Eliza Allen, Author at Federal Financial Analytics

21 01, 2025

Karen Petrou: Will There Also be a Financial Firestorm?

Eliza Allen2025-01-21T13:57:41-05:00January 21st, 2025|The Vault|

I live two short blocks from Rock Creek National Park, one of D.C.’s hidden wonders. As befits a national park, Rock Creek is very large and densely wooded, but no one has thought much about fire hazard until last summer’s drought led to some significant brush fires. I thus asked a forestry professor next to whom I happened to be seated waiting for a plane if those of us living near Rock Creek Park should worry. Instantly and unequivocally, his answer was emphatically, “Yes.” I’m still not sure what I or any of us now at risks we never contemplated can do, but I’m even less sure that what can clearly be done to reduce financial-system risk due to natural disasters will be done until after it’s too late.

Is risk really this frightening? A report last week from the Financial Stability Board lays out what it believes to be plausible, yet-severe scenarios demonstrating that the extent to which property insurers and reinsurers are able to absorb natural-disaster risk determines whether a disaster leads to systemic financial risk. In the U.S., this is a thin reed.

We know that the National Flood Insurance Program is woefully unable to address the scale of recent hurricanes and inundations. A treasury study last Friday shows that private insurance is in at least as much disarray. Homeowners in the highest climate-risk zip codes pay premiums about eighty percent higher than those in the lowest-risk codes and have far, far higher non-renewal rates. Fifteen of …

13 01, 2025

Karen Petrou: Bowman’s Most Important Regulatory Recommendation

Eliza Allen2025-01-13T12:42:41-05:00January 13th, 2025|The Vault|

Although bankers have long paid keen attention to FRB. Gov. Bowman’s regulatory thinking, public attention was sparse until last week. In the wake of Michael Barr’s resignation and speculation that Ms. Bowman might take his place as supervisory vice chair, her regulatory thinking finally got the widespread attention her monetary-policy views have long enjoyed. And a good thing too. In a speech last week, she not only reiterated comments about how best to redesign bank regulation and supervision, but also made another, unnoticed point: redesigning these key planks of financial stability need not be the blood sport they have sadly become.

Remarking on a striking change over the past year or so, Gov. Bowman rightly calls out the “adversarial” nature of recent banking-policy deliberations. This is doubtless in part because she is clearly still miffed that Mr. Barr did not engage in Board-wide collaboration, but adversarial combat extends to the Administration, Hill, and the interest groups that influence them. The press too also takes this tone, with the New York Times just last week touting new thinking about bank regulation as a big-bank triumph.

That big banks definitely wanted much of what they may now get is indisputable, but some of what they want also made sense. We know all too well that asymmetric regulation that pushes banks out of otherwise-profitable businesses gives unregulated nonbanks an unbeatable market edge that powers the migration of key intermediation functions and infrastructure beyond regulatory reach. This isn’t necessarily all that bad for …

7 01, 2025

American Banker, Tuesday, January 7, 2025

Eliza Allen2025-01-07T15:39:37-05:00January 7th, 2025|Press Clips|

Barr’s self-demotion changes little for regulatory outlook

By Kyle Campbell

Michael Barr has elected to end his term as Federal Reserve’s top regulator a year and a half ahead of schedule, taking the threat of a costly and potentially damaging legal fight with the incoming Trump administration off the table for himself and the central bank…Karen Petrou, managing partner of Federal Financial Analytics, said whether Fed Chair Jerome Powell allows Barr to helm the committee after he vacates the vice chair position on Feb. 28 will dictate the degree and speed of policy change at the Fed, particularly as it relates to supervision. “If there is a new chair of the Fed committee on [supervision and regulation], things could change more quickly at the Fed,” Petrou said. “If not, then not.” …Regardless of what happens with the Fed’s vice chair for supervision, Petrou said changes to bank policy were always inevitable under Trump. Just how drastic those reforms end up being will be determined by the people the White House chooses to lead the FDIC and OCC. “Interagency bank policy depends very much on who the next acting or confirmed comptroller is and the lineup at the FDIC,” she said. “Without knowing that, I cannot forecast interagency policy, because there is significant potential under the Trump administration that the normally institutional, relatively non-partisan nature of bank regulation will not continue over the next four years.”

