The Vault

Following much talk about the need to update Community Reinvestment Act (CRA) rules since this was last done in 1995, federal banking agencies have finally agreed on a proposed redesign of standards essential to banks that wish to expand or acquire as well as those seeking strong community ties and the policy and political benefit these afford.  Much of the complexity in the NPR results from the agencies’ decision to allow only partial credit for activities (e.g., mortgages) largely assumed in the past…

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As we noted last week, the federal banking agencies sighed a mighty sigh and heaved up a massive inter-agency proposal rewriting decades-old standards detailing which activities earn the Community Reinvestment Act (CRA) points essential for any bank’s strategic objectives and national reputation.  As discussed below, the new proposal is lengthy, complex, and in some cases analytically daunting or flat-out confusing.  Still one critical conclusion is clear…

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On Thursday, the Washington Post included an article on all the ways in which inflation hurts middle-income families, the acute shortage of baby formula, and the cooking-oil shortage’s cost impact in places ranging from a D.C. shop selling doughnuts to sub-Saharan Africa.  Other articles chronicled stablecoins’ instability even as stock markets wobbled precariously above going so deeply into correction that investors are not just chastened, but also cudgeled.  The same day, Chairman Powell won his second term by a wide margin even as he told Marketplace that he couldn’t promise a soft landing, didn’t mean to commit the FOMC to only fifty basis-point hikes, and knows how hard inflation hits for most households while being unsure that the Fed can do much about it.  What markets make of this muddle remains to be seen by those not too faint of heart to look.  What I know it means is that a White House under acute political pressure will ultimately do its best to transfer blame from 1600 Pennsylvania Avenue to 20^th and Constitution at considerable cost to coherent policy.

One might discount my prediction of a political reckoning for the Fed by pointing to President Biden’s stout defense of his central bank last week when he tried to show the nation how much he was doing to quell inflation.  But a careful read of Mr. Biden’s statements shows a focus more on the Fed’s independence than on its skill.  So far, Secretary Yellen has persuaded White House …

In this report, we assess the new Federal Reserve financial-stability report. Secretary Yellen is also testifying now about systemic risk and sure to get questions on the Fed’s conclusions. We will shortly send you an in-depth report on this hearing, but key to the Fed’s report is a more cautious, but still sanguine outlook. For example, banks are found to be resilient and well-capitalized despite growing Fed concern about indirect risk channels such as asset-market volatility, sanctions-related disruptions to payment…

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Was the new CRA proposal worth waiting for?  Advocates on all sides of this question are burrowing into the 678 pages delivered unto them by the FDIC last Thursday.  We’re doing the same for an in-depth analysis we’ll make as objective as possible as quickly as possible.  At first glance, there’s a lot in the proposal for all sides to like a lot.  However, the haste with which the agencies are gathering comment suggests that they hear Republican hoofbeats that may well pick up speed and strength as the industry’s deep read concludes.

The fact sheet released on the proposal laid out the both-sides benefits.  Banks would bet certainty combined with points for investing in much of what they now do or want to do in areas such as social welfare, environmental resilience, and deposit-taking.  Consumer and community advocates were cheered by the proposal’s tougher metrics focus on demographic data designed to demand racial equity, and higher barriers to exemplary CRA ratings.

However, each side carefully hedged its bet.  Bank trade associations applauded the proposal’s provisions in broad terms, celebrating an inter-agency action along with provisions bringing CRA into the 21^st century.  However, none blessed the proposal in substance, doubtless because the new demographic-reporting requirements and tougher grading system already give the industry heartburn.

Conversely, community groups warned that the proposal had better not go soft on banks, especially big ones. Anticipating these concerns, CFPB Director Chopra made it clear that, while he likes a lot in …

The FSB’s report is aimed at establishing global standards that prevent fragmentation along national or regional lines as well as ensuring that regulatory and supervisory actions mitigate climate risk to the greatest extent possible in the face of an array of data and measurement challenges. Although the FSB proposes no specific requirements….

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The FDIC today led the way with release of a long-awaited inter-agency proposal updating decades-old CRA regulation.  We will shortly provide clients with an in-depth assessment of the new approach, which includes an update to assessment-area calculations to address electronic-delivery modalities, tackles new concerns such as environmental and racial justice, and adds new community priorities such as childcare and financial literacy.  This report provides details on these provisions as well as on key points raised at the meeting by CFPB Director Chopra…

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As anticipated, bankers and card networks squared off with merchants at today’s Senate Judiciary hearing addressing credit-card interchange fees.  Chairman Durbin (D-IL) strongly defended his amendment restricting debit-card fees, arguing that expanding fee constraints and network-competition provisions to credit cards would reduce inflation and increase consumer spending power…

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Last week, the head of Britain’s key financial-regulatory agency, Sam Woods, stunned his Basel colleagues by suggesting that the entire edifice of Basel I, II, II.5, III, and what is rightly called IV should be tossed out in favor of something far more elegant and considerably less procyclical than the thousands of pages of Basel minutiae.  Mr. Woods calls the alternative the “Basel Bufferati” in honor of the concept-car approach to auto innovation and it’s hard not to like something with such a cute name that might also achieve these essential goals.  But, Mr. Woods’s Bufferati drives on the power of regulatory discretion over key considerations such as when there’s systemic risk and how susceptible to it each bank is likely to be.  Been there, done that, it didn’t work.

The key features of the Bufferati are a minimums standard that’s a single number comprised only of common equity Tier 1 capital set by each supervisor’s judgement and a buffer for good measure set by  “macroeconomic cost-benefit analyses.”  The buffer could be released under stress and the minimum doesn’t necessarily bind even if there isn’t stress, making it unclear what either of these thresholds is other than ratios that might be useful cushions against undue risk-taking if supervisors guess right about both the bank and the financial system.

Could they?  The idea of leaving minimum ratios to supervisory judgment actually harks back to the world before Basel I, when each nation’s supervisors looked at each of its banks and set …

Using what it describes as “dormant” authority, the CFPB is seeking comment on a rule setting the procedures under which it expands its authority to nonbank financial companies it believes pose consumer-protection risk.  The procedural rule is just what this term implies – one that establishes procedural standards that may change upon finalization – rather than a request for views on the extent to which the CFPB has the authority it claims.  Indeed, the Bureau clearly intends to use the authority stipulated in this rule for supervisory interventions even as comment on the procedures has yet to be completed…

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