The Vault

10 09, 2024

FedFin on: The New Mortgage Capital Rules

Arezou Rafikian2024-09-10T16:43:48-04:00September 10th, 2024|The Vault|

As anticipated as recently as yesterday, the next round of U.S. end-game capital proposals will include a significant win for bankers when it comes to residential mortgage origination. Where it comes out on other key mortgage topics is, though, yet to be revealed….

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

10 09, 2024

FedFin on: Barr Bows to Capital Reality

Arezou Rafikian2024-09-10T16:44:00-04:00September 10th, 2024|The Vault|

Noting that the Basel process reminded him of the need for “humility,” FRB Vice Chair Barr today laid out next steps for the contentious end-game capital proposal. In short, it will be entirely re-proposed with many specific changes to the current proposal (see FSM Report CAPITAL230) and a request to commenters to argue for still more over the planned sixty-day comment period. The re-proposal as it now stands along with changes to the proposed GSIB surcharge (see FSM Report GSIB22) would cut the hike for GSIBs under the new standards by about half to nine percent and the impact for FBOs is now said to be minimal. The impact on covered regional banks is also considerably less, likely now…..

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

9 09, 2024

FedFin on: Discount-Window/Daylight-Overdraft Operations

Arezou Rafikian2024-09-09T16:15:27-04:00September 9th, 2024|The Vault|

Under strong pressure from the banking industry and even Members of Congress such as Sen. Mark Warner (D-VA), the Federal Reserve is seeking comments on how to address frictions and inefficiencies that slow or even stall discount-window and intraday liquidity flows from the central bank. The request for input (RFI) takes no stand on possible changes either to the discount window or to daylight-overdraft processes. Indeed, the RFI confines its preamble to descriptions of how the window and intraday credit work rather than highlighting any areas of particular concern. The RFI is also a cautious initial step with an extended comment period (see below), signaling that any procedural improvements are unlikely until at least mid-2025, with delays beyond that likely if the Fed decides to seek comment on specific options….

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

9 09, 2024

FedFin Assessment: Could the U.S. Float a Sovereign Wealth Fund?

Arezou Rafikian2024-09-09T15:26:33-04:00September 9th, 2024|The Vault|

The Wall Street Journal last night followed prior press reports that Donald Trump is considering some sort of sovereign wealth fund and that the Biden Administration now says it was also doing so well before Mr. Trump broached the idea. FedFin stays out of the politics surrounding this issue, but here lays out the structure of a possible U.S. sovereign wealth fund (SWF) and its financial-market implications. Despite the existence of almost two dozen state-level SWFs and the sharp uptake in U.S. industrial policy, we think neither a new Trump nor Harris Administration could bring forth a U.S. sovereign wealth fund without treading ….

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

9 09, 2024

Karen Petrou: Workers’ Rights and Merger Wrongs

Eliza Allen2024-09-09T13:28:07-04:00September 9th, 2024|The Vault|

In all the fuss and fury over banking-agency merger policy, many have missed a consequential late-August announcement from other U.S. antitrust authorities laying out how workers’ rights will drive merger approvals. This follows 2023 guidelines from the Department of Justice and Federal Trade Commission retracting the old price criterion by which consumer welfare has long been judged in favor of policies taken factors such as network effects and “soft” market power fully into account. The guidelines addressed workers’ rights, but the new agreement adds sharp, sharp teeth. Thus, it’s clear that Administration policy is focused on economic justice along with its tough stand on monopolization. Bankers take warning: operational-integration rationales now cut two ways when it comes to merger approval.

To be sure, bankers are used to one economic-justice criterion when it comes to merger approval: those requiring consideration of customer “convenience and needs” based in large part on how this is demanded of them under the Community Reinvestment Act. Banks planning an acquisition thus typically accompany an offer with a massive CRA pledge promising more loans to low-and-moderate individuals and communities, affordable-housing investments, and the like.

This won’t cut it under the pending merger-policy rewrites from the OCC and FDIC, but these proposals generally do not replace CRA-style approval criteria. Instead, they beef them up, with the FDIC’s policy most notably (and dubiously) requiring acquirers to prove that communities not only will be better served, but also better served than if each bank remained independent.

However, the FDIC also …

26 08, 2024

Karen Petrou: Next Up: Federal Preemption Standards for Elder-Fraud Prevention

Eliza Allen2024-08-26T12:13:45-04:00August 26th, 2024|The Vault|

As we noted before the August recess, Senate Democrats have pressed a new bill designed to make the CFPB Director’s wish the command of law: banks would be clearly accountable for many instances in which consumers fall prey to those impersonating bankers, FBI agents, the CIA, and anyone else they think will persuade a customer, often elderly, to part with a whole lot of cash. Nothing will come of this bill in this Congress, but it will surely be back in the next. With it will come measures also to create a federal framework for the patchwork of state laws holding banks accountable for elder fraud. This sounds good, but drafting here is devilishly difficult.

