FedFin has analyzed several recent IMF reports with significant implications for pending financial-regulatory decisions. Key conclusions include:

  • Stress Tests: The Fund found that the 2013 CCAR did not exert the market discipline of the previous U.S. exercises. This reinforces OFR’s findings about correlation and “gaming” and we believe will accelerate FRB efforts to add further qualitative criteria and a more explicit liquidity interface. Given the binding nature of CCAR, this poses further franchise pressure on U.S. G-SIBs and on FBOs in this market.
  • Credit-Exposure Limits: The IMF has preliminarily found the U.S. behind the curve when it comes to credit-exposure limits. The FRB proposed these in 2012 but then launched a quantitative impact survey in response to bank comments about unintended consequences. Look for a new proposal and, we expect, a tough one given the approach Basel took last year in its limits.
  • Reserving: The Fund unsurprisingly supports expected-loss reserving, not the current GAAP incurred-loss standard. It also endorsed FASB’s pending rule, giving it greater impetus to finalize it despite industry fears about the challenges of modelling expected loss over the life of an exposure. The interface between reserves and regulatory capital remains, at best, rough. Regulators have long promised to fix this but have never done so. With new accounting rules in sight, attention could return to this with beneficial impact on capital-strapped banks.
  • Insurance: The Fund focused here on the awkward interplay between state and federal regulation, pressing for faster and more stringent state action on capital, governance, and intra-group exposures. State regulators in the U.S. often lack the authority to do as the Fund recommends and Treasury’s Federal Insurance Office has little authority here. Thus, expect growing friction in the global insurance framework. One important point for the FRB: the Fund found that its focus on prudential rules, not policy-holder protection, creates conflicting objectives with potentially damaging impact under stress.

We would be pleased to answer any questions you may have and describe FedFin’s practice in areas such as qualitative stress-test governance. Please send  e-mail to info@fedfin.com or call 202-589-0880.