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Host David Boccaccio speaks with Karen Petrou, Federal Financial Analytics Managing Partner, about Federal Reserve, Chairman Powell, and interest rates.

https://www.marketplace.org/shows/marketplace-morning-report/…

Derivatives pose thorny problem for banks, regulators in resolution plans

By Kyle Campbell

Federal regulators want large banks to get specific about their contingency plans for their derivatives holdings. The Federal Deposit Insurance Corp. and the Federal Reserve cited four of the country’s largest banks last week for weaknesses in their resolution plans related to derivatives — a broad and varied market of financial contracts that include swaps, options and futures. The move was the latest and most direct move by the agencies to encourage banks to step up their practices around the handling of these contracts…Yet because of their complexity and the role they play in financial markets, derivatives receive different legal treatment than other assets on a bank’s balance sheet, said Karen Petrou, managing partner at Federal Financial Analytics. Deemed “qualified financial contracts” by Dodd-Frank, derivatives held by systemically large banks — known as “covered entities” — are shielded from typical default provisions in cases of failure. This means that, unlike in a traditional bankruptcy process, when these banks fail, their counterparties cannot simply close out their derivative positions. This arrangement is meant to protect banks, the FDIC and broader financial stability by mitigating losses for large failed banks and preventing counterparties from having to quickly seek out hedging alternatives.But, because these contracts are treated differently under the special resolution regime than they are under the traditional bankruptcy code, Petrou said there is ambiguity and confusion about how they should be handled.”Without clarification of the bankruptcy …

Regulators are aligned on capital reforms. Congress is a different story

By  Kyle Campbell

July 12, 2023Federal regulators have lined up behind stronger capital requirements for large banks, but questions remain about how much political support they can generate in Washington — and how much they will need for their efforts to last.  Unlike the last time bank capital standards were increased after the subprime mortgage crisis, this latest push lacks clear champions in Congress…. Karen Petrou, managing partner of Federal Financial Analytics, said the full impact of the changes will have to be spelled out in the regulators’ notice of proposed rulemaking. In particular, Petrou said the focus will be on differences between the current advanced approaches model used for determining risk-based capital requirements and the new standard approach that will be implemented to align with the so-called Basel III endgame. While capital levels overall will go up as a result of this change, she said, the treatment of specific exposures under the new rules will determine which firms bear the brunt of increase. For banks that have been subjected to the advanced regulations, a switch to a new standard could actually bring a modicum of relief. Because of this, Petrou said she puts little stock in Barr’s assertion that the changes will result in an average increase in capital of 2% across the impacted banks, or that banks could raise the additional equity needed in just two years.”That’s just an average. It’ll have a big impact …

What’s next for Fed supervision? Basel’s Pillar 2 may hold the key

By Kyle Campbell

Regulatory changes are coming to the Federal Reserve in response to this spring’s three large bank failures, and while some will take years to hash out, others can be implemented much more quickly…Karen Petrou, managing partner of Federal Financial Analytics, said Pillar 2 was created to address safety and soundness concerns that are difficult to control uniformly via top-down, standardized capital or liquidity requirements. It grants supervisors broad jurisdiction over concerns not explicitly addressed in Pillar 1 capital framework — namely credit risk, market risk and operational risk. “When the Basel Committee was figuring out how to handle interest rate risk in the express capital standards, they said supervisors and regulators need to do this themselves, either by express interest rate risk capital requirements suitable for their jurisdiction or supervision,” Petrou said. “Same thing with sovereign risk concentrations and a number of other governance issues. When regulators issue core principles for bank governance, those are Pillar 2 standards.”

https://www.americanbanker.com/news/whats-next-for-fed-supervision-basels-pillar-2-may-hold-the-key

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The Fed Is Bailing Out the Wealthy as Everyone Else Pays the Price
By Ryan McMaken

The Federal reserve says that inequality is a problem. At the same, the Fed also pretends to have nothing to do with it.
Last September, for instance, Jerome Powell bemoaned the “relative stagnation of income” for people with lower incomes in the United States, but then claimed the Fed “doesn’t have the tools” to address this issue. Instead, Powell, being the chairman of this ostensibly “independent” and “nonpolitical” central bank, called for the federal government to engage in fiscal policy efforts at income redistribution….In her new book, Engine of Inequality: The Fed and the Future of Wealth in America, Karen Petrou looks in detail at how Fed policy over the past decade—especially quantitative easing (QE) and ultralow interest rates—have benefited the wealthy while leaving most ordinary people behind. Petrou is one of the more interesting and informative analysts examining the financial services sector. As the head of Federal Financial Analytics Inc., she has provided research on the banking sector for more than thirty years, but in recent years she’s become more focused on exposing and examining the unhealthy and destructive effects of Fed policy.  Petrou takes a different approach from the Austrians. She appears to have arrived at her conclusions from observing the trends and outcomes produced by Fed policy and then working backward into a theoretical framework. The data seems to have prompted her to ask why things have gone …