The Vault

20 02, 2025

FedFin on: Debanking Prohibition

Arezou Rafikian2025-02-20T10:46:10-05:00February 20th, 2025|The Vault|

In concert with other efforts to prevent debanking, two Republican senators have introduced legislation to bar insured depository institutions from certain government contracts if the IDI or its affiliate refuses to do business with lawful enterprises they dislike on what the bill describes as social-policy grounds. The bill is very brief and thus does not provide an administrative framework for implementation in areas such as determining which entities banks inappropriately dislike and which contracts are to be barred.

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

19 02, 2025

FedFin Assessment: What Happens When OMB Runs Bank Regulation

Arezou Rafikian2025-02-19T15:40:10-05:00February 19th, 2025|The Vault|

In this report, we build on our earlier alert regarding the President’s executive order (EO) bringing federal financial regulation and supervision directly under the Executive Branch. Although some commenters have suggested this will have little material impact given pending Trump nominees to key posts, we expect it will at the least slow and in many cases alter what would be largely technical decisions by moving them into the often-viral political environment in ways far beyond changes now effected through the Congressional Review Act. Further, areas where the banking industry seeks new rules – e.g., a rewrite of current capital standards taking the best of the 2023 proposal, cryptoasset certainty, debanking, NBFI constraints from the SEC/CFTC – could be complicated by White House or OMB demands based on little knowledge of financial markets and bank operations, along with political pressures rarely evident in the insular realm of banking-agency rulemakings….

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

18 02, 2025

Karen Petrou: The Fed’s Sudden GSIB Jihad

Shane Smith2025-02-18T09:06:45-05:00February 18th, 2025|The Vault|

Even as he stoutly assured Congress last week that the Fed is staunchly apolitical, Chair Powell acknowledged several post-inauguration epiphanies. These include sudden recognition of the supplementary leverage ratio’s impact on Treasury-market liquidity and the importance of cost-benefit and cumulative regulatory-impact analyses along with disavowal of all things climate risk. Another Fed U-turn relates to merger policy, but this escaped broad notice. It shouldn’t have – bank-merger policy is due for a major makeover and that matters.

In a detailed FedFin analysis of banking-industry competition last year, we looked at current market realities and years of research showing that the dramatic erosion in U.S. bank charters is not due to voracious big-bank gobbling of small-bank charters. Instead, it’s the result of inexorable technological advances combined with an array of new rules that challenge the ability of all but the very biggest banks to achieve the economies of scale and scope now vital to charter survival. Many new rules, warranted or not, have also had the inexorable effect of enabling regulatory arbitrage, empowering massive nonbank competitors who easily quash vulnerable companies unable to match technological prowess and network effects.

Sudden Fed policy reversals did not escape Republican notice, with Senate Banking Chair Scott commenting acidly about Fed “flip-flops.” But, unless Members of Congress make Jay Powell angry – and that’s hard to do in public – nothing the Fed chair says in public is offhand even if it seems that way at the time. During last week’s hearings, Mr. Powell changed …

13 02, 2025

FedFin on: Debanking Prohibition

Arezou Rafikian-12025-02-14T16:41:33-05:00February 13th, 2025|The Vault|

Reflecting broad political agreement that debanking should be prevented, a senior Senate Republican has introduced legislation that would effectively terminate a bank’s ability to do business upon any finding that it had denied fair access to anyone within its full range of retail and wholesale customers within the geographic areas the bank chooses to serve. The bill’s definition of fair access is expansive, for example permitting pricing differentiation only based on “proportionate” considerations that do not appear to consider factors such as a product’s or customer base’s relative profitability. Banks would likely err on …

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

10 02, 2025

Karen Petrou: Payment-System Politics and the Havoc It Wreaks

Shane Smith2025-02-10T09:16:53-05:00February 10th, 2025|The Vault|

Any bank that granted even just “read-only” access to its payment services with as few controls as the U.S. Treasury would and should be harshly sanctioned by its supervisors. Who steps in to ensure the smooth functioning of the multi-trillion Treasury payment system? Do any of Mr. Musk’s operatives know what would happen if they pulled the wrong plug and disabled critical payments on U.S. debt or to American citizens such as those for Social Security? And, what if they don’t care if they disrupt payments if they believe this suits a political purpose?

When I wrote my memo last week hoping that these fears are alarmist, we didn’t know then what we know now about unlimited payment system access by a key DOGE warrior since named to head the Fiscal Service and the youth, inexperience, and dubious histories of the payment-system teams. Do any of them know that payment-system finality is an essential element of payment-system credibility and financial-system stability or do they view the payment system as a video game with a prize for the team member who finds the target that rings the loudest political bell? Do any of these Trump appointees know that making even a little mistake could be catastrophic in a system handling trillions of dollars in billions of transactions or are they looking for viral moments on encrypted social-media platforms so they become the envy of like-minded young men?

