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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.

20 05, 2024

FedFin on: FHLB Mission

2024-05-21T16:31:07-04:00May 20th, 2024|The Vault|

FHFA is now advancing an in-depth 2023 report on the Federal Home Loan Banks (FHLBs) with an RFI intended to lay the foundation for regulatory revisions tightening the FHLBs’ mission and thus the extent to which members benefit from low-cost advances without also disbursing these benefits to promote affordable housing and the public interest.  Although the RFI does not take a position on key changes, the questions it poses and the preamble explaining them make it clear that….

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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20 05, 2024

Karen Petrou on: How FSOC Enables Systemic Risk

2024-05-20T11:37:05-04:00May 20th, 2024|The Vault|

One can and should debate the extent to which nonbank mortgage companies (NBMCs) are as systemically-risky as FSOC says they are.  But it’s indisputable that, if FSOC believed what it said, then the paltry and politically-improbable recommendations it announced are proof of only one unhappy conclusion:  all FSOC can meaningfully think to do when it sees a systemic risk is figure out how to bail it out.  This is certainly what taxpayers have learned the hard way and investors have come to expect.  Or, as humorist Dave Barry pointed out after the mid-March systemic deposit bailout, “Eventually the financial community calms down, soothed by the reassuring knowledge that American taxpayers will, as always, step up and cheerfully provide billions of dollars to whichever part of the financial community screwed up this time.”

As we noted in our detailed analysis of FSOC’s report, the Council lays out the rapid-fire growth of NBMCs, the role regulatory arbitrage played in pushing banks to the sidelines of the residential-mortgage business that once defined so many charters, and the direct taxpayer and resulting systemic risk of NBMC liquidity shortfalls.  Asked about this at Wednesday’s HFSC hearing, Acting Comptroller Hsu said that NBMC stress could lead to “widespread contagion risk” that could prove “severe.”

Could NBMCs be pulled off the brink under current law?  In a little-noticed aside, FSOC says no because NBMCs lack the assets that would make viable orderly liquidation by the FDIC under its systemic authority even if the FDIC finally figured out …

13 05, 2024

FedFin on: FSOC’s Analytical Methodology

2024-05-13T16:52:29-04:00May 13th, 2024|The Vault|

Never Mind…

When FSOC released its systemic-designation methodology last year, the Council made it clear that nonbank mortgage companies faced top-down federal regulation.  Never mind.  As with so many other FSOC-declared systemic risks – see, for example, stablecoins – federal regulators have decided not to use the prudential tools they have in favor of asking for statutory change they know they won’t get.

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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13 05, 2024

Karen Petrou: Why FSOC is Right to Revisit FMU Designation

2024-05-13T09:25:12-04:00May 13th, 2024|The Vault|

In the fog in which FSOC chooses to nestle, it was easy to miss an important indication briefly mentioned in the meeting’s readout:  the Council is “reviewing” current financial-market utility (FMU) designations.  Firm-specific and activity-and-practice designations usually get all the airtime.  So it was again on Friday, when FSOC also decided to back off its plan just last November (see Client Report FSOC29) to designate nonbank mortgage banking.  The Council in fact mostly backs off much of what it promises – no wonder Rohit Chopra calls it a “book-report club.”  Precedent thus suggests the FMU threat is idle, but I’ll bet it’s not.

Why?  The FMUs the Council is reviewing were made in 2012 very shortly after Dodd-Frank was enacted in 2010 and told it to do so.  FMUs are to supplement firm designation because one clear lesson of the 2008 crisis is that market infrastructure matters at least as much as very big banks and a nonbank or two.  FMU designations are thus designed to ensure proper functioning of the “clearing and settlement of payment, securities, and other financial transactions” (see FSM Report PAYMENT11). Designated payment companies are subject to Federal Reserve systemic supervision and securities and derivatives entities fall under either the SEC or CFTC.  Unlike the Council’s extremely-controversial designation at about the same time of four systemically-important financial institutions, the FMU designations then and ever since have drawn little scrutiny and no political dispute.  Indeed, when Donald Trump’s Treasury led a 2019 rewrite of the …

30 04, 2024

FedFin on: Public-Interest Regulation

2024-04-30T16:56:58-04:00April 30th, 2024|The Vault|

In conjunction with releasing its new fair-housing rule, FHFA yesterday also created a new office of “Public Interest Examination.”  In short, Fannie, Freddie, and the Home Loan Banks are henceforth – at least for the tenure of this President and FHFA director – to be held to standards that cement their role as public utilities, not privately-owned enterprises.  This is neither unexpected nor unjustified – after all, the regulated entities enjoy manifold taxpayer benefits and two are in conservatorship.  Still, it continues to make it even harder to turn the clock back on Fannie and Freddie or to return the Home Loan Banks to the quiet corners in which they and members enjoyed so many advantages.

