Shane Smith, Author at Federal Financial Analytics

22 12, 2025

Karen Petrou: Why Big-Bank Compensation is No Longer Impregnable

Shane Smith2025-12-22T09:10:07-05:00December 22nd, 2025|The Vault|

I and many others have noted over the years that populists and progressives often advocate the same economic policies no matter how much they otherwise wage culture wars. A little-noticed case in point is work underway in the Trump White House to subject the biggest defense contractors to strict limits on compensation and capital distributions. Treasury Secretary Bessent is said to support the idea, leading Sen. Warren to suggest a “partnership.” Might this extend from prime defense contractors to GSIBs? It’s unlikely, but not impossible.

The rationale for the prime-contractor constraints is frustration over the decades in which these firms have consolidated and gotten ever bigger contracts yet delivered fewer and fewer armaments on time anywhere close to on budget. There is thus a flood of stories about how many ships, planes, and super-weapons the Chinese build as U.S. capabilities grow ever older, slower, and still more expensive. Will de facto nationalization for defense contractors make the U.S. military agile again because contractors grow hungry? I don’t know the sector well enough to even hazard an answer.

But, I do know a bit about banking. Would similar comp constraints lead GSIBs to slim down as Secretary Bessent desires? Maybe, but the power would shift not to smaller banks, but to the biggest nonbanks sure to lure disenchanted GSIB executives to the still-lucrative spheres of private credit and so many other bank-like activities. I doubt Mr. Bessent wants this, but the real deciding factor over GSIB comp limits isn’t substantive; …

15 12, 2025

Karen Petrou: Policy Now Demands that Bankers Back Pornographers – What could Go Wrong?

Shane Smith2025-12-15T09:18:23-05:00December 15th, 2025|The Vault|

As we noted, the OCC last week loosed an anti-debanking fusillade at nine of the nation’s biggest banks. Among other things, the agency sanctions banks for deciding on customers based on “values” and for evaluating relationships affected by negative press coverage. The OCC demands that key business sectors be served without scruple even if, as with “adult entertainment,” there may be good reasons to demur. Some “adult entertainment” may be legal, but much isn’t and even that which is legal may still be reprehensible. Must a bank owned by devout Christians still lend to support activities it believes to be sinful? Should it do so, its community is likely to abhor the bank, unaware of the OCC’s policy as it rallies against the bank in righteous rage. To meet the OCC’s edict and still adhere to risk-management policies, would banks need to ensure – God knows how – that no performers were trafficked and the most vile scenes were all made with images, not children? Can the OCC in fact order banks to eschew values, subjective business judgment, and political opinion? I think and hope not.

We’ve been in such a debanking frenzy that a fundamental examination of what it means has never been overtly undertaken by those demanding an end to it. Most Members of Congress are rightly moving cautiously with a focus largely on ending “reputation risk” reviews, while banks reasonably point to Obama and Biden era no-banking orders to show that the fault lies not with them, …

8 12, 2025

Karen Petrou: Tether’s Tangled Web of High-Risk Assets

Shane Smith2025-12-08T09:08:04-05:00December 8th, 2025|The Vault|

Last week, the IMF said that stablecoins could prove a threat to financial stability if widespread adoption is followed by a sudden consumer-confidence shock. A little-noticed report makes it clear that any consumer with confidence in the largest USD-denominated stablecoin, Tether, is betting on fumes and policy-makers touting widespread adoption are playing with fire. As the IMF rightly says, stablecoins may well have valuable use cases, but radical reform is essential for innovation without immolation.

The Tether report comes from S&P, a rating agency with an unfortunate habit of pointing to problems only after they’ve become irreversible and irrefutable. Since its report on Tether was unsolicited, perhaps it’s more objective than many others and thus the early warning the agencies promise, giving markets a chance to retrench and regulators to rethink.

S&P’s report looks at the critical question of whether Tether can convert its dollar-denominated coins into dollars on demand. The GENIUS Act attempts to ensure this with what it hopes are stringent reserve-asset requirements. S&P makes it all too clear that the El Salvador-domiciled issuer has a long, long way to go before it can meet even these requirements.

Since its last rating, S&P has now downgraded Tether to “weak.” This is because the percentage of assets housed in higher-risk and/or volatile sectors actually increased. For example, bitcoin alone accounts for about 5.6 percent of Tether’s reserves, up substantially, with a mix of crypto and high-risk assets now accounting for 24 percent of Tether’s total reserves. Notably, none of …

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 …

Shane Smith

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