5- Client Report

21 03, 2024

REFORM231

2024-03-21T15:27:18-04:00March 21st, 2024|5- Client Report|

Republicans Blast Basel, Global Standard-Setting

Today’s HFSC hearing on global governance featured expected Republican attacks on what they called the opaque nature of U.S. interactions with international organizations, with Chairman McHenry (R-NC) promoting a draft bill requiring regulators to report dealings with global standard-setting groups to Congress.  Much of the hearing otherwise focused on the Basel III Endgame Proposal, with criticism coming not just from the GOP but also some Democrats, especially Rep. Torres (D-NY) who denounced the “Europeanization” of the U.S. financial system.

REFORM231.pdf

20 03, 2024

GSIB24

2024-03-20T12:17:56-04:00March 20th, 2024|5- Client Report|

GSIB-Designation Methodology

Reflecting concerns expressed about banks that window-dress key regulatory data as the post-crisis framework took shape,the Basel Committee has now issued a request for views on how to prevent this when it comes to GSIB calculations related to their surcharge or possible designation.  This is now done annually, but Basel wants to require averaging on perhaps a daily basis to prevent presentations of very short-term data that under-estimate a designated GSIB’s or potential designee’s systemic footprint as Basel has decided to calculate it.

GSIB24.pdf

6 03, 2024

FEDERALRESERVE75

2024-03-06T16:07:02-05:00March 6th, 2024|5- Client Report|

Chair Powell Calls Basel III Re-Proposal “Very Plausible”

As expected, Republicans took turns grilling Chair Powell on the Basel III endgame proposal and calling for its withdrawal, and were likely pleased with the results. When questioned by Chair McHenry (R-NC) and Financial Institutions Subcommittee Chair Barr (R-KY), Mr. Powell stated that he expects “broad and material changes” to the proposal and stated that a re-proposal would be a “very plausible option,” calling the amount of negative comments regarding the proposal “unlike anything I have seen.”  Democrats made affordable housing their primary area of attack, following up on previous Democrat-led letters sent to Chair Powell calling for him to cut interest rates to reduce the burden on housing and construction costs.  Mr. Powell responded to housing concerns by acknowledging the structural housing shortage in the U.S. but reiterated the Fed’s dual mandate and stated that targeting the housing market is outside their jurisdiction.  In addition to monetary policy, much of the questioning also addressed fiscal policy, where Mr. Powell again attempted to stay aloof.  Ahead of today’s hearing, Chair McHenry and Subchair Barr led all HFSC Republicans in sending a letter to Mr. Powell, Chair Gruenberg, and Acting Comptroller Hsu demanding the regulators withdraw the capital proposal.  A bipartisan House coalition of 38 lawmakers led by Reps. Luetkemeyer (R-MO) and Williams (D-GA) also sent a letter to Mr. Powell criticizing the Fed’s proposal to reduce the debit-card interchange fee cap, warning of the proposal’s impact on LMI and underbanked communities.…

15 02, 2024

STRESS32

2024-02-15T15:42:00-05:00February 15th, 2024|5- Client Report|

FedFin Assessment: New Fed Stress Tests are a lot Like the Old Fed Stress Tests

In this report, we assess the strategic and policy implications of the Fed’s new stress-test regime.  Released today, it incorporates new “exploratory” scenarios previewed by Vice Chair Barr as a response to the significant stress-test omissions laid bare in the March banking crisis.  However, these exploratory tests will not directly factor into the SCB, which will also be calibrated to current capital rules since the banking agencies are now most unlikely to finalize these in time for SCB calculations later this year.  We nonetheless expect bank supervisors to run bank results against internal models premised on new capital requirements, using supervisory discretion to address any capital shortfalls they feel warrant distribution restrictions regardless of formal test results.  Similarly, we think supervisors will take near-term action if any of the exploratory scenarios points to near-term risk.

STRESS32.pdf

15 02, 2024

LIQUIDITY34

2024-02-15T15:07:26-05:00February 15th, 2024|5- Client Report|

Congress Contemplates Fed Emergency-Liquidity Power, Discount-Window Use

Today’s HFSC Financial Institutions hearing on emergency liquidity featured much discussion of reform, but few indications of any action Congress will take to advance it apart from support for pending agency efforts to enhance discount-window readiness. However, GOP criticism of the Bank Term Funding Program combined with witness support for its end makes clear the Fed’s political challenge should it reverse course and retain the facility in light of NYCB’s challenges and the potential for broader regional-bank stress.  Republicans including Subcommittee Chairman Barr (R-KY) were skeptical of the Home Loan Banks’ role as lenders to banks in duress; Democrats countered with strong support for the System as a boon to community banks.  Rep. Barr also contemplates some form of legislation to prevent the Fed from crafting new emergency-liquidity programs without prior Congressional approval, with Rep. Luetkemeyer (R-MO) noting his longstanding plan to give the FDIC authority to invoke a transaction-account guarantee regardless of amount without the need for prior Congressional approval.

