Blog – Page 2 – Federal Financial Analytics

14 10, 2025

Karen Petrou: Supervisors Must Match Better Words With Faster, Tougher Deeds

Arezou Rafikian2025-10-21T12:44:02-04:00October 14th, 2025|The Vault|

In remarks last week, Secretary Bessent drew attention to a new OCC and FDIC proposal that, among other things, defines what will be considered “unsafe” and “unsound” when it comes to bank examination and enforcement. As Mr. Bessent said, “While simply defining a term might seem like a small thing, …, a clear focus on material financial risk will put an end to this nonsense.” By which he meant the egregious supervisory lapses that led to four costly bank failures in 2023. He’s right, but the banking agencies must also match these new words with far faster, tougher, and transparent supervisory deeds.

There’s no question that supervisory policy has long forced banks to think at least as much about papering decisions as making them. This is a particular problem for community banks without teams of compliance specialists, adding all too much cost to the technology and product innovations essential to banks that aren’t just safe, but also sound competitors that serve their communities. Much in the post-2008 rulebook needs a rewrite and almost everything proposed after the 2023 crash is badly designed.

But ripping out too many pages in righteous rage could spark yet another of the downward spirals in lax rules and irresponsible banking that occur every other decade or so. I thus worry about a few aspects of this new proposal.

For example, the proposal bars supervisory sanction unless or until a material loss is foreseeable or has actually occurred. Violations of banking or consumer law cannot …

6 10, 2025

Karen Petrou: Preserving the Public Good Along with Revising Deposit-Insurance Coverage

Shane Smith2025-10-06T09:27:42-04:00October 6th, 2025|The Vault|

Although HFSC’s hearing this week is cancelled due to the shut-down, there is no doubt that Congress will give careful consideration to proposals from mid-sized banks seeking a lot more deposit insurance for selected accounts. But this doesn’t mean Congress will also advance this proposal unchanged or unaccompanied. Last week’s letter from Chair Scott to Acting FDIC Chair Hill makes it clear that the Senate Banking Committee head is carefully and correctly thinking through not just which banks win or lose with FDIC-coverage changes, but also what these policies mean to the public good. In short, it’s a lot.

Sen. Scott focuses on three important questions about the second-order effects of coverage change: what might happen to depositor behavior, what rules might need to change to offset unintended consequences, and whether statutory change is needed to limit moral hazard. How FDIC coverage changes for whom drives answers to each of these questions, but several over-arching effects are clear.

First, limiting added FDIC coverage to banks based on certain asset-size thresholds ensures that banks without added protection will not roll over and cough up more insurance premiums. They’ll do what they can to avoid costs unaccompanied by benefit. The largest banks are thus likely to reduce higher-cost domestic deposits and replace them with FHLB advances, wholesale deposits, and global funding. If they substitute these for higher-cost retail and small-business deposits, as seems more than likely, then big banks are also likely to increase their reliance on short-term assets that accord with …

29 09, 2025

Karen Petrou: Why Stablecoins Must Also Reliably Settle and Clear

Arezou Rafikian2025-10-21T12:46:27-04:00September 29th, 2025|The Vault|

As we noted last week, a new study finds that stablecoins and other crypto payments use declined from 2022 to 2024 by about a third, now including less than two percent of U.S. households. Further, these are disproportionately unbanked, with the only bit of growth in payment-stablecoin use coming from households with poor or very poor credit scores. Payee choice was the most important driver of decisions to use a payment stablecoin. These jarring facts brings the trillions-of-trillions of dollars stablecoin dreamers back to earth with a hard thump. They might still prevail, but only if banks don’t quickly counter with potent products and nonbanks also get the rules they want and the payees they need to redefine their problematic stablecoin value proposition.

One critical battle is already being waged. Banks are fighting hard to prevent indirect payment of incentives that advantage stablecoin holders and thus undermine transaction-account alternatives. This question is among the most important on which Treasury now seeks comment before it quickly starts writing rules. The Senate Banking Committee might also revise the GENIUS Act at cost of bankers.

