#Barr – Federal Financial Analytics

25 09, 2024

FedFin on: DOJ Bank-Merger Policy

Eliza Allen2024-09-25T15:37:45-04:00September 25th, 2024|The Vault|

In conjunction with final merger-policy statements from the FDIC and OCC, the Department of Justice (DOJ) released “commentary” expanding on how the 2023 guidelines it issued along with the Federal Trade Commission expressly apply to bank mergers. The DOJ’s commentary and that from the other banking agencies revise merger policy last set in 1995. However, the Fed has yet to do so or even clarify how all of these actions affect its approach beyond a statement earlier this year that the FRB was working with other agencies and a more recent answer from Vice Chair Barr that he is content with Fed policy as it stands…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

16 09, 2024

Karen Petrou: What’s Next for the Capital Rewrite

Eliza Allen2024-09-16T11:24:36-04:00September 16th, 2024|The Vault|

Few, if any, regulatory agencies are omniscient. More than a few think they are, but more often than not regulators who fail quickly to see the error of at least some of their ways are regulators who lose a lot more than they might otherwise have lost. Which brings us to the capital proposal and what next befalls this troubled standard after Michael Barr’s belated recognition that something had to give.

In the near term, we’ll see action by the FRB, FDIC, and OCC to clear a revised proposal along with the Fed’s quantitative impact survey for another round of public comment. I have to believe Fed Vice Chair Barr cleared the revisions he previewed last week with his allies at the OCC and FDIC and is confident that the Fed board will mostly agree with him up to the point of issuing a reproposal, if no further. As a result, a reproposal Mr. Barr said will amount to about 450 pages will soon be upon us.

Is this the last word? Having relearned humility the hard way, Mr. Barr promises it is not. What else might have to change to get a final U.S. version of Basel’s end-game standards across the goal line?

I would guess a lot more than would have been the case had the Fed and other tough-rule advocates more quickly recognized policy and political reality. One key, if seemingly-technical, point on which to give is the pesky “output floor.” Basel imposed the output floor because …

3 06, 2024

FedFin on: Discount-Window Modernization

Arezou Rafikian2024-06-03T17:00:38-04:00June 3rd, 2024|The Vault|

In addition to controversial provisions affecting bank-merger applications and stress-test transparency, legislation recently approved by the House Financial Services Committee includes a less-contentious provision forcing the Federal Reserve to reckon with longstanding problems affecting the use of its discount window, especially under stress conditions. These problems were on costly evidence in March of 2023, when both Silicon Valley Bank and Signature Bank had extraordinary difficulty accessing the discount window due in part to ill-segregated collateral and early Fedwire closing….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

28 05, 2024

Karen Petrou: Why Regulators Fail

Eliza Allen2024-05-28T12:38:29-04:00May 28th, 2024|The Vault|

Last week, the House voted on a bipartisan basis to stick its collective fingers in the SEC’s eye over its cryptoasset jurisdiction. And, in recent weeks, the Vice Chair of the Federal Reserve has been forced to concede that the end-game capital rules that are his handiwork as much as anyone’s will get a “broad, material” rewrite. What do these two comeuppances have in common? Each results from regulatory hubris so extraordinary that even erstwhile allies abandoned the cause. For all MAGA fears about an omnipotent “administrative state,” these episodes show that those seeking sweeping change without plausible rationales are still subject to the will of the people even if the people’s will befuddles those in the government’s corner offices.

First to the SEC. Chairman Gensler’s position on cryptoassets over the past three years is that many ways to use them are securities and anything that’s a security is his for the enforcing. I’m not even going to venture a conclusion on who’s right or wrong when it comes to abstruse Supreme Court rulings on complex definitions. What underpins the SEC’s downfall – temporary though it may be – is that any question as big as what’s a cryptoasset and who can do what with it should be answered by rules subject to public notice and comment, not episodic enforcement actions meant to teach everyone else a lesson.

