The Vault

21 04, 2025

Karen Petrou: The Fed Just Puts Ribbons on Rags

Shane Smith2025-04-21T09:14:50-04:00April 21st, 2025|The Vault|

Four months after announcing plans for minimal changes to its stress tests, the Fed last Thursday screwed up its courage and proposed a couple of them. The remaining, still-small changes will come after the Fed rests up, but none of this seemingly-strenuous effort addresses the fundamental problem with both capital regulation and the testing designed to ensure it suffices: none of these rules make total sense on its own and all of them taken together are a cacophony of competing demands and ongoing collisions with other standards. Prettying up the stress-test rule is thus only putting ribbons on a ragged assemblage of ill-fitting pieces in clashing colors with large, large holes.

Now-ousted VCS Michael Barr promised a “holistic” capital construct during his 2022 confirmation hearings, but he nonetheless clung tightly to one-off rulemakings without any cumulative-impact analysis. Mr. Barr thus opposed last week’s stress-test changes, but for all the wrong reasons. He thought they went too far; in fact, they don’t go anywhere near as far as they could and should.

The new stress-test proposal most substantively says that banks will henceforth be judged by a three-year rolling average of their tested capital levels, rather than on the current, volatile annual schedule. But, averaging numbers that don’t make sense tells one nothing about the utility of each test. Think about a household with two chihuahuas – average dog weight about ten pounds. Next year, a Labrador romps in, and the average goes up, but the yard can still hold three …

17 04, 2025

FedFin on: Antitrust Policy

Arezou Rafikian-12025-04-17T16:29:07-04:00April 17th, 2025|The Vault|

As required by an executive order (EO) from President Trump mandating both review and then repeal of any rules that adversely affect competition, the FTC is seeking public comment on which rules to target and whether these standards could be modified or must be rescinded to meet the President’s goals. This process will clearly invite new scrutiny of the bank-merger process, also likely to lead to comment from banking organizations seeking relief in areas such as de novo chartering requirements and access to brokered or reciprocal deposits….

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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14 04, 2025

Karen Petrou: The Fed Has Given Itself Nothing But Bad Choices

Shane Smith2025-04-14T09:13:54-04:00April 14th, 2025|The Vault|

Much has been written of late about the pickle in which the Fed finds itself due to the President’s quixotic trade war. The Fed is indeed facing a dilemma setting monetary policy, but it confronts a Rubik’s Cube trying also to ensure financial stability. The reason: the more the Fed fights inflation, the less it can secure the financial system and the more it is forced to secure the financial system, the less able it will be to conduct monetary policy. This vise results from the Fed’s huge portfolio, yet another example of why the Fed should have reduced its portfolio as quickly as possible after both 2008 and 2020. Since it didn’t, it now has only bad choices if Treasury-market illiquidity turns toxic.

This negative feedback loop is the result not only of the Fed’s cumbersome trillions, but also of its unwillingness to make another hard decision: meaningful action to address identified systemic risks. Had the Fed heeded its own warnings going back to 2020, it might have done something to reduce Treasury-market dependence on high-risk, leveraged hedge funds. To be fair, the Fed cannot directly regulate hedge funds and the SEC lacks prudential authority, but both agencies had lots of ways to curtail systemic risk long before basis-trading hedge funds came to hold at least $1 trillion in assets.

So far, hedge-fund deleveraging is proceeding in a reasonably-ordered way, but risks such as these have a bad habit of cascading. Jamie Dimon already anticipates this, but he …

7 04, 2025

Karen Petrou: Why Regulators Will be Flat-Footed if Bad Now Turns Soon to Worse

Shane Smith2025-04-07T09:15:06-04:00April 7th, 2025|The Vault|

One of the comforts with which bank regulators will doubtless console themselves after last week’s market rout is that the largest U.S. banks have the capital not only to withstand this, but also the probable, profound consequences of the President’s punitive tariffs. However, because U.S. regulators mismeasure capital resilience, this confidence is misplaced. Using the economic-capital approach I recently endorsed shows that, while U.S. banks still are strong, they are not fortresses.

FedFin recently analyzed two new studies demonstrating that geopolitical risk is hard on bank solvency. To this, one of course can say that there’s no real-world need for exhaustive studies of dozens of countries over decades – common sense buttressed by history makes this all too clear. These hard lessons and the data that describe them do, though, make clear that it’s more than worth revisiting the United States after the Smoot-Hawley tariffs to get a sobering idea of the negative feedback loop between geopolitical risk, macroeconomic hazards, bank vulnerability, and – back to the beginning, geopolitical risk. Any talk of the 1930s is alarmist and also inapplicable in numerous respects, but it is the most pertinent example of geopolitical risk over the past century and thus demonstrates the need now to be very, very careful – not something this White House appears to be good at.

Economic-capital measures are a more robust platform to assess bank resilience than regulatory capital and are thus of particular pertinence at this dangerous moment. Regulatory-capital measurements are so complex and often …

3 04, 2025

FedFin Assessment: Will There be Banking Battles in This Trade War?

