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.

1 02, 2023

FedFin on: State Member Bank Powers

2023-02-01T16:54:12-05:00February 1st, 2023|The Vault|

In conjunction with rejecting an uninsured crypto bank’s application for Federal Reserve membership, the Federal Reserve issued a policy statement conforming state member bank powers only to those authorized for national banks even if the state member is an uninsured depository institution. While it is possible for state member banks to gain greater powers following Fed deliberations, the new approach sharply limits the ability of states to empower uninsured charters not only focused on cryptoasset activities, but….

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

30 01, 2023

Karen Petrou: M&Ms, McHenry, and the Making of Financial Policy

2023-01-30T11:28:41-05:00January 30th, 2023|The Vault|

It’s a sad commentary on American politics to observe, as I feel we must, that the experienced chairman of the House Financial Services Committee, Patrick McHenry, has followed M&M’s “spokescandies” as a target of Tucker Carlson’s bilious, yet widely-watched, wrath.  The fundamental frivolity of this contrast is self-evident, but that has yet to dampen the credibility of this combustible commentator with his super conservative acolytes.  That Mr. Carlson matters so much to public discourse is deeply distressing given some of his other targets – Nancy Pelosi’s husband after a brutal attack is only one that comes immediately to mind.  Unlike him and many other Carlson targets, Mr. McHenry can more than take care of himself.  Still, going after him means super-conservatives will blast any Member or measure that falls short of purity on their rightward-loaded scale.  Since nothing these folks like can be enacted into law, all this does is reduce the hopeful odds we cast earlier this year for constructive financial-policy legislation.  Too bad – the nation could use some.

The nub of the accusation lies in his chairman’s decision to leave the word “inclusive” in the name of one of his panel’s revamped subcommittees.  Clearly, the concept of inclusion has become accursed because Democrats often used it in concert with what might seem an equally innocuous word:  diversity.  Democrats did use diversity and inclusion demands to press for racial, gender, and sexual-orientation equity in ways that rubbed many republicans raw, but the idea of inclusion is fundamental to …

25 01, 2023

FedFin on: Negative Option Marketing

2023-01-25T16:14:16-05:00January 25th, 2023|The Vault|

Using one of its controversial edicts to set what some consider a new rule, the CFPB has opined that negative-option or “subscription” marketing of consumer-financial products or services may be unfair, deceptive, or abusive (UDAAP) and thus subject to significant sanction for both the provider and any third parties with which it works.  Although the circular does not prohibit negative-option marketing, these sanctions and the sometimes-vague nature of stipulated safeguards may lead some financial companies…..

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

23 01, 2023

FedFin on: The Fed’s Heavy Hand on Equitable Housing

2023-01-26T12:25:24-05:00January 23rd, 2023|The Vault|

Under Director Thompson, FHFA’s top policy priority is equitable housing.  However, a ground-breaking study from Fed staff shows that FHFA is swimming upstream when the Fed raises rates.  Combined with our own research showing that ultra-low rates also accelerate inequitable housing, the best FHFA can do to help lenders reach LMI borrowers is tread water – better than sinking, but still hard work getting pretty much nowhere….

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

23 01, 2023

Karen Petrou: How the CFPB Plans to Rule by Registry

2023-01-23T11:09:36-05:00January 23rd, 2023|The Vault|

Last week, we provided clients with an in-depth analysis of the CFPB’s latest nonbank registry as well as a hard look at its impact on mortgage securitization.  Any nonbank subject to the CFPB will find its legal arsenal much depleted by the registry’s requirements, a point already well understood by opponents.  Far less noticed but of still greater consequence to all consumer-finance companies is another implication of the Bureaus actions here and in another recent registry proposal:  even where the CFPB has little to no regulatory authority, it will deploy its formidable ability to gain public attention to make unbearable the reputational risk of any practice it abhors.

Justice Brandeis is often quoted as saying that sunshine is the most powerful disinfectant and Director Chopra clearly plans to cast companies under a scorching sun.  That is works was demonstrated by his decision to detail the ways in which he believes overdraft fees support predatory earnings at considerable cost to vulnerable consumers.  That most banks charged overdraft fees in strict compliance with current rules made enforcement action at best a challenging route to reform.  Rewriting the rules would have gotten the Bureau where it wanted to go, but only over at least a year of wrangling.  Set out in the merciless sun by Mr. Chopra and Congressional Democrats, many banks decided that the political and reputational risk of continuing overdraft fees was just too high.

