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.

22 06, 2021

FedFin on: Anti-China Sanctions

2021-06-22T20:46:32+00:00June 22nd, 2021|The Vault|

The Senate has passed by a wide margin legislation taking an array of actions to counter the threat now seen to be posed by the People’s Republic of China.  Among these are optional and mandatory sanctions against a far wider range of targets linked directly or indirectly to China engaging in or benefiting from “malign” activities.  Far broader use of sanctions would create additional legal, reputational, and even charter risk for banks and other financial institutions doing business in the U.S. or with U.S. financial institutions.  New law makes it possible to, when such sanctions are invoked, impose them extraterritorially by virtue of any correspondent relationship with a U.S. bank by the parent company even if that correspondent relationship is not otherwise within the scope of U.S. law.

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

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21 06, 2021

Karen Petrou: Why Crypto Rules Could Prevent Crypto Chaos

2021-06-21T15:39:00+00:00June 21st, 2021|The Vault|

FedFin’s in-depth analysis of the Basel Committee’s cryptoasset proposal kicked up quite a fuss. The major point of contention is our conclusion that the new approach might recast crypto in favor of regulated banks. Some said instead that the new capital requirements are punitive to the point of prohibitive. However, a close read of the consultation persuades me that, despite the need for refinements in several critical places, crypto counterparties outside the lure of illicit finance or high-flying speculation will prefer doing business with a bank and that the new rules make it possible for banks to do business with them. After all, each of us can always give our money to any person or business to hold for us; we instead deposit our money in the bank because, thanks in good part to FDIC insurance and the rules it requires, we know we’ll get our money back.

Stripped to its capital essentials, the consultation creates two classes (inexplicably called groups) of crypto assets. Those which are tokenized versions of other assets – e.g., fiat currency, a mortgage loan – come under risk-based and leverage capital rules largely comparable to those now applied to the underlying asset. Although there are additional risk-management considerations, the difference between a tokenized-digital and a “real” asset is likely a capital and liquidity wash.

Digital assets more like stablecoins get similar like-kind capital treatment, but tough standards also apply to ensure that the underlying real asset is always there and always worth what the digital …

16 06, 2021

FedFin on: A Wrench in the Crypto Works

2021-06-17T15:15:05+00:00June 16th, 2021|The Vault|

As detailed in our new in-depth report, the Basel Committee is proposing a new regulatory framework for bank exposures to cryptoassets that will influence not only what banks do in this critical arena, but also what the GSEs can do and thus what happens to the digital mortgage.  If Fannie and Freddie come under like-kind capital and liquidity rules related to their crypto exposures, digital adoption of any asset with crypto components will be slower but the system could well be safer.

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

15 06, 2021

The Hill, Tuesday, June 15, 2021

2021-06-15T19:51:27+00:00June 15th, 2021|The Vault|

Pressure builds for Fed chief as inflation surges
By Sylvan Lane

The Federal Reserve is facing growing scrutiny from Wall Street and Washington over its cryptic plans to eventually pull back stimulus from an economy that’s starting to struggle with inflation. Fed watchers are eagerly seeking clarity from Chairman Jerome Powell about when the central bank aims to pare down the monthly purchases of bonds meant to dampen the economic blow of COVID-19…And other critics of the Fed’s approach say allowing near-zero interest rates and steady bond purchases to add further fuel to soaring stock prices will only deepen historically high economic inequality. While easy monetary conditions are intended to fuel job creation and economic activity, they can also encourage more speculative forms of investment since low interest rates lead to little growth for savers. “The new policy has been unintentionally but powerfully unequal, and a spike in inflation will be very powerfully anti-equality,” said Karen Shaw Petrou, author of “Engine of Inequality: The Fed and the Future of Wealth in America.” “It’s continued increase in its portfolio combined with rates that are negative in inflation-adjusted terms just drives not only a tremendous amount of wealth inequality, but also distortions in productivity.”

https://thehill.com/policy/finance/558405-pressure-builds-for-fed-chief-as-inflation-surges?rl=1

15 06, 2021

FedFin Analysis: Bank Crypto Safety-and-Soundness Standards

2021-06-17T15:13:27+00:00June 15th, 2021|The Vault|

Advancing some of the most controversial ideas in a 2019 discussion paper,  the Basel Committee has now formally proposed capital, liquidity, risk-management, and supervisory standards it believes nations should apply to bank cryptoasset exposures.  Global regulators have adopted a cautious approach that, despite high-cost proposals for higher-risk cryptoassets, may create a framework in which banks can profitably engage in a wide array of cryptoasset activities and thus expand cryptoassets with the stability and liquidity essential for many of the uses now proposed for them.