Despite the plethora of questions in Treasury’s recent request, another important issue is omitted: who may own a nonbank stablecoin issuer. The Act as is contains a prohibition on ownership by publicly-traded nonfinancial companies, but Treasury can waive this ban if it and other regulators reach several findings that won’t be too hard to find if Treasury wants them unearthed. Pending changes in law and rule could also …

22 09, 2025

Karen Petrou: The Banking Lobby’s New Battlefield

Arezou Rafikian-12025-09-22T09:17:54-04:00September 22nd, 2025|The Vault|

Last week, a Semafor article argued that bank lobbying has lost its punch. Maybe, but before one reaches that conclusion, it’s important also to recognize that banking as an industry has also lost some of its punch while virtually every traditional business sector is bewildered day after day by the manner in which this Administration steps into markets to anoint winners and losers. Mr. Trump doesn’t much like banks, especially big ones, and this is not a problem a new PAC can solve.

Until recently, banks big and small had secure market niches and largely lobbied against each other because no one else meaningfully competed against banks. Bankers were big men (yes, they mostly were men) in each city and town and thus among each Member of Congress’ most important constituents. Due to this, smaller banks almost always beat big banks because what were then tens of thousands of small bankers were a critical presence in almost every district even though the Senate often took big banks’ side because the biggest cities had the biggest banks with the deepest pockets.

Very little lobbying was partisan because most of it was hometown-dependent, not ideological. This approach to advocacy was relatively inexpensive because banks generally relied on themselves and their trade associations, not contributions, in-house lobbyists, hired guns, PR campaigns, extensive analytics, and all the costly appurtenances of modern advocacy.

The power of incumbency once was manifest, but it has dramatically ebbed in the face of new competitors willing to spend as …

8 09, 2025

Karen Petrou: What Treasury Wants from the Fed and Why It Should Get it

Shane Smith2025-09-08T09:29:11-04:00September 8th, 2025|The Vault|

With all the bandwidth absorbed by the Miran and Cook dramas, insufficient attention was paid late last week to Secretary Bessent’s Wall Street Journal article laying out a new monetary-policy model. I like it a lot and not just because Mr. Bessent quotes my book. As he says, we need a different monetary policy model, one that the Fed is clearly unable to develop on its own judging by the five years of work that went into the ultra-cautious 2025 fiddles with the 2020 model. Most of what Mr. Bessent wants will make the Fed better at its core mission and a more independent guardian of the public good, overdue reforms that Democrats should support.

What does reform entail? First, the Fed would adhere to its statutory mandate, not the truncated “dual” one recent Fed leadership selects in defense of its legitimacy. Secretary Bessent and Stephen Miran read all the law, not just selected passages, correctly observing that the mandate is a triple-header of maximum employment, price stability, and “moderate long-term interest rates.” Mr. Miran’s testimony cites the 1946 Full Employment Act as one source of this mandate along with the 1978 law. Current law also implores the Fed to act in concert with the federal government to further the “general welfare.” The FRB and FOMC thus have an affirmative, express duty to do all they can to reduce economic inequality, not inadvertently but significantly worsen it as has long been the case. Mr. Bessent seconds this view …

2 09, 2025

Karen Petrou: How to Redesign the Federal Reserve Banks

Shane Smith2025-09-02T09:19:51-04:00September 2nd, 2025|The Vault|

“U.S. President Donald Trump’s radical shift in economic approach has already begun to change norms, behaviors, and institutions globally. Like a major earthquake, it has given rise to new features in the landscape and rendered many existing economic structures unusable,” or so says Adam Posen at the Peterson Institute. After last week, it looks as if the Federal Reserve as it came to be known over recent decades is also on the scrap heap. It may not be “unusable,” but the uses to which it will be put are to serve Mr. Trump’s political interests, not necessarily those also of the long-term economy’s resilience, equality, or stability. The Fed deserves this due to its geriatric monetary-policy model and persistent contributions to economic inequality. I’m not so sure about the rest of us.

The transformation already under way is not just the result of the President’s unprecedented effort to dismiss a member of the Federal Reserve Board and, if the courts rule in his favor, anyone else he doesn’t like. Another profound change could come next March, when the Board must ratify the appointments of Federal Reserve Bank presidents. With a majority of members of the Board on his side, Mr. Trump could block reappointment of all twelve Reserve Bank presidents in March of next year.

