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Although all of the banking agencies have for years promised a new bank-merger policy, none has proposed one until this OCC rulemaking.  It is intended to add certainty and transparency to the manner in which the OCC reviews merger applications or others for charter combinations from national banks and federal savings associations resulting in a federally-chartered depository, but the OCC retains discretion to do as it chooses in this arena given the flexibility built into all the attributes now laid out that may augur OCC  disapproval and/or expedited processing.  The policy also appears to apply to…

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The CFPB has followed up a controversial proposal to set prices for larger-bank overdrafts exempt from certain consumer standards with a proposal to simply ban certain non-sufficient fund (NSF) fees when banks decide in real time to decline a consumer-payment request.  The Bureau readily acknowledges that banks in fact generally do not now charge NSF fees in these cases, but it fears they might and wishes to preemptively prohibit this as part of the Administration’s campaign against “junk fees.”  Although the rule is aimed principally at electronic declinations, it would apply to check and ACH transactions as declination capability grows via instant-payment system adoption.

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In this report, we build on our previous analyses of the mortgage implications of the pending capital rules, forecasting what’s next for mortgage assets as the FRB, FDIC, and OCC wrestle with the mess Karen Petrou has elsewhere argued they brought upon themselves by careless analytics and political misjudgment. We think the odds for significant changes to mortgage risk weightings are high, but this won’t be enough to quell demands for a brand-new proposal….

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A new Fed staff paper assesses monetary-policy transmission in a world of CBDCs, stablecoins, nonbanks, and tough new bank rules.  We think this a significant advance in Fed research because the paper’s models (see below) reflect the substitutability of bank for nonbank assets and liabilities across the broader market made still more frictionless by the Fed’s ONRRP.  We focus here on policy decisions other than those specific to monetary-policy transmission, focusing first on how the models test the impact of rules akin to Basel III, also illuminating the end-game standard impact and that of other pending rewrites.  As banks have found in practice, tougher liquidity requirements are found to lead banks away from lending to larger holdings of Treasury obligations and reserves.  This is well known, but the model also reinforces concerns about shadow banking by finding that, when banks move out, nonbanks move in with a small net deduction in total credit availability.  A similar effect is observed when modelling higher capital requirements.  The paper observes that all the new rules may well make banks safer, but the resulting larger nonbank role offsets this benefit.  New rules are also found to affect the ability of the Fed to administer rates through interest on reserves, making the Fed more dependent on the ONRRP to transmit monetary policy – a challenge given ONRRP drawdowns as rates rise and the hopes of Gov. Waller and others at the Fed to phase it out.  In a particularly novel finding, the paper’s models also …

Much recent coverage assumes that the Federal Reserve is a vestal virgin when it comes to presidential elections.  In fact, history teaches us that the Fed is far from virginal even though it always slaps the hand of anyone trying to pet it in public.  This peek-a-boo strategy works only as long as policy-makers and the public accept this spotless image.  Increasingly, they don’t and not without cause.  The 2024 election will thus test the credibility of Fed “independence” and threaten it as never before.

How political is the Federal Reserve?  First, all Fed chairs are political because they would not be Fed chairs if they were not also adroitly able to advance themselves and, when it suits, also their institutions.  The best-skilled among them play politics with gusto since doing so behind the wizard’s curtain brings considerable reward even as a pristine image keeps unwelcome suitors at bay.  When this works as it often does, Fed chairs execute the monetary policy they prefer and drop wise words in receptive ears even as they demurely disavow any political thoughts on awkward fiscal- or national-policy questions when queried in the public’s eye.

This nimble strategy was widely adopted After the Fed chair in the early 1970s, Arthur Burns, delayed anti-inflation measures to keep interest rates low enough to boost Richard Nixon’s prospects.  These decisions were transparent and brought out virulent Democratic opponents of the Fed even before Mr. Burns‘ diary confirmed his political bent, damaging Fed credibility.

The “Maestro” …