Most people would learn the lesson if a coherent regulatory policy spelled it out. When policy is set by whack-a-mole instead of …

25 03, 2024

Karen Petrou: How the FDIC Fails and Why It Matters So Much

Eliza Allen2024-03-25T11:45:45-04:00March 25th, 2024|The Vault|

Last January, we sent a forecast of likely regulatory action and what I called a “philosophical reflection” on the contradiction between the sum total of rules premised on unstoppable taxpayer rescues and U.S. policy that no bank be too big to fail. Much in our forecast is now coming into public view due to Chair Powell and Vice Chair Barr; more on that to come, but these rules like the proposals are still premised on big-bank blow-outs. I thus turn here from the philosophical to the pragmatic when it comes to bank resolution, picking up on a stunning admission in the FDIC’s proposed merger policy to ponder what’s really next for U.S. banks regardless of what any of the agencies say will result from all the new rules.

Let me quote at some length from the FDIC’s proposed merger policy:

“In particular, the failure of a large IDI could present greater challenges to the FDIC’s resolution and receivership functions, and could present a broader financial stability threat. For various reasons, including their size, sources of funding, and other organizational complexities, the resolution of large IDIs can present significant risk to the Deposit Insurance Fund (DIF), as well as material operational risk for the FDIC. In addition, as a practical matter, the size of an IDI may limit the resolution options available to the FDIC in the event of failure.”

In short, the FDIC wants to block most big-bank mergers because it can’t ensure orderly resolution of a large insured depository …

22 01, 2024

Karen Petrou: How the Banking Agencies Dealt Themselves Such a Weak End-Game Hand

Shane Smith2024-01-22T09:22:56-05:00January 22nd, 2024|The Vault|

We said from the start that finalizing the capital rules as proposed would be difficult because I have truly never seen a sweeping rule buttressed by such shoddy analytics. It’s of course true that lots of rules make little sense, but rules that cost companies as much as the capital rules are uniquely vulnerable to substantive and legal challenges. This is even more likely when, as now, the proposal’s victims know how to temper political claims with well-founded assertions of analytical flaws and unintended consequences. When regulatory credibility is effectively undermined, even those who might otherwise side with the regulators become cautious, if not actually averse to doing so. And thus, it has come to pass for the end-game rules.

As our analyses of all of the comment letters filed last week by dozens of Democrats make clear, only a few super-progressive Democrats now stand firmly with the regulators and even they have a few qualms. Maybe the agencies will try to bull it out – we thought so as recently as early this month in our outlook. We were clear there that major changes would need to be made to finalize the end-game rules; now, we’re not sure even these will do. The odds now are considerably higher for the re-proposal pressed last week by FRB Govs. Waller and Bowman.

The agencies are of course not naïve. They knew that the final rule would have to show a few concessions to its critics. As a result, …

20 11, 2023

Karen Petrou: The Fate of the End-Game Rules Does not Lie in the FDIC’s Hands

Eliza Allen2023-11-20T12:16:01-05:00November 20th, 2023|The Vault|

It’s a hard fact of life that nothing good comes to federal agencies caught up in scandal even when scandal is misplaced. So the real question for the FDIC is whether the bad already all too evident at the divided banking agency will grow still worse, threatening the FDIC’s ability to participate in pending rulemakings or, even worse, resolutions. It likely will be no accident if the FDIC comes unglued and the capital and other proposals fall apart. I think new rules will proceed, but the FDIC’s threat is far from out of the blue.

Is this cynical? I prefer to think of it as an observation born of experience, but this is a city about which Harry S. Truman famously said, “If you want a friend in Washington, get a dog.”

FedFin reports last week tracked Marty Gruenberg’s travails before Senate Banking and then again at House Financial Services, with Ranking Member Waters surprisingly aligning herself with her usual GOP enemies when it came to castigating Mr. Gruenberg over sexual-harassment problems at the agency reported by the Wall Street Journal as the week of hearings broke two days before.