There is no question that elder fraud is a grievous concern. I saw it firsthand as my father slipped farther and farther from being able to discern that the “nice” people happy to talk to him for hours were not beguiled by his avuncular charm – they wanted his bank account number. Washington media is full of stories of the “gold-bar” fraud stealing millions from local retirees and this is, of course, just a tiny sample of a problem estimated to cost at least $3.4 billion a year.

Is there a need for federal preemption? Last week’s American Banker had a helpful run-down of various state approaches. In general, state laws or pending measures seek remedies such as notifications to adult protective services or law enforcement, mandatory holds on suspect transactions, or at the …

19 08, 2024

FedFin on: ILC Charters

Arezou Rafikian2024-08-20T12:26:21-04:00August 19th, 2024|The Vault|

A divided FDIC board has approved a proposal retracting key sections of the agency’s 2020 rule meant to open the way to new ILC charters. Strongly opposed at the time by now-Chair Gruenberg, the proposal subjects parent companies applying to establish what the NPR calls “captive” or “shell” ILCs to more stringent review when applying for a charter that are likely to lead to denial in most cases. The NPR also expands the scope of FDIC review when it comes to Change-in-Bank-Control Act (CBCA) notices to charter conversions and certain other actions. The analysis presented in the proposal along with questions on which it seeks comment suggest the agency could go considerably farther to rein in ILCs, although most additional actions would require new rulemakings.

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

19 08, 2024

Karen Petrou: What the Fed Must Do to Make Monetary Policy Work

Shane Smith2024-08-19T09:22:53-04:00August 19th, 2024|The Vault|

Later this week, monetary-policy disciples – at least those who agree with the Fed – will gather around the campfire atop Jackson Hole to ponder the question set before them: whether monetary-policy transmission has been effective and, since it’s awesomely obvious it hasn’t, what might be done about that. The plan is clearly to float trial balloons in the clear mountain air to see if the Fed’s thinking about the new plan slated for 2025 is any better than that which lay behind its disastrous 2019 monetary-policy rewrite. Those allowed into these August precincts will have much of value to say this time around much as they sought to do the last time the Fed asked for all their views. Odds are, though, that Jackson Hole will not consider three non-econometric phenomena that lie behind recent policy misfires: economic inequality, NBFI migration, and the strong counter-cyclical impact of Fed supervisory policy.

Why do these matter so much?

First to economic inequality. The last time the Fed rewrote its monetary-policy model, it deigned to consider economic inequality, but promptly dismissed any reasons to worry. There were, though, lots of them.

The 2019 inequality exercise suffered from the same problem as most Fed models: reliance on representative-agent, not heterogeneous data showing distributional disparities. This approach thus reaffirmed blithe convictions that anything that keeps employment high and inflation in check is good for lower-wealth and -income households because it’s good for everyone else. See my book for why that’s grievously wrong and recent …

12 08, 2024

FedFin on: Deposit Composition and Risk

Arezou Rafikian2024-08-12T16:40:54-04:00August 12th, 2024|The Vault|

In conjunction with its proposal to take a far tougher stand on brokered deposits, the FDIC is seeking information on the configuration of U.S. bank deposits that cannot be discerned from current call report data. If these data persuade the FDIC and other agencies to act, then call-report data could be far more extensive and impose greater market discipline, FDIC premiums could be redesigned, pressure would grow for reliance on core deposits and FHLB advances, and FDIC-coverage reform might gain renewed Congressional attention.

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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12 08, 2024

Karen Petrou: Why the 1951 Fed-Treasury Accord Doesn’t Matter in 2024

Eliza Allen2024-08-12T10:24:30-04:00August 12th, 2024|The Vault|

Later this month, FedFin will issue a brief assessing whether Fed independence is really at risk, taking into account not just what Donald Trump has said, but also what progressives and populists agree should be done to change the U.S. central bank’s governing law. As we’ve frequently noted, Donald Trump can talk tough about the Fed, but Congress has to agree to get tough before he can do anything but gradually change Fed leadership and hope his appointees do his bidding despite formidable resistance across the Fed’s entrenched institutional culture. The forthcoming brief will put much of the daily back-and-forth on this critical question into the often-missing context needed to understand how much risk the Fed really runs. However, I’ve gotten so many questions in the last few days following an American Banker article that I’ll answer a few of them now.

The questions revolve around the Fed-Treasury agreement in 1951 putting Treasury fully in the debt-pricing lane and keeping it out of Fed decisions setting monetary policy based on its macroeconomic judgment, not national fiscal or political demands. The question? It’s whether Treasury under Trump could revoke the 1951 Accord and regain control over monetary policy.

The best independent analysis of the history surrounding the 1951 Accord and its substance comes in a paper written in 2001 on the Accord’s fiftieth anniversary by staff at the Federal Reserve Bank of Richmond. It rightly puts the Accord squarely in the historical context necessary to understand if the 1951 Accord has …