#BIS

4 03, 2024

Karen Petrou: The Madness of a Model and its Unfounded Policy Conclusion

2024-03-04T11:50:02-05:00March 4th, 2024|The Vault|

As the pending U.S. capital rules head into their own end-game, there is finally a good deal of talk about an issue long neglected in both public discourse and banking-agency thinking:  the extent to which higher bank capital rules accelerate credit-market migration.  Simple assertions that more capital means less credit are, as I’ve noted before, simplistic.  One must consider how banks reallocate credit exposures to optimize capital impact and, still more importantly, how the credit obligations banks decide to leave behind take a hike.  Now comes a new paper the Financial Times touts concluding that, thanks to shadow banks, “we can jack up capital requirements more.”  Maybe, but not judging by this study’s design.  Even with considerable charity, it can be given no better than the “very creative” grade which kind primary-school teachers accord nice tries.

The paper in question is by Bank of International Settlements staff.  It looks empirically – or so it says – at what it calls the U.S. banking sector’s share since the 1960s of what it lugubriously calls “informationally-sensitive loans.”  It documents a lot of numbers said to demonstrate lower bank lending share, using a model founded on both erroneous data and wild leaps to conclude in a fit of circular reasoning that more nonbank lending explains why there is less bank lending.  In the study’s words, “intermediaries themselves have adjusted their business models.”  What might have led banks to decades of technological intransigence and strategic indolence is neither clearly explained nor verified.

What …

19 12, 2022

FedFin on: FSOC Targets Usual Suspects but Also Points to Big-BHC, Nonbank Mortgage Systemic Risk

2023-01-03T15:56:33-05:00December 19th, 2022|The Vault|

As promised, this FedFin report provides an in-depth analysis of FSOC’s 2022 annual report, focusing on findings with near-term policy implications.  As always, the report is lengthy and includes many observations and market details that provide insight into Treasury and member-agency-staff thought.  Much in it reiterates concerns about short-term funding markets, CCPs, and….

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

5 12, 2022

FedFin on: The Big Squeeze

2022-12-06T16:24:20-05:00December 5th, 2022|The Vault|

Making an important addition to the ongoing debate about Treasury-market liquidity, a new paper from the Bank for International Settlements provides sobering data on agency MBS liquidity with significant implications not only for secondary-market liquidity, but also primary-market stability…..

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

18 04, 2022

Karen Petrou: Starry-Eyed Kids Stumbling in the Cryptoverse

2023-03-02T10:55:51-05:00April 18th, 2022|The Vault|

One of the really sort-of sweet things about many who espouse the inevitability of digital assets is boundless hope for crypto domination derived from little knowledge of how the financial system actually works.  Last week, a prime example surfaced on Reuters, which touted a plan by which $10 billion of bitcoins would supplant the dollar as the global reserve currency.  Here’s to hoping, but the total USD money supply clocks in at close to $22 trillion, suggesting one might need more than a few billion to make even a bit of a dent.  Digital currency may well reign supreme, but it won’t be much more than a speculative bet until someone figures out how to integrate it into legacy systems and market, policy, and regulatory realities.

One might say that using M3 as the measure of the dollar’s power is unfair.  So, let’s use just currency in circulation.  That’s a lot less, but still a formidable $2.3 trillion, a number not only humbling to entrepreneurs, but also progressive Democrats crafting a new form of digital currency via the U.S. Treasury.

Our in-depth analysis assesses this “e-cash” legislation.  The idea here is to create a digital asset that is identical to physical dollars in all but physicality.  This may be a worthy effort, but it won’t be easy.

Take just one issue:  the bill mandates that e-cash be fully private and anonymous but also ensures effective AML enforcement.  Quite simply, that can’t happen.

