Blog

Welcome to The Vault. Every week you’ll find a sample of FedFin opinion and analysis on the most recent issues facing financial services firms. Check back frequently to see what’s new. Click here to contact us.

13 01, 2025

Karen Petrou: Bowman’s Most Important Regulatory Recommendation

2025-01-13T12:42:41-05:00January 13th, 2025|The Vault|

Although bankers have long paid keen attention to FRB. Gov. Bowman’s regulatory thinking, public attention was sparse until last week.  In the wake of Michael Barr’s resignation and speculation that Ms. Bowman might take his place as supervisory vice chair, her regulatory thinking finally got the widespread attention her monetary-policy views have long enjoyed.  And a good thing too.  In a speech last week, she not only reiterated comments about how best to redesign bank regulation and supervision, but also made another, unnoticed point:  redesigning these key planks of financial stability need not be the blood sport they have sadly become.

Remarking on a striking change over the past year or so, Gov. Bowman rightly calls out the “adversarial” nature of recent banking-policy deliberations.  This is doubtless in part because she is clearly still miffed that Mr. Barr did not engage in Board-wide collaboration, but adversarial combat extends to the Administration, Hill, and the interest groups that influence them.  The press too also takes this tone, with the New York Times just last week touting new thinking about bank regulation as a big-bank triumph.

That big banks definitely wanted much of what they may now get is indisputable, but some of what they want also made sense.  We know all too well that asymmetric regulation that pushes banks out of otherwise-profitable businesses gives unregulated nonbanks an unbeatable market edge that powers the migration of key intermediation functions and infrastructure beyond regulatory reach.  This isn’t necessarily all that bad for …

6 01, 2025

Karen Petrou: Oval Office Bluster at a Time of Fed Confusion

2025-01-06T09:08:37-05:00January 6th, 2025|The Vault|

There is no doubt after last year’s last-minute debacle that U.S. fiscal policy is in still tinier tatters.  But, unnoticed so far is the still greater danger of confused fiscal policy combined as it now is with feckless monetary policy.  An economy resting on fiscal- and monetary-policy disarray is an economy at grave risk that sure-and-certain volatility will break through fragile guardrails.  Strained financial systems could then quickly compound the inflationary pressures likely from Trump trade and fiscal policy along with an array of supply-chain and employment risks.  And these are just the slow-burning hazards.  What happens if the financial system is shocked?

Although there has long been much about Fed policymaking that strains credulity, global financial markets have looked to the Fed as to a star in the East.  After 2008, markets had so much faith in the Fed that it was rightly dubbed “the only game in town” in a highly-influential 2016 book.  Now, though, investors and traders are increasingly fearful that, while the game based on Fed actions is still being played with its usual ferocity, there’s no longer an umpire or safety net.

Like adolescents suddenly facing the fact that parents are far from infallible, markets have had a rude, hard awakening in 2024’s last quarter.  Much has been written in recent weeks about the Fed’s steadfast assertion that it’s “data-driven” even as its decisions veer wildly from easing to tightening and back again.  That a stalwart Democratic economist recently endorsed longstanding Republican calls for …

16 12, 2024

FedFin on: A Half-Empty Privatization Glass

2024-12-17T17:52:59-05:00December 16th, 2024|The Vault|

Markets are getting very excited by ongoing Trump transition rhetoric about GSE privatization and a Friday CBO study refining its 2020 scenarios to conclude that release-and-recapitalization could proceed more quickly and prove less costly than four years ago suggested.  That said, CBO remains cautious about what would happen if recap/release actually began, standing by its earlier, conservative view of budgetary implications and systemic impact.  One little-noticed conclusion of note for those favoring privatization for free-market reasons:  if privatized GSEs can’t sustain GSE volume, CBO concludes (we think rightly) that …

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

16 12, 2024

Karen Petrou: The Likely Banking-Agency Rewrite

2024-12-16T09:09:18-05:00December 16th, 2024|The Vault|

Will the Trump Administration and an agreeable Congress really make sense of U.S. bank regulation? I’m not sure that what they do will indeed make sense, but there’s so little sense in the current system that I’m confident they’ll have no qualms about vaunting the institutional barricades that have thwarted due-process reformers since a Senate Banking chair proposed to create a “Federal Banking Commission” in the early 1980s.  Little in the U.S. regulatory colossus is in as much need of creative disruption as banking; the tricky bit will be to ensure that tearing down the current framework doesn’t leave it in ruins.

