-199 vote.  While final legislative text is not yet available, provisions of the bill analyzed here lay out key Democratic demands for any further COVID legislation.  Much in the bill is highly partisan and will face significant obstacles when the Senate finally decides to negotiate, but the measure’s numerous changes to the PPP express widespread bipartisan sentiment about the need quickly to revise this small-business program.  These may thus advance on their own or form the basis for a conference with a far narrower Senate bill.  Other provisions in the HEROES legislation include new Treasury support for mortgage servicers, who would also be required to provide forbearance to all mortgages and prohibited from demanding balloon payments when forbearance ends.  The bill also includes consumer and small-business debt moratoria for 120 days accompanied by an FRB facility to support affected debt collectors.

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In this report, we go beyond our initial assessment of key points in the Fed’s latest financial-stability report not only to analyze the systemic risk the Fed now fears, but also the findings it reaches that will guide FSOC and other federal agencies.  Likely reflecting political sensitivities, the Fed’s report does not attempt any prediction about COVID’s economic impact beyond a forecast of significant near-term U.S. dislocation and possible risks from interactions with China, the EU, and other nations also grappling with the pandemic.  Also reflecting a desire not to describe scenarios that might prove self-fulfilling, the report provides no specific guide to financial-system vulnerabilities beyond noting the potential for significant near-term risk and greater challenges if macroeconomic stress persists.  The report also states that approximately $200 billion of higher-risk corporate debt will mature before the end of 2020, threatening CLOs in ways that may amplify COVID’s macroeconomic impact.

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On Friday, the Federal Reserve released a chastened assessment of U.S. systemic risk, abandoning longstanding faith in the ability of Fed-regulated banks on their own to ensure financial stability no matter the transformation of U.S. finance into an increasingly nonbank sector.  Forced to come to terms with nonbank systemic risk due to all the facilities it was forced to construct, the Fed still thinks it can handle the financial sectors it thinks essential to systemic stability.

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Federal Financial Analytics, Inc.

REG-REWRITE TARGETS SHOW UP ON FED’S RADAR SCREEN

May 18, 2020

The May 15 Federal Reserve financial-stability report makes clear that the Fed will renew efforts to impose systemic rules on prime MMFs, leveraged hedge funds, and higher-risk securitization vehicles. Life-insurance capitalization in the BHC context will get tougher and nonbank mortgage servicers will either get new rules or find it hard to access the U.S. banking system. Credit origination via off-balance sheet obligations at big banks also has a bull’s-eye on it for next-round rules no matter all the COVID-inspired relaxation.

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The Federal Reserve’s latest assessment of U.S. financial stability made headlines due to the systemic-risk now blinking red on the Fed’s radar. Unremarked upon but also blinking closer to the horizon are conclusions about why some financial-sectors hit so much risk so fast and hard when COVID struck. Structural change for key nonbank sectors was already on the to-do list for the Fed and global regulators, but the new report provides considerably greater insight into where the Fed will turn first when the emergency subsides to the point at which prospective actions are possible. Politics will of course play a major role in not just what the Fed prioritizes, but also in what it and FSOC can do. However, the magnitude of a financial- crisis staunched to some degree only by trillions in Treasury and support makes action certain – the only question …

The House “HEROES” bill doesn’t provide servicers with a new Fed liquidity facility, but it does give them a better shot at loans or guarantees backed by Treasury or, in a more expansive reading of the bill, via Fed credit facilities backed by Treasury.  The assistance comes with heavy conditions, but it’s assistance all the same.

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Much of today’s Senate Banking hearing with federal bank regulators focused on familiar issues such as controversial CRA reform. However, senators on both sides of the aisle pressed the Fed to make structural changes in many of its facilities to expand and ease access to them. Senators seemed more concerned with aid to constituents across the spectrum of businesses, municipalities, and financial institutions than with Fed risk, although Sen. Kennedy (R-LA) did query Vice Chairman Quarles about the growing size of the Fed’s balance sheet.

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In the wake of FASB’s current expected credit loss (CECL) methodology, the banking agencies have finalized a proposed methodology for calculating allowances for credit losses (ACL).  The agencies have also expanded on prior guidance for implementing CECL, but have determined not to adjust the transition periods established for capital standards related to CECL.  The final framework requires additional board and management oversight of key CECL estimates and processes, avoiding templates that would provide certainty and granting no leeway to reduce CECL’s near-term impact on higher reserves due to sharply increased loan risk in the midst of the pandemic.

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As I noted last week, the Fed is being remarkably free with its funds for giant corporate borrowers, more than a few of whom brought their risk upon themselves.  I noted then that a group of borrowers with an urgent mission has been left behind:  small biomed companies ineligible for the Fed’s facilities or the PPP.  Data emerging over the course of the last few days shows just how grave this crisis has become – over 500 clinical trials were cancelled at just one university and hundreds more cancellations were disclosed to the SEC.  Cancer research takes the hardest hit, followed by neurological work on strokes, ALS, and other hard ways to go.  No disease group has been safe from clinical-trial disruption.  Some of this is due to necessary prioritization of COVID work, but most of it results from sudden gaps in funding.  Urgent public-private collaboration is at least as essential as bringing cruise lines back upon the sea.  Here are ways to make it happen.

First to just a few key facts about what’s known as translational biomedical research.  This is the research that picks up from where work funded by the National Institutes of Health (NIH), foundations, and families has shown that a therapy holds out hope demonstrated by test tubes, mice, and other early-stage experiments.  The next steps – the translational ones necessary to bring a drug or device to each of our medicine cabinets – are phased clinical trials with increasing numbers of patients …