Still, as physical-cash transactions shrink, the absence …

15 04, 2022

FedFin: BIS Finds Ways to Give Nonbanks Payment-System Access, Increase CBDC’s Inclusion Impact

2023-03-02T10:53:48-05:00April 15th, 2022|Uncategorized|

As promised, we turn here to an in-depth analysis of a paper from global regulators on whether CBDC contributes to financial inclusion – one of the most vital arguments from those advocating CBDC in the U.S. and in many other nations.  The paper is not analytical, as it is based on interviews with nine central banks exploring retail CBDC, but all of those interviewed view CBDC as an effective tool to promote inclusion if designed to do so and the paper also surveys research to back up its findings.  It details numerous ways CBDC could prove inclusive, including a first-time assessment of how making certain CBDC aspects programmable and how regtech could permit nonbanks to enter the CBDC payment system without undue risk…

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

27 01, 2022

FedFin on: U.S. Central Bank Digital Currency

2023-04-11T16:11:59-04:00January 27th, 2022|The Vault|

Months after initially promising to release a discussion draft on central bank digital currency (CBDC), the Federal Reserve is now seeking comment on whether and how it might create one. Reflecting the hesitancy of several FRB leaders, Chairman Powell included, the draft emphatically states that the Board has made no decision to issue a CBDC and, should it do so, it will seek at least tacit approval from both Congress and whichever Administration is in charge at the time.

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

20 10, 2021

FedFin on: Global CBDC Policy

2023-06-07T15:35:08-04:00October 20th, 2021|The Vault|

Shortly after the BIS and a group of central banks endorsed a construct for retail-facing central-bank digital currency (CBDC), the Group of Seven (G7) finance ministerial issued these public-policy principles to establish a still broader framework for future action.  No G7 nation, including the U.S., has decided on CBDC, but their governments have generally developed these documents to ready themselves, enhance the odds of CBDC better suited to cross-border clearing and settlement, anticipate private stablecoins and the risks they raise, as well as counter China’s efforts to build a CBDC that enhances its global macroeconomic might.

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

18 10, 2021

Karen Petrou: How to Make Stablecoins More than Monopoly Money

2023-06-07T15:59:53-04:00October 18th, 2021|The Vault|

In all of the reports on all of stablecoin’s risks that so frighten central bankers and global finance ministers, none is as terrifying as whether the assets backing hundreds of billions of dollar-equivalent transactions are to be had when needed.  And needed they will be – see not just all the ministerials on high, but also Gillian Tett’s latest, compelling FT column.  Without a meaningful reserve-currency reference, stablecoins are the equivalent of monopoly money without even the teeny little plastic hotels providing an illusion of wealth.  Making stablecoins matter as real money requires meaningful reserves but meaningful reserves mean that stablecoin’s gung-ho promoters won’t get anywhere near as rich.  The business model changes for the way-better, but the construct of stablecoins may be so altered as to make this looming systemic phenomenon only a passing fancy.

The set of difficult choices needed to realize stablecoin’s promise to anyone but profiteers is detailed in our latest report on critical policy issues.  In it, we analyze a set of systemic-risk principles recently proposed by the BIS’s Committee on Payment and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO).  As is usually the case with global-regulatory pronouncements, this proposal defines wide parameters for jurisdiction action, stating most clearly what’s wanted, not what will happen if one were actually to get it.

The CPMI/IOSCO paper is even more hesitant than usual because reserve assets aren’t stablecoin’s only tricky bit.  For example, the paper describes a governance conundrum of formidable proportions …

14 10, 2021

FedFin on: Global Systemic-Risk Standards for Stablecoin Arrangements

2023-06-15T14:58:37-04:00October 14th, 2021|The Vault|

Responding to requests from the G7, G20, and FSB, this report addresses market-infrastructure considerations related to systemically-important stablecoins that do not involve multi-currency baskets (e.g., Facebook’s Diem).  The report builds on the FSB’s current principles and those on cross-border payments, but generally does not propose specific standards.  Instead, it lays out how current global principles in this area should guide both stablecoin developers and regulators.

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

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