Eliza Allen, Author at Federal Financial Analytics

31 03, 2025

Karen Petrou: The President Ditches the Dollar

Eliza Allen2025-03-31T10:49:46-04:00March 31st, 2025|The Vault|

Given the controversies aroused by many of last week’s executive orders, it’s understandable that those redesigning Treasury’s payment system generally escaped notice. They shouldn’t. On purpose or not, President Trump has mandated that digital currency henceforth counts along with the dollar as U.S. fiat currency. That is a very, very big decision with consequences far beyond the ostensible goal of speeding Treasury payments and, yet again, ending waste, fraud, and abuse.

As I laid out in my book, there is nothing preordained about the dollar serving as the U.S. “fiat” currency. The medium of exchange a sovereign demands to honor its obligations is the fiat currency, but nothing forces the citizenry to accept it if the sovereign state is weak, the fiat currency is of dubious value, or options such as gold – the centuries-old go-to or a digital alternative – are better. As the U.S. gained economic power at home and abroad, the fiat currency Lincoln selected to fund the Civil War – the dollar – came to dominate U.S. transactions, especially those with the federal government. Now, the dollar is the dominant fiat currency not only at home, but is also the reserve currency around the globe. This “exorbitant privilege” is preordained by the United States; it was earned.

Now though, the U.S. is stepping back from the once “almighty dollar.” The President said it will accept alternatives to the dollar for tax and all other payments to and apparently also from the Treasury. The executive order …

18 03, 2025

Banking With Interest, Tuesday, March 18, 2025

Eliza Allen2025-04-22T12:52:24-04:00March 18th, 2025|Press Clips|

How Treasury’s Bessent Is Upending Bank Regulation

Host Rob Blackwell

Not that long ago, the Treasury secretary mostly took a back seat to the banking agencies in crafting policy, stepping in only during times of crisis. Not anymore. Karen Shaw Petrou, managing partner of Federal Financial Analytics, discusses Treasury Secretary Scott Bessent’s expansive view of his own role, why he’s taking charge, and what it means for banks.

ow.ly/pt0550VjRAs…

10 03, 2025

Karen Petrou: Will Bessent Do It Better?

Eliza Allen2025-03-10T10:18:10-04:00March 10th, 2025|The Vault|

There are two ways to consolidate federal bank regulation. First, you can change the law and, as detailed in my memo a few weeks back, transform agency responsibilities to reduce duplication and regulatory arbitrage. The other way is for one federal entity to assert all the power it has under law and maybe more simply to take de facto charge of significant Fed, OCC, and FDIC supervisory and regulatory policy. Secretary Bessent has now made it clear that the Trump Administration will open Door Number Two, setting key policy goals and “coordinating” among the agencies. Will Treasury keep banking within essential guardrails? Mr. Bessent might just pull this off, at least for as long as he’s Treasury Secretary in this super-volatile Administration.

Just weeks ago, I would have said a Treasury putsch was impossible because of the Fed’s inviolable status as an independent agency that, even under a more Trump-ready vice chair, would avoid the appearance of taking Treasury’s orders less this subservience spill over to monetary policymaking. Now, though, the President has claimed via executive order that there are no more independent agencies exempt from Executive Branch control. This covers the OCC and FDIC, which were in any case sure to do what was asked of them in this Administration, but it also covers Fed supervisory and regulatory responsibilities. The Fed’s express statutory independence does not cover these activities, making it likely now that the Fed will concede on most sup-and-reg points to defend the fragile barricades surrounding monetary-policy …

3 03, 2025

Karen Petrou: The Casualties of Slash-and-Burn Regulatory Rewrites

Eliza Allen2025-03-03T10:54:41-05:00March 3rd, 2025|The Vault|

There’s no doubt that many U.S. institutions have grown such long teeth over the years that they bit themselves in the foot. As a result, radical reform challenging conventional wisdom is long overdue. But, there are two ways to do this: the break-first/fix-later approach taken by the Trump Administration in biomedical research and other vital arenas; the other is to think first, then act decisively within the boundaries of current law or the better ones you demand. Radical reform to U.S. biomedical research is already leaving near-term treatments and cures on the cutting-room floor. If slash-and-burn transformation is also applied to financial-services supervision and regulation, systemic-risk guardrails could be unintentionally, but dangerously, dismantled.

The risks to biomedical research are not so much in what the Trump Administration has done, but that it’s more often than not done retroactively regardless of contractual commitments for continuing funding authorized under longstanding appropriations and by frenetic, indiscriminate firings of well-performing staff. You simply can’t suddenly stop a clinical trial without endangering patients and putting treatments years behind, if they continue at all. You also can’t stop basic biomedical research all of a sudden without leaving labs with a lot of mice, dogs, and primates to feed and no money for kibble. It also takes years to train good biomedical researchers; suddenly firing thousands of them endangers this pipeline and, with it, treatments and cures.

Biomedical research and financial-system governance have little in common, but leaving financial policy in tatters will also have unintended consequences …

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 …

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