Shane Smith, Author at Federal Financial Analytics

24 11, 2025

Karen Petrou: What Happens if Bank Deposits Follow Assets Out the Door?

Shane Smith2025-11-24T09:30:24-05:00November 24th, 2025|The Vault|

Last week, Treasury Under-Secretary McKernan outlined a critical strategic phenomenon: the growing transformation of bank deposits into financial instruments lacking the sticky permanence or taxpayer backstops that characterize core deposits. Does the financial system need bank deposits, or could it do as well with other liabilities or even representations of liabilities? This question signals, Mr. McKernan said, a policy transformation warranting attention in the most senior quarters, not just among “technocrats.” He’s right, and here’s why.

As the American Banker rightly pointed out last week, analysis here must carefully differentiate tokenized deposits from deposit tokens. Tokenized deposits are deposits, albeit with additional functionality. Deposit tokens – the transformational alternative – are tokens with deposit features that are only deposits in practice, depending on confidence that others will accept the tokens as either a medium of exchange or store of value. Deposit tokens are thus private money and, if they work as an alternative to central-bank money, pose an even more profound strategic challenge to banking as we know it than all of the NBFIs gobbling up traditional bank assets.

Quite simply, deposits are the lifeblood of banking. Could deposit tokens prove to be the vampires that transform legacy banks before tokenized deposits mount a meaningful defense?

Stablecoins are the nearest concern because they are clearly deposit tokens and perhaps front of Mr. McKernan’s mind since Congress blessed them as a new monetary instrument. Stablecoins are of course digital representations of “money” exchanged on a blockchain that are intended to handle …

10 11, 2025

Karen Petrou: How to Bank on Biomed and Revive ESG Investing

Shane Smith2025-11-10T09:03:17-05:00November 10th, 2025|The Vault|

Ever since ESG investing was born, the “E” for environment has swallowed virtually every billion of private capital dedicated to doing good in addition to doing well. Billions flowed into green renewable energy and carbon capture, leaving even fewer private-sector resources to meet urgent social needs encapsulated in ESG’s long-ignored “S” for social. Banks thus did much to address climate risk when that was in vogue. Now that it’s not, regulators, along with banks on their own and via new ESG-investing options can mobilize private philanthropic and investment capital to reduce a problem even more urgent than global warming: suffering people.

Bill Gates last week rightly argued for a new focus: promoting public health, especially when it comes to getting proven vaccines to vulnerable populations left still more defenseless as U.S. resources are yanked from anything that smacks of foreign aid or U.S. public health. But vaccines are only part of the answer. The public good also requires the quickest path possible to successful biomedical research, preventing and treating disease if we are not to be defenseless against the next pandemic and stand by as all too many adults and children die too young or suffer too long.

How could private capital make a lot more of a contribution to this urgent ESG objective?

There is of course the philanthropic option, more than important in rare diseases where the likely profit gained from funding new treatments may not suffice to draw in biopharma funding. The banking agencies should make it …

3 11, 2025

Karen Petrou: How a “Finality Account” Would Make Skinny Master Accounts Make More Sense

Shane Smith2025-11-03T09:19:50-05:00November 3rd, 2025|The Vault|

As I’ve recently noted, the barrier between banking and commerce is ever more evanescent. This isn’t, though, because the banking agencies are letting legacy banks into anything redolent of commerce. It’s because the FRB, OCC, and FDIC are letting nonbanks into banking with few of the regulatory and supervisory costs demanded of existing banks big and small, with one of the most consequential one-way tickets proffered by FRB Gov Waller in his recent proposal to give eligible special-purpose banks access to the Fed’s payment system. He describes these new master accounts as “skinny,” but they have yawning pitfalls and not just for banks.

Ever since the Herstatt failure in 1974, it has been clear that payment-system hiccups give the financial system acute gastric distress. This is why central banks dominate national payment systems, with the 1980 law authorizing the Fed to do so based in large part on the Fed’s arguments that only it could be trusted to keep the payment system’s lights on. And so the Fed said again when rationalizing the need for its own instant payment system rather than entrusting technological evolution to the private sector even though the private sector led the way to real-time payments long before the Fed bestirred itself.

If it is indeed essential for the central bank to control the payment system, then access to the payment system is a public good that should only be allowed for entities able to protect the public. This is of course one of the key …

27 10, 2025

Karen Petrou: Why Scoring is Better Than Tailoring

Shane Smith2025-10-27T09:28:58-04:00October 27th, 2025|The Vault|

A friend of mine last week commented that she was a size 2 in high school, but somehow has become a size 8. If she were a bank, she’d still be forced into her size 2 jeans even if she could only pull them up over one leg and her ability to appear in public was, to say the least, impaired.