One reason for decades of inaction is the federalist structure of U.S. bank regulation, which allows for choice among a federal, state, or hybrid (state member) charter.  Whatever is done to federal bank regulation and federal charters, there is no way Congress will even try to redesign the state-based option.  It might expand preemption, but that’s as far as even this group of radicals will go because Congress will not allow each Member’s state to lose much in the federal reform many of them otherwise want.

Congress will also tread softly on one political demand:  that from small banks for a regulator more likely to listen to their pleas.  Right now, that’s the FDIC, which owes its supervisory role over the decades to small banks despite numerous grievous FDIC mistakes along with the agency’s tunning inability to resolve banks bigger than a bread box.

New leadership may remove …

9 12, 2024

Karen Petrou: Do We Need the Financial Stability Oversight Council?

2024-12-09T09:17:27-05:00December 9th, 2024|The Vault|

On Friday, the Biden Administration’s FSOC proved yet again that it deserved Rohit Chopra’s dismissive description as a “book report club.”  As far as we can tell, all it has done for all of the last four years is issue some nice papers about digital assets and the payment system about which nothing was ever done and put forth dutiful annual reports along with two new systemic-designation standards with which it has since done absolutely nothing.  We’ll take our usual look at this year’s annual report, but it will be even less relevant than usual because FSOC is likely to do at least as little in Trump 2.0 as it did with its own recommendations during Trump 1.0.  Given this sorry record, should the Department of Government Efficiency eviscerate the Council?

Sure, why not if all FSOC plans to do is as meaningless as all is town over the past eight years.  Still, Congress wasn’t wrong when it created a Council designed to force communication across super-siloed regulators and to look hard at nonbanks outside their reach.  Indeed, as nonbanks increasingly dominate core intermediation and infrastructure functions, a forward-looking, effective FSOC would be a vital safeguard against market success derived principally from regulatory arbitrage.

Effective system-wide governance is not impossible.  Late last month, the Bank of England showed what can and should be done to address systemic risk.  Using the Bank’s authority to govern across the financial industry, it released a “System-Wide Exploratory Scenario” (SWES), essentially a financial-system wide stress …

3 12, 2024

FedFin on: Nonbank-Payment Provider Regulation

2024-12-03T16:48:27-05:00December 3rd, 2024|The Vault|

Continuing its efforts to advance controversial actions before the end of the Biden Administration, the CFPB has finalized proposed supervisory standards for large nonbank providers of general-use digital-payment-platform services.  The new standard brings these companies under CFPB supervision as well as regulation and enforcement actions, better aligning their governance with rules applicable to bank payment providers and addressing the Bureau’s deep concerns about digital marketing.  However, this new framework depends on voluntary compliance in anticipation of or as the result of rigorous CFPB supervision…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

25 11, 2024

Karen Petrou: Why the World Needs a Financial Stability Board That Isn’t This Financial Stability Board

2024-11-25T09:04:12-05:00November 25th, 2024|The Vault|

Donald Trump often upends conventional neoliberal wisdom, but one of the seemingly most frightening things the President-Elect espouses is contempt for the global order embodied in bastions such as the Bretton Woods international financial institutions, NATO, the UN, and the World Trade and Health Organizations.  A less-known archetype of right global-order thinking is the Financial Stability Board.  It has so far been spared by Mr. Trump, likely only because it has yet to come to his attention.  Moving out ahead, two House Republicans vying for HFSC Chair are already insisting that each will, Samson-like, pull down the FSB’s banking, insurance, and securities pillars.  Will the global financial system crumble to the lowest common denominator as FSB advocates proclaim?  I doubt it.  Indeed, shaking global financial standard-setters out of their well-stocked echo chamber could actually do global finance a world of good.

