6- Client Memo

22 01, 2024


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.


16 01, 2024


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.


8 01, 2024


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.


18 12, 2023


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.


11 12, 2023


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.


4 12, 2023


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.



20 11, 2023


2023-11-20T12:15:04-05:00November 20th, 2023|6- Client Memo|

The Fate of the End-Game Rules Does not Lie in the FDIC’s Hands

It’s a hard fact of life that nothing good comes to federal agencies caught up in scandal even when scandal is misplaced.  So the real question for the FDIC is whether the bad already all too evident at the divided banking agency will grow still worse, threatening the FDIC’s ability to participate in pending rulemakings or, even worse, resolutions.  It likely will be no accident if the FDIC comes unglued and the capital and other proposals fall apart.  I think new rules will proceed, but the FDIC’s threat is far from out of the blue.


13 11, 2023


2023-11-13T12:07:05-05:00November 13th, 2023|6- Client Memo|

How Inequitable Rules Stoke Financial Crises and What the Banking Agencies Should do to Cut This Link

Last week, OMB issued another edict redesigning the way most of the federal government writes rules, going beyond its earlier directive to consider competitive impact now also to demand detailed consideration of the broader public good, especially when it comes to economic equality.  I focused on public-good regulation in last week’s memo because it is sadly alien to federal financial regulation even though, as OMB says, “the benefits and costs of a regulation are ultimately experienced by people.”  I grant that economists are people, but some are also people who don’t like people, at least when qualitative assessment of what people need challenges the quantitative conclusions they cherish.  Pending banking rules thus ignore the public good in favor of complex market constructs, rationalizing them on assertions that, whatever else befalls finance, crises are less likely.  This is a methodology fraught with perverse consequences, the most important of which is that the agencies’ standards will hike the risk of financial crises precisely because they omit distributional analysis.


6 11, 2023


2023-11-06T15:47:06-05:00November 6th, 2023|6- Client Memo|

How Regulators Unwittingly Run Roughshod Over the Public Good

Friday’s American Banker included a Kyle Campbell article quoting me reiterating some points in my recent testimony about the need for cumulative-impact analyses of the raft of pending rules.  This led others to suggest ulterior motives, arguing that calls for cumulative-impact analyses are fig-leaves dangling over efforts to gut the rules.  While advocates do not often argue for analytical purity when obscurity suits them, the absence of analytical rigor is nonetheless an abrogation of the public good by public officials.  Setting rules based on airy assertions that it will all come right in the end since there most likely won’t be financial crises or at least new financial crises like the old financial crises ensures that this regulatory round will have at least as much wreckage as those that came before.


30 10, 2023


2023-10-30T10:56:27-04:00October 30th, 2023|6- Client Memo|

How to Prevent Open Banking From Turning Into the Wild West

There are so many rules coming from so many directions at U.S. financial institutions that spotting key strategic challenges or opportunities is harder than ever.  That more and more of these rules are longer than 1,000 pages makes C-suite impact considerations still harder to highlight.  In the midst of this morass, one proposal from the CFPB on consumer-data rights may be easy to overlook, but this seemingly-petite 299-page rule is at least as consequential as the thousands of capital and CRA pages getting all the not-so-love.


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