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.

30 05, 2023

FedFin on: Enforcement Policy

2023-05-30T17:09:49-04:00May 30th, 2023|The Vault|

Following a speech earlier this year by the Acting Comptroller arguing that some banks are “too big to manage” and the furor caused by recent failures, the OCC has significantly revised its enforcement policy.  The new framework requires examiners promptly to intervene if any of a bank’s CAMELS scores slips to 3 for unsatisfactory or if the bank is what CFPB Director Chopra would call a “repeat offender” of law, rule, or express supervisory actions or found deficient in practices necessary to ensuring safety and soundness.

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

30 05, 2023

Karen Petrou: How to Short-Circuit a Social-Media Run

2023-05-30T16:36:05-04:00May 30th, 2023|The Vault|

Was the social media run Silicon Valley Bank’s kiss of death?  Its former CEO says so.  Regulators agree because the more the failure came from the great beyond, the less material their manifold supervisory mistakes.  But, while it’s true that managerial malfeasance and supervisory forbearance played a huge role in recent failures, social-media herds can still trample a bank flatter than a morning croissant.  FedFin outlined solutions shortly after the mid-March failures, but we didn’t then know what we also know now about investor runs.  This memo reviews the runs, updates the regulatory responses, and shows why new liquidity buffers – surely the least controversial of any pending proposal – are urgently needed before the next round of regional bank stress.

Why do I say regional banks aren’t out of the woods?  Maybe they are and here’s hoping, but market volatility combined with three new studies suggest we may well be in a calm before the next storm.

Recent data on deposit outflows, Fed-window use, and Home Loan Bank advances remain so worrisome that federal officials are still promising that all deposits are protected all the time even though federal law says they aren’t.  Still, this moral-hazard safety net did not save First Republic and it’s been insufficient to secure other large regional banks from the threat of near-term failure.  The reason for this is to be found in social media, and not just the kind that powered Silicon Valley’s run– the real threat now isn’t coming from …

22 05, 2023

Karen Petrou: How to Ensure That Independent Study of Regulatory Mistakes Leads to Near-Term, Meaningful Redress and Reform

2023-05-22T11:47:33-04:00May 22nd, 2023|The Vault|

Last week, a moderate Senate Democrat was joined by a Republican in yet another letter demanding an independent investigation of regulatory actions related to recent bank failures.  But, as the absence of specifics in any of these letters makes clear, it’s a lot easier to call for independent inquiry than to lay out how to conduct one that might make a meaningful difference.  Precedent is not encouraging – for example, Congress created a Financial Crisis Inquiry Commission after 2008, but it was an unqualified waste of time and money.  Still, we urgently need an independent assessment of what went so wrong combined with another providing near-term, actionable reforms.  Having served on one post-crisis national commission that did a bit of good, I recommend separating the forensic inquiry from the one focused on the future, guarding against conflicts without eliminating expertise, and assessing only a few clear questions suitable for practical answers that can be readily accomplished under current law.

The first decision point determines all the rest:  whether the independent analysis is to be forensic – who dropped which heavy ball on whose toes – or focused on the future – what we learned and what to do about it.  Many of the proposals for an independent commission, including the Congressional letter noted above, want their commission to do both, but none could do so well and asking for this is thus asking for trouble.

A good forensic analysis will reduce the moral hazard enjoyed by federal supervisors long exempt …

15 05, 2023

Karen Petrou: How An Ill-Designed Special Assessment Is Sure To Scramble The Structure Of Federal Deposit Insurance

2023-05-15T11:52:36-04:00May 15th, 2023|The Vault|

As our forthcoming in-depth analysis will detail, the FDIC’s proposed special assessment raises a raft of policy problems not contemplated by the FDIC despite a steep price tag warranting careful thought at a time of financial instability and recessionary risk.  The FedFin analysis will detail the proposal, what the FDIC thinks, and what the proposal might do to whom, but here’s my opinion:  the FDIC’s decision to allocate blame for SVB and Signature’s failures to a select group of surviving larger banks is a politically-expedient violation of the principal of insurance and a terrible precedent for the future of federal deposit coverage.

First problem: the FDIC assigns blame to a large group of bigger banks even though its own analysis of the SVB and SBNY failures points to a different underlying reason for the systemic designation.  In the proposal, the FDIC targets large holdings of uninsured deposits even though both its post-mortem and the Fed’s of the two systemic failures cites bad management as the most important cause of death.  Both agencies do note the new risks posed by social-media runs that hastened the banks’ passing, but each also makes it clear that these new-age runs are an endemic challenge to bank resilience, not a risk unique to SVB and Signature or other banks with large amounts of uninsured deposits.  The FDIC proposal contains no explanation of why uninsured-depositories are the systemic rescue’s fall guys even though these deposits aren’t the cause of the two bank failures and the risks …