LIQUIDITY34.pdf

8 02, 2024

FSOC31

2024-02-08T14:30:15-05:00February 8th, 2024|5- Client Report|

NonBank Mortgage Companies Are Prime SIFI Target

Treasury Secretary Yellen’s hearing today before Senate Banking followed the path set in Tuesday’s HFSC session (see Client Report FSOC30), with Ms. Yellen refusing to take a stand on matters such as the capital rules and banking-agency supervisory effectiveness.  Republicans in sparse attendance used the session to reiterate their critique of FSOC’s systemic-designation standard (see FSM Report SIFI36) and the capital rules; Democrats were most focused on defending Bidenomics.  However, questioning touched on NBFI risk with a particular focus on nonbank mortgage companies; the secretary reiterated conclusions about possible systemic risks laid out in FSOC’s most recent report (see Client Report FSOC29), now going further to say that one or another nonbank mortgage company could fail under market stress.  As we noted when FSOC standards were released, nonbank mortgage companies are top targets for systemic intervention, with Ms. Yellen’s comment today focused on individual companies suggesting that this might come via designation, not activity-and-practice standards.  There was little focus on NYCB today, but much attention to CRE risk; the secretary reiterated that it is worrisome for smaller banks, but not systemic.

FSOC31.pdf

6 02, 2024

FSOC30

2024-02-06T15:01:20-05:00February 6th, 2024|5- Client Report|

Yellen Ducks Capital Question, Further Threatening Finalization

As anticipated, today’s HFSC hearing with Treasury Secretary and FSOC Chair Yellen showcased sharp Republican criticism of the Council’s nonbank designation authority (see FSM Report SIFI36), with Chairman McHenry (R-NC) and Financial Institutions Subcommittee Chairman Barr (R-KY) citing the guidance as yet another example of regulatory politicization, calling FSOC a “rogue” and “roving” regulator.  Digital asset regulatory gaps were a top GOP concern, with Chairman McHenry also joined today by Reps. Hill (R-AR), Johnson (R-SD), and Thompson (R-PA) in sending a letter to Ms. Yellen requesting much greater attention to SEC and CFTC collaboration on digital asset oversight.  The hearing also continued to raise doubts about the viability of the agencies’ capital proposal (see FSM Report CAPITAL230), with Ms. Yellen repeatedly refusing to endorse it and emphasizing that the rule’s final form is the purview of the banking agencies.  Democratic opposition to the proposal was most starkly captured by Rep. Scott (D-GA), who said not only that it would be economically “terrible,” but that the majority of Committee members shared this opinion.  Ranking Member Waters (D-CA) strongly countered this view, but Democratic support today was muted.  Rep. Waters was also joined last night by Reps. Green (D-TX), Lynch (D-MA), Cleaver (D-MO), and Foster (D-IL) in sending a letter to Chairman McHenry requesting a hearing examining what they argue are racial disparities in mortgage approval rates at Navy Federal Credit Union.

FSOC30.pdf

1 02, 2024

PAYMENT28

2024-02-01T14:59:06-05:00February 1st, 2024|5- Client Report|

Banks Catch a Break on Payment Fraud

Today’s Senate Banking Committee hearing on scams and fraud in the banking system focused on the rise of P2P payment app scams, the growing popularity of traditional methods of fraud executed via wire transfer and check fraud, and emerging crypto and AI risks.  Democrats focused on legislative remedies; the handful of Republicans who attended the hearing pushed for consumer education.  Chairman Brown (D-OH) generally lambasted banks as too lax when it comes both to fraud and consumer redress but he nonetheless praised the American Bankers Association for its new anti-fraud system.  Indeed, attacks on Zelle – a feature of prior hearings (see Client Report REFORM213) – were muted.  The chair and other Democrats also endorsed the CFPB’s pending proposal on tech payment companies (see FSM Report PAYMENT27), recently attacked in a comment letter from House Republicans.

PAYMENT28.pdf

26 12, 2023

SANCTION21

2023-12-26T12:09:07-05:00December 26th, 2023|5- Client Report|

Secondary Sanctions to Prove First-Order Challenge

As promised, this report provides an in-depth assessment of President Biden’s Friday executive order  expanding anti-Russia sanctions via secondary ones on financial institutions that – knowingly or not – facilitate or conduct newly-identified transactions related to sanctioned persons, services, or goods.  These address frequent Congressional criticism about ineffective sanctions (see Client Report SANCTION20) and expose both foreign banks and U.S. correspondents to heightened legal and reputational risk.  However, as described in this report, secondary sanctions reach beyond the banks to entities often used to facilitate transactions critical to Russia’s war effort in foreign-exchange, insurance, and the payments markets.  However, it appears that sanctions risk applies only to MSBs, not to payment processors or system operators.

SANCTION21.pdf

18 12, 2023

FSOC29

2023-12-18T11:36:07-05:00December 18th, 2023|5- Client Report|

FedFin Assessment: FSOC Worries A Lot, Watches, Waits

This year’s FSOC report trods much old ground with two exceptions.  The first pertains to a new focus on artificial intelligence, machine learning, and new, generative technologies.  That said, the report does little beyond highlight this risk and include it among all the others federal agencies are told to monitor.  Private credit now also alarms FSOC, with insurance company investment in this sector of particular systemic concern in concert with the sectors’ CRE and junk-bond exposures, offshore reinsurance, and PE ownership.  As detailed in this report, banks are found to be resilient and have ample capital even as the report supports consideration of pending regulatory revisions.  Banking agencies are also asked to monitor uninsured-deposit levels and assess run-risk in light of social media and other accelerants.  In sharp contrast to more alarmist statements in the past and extensive Treasury reports (see Client Report CRYPTO32), this year’s report downplays cryptoasset risk because federal regulators are said to have taken steps to contain it.  The report also reiterates FSOC’s continuing focus on cyber and climate risk, with the closed session preceding the meeting considering a framework being developed by the OCC to measure and monitor financial risks and bank exposures.  Agencies are also encouraged to pursue comparable, “decision-useful” climate disclosures.  The LIBOR transition is considered a success and no longer poses a systemic risk.

FSOC29.pdf

Go to Top