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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29 04, 2024

FedFin Assessment: Index-Fund Passivity Debate Could Touch Broader Control Questions

2024-04-29T14:40:25-04:00April 29th, 2024|The Vault|

As we noted, the FDIC board late last week faced the unusual and perhaps unprecedented situation of a staff resolution supported by its Chair and one Democratic Director that was countered by a different proposal from Republican Directors, with both options finally tabled due to objections from the Acting Comptroller.  Both proposals address the extent to which index-fund managers can hold what would otherwise be controlling stakes in banking organizations exempted by virtue of passivity commitments that have come under fire from all sides.  We expect the next move will be…

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

 …

29 04, 2024

Karen Petrou: The Inexorable, Inadvertent Inequality Vise

2024-04-29T09:18:06-04:00April 29th, 2024|The Vault|

Last week, we sent you an analysis of a new Fed study reinforcing previous research, my own included, finding that U.S. economic inequality exacerbates financial instability.  Notably, this paper added an important, novel element:  the extent to which economic inequality increases the role of NBFIs and thus heightens systemic risk even more than was the case when banks ran the financial show.  But does economic inequality lead to greater NBFI reliance and resulting risk or do NBFIs on their own have a still more pernicious inequality effect that makes the risk of financial crisis still more acute?  In short, yes – this is a potent negative-feedback loop of prodigious power.

What makes this feedback loop reverberate so dangerously?  More research is essential, but breaking down the income and wealth components of economic inequality into the key drivers of systemic risk along with the regulatory and monetary-policy determinants of financial-sector competitiveness suggests a causal connection between more inequality leading to more NBFIs and more risk leading to more inequality and still more NBFIs and then heightened financial risk and consequential inequality.

In super-short, income inequality is determined in part by wage/salary and capital (i.e., investment) income.  The more income from whatever source, the better for buying what one needs and wants unless recessions, progressive taxation, or other personal or policy actions prevent the cumulative increases in income that power up spending and, still more importantly, generate wealth.

Wealth equality is judged by net worth – that is, how much you have …

22 04, 2024

FedFin on: Fed Systemic-Risk Assessment: Some Worries, No Troubles

2024-04-23T16:37:21-04:00April 22nd, 2024|The Vault|

The latest Federal Reserve financial-stability assessment continues the Fed’s practice of detailing vulnerabilities without drawing bottom-line conclusions; the Board once did so, but ceased this practice after opining that the financial system’s risk was “moderate” shortly before the 2020 crash.  The Board’s report now also says that it assesses vulnerabilities, not the likelihood of near-term shock.  Survey respondents do make this assessment, with this report showing a striking increase in concerns about policy uncertainty in light of continuing inflation and the higher-for-longer rate outlook…

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

22 04, 2024

Karen Petrou: Credit-Card Surcharges: One Inflationary Culprit the CFPB Could Catch

2024-04-22T09:29:18-04:00April 22nd, 2024|The Vault|

One could go on – indeed many do – about whether inflation is showing enough signs of a slow-down to warrant lower interest rates.  I’ve said before that lower rates won’t have the housing-affordability benefits advocates expect, but this doesn’t address the underlying issue of just how hot inflation may be running.  I’m not sure if anyone – including the Fed – really knows, but battles on my neighborhood listserv validated by growing data make clear that federal data overlook one hidden price hike driving more and more Americans flat-out crazy:  credit-card surcharges that are nothing but shadow price hikes of as much as four percent.

In fact, card surcharges are the epitome of the “junk” fees the CFPB has vowed to quash.  The credit-card late fees the Bureau lambasts are due to consumer sins of omission or commission – i.e., consumers have the ability – I would say obligation – to keep their card debt within amounts they can honor as well as the choice to pay on time.  How much should be charged for paying late is obviously a point of discussion, but that consumers have a duty to pay on time is indisputable.

In sharp contrast, card surcharges are often unavoidable and ill-disclosed.  The neighborhood listserv is something of a group rant, but it does include interesting illustrations of hidden credit-card surcharges that are often – think car-repair shops – meaningful and material add-on prices discovered only after the fix, quite literally, is in.

D.C. is an …

15 04, 2024

Karen Petrou: The FDIC Plan to End Too-Big-to-Fail Brings Promise of More Bailouts

2024-04-15T09:41:37-04:00April 15th, 2024|The Vault|

In 2013, the FDIC issued a short, unilluminating paper purporting to show how the agency would implement one aspect of the orderly-liquidation authority (OLA) Congress granted in 2010 to prevent the profligate bailouts that blighted the great financial crisis.  I was unconvinced by the 2013 paper and even more perplexed when years passed and the utterance on single-point-of-entry (SPOE) resolutions was all the FDIC deigned to pronounce.  After all, if big banks and systemic nonbanks can’t be closed without bailouts, then moral hazard triumphs and crashes become still more frequent and pernicious.  Last week, mountains moved and Chair Gruenberg said that anything big will not be bailed out.  Would this were true, but it’s not.

Despite the agency’s failure last year to find a solution other than a bailout for high-risk regional banks and an Inspector-General report finding the FDIC most OLA-unready, the FDIC now is confident that it can handle even the biggest blow-out at U.S. global systemically-important banks.  This derives from untested faith in SPOE, the FRB’s TLAC rule, GSIB living wills, and what it calls legal certainty pertaining to qualified financial contracts (QFCs).

Maybe so re GSIBs, but this sangfroid is still more puzzling when one reads on and finds that the FDIC thinks so well of its GSIB OLA capabilities that it says that it’s also ready to deploy them for foreign-GSIB operations in the U.S., any regional bank that hits a systemic bump, and even nonbank SIFIs.  Nothing is said about the fact that …

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