#banks

Karen Petrou: The High Cost to Competitiveness of the Bankers’ Quest for Certainty

Shane Smith2025-07-28T09:27:41-04:00July 28th, 2025|The Vault|

FedFin reports since at least 2011 have identified the comparative advantage nonbanks enjoy thanks to lots of costly bank-only standards. However, we missed one big nonbank advantage sure to prove even more decisive in the stablecoin wars: bankers crave regulatory certainty even as their competitors aggressively exploit the battlefield advantage that uncertainty gives to those who dare.

Bankers aren’t dare-devils because they’re not supposed to be. Indeed, anyone who takes someone else’s money should be very, very careful. Decades of accepting deposits under strict rules without meaningful competition meant that most bankers rightly asked a lot of questions before doing anything even a little bit novel. To be sure, high-flying bankers abused taxpayer benefits thanks to negligent or even captive supervisors and rules weren’t always right. Still, rules and the supervisors who enforced them generally kept bankers in their lane since there wasn’t any faster traffic.

This comfy balance between caution and competitiveness was fiercely challenged for the first time when money-market funds dawned in the late 1970s, luring bank deposits at a time when anachronistic rules barred banks from offering competitive interest rates. High-flying bankers then sought to evade these constraints by making high-risk loans, thus bringing about the 1980s S&L crisis and the banking debacle that followed in the early 1990s. Both of these were systemic in terms of taxpayer cost, but neither had macroeconomic or financial-stability impact.

Newer, better rules succeeded these crises, but they were outflanked as “nonbank banks” became the first commercial firms to exploit …

Karen Petrou: Important Lessons in Regulatory Impact

Arezou Rafikian2024-06-03T17:00:05-04:00June 3rd, 2024|The Vault|

With battle lines deeply dug in over so many recent rules, two new studies are important, timely reminders that rewriting rules doesn’t always mean eviscerating rules. Sometimes, it’s a vital corrective to unintended consequences all too evident as proposals turn into rules that turn into a new, destructive market dynamic. It might seem to make nothing more than common sense to recognize that rules need reconsideration, but as the occasional victim of diatribes following what I thought were just pragmatic recommendations, it’s reassuring to see a study from one of the current rules’ architects, Daniel Tarullo, and another from the Fed lay out the need for meaningful revisions to two high-impact rules: big-bank stress tests and – just in time for still more of them – liquidity rules.

First to Mr. Tarullo’s paper. In addition to being the instigator of much in the Dodd-Frank Act and the rules thereafter, Mr. Tarullo inaugurated big-bank stress tests in 2009. Banks then denounced them, but they weren’t exactly in the best of bargaining positions after the 2008 great financial crisis. So, stress tests began as an urgent reality check. But, proving the regulatory-rewrite point, over a decade later they took on a new purpose in concert with still more importance by virtue of the new stress capital buffer inexorably and often ineffectively linking stress testing to the bank regulatory requirements that barely existed in 2009.

In 2009, we needed stress tests because capital rules were essentially toothless. Capital rules are now fanged …