Overdraft reform thus proved easy to say and then to do.  So it is …

19 01, 2023

FedFin on: Form-Contract Registry

2023-01-19T16:53:19-05:00January 19th, 2023|The Vault|

Building on its proposed nonbank registry related to enforcement orders, the CFPB is now also proposing a public registry requiring posting of provisions in consumer-finance contracts the agency believes threaten consumer legal or free-speech rights when issued by supervised nonbanks.  The agency’s concern is based on its view that consumers generally have no ability to understand and alter the agreements presented to them as take-it-or-leave-it propositions with no choice other than a signature or an “agree” box to click.  Further, many contractual terms are decided between originators and third parties – e.g., credit reporting agencies, loan servicers, and debt collectors – over which the consumer has no power of choice or ability.  The registry is thus also intended to capture these sub-contracts determining back-end consumer risk, a move with considerable implications for proprietary relationships with these third-party providers.  Much in the new standards strikes at….

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

17 01, 2023

Karen Petrou: How FHLBs Miss the Mission, Heighten Financial Risk

2023-01-17T17:01:18-05:00January 17th, 2023|The Vault|

Recent revelations about the Federal Home Loan Bank System have made it still more imperative to address whether at least $1 trillion of implicitly-guaranteed federal debt should be authorized to feather the FHLBs’ pockets instead of furthering public welfare.  As we detailed in a recent client report,  flat-out mission contradictions are clear in the case of a crypto-heavy bank’s use of FHLB funding as a lifeline which it surely obtained because the System can lend with impunity because it has a prior lien ahead of even the FDIC.  However, this case isn’t the only current mission conundrum.  The other is little-noticed but at least as problematic: the extent to which Home Loan Banks lend not to support homes, but instead to give foreign banks in the U.S. a tidy revenue source via a nifty interest-rate arbitrage play that disadvantages U.S. banks and may even threaten financial stability and monetary-policy transmission.

But first to the question of whether the FHLB System is required to do better.  It would seem totally obvious that Home Loan Banks issue debt through the System’s Office of Finance thanks to taxpayer benefits.  However, in connection with a discussion of the prior lien, an FHLB spokeswoman said the System operates without any resort to taxpayers.  Leaving aside the fact that the Banks don’t pay taxes and couldn’t raise hundreds of billions at near-Treasury spreads if they weren’t cushioned in the taxpayers’ bosom, the law says these entities are agencies of the U.S. Government and regulates …

12 01, 2023

FedFin on: Financial-Policy Consequences of Silvergate’s Travails

2023-01-12T11:04:34-05:00January 12th, 2023|The Vault|

Karen Petrou’s memo earlier this week and her comments to the American Banker about Silvergate have sparked many client questions.  In this report, we provide additional context for aspects of this bank’s condition with policy consequences.   High-profile cases such as this have a long history of suddenly shifting long-pending policies; depending on outcomes, this bank’s challenges and those of any other crypto-heavy banks will almost surely do so.  In general, the case already confirms U.S. regulators of the wisdom of additional capital for crypto-exposed banks along the lines recently finalized by global regulators (see FSM Report CRYPTO37).  However, it also raises significant questions about the role of the Federal Home Loan Banks, brokered deposits, resolution policy, and AOCI recognition – and these are just for starters as the bank struggles to stay afloat.

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

11 01, 2023

FedFin on: An Implacable Problem With a Policy Solution

2023-01-11T16:47:56-05:00January 11th, 2023|The Vault|

As the Fed has hiked interest rates, mortgage rates have of course also gone up, sending a sudden chill through the residential market and putting home ownership even more out of reach for all but those for whom the home equity they still have after prices correct suffices for long-term wealth accumulation.  However, mortgage rates have often risen higher than expected from usual yield spreads and thus Fed tightening is even more excruciating not just for the mortgage market, but also for FHFA’s equitable-finance mission and the Fed’s hoped-for soft landing…

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


9 01, 2023

Karen Petrou: Is Silvergate Solvent?

2023-01-09T16:42:49-05:00January 9th, 2023|The Vault|

Is Silvergate solvent?  Media coverage suggests it can stay in business based on the crypto bank’s liquidity.  Liquidity is, though, only a necessary condition for a bank to survive.  For it actually to remain in business, a bank must also be solvent.  For Silvergate and several other crypto-heavy banks this won’t be easy.

The critical criterion determining whether regulators allow a bank to remain in business is the extent to which its capital meets or exceeds the rules and, when it doesn’t, how much below these thresholds it falls and why.  Ever since 1991, regulators are supposed to grant banks little leeway on these capital requirements – “prompt corrective action” provisions demand that regulators sanction banks as capital plummets and close them if they haven’t already done so if ratio’s sink to the “critical-capital” threshold.

Faced with a Lehman-like run, Silvergate has understandably focused on assuring stakeholders that it can continue to sell assets to handle all withdrawals.  And so it may, but that’s not its only problem.  Even if it’s liquid, Silvergate faces a grim future if its regulatory-capital ratios falter – and they might.

To survive, Silvergate must run a gauntlet between the amount of capital it holds on a shrinking pool of assets and the capital costs of losses taken as assets are sold to handle withdrawals.  The bank entered the liquidity wringer with ample capital.  According to its third-quarter call report, its leverage ratio was over ten percent.  And, even when the bank dumped over …

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