Blog – Federal Financial Analytics

8 07, 2025

FedFin on: SLR Reform

Arezou Rafikian2025-07-08T10:09:26-04:00July 8th, 2025|The Vault|

Reflecting a new approach to bank regulation and the strong hand of the Treasury Secretary, federal banking agencies have proposed a sweeping rewrite of the enhanced supplementary leverage ratio (eSLR) applicable to the eight U.S. banking organizations designated as global systemically important banks (GSIBs). The proposal does not expressly exempt Treasury obligations from the eSLR denominator, but it alters the manner in which the ratio is calculated….

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

7 07, 2025

Karen Petrou: Stablecoin Banks and the Increasingly-Uncertain Future of Banking

Shane Smith2025-07-07T09:18:34-04:00July 7th, 2025|The Vault|

The CEO of a high-flying conglomerate named Textron once quipped that his investment bank’s c-suite had a long wall of his deal-done plaques and another facing wall just as replete with his deal-undone announcements. The investment bank made money on the way up and down, as did he. The big losers: investors. Is this a lesson for our times as stablecoin issuers line up for bank charters? Banks hope so, but I fear not.

The difference between Textron then and all the nonbanks gunning now for bank charters is that, in the way-back, Textron competed on the proverbial level playing field. The reason most of its acquisitions went bust is because the economies of scale and scope Textron touted were mostly chimeras since technology and data then did not reward consolidation. Now they do.

Even more importantly, the firms Textron bought were also under the same rules – such as they were – as their competitors. Now, of course, this isn’t anywhere close to the case for bank competitors such as auto manufacturers, tech-platform companies, payment entities, and nonbank stablecoin issuers.

We have written before about how regulatory and merger-policy obstacles make it hard for all but the biggest banks to innovate as well as of the inequities of the pending legislation’s stablecoin regime. We’re not the only ones who know this. Nonbank issuers are already looking for additional avenues of regulatory arbitrage and they don’t have to look far.

Last week’s news brought announcements of national-bank applications from Circle…

30 06, 2025

Karen Petrou: How Banks Can Beat Stablecoins

Shane Smith2025-06-30T09:17:37-04:00June 30th, 2025|The Vault|

Last week, Chair Powell mildly told the Senate Banking Committee that he favors a federal stablecoin framework without yielding to the temptation and saying what it should look like. This is doubtless because Mr. Powell is under such virulent attack in so many quarters that he wisely decided not to pick yet another fight with a President demanding speedy action. But, if pressed, I suspect Mr. Powell would agree with the startling conclusion in an unusually blunt report last week from the Bank for International Settlements:

Society has a choice. The monetary system can transform into a next-generation system built on tried and tested foundations of trust and technologically superior, programmable infrastructures. Or society can re-learn the historical lessons about the limitations of unsound money, with real societal costs, by taking a detour involving private digital currencies that fail the triple test of singleness, elasticity and integrity.

To be sure, one must parse more than a bit of central-bank speak to understand why the BIS is so worried. “Singleness” is a concept rarely spoken of when it comes to money, but it’s the entire point of having a fiat currency. Except when it’s counterfeit, a dollar is treated the same no matter how it’s obtained or from whom thanks to hard lessons learned in the 19^th century about “free banking” and the chaos it spawned.

The dollar-for-dollar reserve assets backing stablecoins as in the GENIUS Act legislation is designed to ensure singleness when it comes to ready exchange of …

25 06, 2025

FedFin on: Stablecoin Regulatory Framework

Arezou Rafikian2025-06-26T12:07:17-04:00June 25th, 2025|The Vault|

After extensive controversy and debate, the Senate has passed S. 1582, a bill designed to create the federal framework for dollar-denominated stablecoins subject to U.S. law advocates believe are essential to speed innovation, improve the payment system, protect the dollar’s status, and ensure U.S. leadership in cryptoasset policy. Opponents generally do not dispute these assertions about possible stablecoin benefits, but strongly object to asymmetries between how payment-stablecoin providers would be regulated compared to banking organizations even when it comes just to offering these instruments. Concerns are also raised about the extent to which stablecoins would compete directly with bank deposits and disintermediate the economy as well as the extent ….