https://www.americanbanker.com/news/barrs-self-demotion-changes-little-for-regulatory-outlook…

3 12, 2024

FedFin on: Nonbank-Payment Provider Regulation

Eliza Allen2024-12-03T16:48:27-05:00December 3rd, 2024|The Vault|

Continuing its efforts to advance controversial actions before the end of the Biden Administration, the CFPB has finalized proposed supervisory standards for large nonbank providers of general-use digital-payment-platform services. The new standard brings these companies under CFPB supervision as well as regulation and enforcement actions, better aligning their governance with rules applicable to bank payment providers and addressing the Bureau’s deep concerns about digital marketing. However, this new framework depends on voluntary compliance in anticipation of or as the result of rigorous CFPB supervision…

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

14 11, 2024

FedFin Assessment: The Complex Outlook for Consumer-Finance Regulation

Eliza Allen2024-11-14T15:45:08-05:00November 14th, 2024|The Vault|

As with merger policy (see forthcoming FedFin report), consumer-finance regulation will be crafted in the Trump Administration by complex pull-backs of current, progressive standards and pull-forward of populist goals which often parallel progressive ones. This is most clearly the case where powerful business lobbies such as merchants wield the greatest force (e.g., interchange fees), but will also be evident in consumer-privacy, tech-platform, credit-card, and “relationship-banking” efforts. This report assesses these and other issues under the CFPB’s jurisdiction, looking also at the outlook for the agency itself as Republicans gain Congressional control, allowing them to press for structural change to this controversial agency…

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

…

12 11, 2024

Karen Petrou: Why Banks Should Want New Capital Rules

Eliza Allen2024-11-12T12:02:42-05:00November 12th, 2024|The Vault|

Ever since the election, a lot of bankers have loudly hummed “Ding-dong, regs are dead, the wicked capital regs are dead.” There is no question that the wicked witch’s demise was warranted, but I’m not so sure about the merits of a similarly-ignominious and total end for the capital rules. As FedFin reports make clear, too much in these proposals is wrong-headed, even as they may now be revised. Still, it’s important also to remember that leaving the current rules unchanged leaves as is many provisions that are anachronistic or demonstrably conducive to shadow banking. There’s never been a better time than now to think about how best to modernize large-bank capital rules without unnecessarily eviscerating large-bank competitiveness. Here are a few ideas to start things off.

As I suggested in Congressional testimony, one of the silliest sections in the August 2023 capital proposal is the double-layered set of standardized approach (SA) credit-risk capital charges. Current rules allow big banks to use the advanced approach to credit risk-based capital (RBC), but banks that do so must hold the higher of their own advanced conclusions or the standardized weight. The proposal gets rid of the advanced approach but still requires banks to pick the higher of two SA options set by the regulators, not advantageous models.

Why have two standardized weights if one of them, while lower than the old weight, is based on what regulators have learned about risk since the old weights were posted in 2013? If the second …

21 10, 2024

Karen Petrou: Competitiveness in a Cold, Cruel World

Eliza Allen2024-10-21T12:04:19-04:00October 21st, 2024|The Vault|

When I gave a talk last week about bank-merger policy, I was asked an important question: if I’m right about the franchise-value challenges facing most U.S. banks, then why is banking here doing so much better than in other advanced, market-oriented nations? The answer in part is that, in a pond full of ugly ducklings, a scrawny mallard with just a few more feathers looks a lot better. But, it’s more complicated than that. The reasons why make it clear that, if bank-merger policy remains implacably set against economies of scale and scope, then only a very few, very big birds and more than a few nonbirds will own the waters.