And, as the hearing went on, Mr. Gruenberg found himself in even more of a pickle. In another uncoincidental moment, Chairman McHenry got wind of 2008 allegations against the chair, allegations Mr. Gruenberg belatedly recalled when prompted by yet another poke from the Journal. Now, Mr. McHenry has opened a formal investigation even as a statement from GOP members of …

25 09, 2023

Karen Petrou: How to Right the Raft of New Rules

Arezou Rafikian2023-09-25T09:28:19-04:00September 25th, 2023|The Vault|

What struck me most about the HFSC hearing at which I testified last week was how lukewarm Democrats are to the new rules unless they feel compelled to defend the White House or core political objectives. When the partisan spotlight dimmed, more than a few Democrats said that the rules might have both small and even significant perverse consequences. Given that GOP-led repeal of the rules is impossible and court overturn is at best a lengthy process, hard work to get the rules more to the middle is essential. Even if large banks still think the rules are bad, they’ll be better and that’s all to the good.

What’s the how-to? In short, it’s a concerted campaign to fix the most problematic technical confusions in the massive body of new rules – these are manifest and manifold, focusing hard on obvious flaws and saving raging debates such as those over how big banks should be for another day. I think this approach is best not only because it avoids political landmines, but also because it works.

In the mid-2000s, a group of custody banks with which we worked laid out numerous unintended consequences in the Basel II approach to operational risk-based capital. By the time this landed in the final Basel III rules, it wasn’t great, but it was a lot, lot better in terms of actually capitalizing real risk at savings mounting to billions in what would have been unnecessary regulatory capital.

My testimony lays out a road-map of …

17 07, 2023

Karen Petrou: Counter-Cyclicality is One Critical Missing Piece of Barr’s Unholistic Construct

Arezou Rafikian2023-07-17T16:55:22-04:00July 17th, 2023|The Vault|

Banks and Republicans are beating up on Michael Barr for much in his new capital construct. The furor focuses on the high cost of the new capital rules, cost glossed over in Mr. Barr’s talk via an over-arching assumption that banks can readily do without two years of post-dividend retained earnings. Maybe they can; investors not so much. This is a big problem, but a little-noticed one also warrants more scrutiny: the decision to leave untouched and apparently not even considered the U.S. version of the counter-cyclical capital buffer (CCyB). This makes the new framework still more procyclical and even less holistic. CCyBs have worked well around the world and a well-designed one in the U.S. would obviate the need for some – not all, but some – of Mr. Barr’s most counter-productive ideas even as it makes banks more resilient, the financial system safer, and the economy less volatile.

What are CCyBs? The basic idea is that these are capital charges triggered in good times that are released under stress, making banks and the economies they serve better able to ride out macroeconomic boom-bust cycles. The final U.S. version of the global CCyB framework acknowledges this global standard, but it goes on to say only that the Federal Reserve will know a boom or bust when it sees it and will do something about it via some sort of CCyB should it feel inclined to do so possibly after a rulemaking process on the up- and down-sides that …

3 07, 2023

Karen Petrou: The Unintended Consequence Of Capital Hikes Isn’t Less Credit, It’s More Risk

Eliza Allen2023-07-03T12:08:54-04:00July 3rd, 2023|The Vault|

As was evident throughout Chairman Powell’s most recent appearances before HFSC and Senate Banking, conflict between capital and credit availability characterizes what is to come of the “end-game” capital rules set for imminent release. The trade-off is said to be between safer banks and a sound economy, but this is far too simple. As we’ve seen over and over again as capital rules rise, credit availability stays the same or even increases. What changes is who makes the loans and what happens to borrowers and the broader macro framework, which in the past has been irrevocably altered. The real trade-off is thus between lending from banks and the stable financial intermediation this generally ensures and lending from nonbanks and the risks this raises not just to financial stability, but also to economic equality.

As post-2008 history makes clear, banks do not stop lending when capital requirements go up; they stop taking certain balance-sheet risks based on how the sum total of often-conflicting risk-based, leverage, and stress-test rules drives their numbers. That all these rules push and pull banks in often-different directions is at long last known to the Fed based on Vice Chair Barr’s call for a “holistic review”. Whether it plans to do anything about them and their adverse impact on the future of regulated financial intermediation remains to be seen. Until something is done, banks will look across the spectrum of capital rules, spot the highest requirement, and then figure out how best to remain profitable …