Blog – Page 3 – Federal Financial Analytics

31 03, 2025

FedFin on: Stablecoin Regulatory Framework

Arezou Rafikian2025-03-31T13:07:30-04:00March 31st, 2025|The Vault|

The chair of the House Financial Services Committee, Rep. French Hill (R-AR), the Digital Asset Subcommittee’s chair, Rep. Bryan Steil (R-WI), eight other Republicans and three Democrats have introduced House legislation to create a long-awaited federal framework for dollar-denominated payment stablecoins. The bill differs substantively from Senate language, especially with regard to the scope of federal authority and the extent to which stablecoins might come to supplant bank deposits. However, the bills are similar in many respects and are likely to become still closer as House and Senate consideration continues ahead of final agreement and enactment into law later this spring….

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

31 03, 2025

Karen Petrou: The President Ditches the Dollar

Eliza Allen2025-03-31T10:49:46-04:00March 31st, 2025|The Vault|

Given the controversies aroused by many of last week’s executive orders, it’s understandable that those redesigning Treasury’s payment system generally escaped notice. They shouldn’t. On purpose or not, President Trump has mandated that digital currency henceforth counts along with the dollar as U.S. fiat currency. That is a very, very big decision with consequences far beyond the ostensible goal of speeding Treasury payments and, yet again, ending waste, fraud, and abuse.

As I laid out in my book, there is nothing preordained about the dollar serving as the U.S. “fiat” currency. The medium of exchange a sovereign demands to honor its obligations is the fiat currency, but nothing forces the citizenry to accept it if the sovereign state is weak, the fiat currency is of dubious value, or options such as gold – the centuries-old go-to or a digital alternative – are better. As the U.S. gained economic power at home and abroad, the fiat currency Lincoln selected to fund the Civil War – the dollar – came to dominate U.S. transactions, especially those with the federal government. Now, the dollar is the dominant fiat currency not only at home, but is also the reserve currency around the globe. This “exorbitant privilege” is preordained by the United States; it was earned.

Now though, the U.S. is stepping back from the once “almighty dollar.” The President said it will accept alternatives to the dollar for tax and all other payments to and apparently also from the Treasury. The executive order …

26 03, 2025

FedFin on: Trump Orders Improve Federal-Payment Efficiency, Increase White House Control

Arezou Rafikian2025-03-26T15:52:28-04:00March 26th, 2025|The Vault|

As noted, the President yesterday issued two executive orders demanding significant change to the federal payment system. In this report, we assess the financial-market and banking-system implications of the orders, one of which emphatically states that nothing done to enhance digitalization may be construed to authorize a central bank digital currency. The purpose of the orders is to reduce fraud, with the Administration saying that GAO has calculated annual federal losses due to fraud to be as much as $521 billion, some of which is doubtless independent of payment-system operations……

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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24 03, 2025

FedFin on: Will the Sovereign Wealth Fund Buy Scorched Earth?

Arezou Rafikian-12025-03-24T15:12:07-04:00March 24th, 2025|The Vault|

In this report, we do our damnedest to make sense of what’s been wrought at Fannie, Freddie, and FHFA in the few days since Bill Pulte took charge and Treasury Secretary Bessent mused about folding the GSEs into the sovereign wealth fund….

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

24 03, 2025

Semafor, Monday, March 24, 2025

Arezou Rafikian-12025-03-25T13:35:57-04:00March 24th, 2025|The Vault|

Treasury’s play for regulatory control puts it on collision course with Fed

Eleanor Mueller and Rachel Witkowski

Treasury Secretary Scott Bessent’s play for more control over US banking regulators, including the Federal Reserve, is about to enter a contentious new phase. The Treasury Department is drafting recommendations for streamlining banking regulators like the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation, three people familiar with the process told Semafor — after concluding that the agencies and their workers likely can’t be merged without a green light from Congress….“There are two ways to consolidate federal bank regulation. First, you can change the law,” Karen Petrou, co-founder of Federal Financial Analytics, wrote in a recent note to clients. “The other way is for one federal entity to assert all the power it has under law, and maybe more simply to take de facto charge of significant Fed, OCC, and FDIC supervisory and regulatory policy. “Secretary Bessent has now made it clear that the Trump Administration will open Door Number Two,” Petrou added. Bessent’s plan builds on a recent order Trump signed directing the central bank and other independent agencies to submit regulations to the Office of Management and Budget for review, according to three other people familiar with the secretary’s thinking.

https://www.semafor.com/article/03/24/2025/treasurys-play-for-control-over-regulators-puts-it-on-collision-course-with-fed

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17 03, 2025

FedFin on: Why an SWF Might Solve the Conservatorship Conundrum

Arezou Rafikian-12025-03-17T15:58:03-04:00March 17th, 2025|The Vault|

An intriguing op-ed in today’s Financial Times posits a solution to the GSE-privatization problem: including them in the sovereign wealth fund (SWF) already being established by the White House. Could this work? It just might.

