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.

15 09, 2021

FedFin on: GSEs Get a New, If Familiar, Gig

2021-09-15T17:44:41+00:00September 15th, 2021|The Vault|

As noted yesterday, Treasury and the FHFA pulled the Trump PSPA’s plug, although importantly and widely overlooked is that this is true only when it comes to near-term asset-purchase considerations.  Still, with this action atop all the others redefining Fannie and Freddie since Sandra Thompson took over, the GSEs are being reconfigured into agents of Administration policy in concert with being still more critical agencies for housing finance.

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

13 09, 2021

Karen Petrou: Are Federal Reserve Banks Forever?

2021-09-13T13:18:24+00:00September 13th, 2021|The Vault|

After my latest opinion piece appeared in Barron’s on Thursday, I was stunned by the virulence with which Barron’s readers — not exactly a bunch of Democratic Socialists — agreed with me not because of my reasoning, but because they believe the Fed in general and Jay Powell in particular are engaged in a sweeping conspiracy on behalf of the wealthiest global capitalists.  The new controversy over Reserve Bank president stock holdings only adds fuel to this fire.  Are Federal Reserve Banks forever?  Their history suggests maybe not.

Reserve Banks are creatures of 1913, created in concert with the Federal Reserve Board in Washington as part of the awkward compromise that persuaded those who feared a dominant federal banking powerhouse that the central bank would have roots outside the largest cities and thus be beyond the reach of New York’s powerful bankers.

This balancing act is in fact one reason the Board is headquartered in Washington, not New York, and also why the New York Fed is the most powerful among nominal equals when it comes to its fellow Reserve Banks.  The fundamental anachronism of the System is evident in its geographic footprint — a heavy concentration of Reserve banks up to Kansas City and St. Louis and then not a single Reserve Bank for all of the mountain and western states but the lone edifice still standing apart in San Francisco.

The ethics rules now at issue due to recent revelations are also artifacts of not just the Reserve …

8 09, 2021

FedFin on: Small-Business Lending Disclosures

2021-09-08T16:37:29+00:00September 8th, 2021|The Vault|

Turning again to a provision in the 2010 Dodd-Frank Act, the Bureau of Consumer Financial Protection has issued a sweeping proposal to implement small-business and small-farm lending disclosure requirements akin to those long required under the Home Mortgage Disclosure Act (HMDA).  Although the law focuses on lender reports to discern different loan-approval rates based on gender or ethnic/racial groups, the notice of proposed rulemaking (NPR) goes farther also to require extensive detail on loan amounts and pricing on approved loans a borrower chooses not to accept.  Data would be required from all but the very smallest bank and nonbank lenders.

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

7 09, 2021

Karen Petrou: The Coming Fair-Lending Fracas

2021-09-07T13:04:35+00:00September 7th, 2021|The Vault|

A week ago Thursday, I was honored to participate in a Congressional Black Caucus Foundation forum assessing the extent to which the Fed exacerbates U.S. economic inequality.  Views were mixed on that front, but several panelists stoutly condemned financial institutions for actively discriminating against people and communities of color and the Fed for allowing them to get away with it.  That won’t be the last we hear of this.

As our recent assessment of the latest mortgage data make clear, these allegations are not without merit.  That underlying factors are complex and sometimes include contradictory evidence does not belie the fact that data remain problematic, the industry is deeply distrusted, and the White House has made racial equity a top-priority Presidential action item.  First to what the data do and don’t show and then to what will be done about them unless some of the things that can instead be done are quickly done.

The latest HMDA data show troubling denial disparity ratios (DDRs), interest-rate, and cost disparities when minorities are compared to whites.  The DDR for Blacks was 2.6:1, rates were .125 percentage points higher, and the cost of a loan was 38% more.  Black credit scores were the lowest among demographic groups (690) and loan amounts were the smallest, but these differences are still striking.

Little noticed but even more puzzling are the DDRs for Asians versus whites.  Asian DDRs were 1.4:1 even though credit score and loan amounts were the highest of all demographic groups. …

27 08, 2021

FedFin on: Green Risk-Based Capital Requirements

2021-08-27T17:36:54+00:00August 27th, 2021|The Vault|

House Democrats are considering legislation to mandate a punitive capital construct for bank and, in some cases, also to certain nonbank exposures to companies with fossil-fuel links.  A still higher capital surcharge would also govern large-BHC activities that may increase greenhouse-gas emissions, a criterion bank regulators would have to define ahead of deciding what surcharge to set.  This surcharge appears to contemplate a capital requirement on some of the so-called “Scope 3” climate exposures and thus could prove particularly problematic given ongoing methodological uncertainties in this area.

