ElizaAllen

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So far Eliza Allen has created 868 blog entries.
21 10, 2024

Karen Petrou: Competitiveness in a Cold, Cruel World

2024-10-21T12:04:19-04:00October 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

2024-10-16T09:34:28-04:00October 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

2024-09-30T11:29:16-04:00September 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

2024-09-25T15:37:45-04:00September 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.…

24 09, 2024

FedFin on: OCC Bank-Merger Policy

2024-09-24T16:56:21-04:00September 24th, 2024|The Vault|

In conjunction with final FDIC action on its merger policy, the OCC also finalized its proposal.  The final OCC standards include a rule revising merger-review procedures to eliminate streamlined and expedited consideration in favor of OCC commitments to act in a timely fashion, especially for smaller deals it believes will be considered on a schedule no different than that now governing these deals or perhaps even more quickly.  However, long delays are still more likely for larger transactions or those with controversial elements…

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

23 09, 2024

Karen Petrou: The New Bank-Regulatory Paradigm We Need

2024-09-23T11:58:35-04:00September 23rd, 2024|The Vault|

On Friday, we posted a client alert to a new Federal Reserve study that, to put it succinctly, overturns received wisdom about what makes banks fail.  It is a paradigm-busting analysis based on solid, validated, empirical evidence, not on the models notoriously replete with assumptions that suit a researcher’s fancy or whomever backs the work.  This study’s main finding is that, even before the advent of federal deposit insurance, bank failure is due to and reliably predicted by growing bank insolvency – not illiquidity – at otherwise-solvent banks and generally not even by runs at very weak banks.  Depositors and, worse, supervisors are demonstrably slow to catch on to emerging risk, with depositors understandably subject to information asymmetries and supervisors inexcusably distracted, confused, or even captive.  Policy should not be based on one study, but this one study warrants immediate attention backed as it is by many others and replete with damning data analyzed with a straightforward methodology using records going back to 1986.  Now would be a very good time to take heed – banking agencies in 2024 are building yet another regulatory edifice to compensate for yet another round of critical supervisory lapses.  This may well prove as doomed as its predecessors unless regulators stop blaming banks after failure for bad behavior well within supervisory sight and reach long before indisposition turned terminal.

Importantly, I am not saying that this study proves there is no need for capital or liquidity regulation just as our new merger-policy study does …

16 09, 2024

Karen Petrou: What’s Next for the Capital Rewrite

2024-09-16T11:24:36-04:00September 16th, 2024|The Vault|

Few, if any, regulatory agencies are omniscient.  More than a few think they are, but more often than not regulators who fail quickly to see the error of at least some of their ways are regulators who lose a lot more than they might otherwise have lost.  Which brings us to the capital proposal and what next befalls this troubled standard after Michael Barr’s belated recognition that something had to give.

In the near term, we’ll see action by the FRB, FDIC, and OCC to clear a revised proposal along with the Fed’s quantitative impact survey for another round of public comment.  I have to believe Fed Vice Chair Barr cleared the revisions he previewed last week with his allies at the OCC and FDIC and is confident that the Fed board will mostly agree with him up to the point of issuing a reproposal, if no further.  As a result, a reproposal Mr. Barr said will amount to about 450 pages will soon be upon us.

Is this the last word?  Having relearned humility the hard way, Mr. Barr promises it is not.  What else might have to change to get a final U.S. version of Basel’s end-game standards across the goal line?

I would guess a lot more than would have been the case had the Fed and other tough-rule advocates more quickly recognized policy and political reality.  One key, if seemingly-technical, point on which to give is the pesky “output floor.”  Basel imposed the output floor because …

9 09, 2024

Karen Petrou: Workers’ Rights and Merger Wrongs

2024-09-09T13:28:07-04:00September 9th, 2024|The Vault|

In all the fuss and fury over banking-agency merger policy, many have missed a consequential late-August announcement from other U.S. antitrust authorities laying out how workers’ rights will drive merger approvals.  This follows 2023 guidelines from the Department of Justice and Federal Trade Commission retracting the old price criterion by which consumer welfare has long been judged in favor  of policies taken factors such as network effects and “soft” market power fully into account.  The guidelines addressed workers’ rights, but the new agreement adds sharp, sharp teeth.  Thus, it’s clear that Administration policy is focused on economic justice along with its tough stand on monopolization.  Bankers take warning:  operational-integration rationales now cut two ways when it comes to merger approval.