9 05, 2023

FedFin on: Fed Frets About Banks, Nonbanks, Hedge Funds

2023-05-09T11:45:59-04:00May 9th, 2023|The Vault|

Perhaps because its last financial-stability report (see Client Report SYSTEMIC94) was contradicted  just five months later by a systemic-risk designation, the Federal Reserve’s latest report eschews a conclusion about prospective risk in favor of a review of current concerns.  As noted upon the report’s release, these include a somewhat less effusive view of bank resilience than has characterized prior reports but the Board nonetheless views the banking system as sound and recent failures as essentially idiosyncratic.  The report is, however, concerned with midsized-bank CRE concentrations and the near-term impact of macroeconomic factors and deposit outflows on credit availability, noting as Chairman Powell did last week that this could adversely affect economic growth.

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

8 05, 2023

Karen Petrou: How to End the Sins of Supervisory Omissions and Bail-Out Commissions

2023-05-08T09:35:05-04:00May 8th, 2023|The Vault|

The reason the FDIC sold First Republic to JPMorgan is that it didn’t want to do yet another resolution that bailed out uninsured depositors.  The reason the FDIC didn’t want to backstop more uninsured depositors is that it would have had to say First Republic was as systemic as SVB and Signature Bank and this was nowhere near as credible.  The reason the FDIC had to find these two earlier failures systemic was because it couldn’t think of anything better and the reason it couldn’t think of anything better in any of these resolutions is that it was wholly unprepared for them and, now, for any of the others that may come suddenly upon us.  The FDIC must quickly rewrite its resolution playbook, but even a good one won’t work without a new set of triggers for meaningful prompt corrective action that forces change at troubled banks and readies the FDIC for resolution – not bail-out – if change doesn’t come quickly.

Last week’s near-death spirals show how quickly banks with respectable earnings and deposit inflows go down for the count when market sentiment turns on them.  Unlike the March failures, regional banks on the ropes since then were punched by investors, not the uninsured depositors who are now big winners on their moral-hazard bet.  These investors weren’t all short-sellers – many of them were equity stockholders who seemed suddenly to realize that the FDIC wouldn’t protect them when a troubled regional is sold to a bigger banking organization.  Why …

3 05, 2023

FedFin on: Nonbank SIFI Designation

2023-05-03T17:03:24-04:00May 3rd, 2023|The Vault|

In concert with proposing a new systemic-risk methodology, the Financial Stability Oversight Council sought comment on guidance that significantly rewrites the manner in which nonbanks are designated as systemically important financial institutions (SIFIs).  The new approach retracts key aspects of the Trump FSOC’s approach, for example eliminating the necessity of determining if a possible designee is likely to fail and what the costs and benefits of new systemic standards are likely to be.  Although the new approach retains numerous procedural opportunities for the possible designee to know of and protest action, these and other changes…

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

2 05, 2023

FedFin Analysis: FDIC Presses Targeted Coverage; Open to Excess Coverage, Collateralization, MBRs

2023-05-03T15:32:35-04:00May 2nd, 2023|The Vault|

In this report, we follow our initial assessment of the FDIC’s deposit-insurance reform report with an in-depth analysis of its recommendations and their prospects.  Aspects of this report reiterate conclusions initially noted in the agency’s Friday report on Signature Bank’s failure (see Client Report REFORM222), noting in particular the sharp growth of uninsured deposits at larger banks and the growing risk of social-media runs.  The new report also states that FedNow is likely to exacerbate run risk which increases if open banking advances.

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

1 05, 2023

FedFin Analysis: GAO Slams FRB, FDIC Supervision

2023-05-03T15:37:21-04:00May 1st, 2023|The Vault|

Following our analyses of the Fed’s report on SVB (see Client Report REFORM221) and the FDIC’s on SBNY (see Client Report REFORM222), we turn now to one from the General Accountability Office sure to have at least as much impact on bipartisan consideration of what needs next to be done to govern regional banks.  HFSC Chairman McHenry (R-NC) has already cited the GAO report in his rebuttal to those from the banking agencies, and it may well have tempered Senate Banking Chairman Brown’s (D-OH) support of a focus solely on new law and rule.

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


1 05, 2023

FedFin Assessment: FDIC Blames Signature Governance, Clarifies Failure Scenario

2023-05-03T15:20:31-04:00May 1st, 2023|The Vault|

In this report, we build on our assessment earlier today of the Fed’s SVB autopsy (see Client Report REFORM221) with an assessment of the FDIC’s self-review of Signature’s failure.  As noted on Friday, the FDIC confines this report to Signature’s supervision; a separate report will address policy recommendations.  Although the analysis has some findings in common with the Fed’s SVB assessment with regard to matters such as supervisors’ failure to keep up with a fast-growing bank, the FDIC principally focuses on key risk indicators at the bank rather than supervisory shortcomings.

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

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