As in any comparative analysis, the first step to judging U.S. banks versus those in other nations is to define which banks are being compared. Most other nations have very few, very big banks often considered national-champion charters dedicated as much to supporting their sovereign governments as to placating shareholders. As our recent merger-policy paper details, national champions are insulated from market discipline because they are almost always expressly too big to fail. Credit Suisse was an exception to this rule, but only because it failed so fast and Switzerland was so unready for resolution that it could do nothing more than fold one national champion into another, UBS.

For all the talk of TBTF banks in the U.S. and the benefits the very biggest enjoy during flight-to-safety situations, none are yet a national champion, and a good thing …

16 10, 2024

American Banker, Wednesday, October 16, 2024

Eliza Allen2024-10-16T09:34:28-04:00October 16th, 2024|Press Clips|

TD money-laundering scandal puts supervision back under the microscope

By Kyle Campbell

After using one of its most powerful enforcement tools to crack down on rampant money laundering at TD Bank, a Washington regulator finds its own oversight functions under the microscope. The Office of the Comptroller of the Currency implemented an asset cap on TD, prohibiting the Toronto-based bank from growing its balance sheet until its money-laundering controls are fixed…Karen Petrou, managing partner at Federal Financial Analytics, said the extensive consent order issued by the Financial Crimes Enforcement Network outlined a host of red flags that bank examiners should have detected years ago. Based on enforcement actions from Fincen, the OCC and the Federal Reserve, it is not clear if regulators picked up on the issues before last year. At that point, she said, they had few non-drastic options to choose from. “Because the banking agencies didn’t catch it early, when they could have remonstrated effectively or shut the bank down, they ended up with the 10th largest bank in the country that they were undoubtedly afraid to shut down for potential systemic risks,” she said. “They let a bank get away with AML murder by the time it was hauled before the courts, no thanks to the supervisors, from what one could tell.”… Petrou said these and other practices amounted to “red flags across the battlement” that supervisors should have been able to pick up on easily. “Absolutely blaring sirens going back 11 years,” she said.…

30 09, 2024

Karen Petrou: How DOJ’s Case Against Visa Could Make Debit-Card Markets Still More Concentrated

Eliza Allen2024-09-30T11:29:16-04:00September 30th, 2024|The Vault|

In our recent paper on bank-merger policy, we noted that over-stringent merger policy is likely to lead to unintended and perverse consequences. This emphatically is not to say that all bank mergers are good mergers, but rather to emphasize that blocking all mergers based on arbitrary criteria may well backfire and lead to still-greater concentration in a market defined as much by regulatory-arbitrage opportunities as competitiveness. Case in point: Justice may rightly want to bring Visa to heel, but its bank-merger policy could simultaneously block the kinds of bank consortia that would otherwise be able to continue market-critical card processing and also bring it under the regulatory umbrella. If DOJ successfully sues Visa, its bank-merger policy is likely to replace one disgraced omnipotent network-effect competitor with another omnipotent network-effect competitor rather than one or more regulated networks comprised of regulated, competing banks.

One of the often-overlooked – but very important – aspects of new merger policy from the Department of Justice is its dark view of financial networks and platforms. These are of course most pertinent in the payment system where, as one payment executive recently put it, “payment is a matter of volumes. If you don’t have volumes, you don’t have the capacity to be competitive.” Put another way, payment systems are network-effect entities and, unless Justice understands this, the only bank payment-system providers will be one or more of the very biggest banks that don’t need third-party networks to generate scale. Existing bank consortia of different-sized …

25 09, 2024

FedFin on: DOJ Bank-Merger Policy

Eliza Allen2024-09-25T15:37:45-04:00September 25th, 2024|The Vault|

In conjunction with final merger-policy statements from the FDIC and OCC, the Department of Justice (DOJ) released “commentary” expanding on how the 2023 guidelines it issued along with the Federal Trade Commission expressly apply to bank mergers. The DOJ’s commentary and that from the other banking agencies revise merger policy last set in 1995. However, the Fed has yet to do so or even clarify how all of these actions affect its approach beyond a statement earlier this year that the FRB was working with other agencies and a more recent answer from Vice Chair Barr that he is content with Fed policy as it stands…

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

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