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

17 03, 2025

Karen Petrou: A New, Unified Theory of Effective Bank Regulation

Shane Smith2025-03-17T09:13:31-04:00March 17th, 2025|The Vault|

There is one perennial, overlooked, and devastating irony in the vast body of bank capital and liquidity regulation: the better a bank’s liquidity score, the less regulatory capital it has. Although liquidity and capital are inexorably linked when it comes to preserving bank solvency, the need to comply with two contradictory standards forces banks to change their business model to meet both ends in the middle at considerable cost to profitability and long-term franchise value. This is of course a major threat to solvency of which bank regulators are either blissfully unaware or, worse, heedless. Federal banking agencies have stoutly refused to undertake the essential cumulative-impact analysis we’ve fruitlessly urged on them most recently in Congressional testimony. A new Federal Reserve Bank of New York study shows not just why they should judge rules by sum-total impact, but also how they could do so and thereby have a much better sense of which banks might actually go broke before they do.

I refer you to the full FRB-NY paper for details. It crafts an economic-capital construct calculated by netting the net present value of financeable assets versus par liabilities as a baseline measure which can then be tested under various stress scenarios that start with illiquidity and end in insolvency and vice versa. This leads to a robust measure of survivability that combines the impact of credit risk, liquidity, and the real-world market conditions current rules ignore. In essence, economic capital is derived from the hard-nosed, real-time factors that wise …

10 03, 2025

Karen Petrou: Will Bessent Do It Better?

Eliza Allen2025-03-10T10:18:10-04:00March 10th, 2025|The Vault|

There are two ways to consolidate federal bank regulation. First, you can change the law and, as detailed in my memo a few weeks back, transform agency responsibilities to reduce duplication and regulatory arbitrage. The other way is for one federal entity to assert all the power it has under law and maybe more simply to take de facto charge of significant Fed, OCC, and FDIC supervisory and regulatory policy. Secretary Bessent has now made it clear that the Trump Administration will open Door Number Two, setting key policy goals and “coordinating” among the agencies. Will Treasury keep banking within essential guardrails? Mr. Bessent might just pull this off, at least for as long as he’s Treasury Secretary in this super-volatile Administration.

Just weeks ago, I would have said a Treasury putsch was impossible because of the Fed’s inviolable status as an independent agency that, even under a more Trump-ready vice chair, would avoid the appearance of taking Treasury’s orders less this subservience spill over to monetary policymaking. Now, though, the President has claimed via executive order that there are no more independent agencies exempt from Executive Branch control. This covers the OCC and FDIC, which were in any case sure to do what was asked of them in this Administration, but it also covers Fed supervisory and regulatory responsibilities. The Fed’s express statutory independence does not cover these activities, making it likely now that the Fed will concede on most sup-and-reg points to defend the fragile barricades surrounding monetary-policy …

3 03, 2025

Karen Petrou: The Casualties of Slash-and-Burn Regulatory Rewrites

Eliza Allen2025-03-03T10:54:41-05:00March 3rd, 2025|The Vault|

There’s no doubt that many U.S. institutions have grown such long teeth over the years that they bit themselves in the foot. As a result, radical reform challenging conventional wisdom is long overdue. But, there are two ways to do this: the break-first/fix-later approach taken by the Trump Administration in biomedical research and other vital arenas; the other is to think first, then act decisively within the boundaries of current law or the better ones you demand. Radical reform to U.S. biomedical research is already leaving near-term treatments and cures on the cutting-room floor. If slash-and-burn transformation is also applied to financial-services supervision and regulation, systemic-risk guardrails could be unintentionally, but dangerously, dismantled.

The risks to biomedical research are not so much in what the Trump Administration has done, but that it’s more often than not done retroactively regardless of contractual commitments for continuing funding authorized under longstanding appropriations and by frenetic, indiscriminate firings of well-performing staff. You simply can’t suddenly stop a clinical trial without endangering patients and putting treatments years behind, if they continue at all. You also can’t stop basic biomedical research all of a sudden without leaving labs with a lot of mice, dogs, and primates to feed and no money for kibble. It also takes years to train good biomedical researchers; suddenly firing thousands of them endangers this pipeline and, with it, treatments and cures.

Biomedical research and financial-system governance have little in common, but leaving financial policy in tatters will also have unintended consequences …

24 02, 2025

Karen Petrou: How the White House Could Have Fun with the Fed

Shane Smith2025-02-24T09:11:47-05:00February 24th, 2025|The Vault|

President Trump has an awesome ability to keep even his closest allies perplexed by nonstop announcements that often break precedent, accepted norms, and even the law. Just as opponents begin to rally against one initiative, the White House launches another, sending dissenters off in a different direction, leaving the actions they initially targeted unchanged or even forgotten. Still, several policy themes are coming through loud and clear through all these different actions that have far-reaching financial-market cumulative impact. One is the sheer volatility all this chaos creates; another to which I turn here is the President’s sure and certain effort to make the Federal Reserve a tool of the executive branch, going beyond setting interest rates to turn it into America’s sovereign wealth fund.

As we noted, The President’s executive-order barrage includes one demanding a U.S. sovereign wealth fund (SWF). The tricky bit here is not the lines that would quickly blur between public and private enterprise, an historic U.S. economic principle that won’t slow Mr. Trump down for a minute. Instead, it’s where the money funding the SWF comes from given the lack of a nationalized commodities enterprise such as Norway’s and the Administration’s hell-bent campaign to reduce the federal deficit. Solution? The Fed.

U.S. law is seemingly an obstacle to deploying the Fed as an SWF since it allows the Fed to hold only direct obligations of the U.S. Treasury and its agencies as well as – a Fed sleight of hand in the 2008 crisis – Fannie …