Current “tailoring” rules take no account of inflation or, even worse, much that matters when it comes to risk. In 2020, the banking agencies issued tailoring standards categorizing banks via a series of size and “complexity” thresholds that determine applicable prudential standards and supervisory vigilance, or so it was said at the time. The final rule also reserved the regulators’ right to alter a bank’s category –presumably to a tougher one – based on whatever worried them. In practice, the standards have been implemented almost exclusively by reference to a bank’s size and nothing – not even all of the risks evident at some mid-sized banks ahead of the 2023 crisis – led supervisors to look harder.

A bank below $250 billion was deemed simple and safe; any above that threshold, almost certainly not. Further, any bank above $700 billion turned into a pumpkin – that is, a GSIB – even if it is neither global nor systemically-important. Big equals bad even though bad is remarkably indifferent to asset size when there is rapid growth, ill-begotten incentives, lax supervision, or negligent risk management.

The banking agencies rightly plan to …

20 10, 2025

Karen Petrou: Say Bye-Bye to the Banking/Commerce Barrier

Shane Smith2025-10-20T09:11:24-04:00October 20th, 2025|The Vault|

In his comments last week about stablecoins, FRB Gov. Barr worried aloud about cracks in the banking/commerce barrier. How quaint. This barrier has been crumbling for years, but two decisions last week knocked it down. The big issue these days isn’t keeping commercial firms out of banking – give it up, they’re in. Instead, the big question is whether this nation also wants relationship-focused, regulated banks insulated from conflicts of interest and buffered against market shocks. If it does, then traditional banks need new powers, fast.

The most impermeable barrier between banking and commerce was supposedly erected in the 1956 Bank Holding Company Act along with the narrow set of permissible BHC powers allowed in 1970. These laws sought to keep insurance and commercial firms from controlling insured depositories much as the Glass-Steagall Act did in 1933 when it came to securities firms. However, Sears Roebuck took advantage of gaping loopholes, opening a bank in the early 1980s. Congress did little but legitimize these charters, allowing a class of “nonbank banks” in 1987 and broadening bank/nonbank affiliation in 1999.

FDIC Acting Chair Hill has now made it clear that he will go even farther. Next time a bank fails, look for a private-equity company or other nonbank to pick up the pieces. Mr. Hill stated that the FDIC will now not only cotton to these acquisitions, but even facilitate them with “seller financing” and a pre-qualification program akin to one established in 2024 by the OCC.

Would these nonbank owners …

6 10, 2025

Karen Petrou: Preserving the Public Good Along with Revising Deposit-Insurance Coverage

Shane Smith2025-10-06T09:27:42-04:00October 6th, 2025|The Vault|

Although HFSC’s hearing this week is cancelled due to the shut-down, there is no doubt that Congress will give careful consideration to proposals from mid-sized banks seeking a lot more deposit insurance for selected accounts. But this doesn’t mean Congress will also advance this proposal unchanged or unaccompanied. Last week’s letter from Chair Scott to Acting FDIC Chair Hill makes it clear that the Senate Banking Committee head is carefully and correctly thinking through not just which banks win or lose with FDIC-coverage changes, but also what these policies mean to the public good. In short, it’s a lot.

Sen. Scott focuses on three important questions about the second-order effects of coverage change: what might happen to depositor behavior, what rules might need to change to offset unintended consequences, and whether statutory change is needed to limit moral hazard. How FDIC coverage changes for whom drives answers to each of these questions, but several over-arching effects are clear.

First, limiting added FDIC coverage to banks based on certain asset-size thresholds ensures that banks without added protection will not roll over and cough up more insurance premiums. They’ll do what they can to avoid costs unaccompanied by benefit. The largest banks are thus likely to reduce higher-cost domestic deposits and replace them with FHLB advances, wholesale deposits, and global funding. If they substitute these for higher-cost retail and small-business deposits, as seems more than likely, then big banks are also likely to increase their reliance on short-term assets that accord with …

8 09, 2025

Karen Petrou: What Treasury Wants from the Fed and Why It Should Get it

Shane Smith2025-09-08T09:29:11-04:00September 8th, 2025|The Vault|

With all the bandwidth absorbed by the Miran and Cook dramas, insufficient attention was paid late last week to Secretary Bessent’s Wall Street Journal article laying out a new monetary-policy model. I like it a lot and not just because Mr. Bessent quotes my book. As he says, we need a different monetary policy model, one that the Fed is clearly unable to develop on its own judging by the five years of work that went into the ultra-cautious 2025 fiddles with the 2020 model. Most of what Mr. Bessent wants will make the Fed better at its core mission and a more independent guardian of the public good, overdue reforms that Democrats should support.

