5- Client Report – Federal Financial Analytics

22 04, 2024

SYSTEMIC99

Shane Smith2024-04-22T11:35:44-04:00April 22nd, 2024|5- Client Report|

Fed Systemic-Risk Assessment: Some Worries, No Troubles

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 Fed continues to fear vulnerabilities due to historic levels of hedge-fund leverage, life-insurance illiquidity, and MMF redemption risk. The Fed seems to be less concerned about these risks than the IMF’s recent financial-stability assessment, although new big-bank stress tests now include an exploratory scenario related to hedge funds (see Client Report STRESS32). The report does not voice the concerns about private credit laid out in recent Fed research or by the IMF.

SYSTEMIC99.pdf…

18 04, 2024

MORTGAGE122

Shane Smith2024-04-18T15:29:06-04:00April 18th, 2024|5- Client Report|

Housing Takes on Immediate Political Impact, Will Action Follow?

Although there was no need for further evidence that campaign season has begun, today’s Senate Banking housing hearing surely confirmed it. Chair Brown (D-OH) used his opening statement and virtually all of his questioning to focus on Ohio-specific issues; GOP senators argued forcefully that Biden Administration policies reduce housing supply and hike unaffordability. Sen. Brown talked about the need for legislation in several instances, but it remains to be seen if he plans near-term action on a specific proposal. Perhaps hoping for this, Sen. Cortez-Masto (D-NV) questioned FHFA Director Thompson about Home Loan Bank mission compliance, pressing colleagues to support a bill she introduced in the last Congress to double the System’s affordable-housing obligation and alter other aspects of their operations. Sandra Thompson announced that FHFA this year will issue proposals to address the Banks’ mission and “streamline” AHP activities – she did not say how – as well as sharply constrain insurance-company members with a new, ongoing requirement for mortgage-finance activities.

MORTGAGE122.pdf…

11 04, 2024

RESOLVE51

Eliza Allen2024-04-11T14:22:52-04:00April 11th, 2024|5- Client Report|

FedFin Assessment: FDIC Plan to Resolve GSIBs Fails to Answer Many Key Questions

In its first public statement since 2013 about how it would execute an SPOE resolution (see FSM Report RESOLVE23), the FDIC yesterday released a report Chair Gruenberg described as demonstrating the FDIC’s readiness to resolve a U.S. GSIB and the process it has developed for doing so under the orderly liquidation authority (OLA) provided in the Dodd-Frank Act (see FSM Report SYSTEMIC30). As detailed in this FedFin report, the FDIC’s goal is to set stakeholder expectations regarding what to expect in an OLA resolution of a U.S. GSIB, but much reiterates current law and prior actions such as GSIB filings related to their resolution plans and the FRB’s TLAC standards (see FSM Report TLAC6). Although perhaps released by the Chairman at least in part to assert FDIC capabilities at a time of internal stress and Congressional criticism, it remains unclear the extent to which the FDIC is ready and able to execute the protocols it describes. The paper principally addresses only SPOE resolutions, which it states are best suited to OLA without making clear what it would do if a GSIB chose MPOE (none have so far although this is permitted under the living-will rules), a regional bank found to be systemic used MPOE (as several do), or if resolution involves a nonbank, where MPOE might well be preferable.

RESOLVE51.pdf…

9 04, 2024

AML137

Shane Smith2024-04-09T15:41:41-04:00April 9th, 2024|5- Client Report|

Senators Search for Digital-Asset AML Compromise

Today’s Senate Banking Committee Hearing with Deputy Secretary Adeyemo reviewed the Administration’s request for additional digital asset AML/CFT authority. Democrats were generally supportive of outlined statutory changes, citing various potential legislative solutions. Republicans focused their criticism on the Biden Administration’s efforts to sanction Iran, noting the growth of Iranian oil exports to China as a major avenue of sanction evasion. Although Ranking Member Scott (R-SC) called digital assets the “scapegoat” of this administration, Sens. Tillis (R-NC) and Hagerty (R-TN) floated a discussion draft of legislation to ensure that AML standards apply to centralized, consumer-facing digital asset financial institutions, calling this a good first step to ensuring the broader AML coverage sought in the Warren-Marshall bill (S.2669). Chairman Brown (D-OH) gave no indication of whether he is prepared to give the GOP’s approach consideration as he and others work to include a digital-asset AML bill in legislative vehicles. As noted earlier today, Sen. Warren (D-MA) made it clear that she has considerable problems with pending bipartisan House stablecoin legislation; we think compromise here is quite possible if something AML-related advances which Sen. Warren is willing to support. Surprisingly, Republicans did not use the hearing to press Treasury on SAR surveillance despite Sen. Scott’s letter raising serious concerns in this arena. Much of the hearing also addressed the committee’s bipartisan bill (S.1271) authorizing sanctions targeting fentanyl trafficking.

AML137.pdf…

21 03, 2024

REFORM231

Shane Smith2024-03-21T15:27:18-04:00March 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

Arezou Rafikian2024-03-20T12:17:56-04:00March 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

Shane Smith2024-03-06T16:07:02-05:00March 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

Eliza Allen2024-02-15T15:42:00-05:00February 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

Shane Smith2024-02-15T15:07:26-05:00February 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

Shane Smith2024-02-08T14:30:15-05:00February 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…