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

14 06, 2021

Karen Petrou: A Little-Noticed Rule and How It Could Redefine Mortgage Finance

2021-06-14T13:43:50+00:00June 14th, 2021|The Vault|

Although it seems technical, the question of what’s a qualified mortgage (QM) defines which mortgages make up most of the U.S. market.  This, though, is well known after years of QM squabbles.  What many have forgotten is an even bigger question:  what’s a qualified residential mortgage (QRM).  This term defines which mortgages can be securitized without forcing the originator to hold “skin in the game” – i.e., a portion of the loan on its portfolio.  Given the transformation of U.S. mortgage finance into a business dominated by nonbanks without balance sheets, a problematic QRM would quash a whole lot of mortgage finance no matter the QM.

The banking agencies, SEC, FHFA, and HUD finalized the QRM in 2014 after two proposals and a whole lot of controversy.  The problem crafting the QRM was the wide divide between MBS investors – who wanted tough credit-risk retention to ensure incentive alignment – and lenders who wanted none of this.  Policy-makers were split, but the balance ultimately came down in favor of the current QRM because of concerns so soon after the great financial crisis that housing finance couldn’t recover without a free pass to the secondary market.  Private-label securitizers pushed for equal treatment with the GSEs if private credit enhancements or other capital stood ahead of the investor in a QRM, but the reputation of private mortgage insurance (MI) was badly sullied by the crisis and there was little faith in PLS or their ratings after the subprime-MBS debacle.  As a …

4 06, 2021

Karen Petrou: The Inclusion Illusion

2021-06-04T16:34:05+00:00June 4th, 2021|The Vault|

Everything’s coming up inclusive these days.  Indeed, any policy anyone wants to pass is inevitably dubbed inclusive just as any pair of jeans is said to be slimming.  However, genuine inclusion isn’t any easier than a fashion silhouette.  Thus, to understand which inclusiveness claims are compelling and thus which policies warrant pursuit, one has to look past the label to see if it really fits.

As just one example – policies on CBDC and the payment system – makes clear, any judgment about inclusion must start with an understanding of who’s being included into what on which terms.  Just because something is ubiquitous – a major rationale for both CBDC and Fed ownership of the payment system – doesn’t mean it’s inclusive.  Think for example about check-cashing stores or payday lenders – they’re often ubiquitous in the areas seen most as in need of inclusion, but this ubiquity of course comes at a high cost to economic equality by virtue of the price demanded for these financial services.

Ubiquity is anti-inclusive if it comes at cost to those using a service, those with an idea for a competing and better service, or those for whom the seemingly-ubiquitous offering is inaccessible due to barriers erected by income, age, or ability.  That something is present for most people and even cost-effective for them still doesn’t mean it’s ubiquitous unless it’s also right for the most vulnerable and present for those who need it most.

Indeed, ubiquity can be achieved at considerable cost …

25 05, 2021

FedFin: U.S. Financial Climate-Risk Policy

2021-05-25T14:55:03+00:00May 25th, 2021|The Vault|

President Biden has issued an executive order (EO) setting in motion a series of administrative actions designed to reduce both climate risk in the financial sector and in any way financial companies make it worse.  Mandatory action by HUD and other agencies is also required to redesign federal mortgage backstops.  These could have significant impact, but the White House otherwise has limited authority over U.S. financial regulation because all of the key agencies responsible for it are independent and thus not subject to direct mandates via an EO.

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

21 05, 2021

Karen Petrou: Inequality, Inflation, and the Mess We’re In

2021-05-21T15:56:01+00:00May 21st, 2021|The Vault|

In a ground-breaking article earlier this week, Jon Hilsenrath of the Wall Street Journal showed that one can’t even guess at the outcome of unprecedented accommodative monetary policy without factoring also the impact of fiscal stimulus unseen since the Great Depression.  As I told Jon, these two juggernauts are not only steaming towards each other, but plowing ahead regardless of seas made stormier by economic inequality at ever steeper heights.  The Fed for example thinks inflation is “transitory” because it measures inflation without regard to income inequality.  When inflation is understood as purchasing power – the measure the law demands – it’s clear not only that inflation isn’t transitory, but also that it’s very, very worrisome.

Much in current monetary policy is premised on what economists call the marginal propensity to consume – i.e., the engine of want that powers demand that then promotes employment and growth or, if unduly over-heated, sparks inflation.  The Fed assumes to this day that interest rates drive decisions about how to use discretionary income, but the inexorable vise of income and wealth inequality means that now only upper-income households have this marginal propensity and most of them have more than enough already so their propensity is small even if their margin is large.  In sharp contrast, low-, moderate-, and middle-income families do the bulk of U.S. consumption but they have little capacity to increase or shrink it in response to changing rates because most of them live paycheck to paycheck.  Thus, when prices go …

20 05, 2021

FedFin: The Meaning of Mortgage Forbearance

2021-05-20T15:24:23+00:00May 20th, 2021|The Vault|

Using its formidable trove of non-public data, the Federal Reserve Bank of New York has released a series of staff reports assessing the status of mortgage forbearance, concluding that forbearance has ameliorated the negative impact of the pandemic for borrowers (if not exactly for servicers and investors) but that serious-delinquency levels akin to the Great Recession still appear likely as forbearance ends.

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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