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

23 06, 2025

Karen Petrou: How to Rewrite the Leverage Ratio

Arezou Rafikian2025-06-23T09:42:05-04:00June 23rd, 2025|The Vault|

In 2016, FedFin issued a paper urging a radical rethink of leverage capital standards. Good things come to those who wait. Still, why we had to wait so long is hard to fathom given the predicted, manifest systemic problems due to the leverage standards evident as early as 2019 and in the two systemic crises that followed in short order.

What to do? Revisiting rules he once refused to touch, former Fed supervisory-head Dan Tarullo last week argued for an end to the enhanced supplementary leverage ratio (eSLR), with this add-on charge for the largest U.S. banks replaced by higher risk-based standards And tougher treatment of Treasury holdings. Indeed, Mr. Tarullo opposes taking Treasuries, even just short-term ones, out of the leverage denominator, pressing also for continued inclusion of central-bank deposits. A lower SLR, he suggests, captures the risks of these obligations in concert with his proposed capital add-ons.But what risk to central-bank deposits really pose? If they are at the Fed, which holds the vast majority of U.S. central-bank deposits, then these funds are as liquid and robust as the Federal Reserve itself. If the Fed’s no good, then neither is the dollar and much, much else is wrong that even the toughest eSLR cannot fix.

Further, imposing a capital requirement on reserves held at the Fed makes it less likely that banks will be liquid in any form of run or market crisis. The banking agencies could of course again exempt reserves in a crisis just as they …

16 06, 2025

FedFin on: The Way Out via a Golden Arch?

Arezou Rafikian2025-06-16T16:36:45-04:00June 16th, 2025|The Vault|

The President’s Friday executive order and subsequent statements indicate that the President has taken a “golden share” in U.S. Steel as a condition for the long-delayed Nippon acquisition. Might this be the way the White House could maintain control of Fannie and Freddie while monetizing at least some of Treasury’s stake in the two companies? As we show here, it’s not easy, but it’s also not an impossible way to reconcile all the competing objectives sketched out so far by Bill Pulte and the White House….

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

16 06, 2025

Karen Petrou: Why Republicans Want the Fed’s Money

Shane Smith2025-06-16T09:23:03-04:00June 16th, 2025|The Vault|

In the iconic movie “Goldfinger,” a murderous thug with a deadly bowler hat chases James Bond around Fort Knox as our hero stops a maniacal plutocrat from making the nation’s gold stock go radioactive. Compared to current gold conspiracies, that almost makes sense. Both President Trump and Elon Musk, among others, have doubted the security of the nation’s gold supply on nothing more than the fact that they haven’t actually seen it. To the rescue last week rode several super-conservative Members of Congress, who have introduced a bill to force an “independent” audit – read not the GAO or even Treasury – of all the gold held by or entrusted to the U.S. Gold conspiracies have come and gone since at least 1974, but the heights reached now speak to profound, widespread distrust of the government even by those who run it. This paranoia isn’t limited to inert stockpiles. It pervades two of the nation’s three branches of government and even occasionally touches the third. Thus, just because something doesn’t seem to make sense doesn’t mean it won’t happen.

I bring this up because several responses to my memo a couple of weeks back said Congress would never cotton to a sharp reduction in the payment of interest on reserve balances (IORB) or to balances held in the U.S. by foreign central banks. “Fringe thinking,” or so I was told by friends at the Fed, thinking they believed they could easily dismiss without a second thought by reminding critics …

9 06, 2025

Karen Petrou: How to Fix Regulatory Capital? Think Big, Go Simple, Get Tough

Shane Smith2025-06-09T09:32:04-04:00June 9th, 2025|The Vault|

Anyone who was surprised by Miki Bowman’s ambitious agenda hasn’t been paying attention. The new vice chair for supervision on Friday reiterated much she’s said before about supervision and regulation, now also saying more specifically what she’ll do about it given that she’s in a position to do it. Much in her plan is heartening, but one proposal is break taking in both its simplicity and importance: Ms. Bowman wants to make the complex of big-bank capital rules make sense as a whole. Former Vice Chair Barr promised to do this when he was confirmed, but he instead proposed only to complicate the capital construct. Ms. Bowman might just put it right.

