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So far Eliza Allen has created 789 blog entries.
15 07, 2024

Karen Petrou: The Problem With Preemption

2024-07-15T10:20:49-04:00July 15th, 2024|The Vault|

Last week, I wrote about the populist and progressive tie that binds each side of the U.S. political spectrum, pointing in particular to how the left and right are each calling for an end to “financial censorship.”  MAGA Republicans in Florida have taken the lead here for populists with new legislation barring banks from closing accounts based on pretty much anything but the fact that the account holder took out all the money and maybe not even then.  As FedFin subsequently described, Members of the House Financial Services Committee called first on Secretary Yellen and then on Chair Powell to declare that federal law preempts the state statute, noting that the Florida law bars banks from closing accounts even when money laundering is feared, imperiling law enforcement and financial integrity.  Secretary Yellen called for preemption, although it’s hers only to urge, not to grant.  Mr. Powell was more circumspect, but he surely supports preemption.  But, this is also not for the Fed to declare; the power of preemption indeed rests with only the Office of the Comptroller of the Currency.  So far, it’s done nothing and the nothing it’s done points to the consequences of one of the quieter decisions in this year’s tumultuous Supreme Court term and the threat this poses to the national-bank charter.

As you well know, almost all the attention on the Supreme Court that isn’t glued to Donald Trump targeted two end-of-session decisions revoking Chevron and extending ad infinitum the statute of limitations for regulatory …

8 07, 2024

Karen Petrou: What MAGA Republicans and Rohit Chopra Both Want

2024-07-08T13:20:21-04:00July 8th, 2024|The Vault|

Following last week’s celebration of American independence, my thoughts turned to the confluence of concern from both sides of the political spectrum about an issue at the heart of the Bill of Rights:  “financial censorship.”  When Florida Gov. Ron DeSantis and CFPB Director Chopra agree – as they do – on a hot-button point such as freedom of thought as it may be expressed in financial transactions, a new framework is upon us no matter who wins in November.  Virtuous as this ideal is, putting it into practice is fraught with consequences, more than a few unintended.

That Mr. Chopra chose to address the Federalist Society is notable in and of itself.  I’ve done this more than a few times and emerged not only unscathed, but often enlightened.  But that was before Democrats viewed the Society as a cabal meant to subvert rules such as those Mr. Chopra is fond of issuing.  But the CFPB director knew his crowd – he and even super-MAGA conservatives fear that powerful financial companies threaten freedom of thought because giant platforms have undue control over each of our wallets.  This may not be true, but at least one such company gave it a try and those taking aim at financial censorships think that once is enough, and they are right.

However, the focus on financial censorship goes beyond what payment companies allow us to express via what we purchase.  The debate is over a decade old, beginning as it did when Obama Administration banking …

24 06, 2024

FedFin on: Squeezing Closed Ends

2024-06-24T16:47:53-04:00June 24th, 2024|The Vault|

Late Friday afternoon, FHFA hoped quietly to announce that, while it was approving the gist of Freddie’s request to purchase certain closed-end second liens, it heard many critics and would sharply curtail the approval and, should it go any farther, seek still more public comment.  For good measure, FHFA Director Thompson even invited comment on the new program approval process, one of the more controversial provisions in 2008’s GSE-regulatory rewrite…

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

28 05, 2024

Karen Petrou: Why Regulators Fail

2024-05-28T12:38:29-04:00May 28th, 2024|The Vault|

Last week, the House voted on a bipartisan basis to stick its collective fingers in the SEC’s eye over its cryptoasset jurisdiction.  And, in recent weeks, the Vice Chair of the Federal Reserve has been forced to concede that the end-game capital rules that are his handiwork as much as anyone’s will get a “broad, material” rewrite.  What do these two comeuppances have in common?  Each results from regulatory hubris so extraordinary that even erstwhile allies abandoned the cause.  For all MAGA fears about an omnipotent “administrative state,” these episodes show that those seeking sweeping change without plausible rationales are still subject to the will of the people even if the people’s will befuddles those in the government’s corner offices.

First to the SEC.  Chairman Gensler’s position on cryptoassets over the past three years is that many ways to use them are securities and anything that’s a security is his for the enforcing.  I’m not even going to venture a conclusion on who’s right or wrong when it comes to abstruse Supreme Court rulings on complex definitions.  What underpins the SEC’s downfall – temporary though it may be – is that any question as big as what’s a cryptoasset and who can do what with it should be answered by rules subject to public notice and comment, not episodic enforcement actions meant to teach everyone else a lesson.

Most people would learn the lesson if a coherent regulatory policy spelled it out.  When policy is set by whack-a-mole instead of …

20 05, 2024

Karen Petrou on: How FSOC Enables Systemic Risk

2024-05-20T11:37:05-04:00May 20th, 2024|The Vault|

One can and should debate the extent to which nonbank mortgage companies (NBMCs) are as systemically-risky as FSOC says they are.  But it’s indisputable that, if FSOC believed what it said, then the paltry and politically-improbable recommendations it announced are proof of only one unhappy conclusion:  all FSOC can meaningfully think to do when it sees a systemic risk is figure out how to bail it out.  This is certainly what taxpayers have learned the hard way and investors have come to expect.  Or, as humorist Dave Barry pointed out after the mid-March systemic deposit bailout, “Eventually the financial community calms down, soothed by the reassuring knowledge that American taxpayers will, as always, step up and cheerfully provide billions of dollars to whichever part of the financial community screwed up this time.”

As we noted in our detailed analysis of FSOC’s report, the Council lays out the rapid-fire growth of NBMCs, the role regulatory arbitrage played in pushing banks to the sidelines of the residential-mortgage business that once defined so many charters, and the direct taxpayer and resulting systemic risk of NBMC liquidity shortfalls.  Asked about this at Wednesday’s HFSC hearing, Acting Comptroller Hsu said that NBMC stress could lead to “widespread contagion risk” that could prove “severe.”

