6- Client Memo – Page 3 – Federal Financial Analytics

20 11, 2023

M112023

Eliza Allen2023-11-20T12:15:04-05:00November 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.

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13 11, 2023

M111323

Eliza Allen2023-11-13T12:07:05-05:00November 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.

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6 11, 2023

M110623

Eliza Allen2023-11-06T15:47:06-05:00November 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.

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30 10, 2023

M103023

Eliza Allen2023-10-30T10:56:27-04:00October 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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23 10, 2023

M102323

Eliza Allen2023-10-23T12:03:15-04:00October 23rd, 2023|6- Client Memo|

Why the New CRA Rules Won’t Serve Communities Any Better Than the Old CRA Rules

On Tuesday, the banking agencies will release the final version of their 679-page proposal to rewrite the Community Reinvestment Act. Regrettably, much of the proposal reflected the worst of false-science staff seeking complex new models defining subjective goals combined with certainty-loving compliance officers and lawyers who just want to be told the number they need to hit, not if the number makes any sense. Unsurprisingly, there were hundreds of comment letters in which banks generally said the agencies should ease up and community groups urged still more stringent standards. But the story doesn’t end with this unremarkable line-up– in just the last few months, two major bank trade associations and one often-virulently anti-bank advocacy group agreed on one crucial thing: anything close to what the agencies proposed won’t work.

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16 10, 2023

M101623

Arezou Rafikian2023-10-16T09:21:55-04:00October 16th, 2023|6- Client Memo|

The Apples-to-Martians Comparison of PE Capital to That Demanded of Banks

What is capital? We talk a lot about how much banks should hold and what more bank capital means to whom. But few have said much about what regulatory capital actually is. That’s a signal, strategic omission as private-equity firms spin a tale of capital resilience without actually having anything comparable to what banks must raise even as nonbanks take over more and more financial markets key to stability, economic equality, and macroeconomic growth. Let nonbanks compete wherever they can, but suggestions that private equity hold more capital than banks is a whopper that cannot go unchallenged as lending migrates to these powerful firms.

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10 10, 2023

M101023

Eliza Allen2023-10-10T11:29:24-04:00October 10th, 2023|6- Client Memo|

The Urgent Financial Reform the Fed and FDIC Hope we Forget

Even after the great financial crisis in 2008, the repo meltdown of 2019, a financial-market bailout of unprecedented proportions in 2020, and three bank failures so far this year, the FDIC and Fed are no closer than they were in 2007 to knowing what to do if a medium-size bank fails, a nonbank barrels down on the banking system, or critical financial-infrastructure flickers. Bond markets are back on the brink and geopolitical risk have become a still-greater concern. The agencies may think new capital and resolution rules are an iron dome allowing them to forego agency repair, but history – see the Gaza Strip – provides no comfort – as I hope we don’t have to learn again, fortifications aren’t enough in the absence of effective surveillance and rapid response.

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29 09, 2023

M092923

Eliza Allen2023-09-29T11:41:36-04:00September 29th, 2023|6- Client Memo|

How a Shut-Down Stokes Systemic Risk

Although there’s been some talk of what a government shut-down does to the SEC, there’s lots, lots more to worry about. Risks are out there, risks that should be taken very, very seriously by the Members of Congress who seem to think that more chaos stokes their political fortunes. Perhaps it does, but it could well do a lot of damage to their finances, not to mention those of all the voters who might well bear a reasonable grudge.

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25 09, 2023

m092523

Arezou Rafikian2023-09-25T09:26:11-04:00September 25th, 2023|6- Client Memo|

How to Right the Raft of New Rules

What struck me most about the HFSC hearing at which I testified last week was how lukewarm Democrats are to the new rules unless they feel compelled to defend the White House or core political objectives. When the partisan spotlight dimmed, more than a few Democrats said that the rules might have both small and even significant perverse consequences. Given that GOP-led repeal of the rules is impossible and court overturn is at best a lengthy process, hard work to get the rules more to the middle is essential. Even if large banks still think the rules are bad, they’ll be better and that’s all to the good.

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11 09, 2023

M091123

Eliza Allen2023-09-11T09:40:12-04:00September 11th, 2023|6- Client Memo|

The PCA Cure for Much That Ails New Banking Rules

It’s a cliché, but it’s also true that one can’t beat something with nothing, especially in Washington. This is an axiom well worth remembering when it comes to all of the new capital and resolution rules befalling the nation’s biggest banks. I don’t think they need to be beaten back in their entirety – much in the proposals fixes vital flaws. But the agencies have done a remarkably poor job conjuring the impact of each of these sweeping proposals, let alone their cumulative impact in the context of all the other rules and the grievous supervisory lapses that contributed to recent failures no matter all the rules that could well have sufficed if enforced. Thus, the most obvious problems with this new construct are opacity, complexity, and most importantly reasonable doubts that, even with all these sharpened arrows, supervisors will still fail to draw their bows and then fire early and often. All too much in the new rules is false science, as even a cursory read of the impact analyses makes painfully clear. Instead of setting standards on lofty, unproven models, safeguards should rely on an engineering axiom: use warning lights that force prompt and corrective action. Think of the ground warning in an airplane followed by urgent “pull-up” commands and then go to work on the banking dashboard with clear, enforceable rules and new PCA thresholds forcing supervisory action and accountability.

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