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

26 08, 2021

FedFin on: Climate-Risk Stress Testing

2021-08-27T17:38:38+00:00August 26th, 2021|The Vault|

Legislation from House and Senate Democrats would force the Federal Reserve quickly to implement mandatory stress testing for all large banking organizations and large nonbanks judged by asset size if they are principally engaged in finance.  The measure attempts to address concerns about climate-risk uncertainties in areas such as data, models, and comparability by convening expert groups.

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

23 08, 2021

Karen Petrou: Why Facebook Faces a Comeuppance

2021-08-23T16:45:19+00:00August 23rd, 2021|The Vault|

There are occasional, if stunning, lightning bolts from corner offices demonstrating a profound disconnect between a CEO’s understanding of his firm’s role in the world and what pretty much everyone else thinks.  In 2009, it was CEO Lloyd Blankfein saying Goldman Sachs did “God’s work.”  Now, it’s David Marcus, the CEO of Facebook’s digital-currency project, telling the New York Times that Facebook faces “unfair resistance” as it enters the global payment system because it’s nothing more threatening than a “challenger.”  Few outside the Valley still think of tech-platform companies as scrappy, inspired outsiders.  But, even if they do, key public officials don’t.  That’s why the raft of new rules I outlined last week is for sure.

How can I be so certain that crypto and fintech firms – especially big ones – will meet the regulatory reaper?  For one thing, every U.S. public official who can make this happen says it’s going to happen.  For another, a disconnect between external reality and internal illusion increases the odds of a rude awakening.

Goldman Sachs had its in the reforms following the great financial crisis; tech companies are facing theirs in President Biden’s new competition policy and a set of tough-minded antitrust regulators sure to act no matter how bogged down Congressional reform may be.  And, once the Financial Stability Oversight Council, the Fed, the OCC, the SEC, CFTC, FinCEN, and the CFPB get going, they’ll ride roughshod.

The indisputable fact is that Facebook is no challenger to anything other …

16 08, 2021

Karen Petrou: The New Rules for the Crypto Game

2021-08-16T16:06:04+00:00August 16th, 2021|The Vault|

It should have been self-evident that it made sense to bar crypto companies from evading AML and tax law or from helping their customers do so.  Still, the infrastructure bill almost toppled as claims flew that the proposal would doom the U.S. to an increasingly dysfunctional analog future.  We shall see what comes of this provision now that the infrastructure bill heads to the House, but it epitomizes the challenges that lie ahead for legislation from Sen. Warren and other Democrats seeking to govern crypto-finance.  Ambitious crypto legislation will stall in this contentious Congress absent a crisis that focuses its fleeting attention.  Thus, the keys to crypto’s kingdom lie in the regulators’ hands.  These will be busy.

First to what bank regulators will do.  As I told the American Banker, the OCC may well resume crypto charters but new crypto charters will be very, very different than those approved by Acting Comptroller Brooks.

For one thing, any stablecoin in any national-bank charter or, for that matter, even any stablecoin facilitated by  a national bank will now need to be fully reserved and that means fully, not sort-of as is clearly the case with Tether, Coinbase, and many others that simply backed their promises of stability with whatever best suits their short-term profitability.

The OCC will do so now secure in the knowledge that the FSOC stablecoin review recently ordered by Secretary Yellen will demand 100%, sterile reserving across the spectrum of stablecoin products and the SEC and …

11 08, 2021

FedFin: En Garde!

2021-08-11T14:57:33+00:00August 11th, 2021|The Vault|

As we briefly noted yesterday, the CFPB released a report assessing how the largest servicers handled borrowers over recent, chaotic months. Identifying wide dispersion in industry practice, the Bureau warns of enforcement actions to come even as it continues to assess the “outliers.”

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

10 08, 2021

FedFin on: LIBOR Transition

2021-08-10T17:09:27+00:00August 10th, 2021|The Vault|

The House Financial Services Committee has reported H.R. 4616, a bill designed to prevent the chaos feared when the use of the LIBOR benchmark ceases for legacy contracts that lack language authorizing reliance on an alternative, “fallback” rate.  The measure in no way obviates the obligation U.S. financial institutions have to various regulators to abandon LIBOR where fallback language exists or in new contracts.

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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