Could NBMCs be pulled off the brink under current law?  In a little-noticed aside, FSOC says no because NBMCs lack the assets that would make viable orderly liquidation by the FDIC under its systemic authority even if the FDIC finally figured out …

22 04, 2024

FedFin on: Fed Systemic-Risk Assessment: Some Worries, No Troubles

2024-04-23T16:37:21-04:00April 22nd, 2024|The Vault|

The latest Federal Reserve financial-stability assessment continues the Fed’s practice of detailing vulnerabilities without drawing bottom-line conclusions; the Board once did so, but ceased this practice after opining that the financial system’s risk was “moderate” shortly before the 2020 crash.  The Board’s report now also says that it assesses vulnerabilities, not the likelihood of near-term shock.  Survey respondents do make this assessment, with this report showing a striking increase in concerns about policy uncertainty in light of continuing inflation and the higher-for-longer rate outlook…

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

5 04, 2024

Marketplace, Friday, April 5, 2024

2024-04-05T15:37:25-04:00April 5th, 2024|Press Clips|

When is strong hiring too strong?

Hiring in the month that just ended was quite a bit stronger than expected, with more than 300,000 jobs added to payrolls and the unemployment rate falling slightly to 3.8%. That’s continuing the Fed’s interest rate predicament. We’ll discuss with Karen Petrou, co-founder and managing partner at Federal Financial Analytics.

1 04, 2024

Karen Petrou: The Frightening Similarity Between Key Bridge and Bank Stress Tests

2024-04-12T09:41:28-04:00April 1st, 2024|The Vault|

On Friday, the Washington Post reported that Key Bridge passed all its stress tests before it fell into the harbor.  These were well-established protocols looking at structural resilience – acceptable, if not awesome – and, after 9/11, also at terrorist attack.  That a giant container ship might plow into the bridge was not contemplated even though this has happened before in the U.S. and not that long ago.  Which brings me to bank stress-testing and how unlikely it is to matter under actual, acute stress because the current U.S. methodology correlates risk across big banks in ways that can make bad a lot worse.  Even more troubling, tests still don’t look over the banking parapet.

To be sure, the Fed’s semi-annual financial-stability reports (see Client Report SYSTEMIC97) muse about risks that lurk outside the largest banks, and FSOC dutifully catalogs nonbank risk each and every year in a copious annual report (see Client Report FSOC29).  Last year, FSOC also said a lot about what might someday be done to address it via systemic designation (see FSM Report SIFI36).  But what’s being done, not just said, about nonbank risk even as inter-connections become ever more entwined?  Not much in the U.S. even though other national regulators are taking meaningful steps first to know where it lies and then to curtail it.

For example, the Bank of England and Australia’s Prudential Regulatory Authority are quickly moving past bank-centric stress testing, with Australia importantly looking not just within the financial …

25 03, 2024

Karen Petrou: How the FDIC Fails and Why It Matters So Much

2024-03-25T11:45:45-04:00March 25th, 2024|The Vault|

Last January, we sent a forecast of likely regulatory action and what I called a “philosophical reflection” on the contradiction between the sum total of rules premised on unstoppable taxpayer rescues and U.S. policy that no bank be too big to fail.  Much in our forecast is now coming into public view due to Chair Powell and Vice Chair Barr; more on that to come, but these rules like the proposals are still premised on big-bank blow-outs.  I thus turn here from the philosophical to the pragmatic when it comes to bank resolution, picking up on a stunning admission in the FDIC’s proposed merger policy to ponder what’s really next for U.S. banks regardless of what any of the agencies say will result from all the new rules.

Let me quote at some length from the FDIC’s proposed merger policy:

“In particular, the failure of a large IDI could present greater challenges to the FDIC’s resolution and receivership functions, and could present a broader financial stability threat. For various reasons, including their size, sources of funding, and other organizational complexities, the resolution of large IDIs can present significant risk to the Deposit Insurance Fund (DIF), as well as material operational risk for the FDIC. In addition, as a practical matter, the size of an IDI may limit the resolution options available to the FDIC in the event of failure.”

In short, the FDIC wants to block most big-bank mergers because it can’t ensure orderly resolution of a large insured depository …

4 03, 2024

Karen Petrou: The Madness of a Model and its Unfounded Policy Conclusion

2024-03-04T11:50:02-05:00March 4th, 2024|The Vault|

As the pending U.S. capital rules head into their own end-game, there is finally a good deal of talk about an issue long neglected in both public discourse and banking-agency thinking:  the extent to which higher bank capital rules accelerate credit-market migration.  Simple assertions that more capital means less credit are, as I’ve noted before, simplistic.  One must consider how banks reallocate credit exposures to optimize capital impact and, still more importantly, how the credit obligations banks decide to leave behind take a hike.  Now comes a new paper the Financial Times touts concluding that, thanks to shadow banks, “we can jack up capital requirements more.”  Maybe, but not judging by this study’s design.  Even with considerable charity, it can be given no better than the “very creative” grade which kind primary-school teachers accord nice tries.

The paper in question is by Bank of International Settlements staff.  It looks empirically – or so it says – at what it calls the U.S. banking sector’s share since the 1960s of what it lugubriously calls “informationally-sensitive loans.”  It documents a lot of numbers said to demonstrate lower bank lending share, using a model founded on both erroneous data and wild leaps to conclude in a fit of circular reasoning that more nonbank lending explains why there is less bank lending.  In the study’s words, “intermediaries themselves have adjusted their business models.”  What might have led banks to decades of technological intransigence and strategic indolence is neither clearly explained nor verified.

What …

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