Arezou Rafikian2025-04-03T16:37:22-04:00April 3rd, 2025|The Vault|

In this report, FedFin provides its first assessment of how the sweeping tariffs on trade-in-goods set last night by the White House are likely to affect financial-services firms. We address first-order effects from trade-in-goods disruptions and resulting macroeconomic consequences as well as the extent to which this trade war – and it’s already a trade war – may spread to trade-in-services that disrupt the course of cross-border finance, transborder data flows, and even financial stability….

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

31 03, 2025

FedFin on: Stablecoin Regulatory Framework

Arezou Rafikian2025-03-31T13:07:30-04:00March 31st, 2025|The Vault|

The chair of the House Financial Services Committee, Rep. French Hill (R-AR), the Digital Asset Subcommittee’s chair, Rep. Bryan Steil (R-WI), eight other Republicans and three Democrats have introduced House legislation to create a long-awaited federal framework for dollar-denominated payment stablecoins. The bill differs substantively from Senate language, especially with regard to the scope of federal authority and the extent to which stablecoins might come to supplant bank deposits. However, the bills are similar in many respects and are likely to become still closer as House and Senate consideration continues ahead of final agreement and enactment into law later this spring….

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

31 03, 2025

Karen Petrou: The President Ditches the Dollar

Eliza Allen2025-03-31T10:49:46-04:00March 31st, 2025|The Vault|

Given the controversies aroused by many of last week’s executive orders, it’s understandable that those redesigning Treasury’s payment system generally escaped notice. They shouldn’t. On purpose or not, President Trump has mandated that digital currency henceforth counts along with the dollar as U.S. fiat currency. That is a very, very big decision with consequences far beyond the ostensible goal of speeding Treasury payments and, yet again, ending waste, fraud, and abuse.

As I laid out in my book, there is nothing preordained about the dollar serving as the U.S. “fiat” currency. The medium of exchange a sovereign demands to honor its obligations is the fiat currency, but nothing forces the citizenry to accept it if the sovereign state is weak, the fiat currency is of dubious value, or options such as gold – the centuries-old go-to or a digital alternative – are better. As the U.S. gained economic power at home and abroad, the fiat currency Lincoln selected to fund the Civil War – the dollar – came to dominate U.S. transactions, especially those with the federal government. Now, the dollar is the dominant fiat currency not only at home, but is also the reserve currency around the globe. This “exorbitant privilege” is preordained by the United States; it was earned.

Now though, the U.S. is stepping back from the once “almighty dollar.” The President said it will accept alternatives to the dollar for tax and all other payments to and apparently also from the Treasury. The executive order …

26 03, 2025

FedFin on: Trump Orders Improve Federal-Payment Efficiency, Increase White House Control

Arezou Rafikian2025-03-26T15:52:28-04:00March 26th, 2025|The Vault|

As noted, the President yesterday issued two executive orders demanding significant change to the federal payment system. In this report, we assess the financial-market and banking-system implications of the orders, one of which emphatically states that nothing done to enhance digitalization may be construed to authorize a central bank digital currency. The purpose of the orders is to reduce fraud, with the Administration saying that GAO has calculated annual federal losses due to fraud to be as much as $521 billion, some of which is doubtless independent of payment-system operations……

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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24 03, 2025

FedFin on: Will the Sovereign Wealth Fund Buy Scorched Earth?

Arezou Rafikian-12025-03-24T15:12:07-04:00March 24th, 2025|The Vault|

In this report, we do our damnedest to make sense of what’s been wrought at Fannie, Freddie, and FHFA in the few days since Bill Pulte took charge and Treasury Secretary Bessent mused about folding the GSEs into the sovereign wealth fund….

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

24 03, 2025

Semafor, Monday, March 24, 2025

Arezou Rafikian-12025-03-25T13:35:57-04:00March 24th, 2025|The Vault|

Treasury’s play for regulatory control puts it on collision course with Fed

Eleanor Mueller and Rachel Witkowski

Treasury Secretary Scott Bessent’s play for more control over US banking regulators, including the Federal Reserve, is about to enter a contentious new phase. The Treasury Department is drafting recommendations for streamlining banking regulators like the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation, three people familiar with the process told Semafor — after concluding that the agencies and their workers likely can’t be merged without a green light from Congress….“There are two ways to consolidate federal bank regulation. First, you can change the law,” Karen Petrou, co-founder of Federal Financial Analytics, wrote in a recent note to clients. “The other way is for one federal entity to assert all the power it has under law, and maybe more simply to take de facto charge of significant Fed, OCC, and FDIC supervisory and regulatory policy. “Secretary Bessent has now made it clear that the Trump Administration will open Door Number Two,” Petrou added. Bessent’s plan builds on a recent order Trump signed directing the central bank and other independent agencies to submit regulations to the Office of Management and Budget for review, according to three other people familiar with the secretary’s thinking.

https://www.semafor.com/article/03/24/2025/treasurys-play-for-control-over-regulators-puts-it-on-collision-course-with-fed

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