What does reform entail? First, the Fed would adhere to its statutory mandate, not the truncated “dual” one recent Fed leadership selects in defense of its legitimacy. Secretary Bessent and Stephen Miran read all the law, not just selected passages, correctly observing that the mandate is a triple-header of maximum employment, price stability, and “moderate long-term interest rates.” Mr. Miran’s testimony cites the 1946 Full Employment Act as one source of this mandate along with the 1978 law. Current law also implores the Fed to act in concert with the federal government to further the “general welfare.” The FRB and FOMC thus have an affirmative, express duty to do all they can to reduce economic inequality, not inadvertently but significantly worsen it as has long been the case. Mr. Bessent seconds this view …

2 09, 2025

Karen Petrou: How to Redesign the Federal Reserve Banks

Shane Smith2025-09-02T09:19:51-04:00September 2nd, 2025|The Vault|

“U.S. President Donald Trump’s radical shift in economic approach has already begun to change norms, behaviors, and institutions globally. Like a major earthquake, it has given rise to new features in the landscape and rendered many existing economic structures unusable,” or so says Adam Posen at the Peterson Institute. After last week, it looks as if the Federal Reserve as it came to be known over recent decades is also on the scrap heap. It may not be “unusable,” but the uses to which it will be put are to serve Mr. Trump’s political interests, not necessarily those also of the long-term economy’s resilience, equality, or stability. The Fed deserves this due to its geriatric monetary-policy model and persistent contributions to economic inequality. I’m not so sure about the rest of us.

The transformation already under way is not just the result of the President’s unprecedented effort to dismiss a member of the Federal Reserve Board and, if the courts rule in his favor, anyone else he doesn’t like. Another profound change could come next March, when the Board must ratify the appointments of Federal Reserve Bank presidents. With a majority of members of the Board on his side, Mr. Trump could block reappointment of all twelve Reserve Bank presidents in March of next year.

The Federal Reserve Act places a rolling list of five Reserve Bank presidents on the FOMC in an effort to balance what congress feared in 1913 would be undue Wall Street influence on monetary …

28 07, 2025

Karen Petrou: The High Cost to Competitiveness of the Bankers’ Quest for Certainty

Shane Smith2025-07-28T09:27:41-04:00July 28th, 2025|The Vault|

FedFin reports since at least 2011 have identified the comparative advantage nonbanks enjoy thanks to lots of costly bank-only standards. However, we missed one big nonbank advantage sure to prove even more decisive in the stablecoin wars: bankers crave regulatory certainty even as their competitors aggressively exploit the battlefield advantage that uncertainty gives to those who dare.

Bankers aren’t dare-devils because they’re not supposed to be. Indeed, anyone who takes someone else’s money should be very, very careful. Decades of accepting deposits under strict rules without meaningful competition meant that most bankers rightly asked a lot of questions before doing anything even a little bit novel. To be sure, high-flying bankers abused taxpayer benefits thanks to negligent or even captive supervisors and rules weren’t always right. Still, rules and the supervisors who enforced them generally kept bankers in their lane since there wasn’t any faster traffic.

This comfy balance between caution and competitiveness was fiercely challenged for the first time when money-market funds dawned in the late 1970s, luring bank deposits at a time when anachronistic rules barred banks from offering competitive interest rates. High-flying bankers then sought to evade these constraints by making high-risk loans, thus bringing about the 1980s S&L crisis and the banking debacle that followed in the early 1990s. Both of these were systemic in terms of taxpayer cost, but neither had macroeconomic or financial-stability impact.

Newer, better rules succeeded these crises, but they were outflanked as “nonbank banks” became the first commercial firms to exploit …

7 07, 2025

Karen Petrou: Stablecoin Banks and the Increasingly-Uncertain Future of Banking

Shane Smith2025-07-07T09:18:34-04:00July 7th, 2025|The Vault|

The CEO of a high-flying conglomerate named Textron once quipped that his investment bank’s c-suite had a long wall of his deal-done plaques and another facing wall just as replete with his deal-undone announcements. The investment bank made money on the way up and down, as did he. The big losers: investors. Is this a lesson for our times as stablecoin issuers line up for bank charters? Banks hope so, but I fear not.

The difference between Textron then and all the nonbanks gunning now for bank charters is that, in the way-back, Textron competed on the proverbial level playing field. The reason most of its acquisitions went bust is because the economies of scale and scope Textron touted were mostly chimeras since technology and data then did not reward consolidation. Now they do.

Even more importantly, the firms Textron bought were also under the same rules – such as they were – as their competitors. Now, of course, this isn’t anywhere close to the case for bank competitors such as auto manufacturers, tech-platform companies, payment entities, and nonbank stablecoin issuers.

We have written before about how regulatory and merger-policy obstacles make it hard for all but the biggest banks to innovate as well as of the inequities of the pending legislation’s stablecoin regime. We’re not the only ones who know this. Nonbank issuers are already looking for additional avenues of regulatory arbitrage and they don’t have to look far.

Last week’s news brought announcements of national-bank applications from Circle…

Shane Smith

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