The Federal Reserve Act places a rolling list of five Reserve Bank presidents on the FOMC in an effort to balance what congress feared in 1913 would be undue Wall Street influence on monetary …

25 08, 2025

Karen Petrou: The GSEs’ Guarantee Gauntlet

Arezou Rafikian2025-08-25T09:25:50-04:00August 25th, 2025|The Vault|

The Wall Street Journal last week described Bill Pulte’s recent mortgage-fraud allegations as ill-advised “political lawfare.” Thus it is, but it’s also an unfortunate distraction from a high-priority decision within Mr. Pulte’s legal remit: ending the GSEs’ conservatorship. If FHFA and the Administration do not tread carefully, they will do a lot of damage not just to the mortgage market, but also to the President’s mid-term hopes and long-term legacy.

The GSEs matter this much not just because a liquid, affordable mortgage market matters so much. It’s also because the GSEs issue $7.7 trillion in debt obligations, or almost a third of Treasury’s $29 trillion. The type of federal backstop afforded to the GSEs or assumed by markets determines how much Fannie and Freddie must pay to attract investors. How much the agencies pay also affects how much Treasury must pay to do the same. Because Treasury obligations float the U.S. Government’s boat, the cost of agency debt matters even more.

As we noted in a FedFin report last week, the GSEs federal guarantee comes in four flavors: explicit, “effective,” implicit, and none to speak of. Privateers refer the last flavor, but markets will assume the GSEs still enjoy an implicit guarantee no matter what anyone says, so the real flavors on offer are only the first three.

Because the GSEs are in conservatorship, they now have what FHFA has long called the “effective” guarantee – i.e., they are almost as good as full-faith-and-credit USG obligations, but not quite that …

19 08, 2025

FedFin: A Key Conservatorship Question

Arezou Rafikian2025-08-19T15:12:01-04:00August 19th, 2025|The Vault|

Following a talk last week, FedFin managing partner Karen Petrou was asked her thoughts about how different conservatorship-exit options affect the Treasury market and thereby the dollar’s reserve-currency status. This issue has yet to surface in public debate, but it is top-of-mind for Treasury and thus will govern what Pulte and the President are likely to do….

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

18 08, 2025

Karen Petrou: Why More Deposit Insurance is a Very Bad Idea

Arezou Rafikian2025-08-18T12:06:00-04:00August 18th, 2025|The Vault|

As we recently noted, bipartisan senators are readying an amendment authorizing almost-unlimited FDIC coverage for noninterest-bearing transaction accounts as long as the bank accepting them is smaller than $250 billion. Pressing for this, Sen. Warren said the new FDIC backing should only be available to smaller IDIs because, “The giant banks don’t need another subsidy.” Maybe, but this still leaves open a critical question: why should larger banks pay the premiums that back FDIC-insurance subsidies for their competitors? If this makes sense for FDIC insurance, then why stop here? Let’s have the biggest banks also pick up the tab for small-bank modernization, branch expansion, and maybe nicer signs.

If big banks need to nurse small ones along, then the small-bank business model needs a reboot, not de facto nationalization for smaller banks that can’t find their way. Many do. In fact, smaller banks with marketing acumen have long been able to attract deposits by paying a bit more for them. Further, it’s not as if smaller banks can’t get added coverage if they want more deposits. All that’s different is that smaller banks must pay for this themselves instead of sending the tab over to the rest of the industry and, down the road, to depositors and taxpayers.

As a recent note from the Federal Reserve Bank of Dallas pointed out, reciprocal deposits meet the needs of banks that want more FDIC coverage. All it takes is paying a fee for this privilege, and the $500-$600 million total annual cost …

15 08, 2025

FedFin on: Merchant-Banking Powers

Arezou Rafikian2025-08-15T12:08:48-04:00August 15th, 2025|The Vault|

Senate Banking GOP leadership has introduced legislation grandfathering existing merchant-banking holdings into a new, fifteen-year maximum tenor. Merchant-banking activities have not been widely discussed in many years, but are likely to gain renewed interest now that nonbanks may gain expanded banking powers under pending cryptoasset legislation. Banks have also long suffered under real-estate development and other activity limits they may seek to remove if this legislation advances….

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