To be sure, bankers are used to one economic-justice criterion when it comes to merger approval: those requiring consideration of customer “convenience and needs” based in large part on how this is demanded of them under the Community Reinvestment Act.  Banks planning an acquisition thus typically accompany an offer with a massive CRA pledge promising more loans to low-and-moderate individuals and communities, affordable-housing investments, and the like.

This won’t cut it under the pending merger-policy rewrites from the OCC and FDIC, but these proposals generally do not replace CRA-style approval criteria.  Instead, they beef them up, with the FDIC’s policy most notably (and dubiously) requiring acquirers to prove that communities not only will be better served, but also better served than if each bank remained independent.

However, the FDIC also …

26 08, 2024

Karen Petrou: Next Up: Federal Preemption Standards for Elder-Fraud Prevention

2024-08-26T12:13:45-04:00August 26th, 2024|The Vault|

As we noted before the August recess, Senate Democrats have pressed a new bill designed to make the CFPB Director’s wish the command of law:  banks would be clearly accountable for many instances in which consumers fall prey to those impersonating bankers, FBI agents, the CIA, and anyone else they think will persuade a customer, often elderly, to part with a whole lot of cash.  Nothing will come of this bill in this Congress, but it will surely be back in the next.  With it will come measures also to create a federal framework for the patchwork of state laws holding banks accountable for elder fraud.  This sounds good, but drafting here is devilishly difficult.

There is no question that elder fraud is a grievous concern.  I saw it firsthand as my father slipped farther and farther from being able to discern that the “nice” people happy to talk to him for hours were not beguiled by his avuncular charm – they wanted his bank account number.  Washington media is full of stories of the “gold-bar” fraud stealing millions from local retirees and this is, of course, just a tiny sample of a problem estimated to cost at least $3.4 billion a year.

Is there a need for federal preemption?  Last week’s American Banker had a helpful run-down of various state approaches.  In general, state laws or pending measures seek remedies such as notifications to adult protective services or law enforcement, mandatory holds on suspect transactions, or at the …

12 08, 2024

Karen Petrou: Why the 1951 Fed-Treasury Accord Doesn’t Matter in 2024

2024-08-12T10:24:30-04:00August 12th, 2024|The Vault|

Later this month, FedFin will issue a brief assessing whether Fed independence is really at risk, taking into account not just what Donald Trump has said, but also what progressives and populists agree should be done to change the U.S. central bank’s governing law.  As we’ve frequently noted, Donald Trump can talk tough about the Fed, but Congress has to agree to get tough before he can do anything but gradually change Fed leadership and hope his appointees do his bidding despite formidable resistance across the Fed’s entrenched institutional culture.  The forthcoming brief will put much of the daily back-and-forth on this critical question into the often-missing context needed to understand how much risk the Fed really runs.  However, I’ve gotten so many questions in the last few days following an American Banker article that I’ll answer a few of them now.

The questions revolve around the Fed-Treasury agreement in 1951 putting Treasury fully in the debt-pricing lane and keeping it out of Fed decisions setting monetary policy based on its macroeconomic judgment, not national fiscal or political demands.  The question?  It’s whether Treasury under Trump could revoke the 1951 Accord and regain control over monetary policy.

The best independent analysis of the history surrounding the 1951 Accord and its substance comes in a paper written in 2001 on the Accord’s fiftieth anniversary by staff at the Federal Reserve Bank of Richmond.  It rightly puts the Accord squarely in the historical context necessary to understand if the 1951 Accord has …

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