As FedFin noted last week, what Congress and the press took as a pledge …

3 02, 2025

Karen Petrou: Why Playing with Treasury’s Payment System is Playing with Fire

Shane Smith2025-02-03T09:04:54-05:00February 3rd, 2025|The Vault|

In just two weeks, Donald Trump has done something no one ever expected which he may not even intend: overturning the axiomatic expectation that a full-faith-and-credit obligation of the United States government is the best there is. Now, the U.S. will honor its commitments only if it still likes them. Anything that upends financial-market axioms stokes systemic risk and stoking is now so heated that it threatens even the multi-trillion Treasury market on which U.S. prosperity and global financial stability depend.

Is this alarmist? Yes, but then who would have thought the White House would issue an edict freezing all federal funding or maybe just some federal funding even though more than just some federal funding was frozen? Who would have thought the U.S. would cease all but a very few foreign-aid payments including those with other sovereign governments no matter which geopolitical or humanitarian interests are sacrificed? Even if some of this was audible on the campaign trail, none of it was thinkable to anyone counting on constitutional checks and balances along with a sound sense by someone in the White House of second-order effects.

It is in this context that one more Trump Administration action is particularly worrisome and why I fear even for the once-sacrosanct promise that the U.S. will not just honor its commitments, but also pay its bills. Elon Musk’s acolytes at DOGE have now been granted unfettered access to the Treasury payment system. Why?

Maybe it’s just curiosity or maybe DOGE wants to update …

27 01, 2025

Karen Petrou: Why It is Hard to Damn Debanking

Shane Smith2025-01-27T09:07:41-05:00January 27th, 2025|The Vault|

As we noted last week, one of the next executive orders flying off the resolute desk in the Oval Office is likely to demand an end to debanking. In sharp contrast to the executive orders eviscerating DEI, the independent banking agencies need not follow a presidential debanking order. This affects their independent safety-and-soundness powers unlike personnel policy subject to the Executive Branch. But, independent or not, the banking agencies are nothing if not politically aware and at least two of the three agencies are also now politically-aligned with the president. It’s thus not a question of whether there will be anti-debanking standards, but rather what they do to banks trying to make a buck.

Wanting debanking doesn’t mean that getting debanking will be easy or inconsequential to the thousands of banks that never consciously debanked a dollar’s worth of deposits. One of the thorniest debanking problems derives from the fact that banks and other financial companies quite properly make business decisions based on qualitative factors, not just the quantitative ones on which anti-debanking efforts relied. Some of these qualitative factors are quite simply what makes some bankers better bankers than other bankers when it comes to decisions about whom to serve how based on expectations of future profitability. As history all too often proves, strategic insights are often at least as subjective as quantifiable.

Banks have also long chosen not to serve complex businesses that require costly underwriting and risk-management capacity unless they have the economies of scope and scale …

23 01, 2025

FedFin on: Consumer-Data Monetization

Arezou Rafikian-12025-01-24T16:55:52-05:00January 23rd, 2025|The Vault|

Shortly before the inauguration, the CFPB released a request for information (RFI) on how consumer-finance companies handle consumer data, focusing in particular on data monetization. As an RFI, this request is not directly subject to President Trump’s order affecting pending rulemakings, but a new CFPB director could withdraw or revise it. Should that not be the case, the RFI could lead the new director to reopen the agency’s open-banking rule and/or mandate new privacy opt-out notices for nonbanking entities offering consumer financial services…

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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21 01, 2025

FedFin on: Elimination of the Mortgage Payment Tax Deduction

Arezou Rafikian-12025-01-21T13:59:19-05:00January 21st, 2025|The Vault|

The long list of budget options for reconciliation released by House Budget includes two with direct GSE impact as well as one – elimination of the mortgage-payment tax deduction – that would pack a major punch across the sector and is sure to be as vigorously opposed as usual. The list thus also includes a less painful and less deficit-beneficial reduction in the principal amount eligible for payment deductions from $750,000 to $500,000….

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

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21 01, 2025

Karen Petrou: Will There Also be a Financial Firestorm?

Eliza Allen2025-01-21T13:57:41-05:00January 21st, 2025|The Vault|

I live two short blocks from Rock Creek National Park, one of D.C.’s hidden wonders. As befits a national park, Rock Creek is very large and densely wooded, but no one has thought much about fire hazard until last summer’s drought led to some significant brush fires. I thus asked a forestry professor next to whom I happened to be seated waiting for a plane if those of us living near Rock Creek Park should worry. Instantly and unequivocally, his answer was emphatically, “Yes.” I’m still not sure what I or any of us now at risks we never contemplated can do, but I’m even less sure that what can clearly be done to reduce financial-system risk due to natural disasters will be done until after it’s too late.

Is risk really this frightening? A report last week from the Financial Stability Board lays out what it believes to be plausible, yet-severe scenarios demonstrating that the extent to which property insurers and reinsurers are able to absorb natural-disaster risk determines whether a disaster leads to systemic financial risk. In the U.S., this is a thin reed.

We know that the National Flood Insurance Program is woefully unable to address the scale of recent hurricanes and inundations. A treasury study last Friday shows that private insurance is in at least as much disarray. Homeowners in the highest climate-risk zip codes pay premiums about eighty percent higher than those in the lowest-risk codes and have far, far higher non-renewal rates. Fifteen of …