6- Client Memo

20 02, 2024

M022024

2024-02-20T09:14:36-05:00February 20th, 2024|6- Client Memo|

How the OCC Made a Bad Bank Both Bigger and Badder

As I noted last week, the OCC’s proposed bank-merger policy fails to reckon with the strong supervisory and regulatory powers federal banking agencies already have to quash problematic consolidations and concentrations.  Here, I turn to one reason why the OCC may not trust these rules:  it doesn’t trust itself.  A bit of recent history shows all too well why this self-doubt is warranted even though it’s also inexcusable.

m022024.pdf

12 02, 2024

M021224

2024-02-12T09:32:53-05:00February 12th, 2024|6- Client Memo|

How to Have Sound Bank-Merger Policy Reflecting Unique Bank Regulation

Chair Powell said a week ago that, thanks to commercial real estate risk, some banks will need to be “closed” or “merged out of existence,” hopefully adding that these will be “smaller banks for the most part.”  That this may befall the banking system sooner than Mr. Powell suggested is all too apparent from NYCB’s travails. The OCC’s new merger proposal flies in the face of this hard reality, dooming mergers of size or maybe even small ones until it’s too late. A surprising source – a super-progressive analysis of bank merger policy – makes it clear why the OCC’s approach is not only high-risk, but also ill-conceived.

m021224.pdf

5 02, 2024

M020524

2024-02-05T10:42:05-05:00February 5th, 2024|6- Client Memo|

Why Lower Rates Won’t Lead to More Affordable Housing

As Politico rightly pointed out last week, the inability of anyone who doesn’t already own a home to get one is turning into a significant political problem for incumbents of all persuasions.  It might also come to be one for the Federal Reserve based on a call I got from a senior senator a couple of weeks ago.  This is not exactly what the Fed needs given how hot a political potato it’s already become.

m020524.pdf

29 01, 2024

M012924

2024-01-29T15:16:08-05:00January 29th, 2024|6- Client Memo|

The Risks New Capital Rules Can’t Cure

Part one of my end-game assessment was last week’s memo laying out the growing odds that the agencies will be forced to issue a new proposal which hopefully makes better sense than the current one.  Part two here points out how the agencies have so tightly wrapped themselves around the capital rule’s axle that they are unable to see how many even more critical challenges are going unaddressed.  Risks overlooked are often risks even the toughest capital rules cannot contain because the cost of new capital rules actually contributes to the arbitrage and risk-migration accelerating the pace of systemic-risk transformation.  This is a negative feedback loop if ever there were one.

m012924.pdf

22 01, 2024

M012224

2024-01-22T09:40:25-05:00January 22nd, 2024|6- Client Memo|

How the Banking Agencies Dealt Themselves Such a Weak End-Game Hand

We said from the start that finalizing the capital rules as proposed would be difficult because I have truly never seen a sweeping rule buttressed by such shoddy analytics.  It’s of course true that lots of rules make little sense, but rules that cost companies as much as the capital rules are uniquely vulnerable to substantive and legal challen­­­ges.  This is even more likely when, as now, the proposal’s victims know how to temper political claims with well-founded assertions of analytical flaws and unintended consequences.  When regulatory credibility is effectively undermined, even those who might otherwise side with the regulators become cautious, if not actually averse to doing so.  And thus, it has come to pass for the end-game rules.

m012224.pdf

16 01, 2024

M011624

2024-01-16T09:30:34-05:00January 16th, 2024|6- Client Memo|

The Deep Cracks in the Fed’s Ever-Virginal Façade

Much recent coverage assumes that the Federal Reserve is a vestal virgin when it comes to presidential elections.  In fact, history teaches us that the Fed is far from virginal even though it always slaps the hand of anyone trying to pet it in public.  This peek-a-boo strategy works only as long as policy-makers and the public accept this spotless image.  Increasingly, they don’t and not without cause.  The 2024 election will thus test the credibility of Fed “independence” and threaten it as never before.

M011624.pdf

8 01, 2024

M010824

2024-01-08T11:25:26-05:00January 8th, 2024|6- Client Memo|

Reflections on Regulatory Failure and a Better Way

Earlier today, we released our 2024 regulatory outlook, a nice summary of which may be found on Politico’s Morning Money.  As I reviewed the draft, I realized how much of what the agencies plan is doomed to do little of what has long been needed to insulate the financial system from repeated shock.  This is a most wearisome thought that then prompted the philosophical reflection also to be found in this brief.  It asks why lots more bank rules do so little for financial resilience yet are always followed by still more rules and then an even bigger bust.   I conclude that financial policy should be founded on Samuel Johnson’s observation that, “when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”  That is, redesign policy from one focused on endless, ever-more-complex rules spawning still larger bureaucracies into credible, certain, painful resolutions to concentrate each financial institution’s mind and that of a market that would no longer be assured of bailout or backstop.

m010824.pdf

18 12, 2023

m121823

2023-12-18T09:26:36-05:00December 18th, 2023|6- Client Memo|

Why U.S. Soft Power is So Squishy

Late last week, Treasury issued a super-perky blog post asserting that U.S.-led sanctions will soon subdue Russia’s military might.  However, judging by the data Treasury rallies, saying sanctions subdued Russia’s war-making capabilities is akin to a Yorkie’s confidence that it can tackle a Rottweiler.  The terrier can indeed get in a few painful nips, but bring the big dog down?  It could if sanctions worked.  But, they don’t.  The more Treasury persuades itself they do, the faster U.S. might dissipates thanks to resolute attacks and internal insouciance.

m121823.pdf

11 12, 2023

M121123

2023-12-11T10:22:58-05:00December 11th, 2023|6- Client Memo|

Unicorns, Zombies, and Capital Regulation

As was again clear at last week’s Senate Banking hearing, credit availability is much on the mind when it comes to LMI communities and small business.  This makes a good deal of sense given the capital proposal’s unintended consequences, but it’s only part of the story.  When start-up ventures are unable to get bank loans, they turn to the capital market.  This is often necessary due to the start-up’s risk, but in recent years it’s also been driven by hundreds of billions of investor dollars desperately chasing higher yields as the Fed year-in, year-out kept real rates below zero.  Now that rates are finally, really positive, yield-chasing funds have evaporated.  As the New York Times made clear, unicorns have turned into zombies.  Some of the walking dead deserved to die long ago, but the flood of capital-markets funds exiting this sector also strands ventures that could and should have been vital innovators.  Had these entities been buoyed by bank loans as soon as they were viable, many would still be walking.

m121123.pdf

4 12, 2023

M120423

2023-12-04T11:03:03-05:00December 4th, 2023|6- Client Memo|

Why Curbing Banks Won’t Curtail Private Credit

Last Wednesday, Sens. Brown and Reed wrote to the banking agencies pressing them to cut the cords they believe unduly bind big banks to private-credit companies.  The IMF and Bank of England have also pointed to systemic-risk worries in this sector, as have I.  Still, FSOC is certainly silent and perhaps even sanguine.  This is likely because FSOC is all too often nothing more than the “book-report club” Rohit Chopra described, but it’s also because it plans to use its new systemic-risk standards to govern nonbanks outside the regulatory perimeter by way of cutting the banking-system connections pressed by the senators.  Nice thought, but the combination of pending capital rules and the limits of FSOC’s reach means it’s likely to be just thought, not the action needed ahead of the private-credit sector’s fast-rising systemic risk.

m120423.pdf

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