Like all the other global-order monuments, the FSB was founded with the very best of intentions.  The 2008 crisis and warning tremors in the late 1990s proved at grave cost how financial earthquakes know no borders.  What better than a new body of global financial standards akin to those that keep cross-border telecommunications humming to protect global banking, insurance, securities, commodities, and payments?  And thus, the G20 brought forth the FSB in 2009.

The FSB promptly did the best it could as quickly as it could not only to ramp up subgroups such as a renewed Basel Committee, but also to tackle the absence of resolution protocols for the …

18 11, 2024

Karen Petrou: Why Banks Need More Than Just New Capital Rules

2024-11-18T09:27:52-05:00November 18th, 2024|The Vault|

Bankers complain with considerable fervor about a “tsunami of new rules.”  There has certainly been a flood of standards indirectly implemented by supervisors, simply demanded by the CFPB, proposed, and finalized.  It’s thus understandable that bankers think they’re drowning.  But, as forest fires rage in Brooklyn and much of the nation is conserving water, it’s important to recall that too little rain is also dangerous.  Which brings me to the strategic hazard banks run if deregulation, while alleviating a bit of bank burden, leaves untouched all the regulatory asymmetries that make it easy for shadow banks to dominate still more profitable activities once considered core banking services.  If shadow banks offer better products, so be it.  However, much of their market power derives only from adroit regulatory arbitrage.  That’s not just bad for banks; it’s also dangerous to financial consumers, investors, and stability.

Regulators can go only so far in easing banks’ burden because the law requires many of the rules that bind them.  Nonbanks are not governed by much federal law and there are scant state safety-and-soundness standards.  Tech-platform companies are outside the law unless federal regulators use their inter-connection and antitrust powers to rein them in.  That these nonbanks have their eyes on core intermediation and payment services is now indisputable.  That banks will end up as little more than bedraggled “partners” or ancillary-service providers to nonbanks is inevitable unless necessary bank-regulatory reform comes with long-overdue nonbank safety-and-soundness and resolution standards.

Our forecasts of financial policy under President …

15 11, 2024

FedFin Assessment: It’s Still Not Game-On for Most Bank Mergers

2024-11-15T12:58:54-05:00November 15th, 2024|The Vault|

As promised, this post-election forecast looks at bank-merger policy, providing a cautionary note in response to the go-go, game-on forecasts for new mergers often touted by investment bankers.  While community- and midsize-bank mergers will move with more certainty, more alacrity is unlikely unless the OCC and FRB join the FDIC with at least an initial deadline.  The same banking-agency staff who will work on bank mergers next year are also the same banking-agency staff working on them now.  However, we also expect new OCC and FDIC leadership to retract recent agency merger policies, saying at the same time that new ones are forthcoming.  Why is there a need for new ones?  As detailed in this report, aspects of the new policies addressed….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.

 …

14 11, 2024

FedFin Assessment: The Complex Outlook for Consumer-Finance Regulation

2024-11-14T15:45:08-05:00November 14th, 2024|The Vault|

As with merger policy (see forthcoming FedFin report), consumer-finance regulation will be crafted in the Trump Administration by complex pull-backs of current, progressive standards and pull-forward of populist goals which often parallel progressive ones.  This is most clearly the case where powerful business lobbies such as merchants wield the greatest force (e.g., interchange fees), but will also be evident in consumer-privacy, tech-platform, credit-card, and “relationship-banking” efforts.  This report assesses these and other issues under the CFPB’s jurisdiction, looking also at the outlook for the agency itself as Republicans gain Congressional control, allowing them to press for structural change to this controversial agency…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.

Go to Top