Press Clips

Fed's rosier outlook could mean end of emergency lending facility By Kyle Campbell Recent forecasts from the Federal Reserve projecting greater stability in 2024 could spell the end for an increasingly popular funding facility at the central bank...Karen Petrou, managing partner at Federal Financial Analytics, said removing the facility could have consequences..."As with all its emergency fixes, the Fed is in a mighty pickle if it closes the BTFP," Petrou said. "Banks continue to sit on large unrealized losses and love this security blanket."  Petrou noted that the program provides cheaper funding than the Fed's official last resort lending facility, the discount window, as well as other funding sources, such as the Federal Home Loan Banks and the private repurchase agreement market. As commercial deposits continue to trend down — having fallen by $900 billion since their peak in April 2022 — Petrou said banks want as many alternative funding options as possible. But, she noted, this [...]

Operational risk emerging as linchpin of Basel capital debate By Kyle Campbell What had for months been a broad debate around the wisdom and process of the Basel III capital proposal has narrowed in recent weeks to center on a particular aspect of that proposal: capital retention for banks' operational risks...Karen Petrou, managing partner at Federal Financial Analytics, said capital is a "poor palliative" for operational risks, because it is different from other types of risks.... "Operational risk is very different from credit and market risk. It's equivalent to what you do when the lights go out, and the approach that somehow, if you have a pot of money, you will see better is nonsensical," Petrou said. "What you actually need is a generator, and that costs money." ... But Petrou notes that the rule retains the seven categories of operational risk — internal fraud, external fraud, employee practices and workplace [...]

‘The general’s at risk': FDIC controversy threatens plans to rein in Wall Street By Zachary Warmbrodt The misconduct scandal swirling at the FDIC is threatening to derail a Washington crackdown on the biggest U.S. banks ... “The proposal is showing some very significant vulnerabilities,” Federal Financial Analytics managing partner Karen Petrou said of the planned hike in bank capital. https://www.politico.com/news/2023/11/17/fdic-misconduct-wall-street-regulations-00127777

Bidenomics Has a Mortal Enemy and It Isn’t Trump By Karen Petrou On Oct. 26, the Department of Commerce announced that gross domestic product had grown at an annual rate of 4.9 percent in the third quarter. This growth rate ran well above even optimistic forecasts, leading to what can only be called triumphalism from a White House dead-set on making “Bidenomics” a key to its 2024 presidential campaign. President Biden issued a self-congratulatory statement, the White House echoed it over and over — and Donald Trump’s relative popularity increased. As the White House touted U.S. prosperity, a New York Times-Siena College poll found that 59 percent of voters in six key swing states have more confidence in Donald Trump’s ability to manage the economy over Joe Biden’s, regardless of whom they think they’ll vote for. Zero — yes, zero — respondents under 30 in three of the swing states [...]

Banks 'flying blind' without cumulative data on regulatory proposals By   Kyle Campbell Regulatory changes, both adopted and proposed, have been in ample supply in Washington as of late, but banks and analysts alike say it's hard to know just how those changes will fit together, in part because government forecasts have been scarce....Despite the overlapping nature of these proposals, there has been no effort to reconcile their combined impact on the banking sector or the broader economy, Karen Petrou, managing partner of Federal Financial Analytics said. "There is no cumulative impact statement from the agencies, and that's just a profound failure of analytical rigor," Petrou said. "The agencies not only seem unable to do cumulative impact analysis, but weirdly unwilling to despite the suggestions that they're working on something 'holistic.' It's puzzling."Without a comprehensive overview of how these potential rule changes would interact with one another, banks and their [...]

That 5% is actually kinda normal by David Brancaccio The era of borrowing money for practically nothing is over. Today, we’re joined by Karen Petrou, co-founder and managing partner at Federal Financial Analytics, to learn about the history of 5% bond yields and what currently higher yields mean for the broader economy. Marhttps://www.marketplace.org/shows/marketplace-morning-report/are-interest-rates-high-or-have-we-just-gotten-spoiled/#That-5%-is-actually-kinda-normal

US Weighs Leaning on Banks to Curb Hedge Fund Leveraged Trading By Lydia Beyoud and Katanga Johnson Top US regulators are zeroing in on dangers posed by highly leveraged hedge fund trades, and considering options to rein in risks to the broader financial system. Regulators are especially concerned about the growth of one strategy known as the basis trade, which involves the use of leverage to profit from the price gap between Treasury futures and the underlying cash market. Borrowing in the repurchase market using US Treasuries as collateral has soared in recent years to almost $3 trillion....Karen Petrou, a managing partner at Washington-based consulting firm Federal Financial Analytics Inc., says that regulators are aware of the difficulties of imposing major rule changes or designating firms. “The banking agencies know this,” she said. “Short of these new tools, then, regulators are hoping to reduce counterparty risk by using their existing [...]

By Victoria Guida and Zachary Warmbrodt The agencies, industry and observers have floated a range of options on how to improve the guardrails over the long term:...Federal Financial Analytics managing partner Karen Petrou said there needed to be more rigorous planning and stress testing of banks’ plans for funding in an emergency, which would help them weather the kind of social media-fueled run that brought down SVB. https://www.politico.com/newsletters/morning-money/2023/10/17/cash-is-king-00121871  

Absolute zero: Lessons learned from the Fed's zero interest rate experiment By Kyle Campbell Once a controversial move, lowering interest rates to effectively zero is now an accepted part of the Federal Reserve's crisis playbook, despite the havoc that a rapid increase in rates has wreaked on the housing market and banks' balance sheets. Fed Chair Jerome Powell said he would not hesitate to take rates to their lower bound again in the future, despite the ramifications of that move present in the economy today.... Karen Petrou, managing partner of Federal Financial Analytics, said the Fed's various methods have been effective in averting a complete collapse of the financial system. To that end, she said, the Fed does not need to remove any tools or put limitations on the degree of their use. Instead, Petrou said, the Fed should focus on how and when to pull such support back once [...]

Here’s how a government shutdown can cause a major financial crisis By Chris Matthews As a government shutdown appears likely, Americans are preparing for disruptions to food aid, air travel, and much more. Worse yet, it’s also possible that a prolonged shutdown could contribute to systemic stress in U.S. financial markets. That’s according to Karen Petrou, managing director of the advisory company Federal Financial Analytics Inc. “Financial stability depends on part on critical financial infrastructure, particularly in the payment, settlement and clearing spaces, and a large and increasing amount of that infrastructure is outside the reach of the banking agencies,” Petrou said in an interview with MarketWatch....... Petrou also warned that recent fragility in the market for U.S. Treasuries, which has seen less liquidity and wider bid-ask spreads of late, could be exacerbated as global investors become less confident in the competence of the U.S. Congress. A third risk is [...]