As we laid out when Mr. Barr promised a “holistic” capital policy, the current approach pulls in at least three directions, and that’s before one starts thinking about unintended consequences related to liquidity and interest-rate risk. First, there are the risk-based capital (RBC) standards designed to capture the credit risk of every asset and exposure, sometimes more than once based on which numbers come out how. Not content with that much complexity, Mr. Barr and other regulators in 2023 proposed a “dual-stack” approach to credit risk largely because, we concluded, they couldn’t make up their minds which one was right. Then there are standards governing market and operational risk – some forward-looking, some retrospective, and some stuck in the middle distance.

There are also leverage rules designed to capture assets deemed to pose no credit risk even though …

2 06, 2025

Karen Petrou: A New Trade War: Interest on Reserves

Shane Smith2025-06-02T09:16:29-04:00June 2nd, 2025|The Vault|

Clients will recall that, during his first term, Donald Trump nominated Judy Shelton, a frequent monetary-policy commentator, to the Federal Reserve Board. However, her nomination sparked outrage among Congressional Democrats and many pundits that doomed confirmation. Ms. Shelton nonetheless remains a trusted adviser to many with the President’s ear, making renomination and, this time, confirmation a strong possibility should Ms. Shelton still want a seat on the Board of Governors. We thus took notice when she last week posted an attack on the payment of interest by the Fed on balances held by foreign branches and agencies. She drew in part on another post adding foreign central banks to the complaint. This might seem a remote or even improbable concern, but so does much else in CEA head Stephen Miran’s proposal positing a “user tax” that’s now in the House reconciliation bill attacking foreign investors. Ms. Shelton’s complaint should thus be taken very seriously, especially given all the other demands to curtail interest on reserve balances (IORB).

Ms. Shelton finds that foreign branches and agencies get 42 percent of interest payments from the Fed, or about $78 billion based on total interest payments to banks of $186 billion in 2024. Rates now on IORB stand at about 4.4 percent – one of the very best deals on offer for super-safe, overnight funds. Another post calculates interest payments to foreign central banks at around $16.5 billion a year. In short, it’s a lot of money which the posts rightly say …

27 05, 2025

Karen Petrou: Making Liquidity Regulation Make Sense

Shane Smith2025-05-27T09:26:04-04:00May 27th, 2025|The Vault|

Although U.S. regulators remain determined to enact each rule as if it relates to no other, researchers have increasingly found that rules have cumulative and often conflicting purposes – see, for example, the sum total of bank rules which empowered nonbank financial intermediaries operating with impunity until they needed trillions in taxpayer backstops in 2020. Following a seminal Federal Reserve Bank of New York paper on the cumulative consequences – none good – of considering capital and liquidity rules in isolation, a new BIS paper considers the internal contradictions of consequential liquidity regulation and central-bank backstops. Now, if only bank regulators at home and abroad did the same.

The BIS paper looks at the push-pull evident in liquidity rules founded on expectations that banks should not use central-bank liquidity even though central banking is founded on the concept of providing liquidity to banks under stress. As all too evident in the 2023 crisis, liquidity compliance cannot ensure banks stand firm in a run, even as the Fed’s discount window opened with all the alacrity of an centuries-old casement. Solutions posed ever since have suggested stiffening the liquidity standards and ensuring discount-window operability, but each thread of this debate ignores the other. The BIS paper happily proposes a framework in which the two pillars of bank resilience under liquidity stress are considered together to craft a sensible benign-scenario liquidity rule along with an effective, disciplined backstop that minimizes moral hazard.

The BIS paper rightly is to avoid so stringent a build-up …