#BoE – Federal Financial Analytics

1 04, 2024

M040124

Eliza Allen2024-04-01T11:17:29-04:00April 1st, 2024|6- Client Memo|

The Frightening Similarity Between Key Bridge and Bank Stress Tests

On Friday, the Washington Post reported that Key Bridge passed all its stress tests before it fell into the harbor. These were well-established protocols looking at structural resilience – acceptable, if not awesome – and, after 9/11, also at terrorist attack. That a giant container ship might plow into the bridge was not contemplated even though this has happened before in the U.S. and not that long ago. Which brings me to bank stress-testing and how unlikely it is to matter under actual, acute stress because the current U.S. methodology correlates risk across big banks in ways that can make bad a lot worse. Even more troubling, tests still don’t look over the banking parapet.

M040124.pdf…

1 04, 2024

Karen Petrou: The Frightening Similarity Between Key Bridge and Bank Stress Tests

Eliza Allen2024-04-12T09:41:28-04:00April 1st, 2024|The Vault|

On Friday, the Washington Post reported that Key Bridge passed all its stress tests before it fell into the harbor. These were well-established protocols looking at structural resilience – acceptable, if not awesome – and, after 9/11, also at terrorist attack. That a giant container ship might plow into the bridge was not contemplated even though this has happened before in the U.S. and not that long ago. Which brings me to bank stress-testing and how unlikely it is to matter under actual, acute stress because the current U.S. methodology correlates risk across big banks in ways that can make bad a lot worse. Even more troubling, tests still don’t look over the banking parapet.

To be sure, the Fed’s semi-annual financial-stability reports (see Client Report SYSTEMIC97) muse about risks that lurk outside the largest banks, and FSOC dutifully catalogs nonbank risk each and every year in a copious annual report (see Client Report FSOC29). Last year, FSOC also said a lot about what might someday be done to address it via systemic designation (see FSM Report SIFI36). But what’s being done, not just said, about nonbank risk even as inter-connections become ever more entwined? Not much in the U.S. even though other national regulators are taking meaningful steps first to know where it lies and then to curtail it.

For example, the Bank of England and Australia’s Prudential Regulatory Authority are quickly moving past bank-centric stress testing, with Australia importantly looking not just within the financial …

4 12, 2023

M120423

Eliza Allen2023-12-04T11:03:03-05:00December 4th, 2023|6- Client Memo|

Why Curbing Banks Won’t Curtail Private Credit

Last Wednesday, Sens. Brown and Reed wrote to the banking agencies pressing them to cut the cords they believe unduly bind big banks to private-credit companies. The IMF and Bank of England have also pointed to systemic-risk worries in this sector, as have I. Still, FSOC is certainly silent and perhaps even sanguine. This is likely because FSOC is all too often nothing more than the “book-report club” Rohit Chopra described, but it’s also because it plans to use its new systemic-risk standards to govern nonbanks outside the regulatory perimeter by way of cutting the banking-system connections pressed by the senators. Nice thought, but the combination of pending capital rules and the limits of FSOC’s reach means it’s likely to be just thought, not the action needed ahead of the private-credit sector’s fast-rising systemic risk.

m120423.pdf

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4 12, 2023

Karen Petrou: Why Curbing Banks Won’t Curtail Private Credit

Eliza Allen2023-12-04T11:03:15-05:00December 4th, 2023|The Vault|

Last Wednesday, Sens. Brown and Reed wrote to the banking agencies pressing them to cut the cords they believe unduly bind big banks to private-credit companies. The IMF and Bank of England have also pointed to systemic-risk worries in this sector, as have I. Still, FSOC is certainly silent and perhaps even sanguine. This is likely because FSOC is all too often nothing more than the “book-report club” Rohit Chopra described, but it’s also because it plans to use its new systemic-risk standards to govern nonbanks outside the regulatory perimeter by way of cutting the banking-system connections pressed by the senators. Nice thought, but the combination of pending capital rules and the limits of FSOC’s reach means it’s likely to be just thought, not the action needed ahead of the private-credit sector’s fast-rising systemic risk.

One might think that banks would do all they can to curtail private-credit competitors rather than enable them as the senators allege and much recent data substantiate. But big banks back private capital because big banks will do the business they can even when regulators block them from doing the business they want. Jamie Dimon for one isn’t worried that JPMorgan will find itself out in the cold.

Of course, sometimes banks should be forced out of high-risk businesses. There is some business banks shouldn’t do because it’s far too risky for entities with direct and implicit taxpayer backstops. This is surely the case with some of the wildly-leveraged loans private-credit companies …

24 07, 2023

DAILY072423

Eliza Allen2023-07-24T17:00:47-04:00July 24th, 2023|2- Daily Briefing|

FDIC Clamps Down On Uninsured Deposit Reporting

Likely reacting to mid-size bank accusations that large banks are under-counting uninsured deposits, the FDIC today posted a financial institution letter highlighting that some financial institutions have incorrectly estimated uninsured deposits on their Call Reports.

Fed Archegos Order Lays Out Broader FBO Issues

Joining the U.K.’s record-breaking order, the Federal Reserve added $268.5 million to the $387 million fine imposed on Credit Suisse for governance and numerous other risk-manage failings related to its $5.5 billion Archegos loss. The Fed’s order is an important reminder that FBO branches may be held to full account for failings tolerated at the time by U.S. or home-country regulators (who today also joined in this enforcement action).

GAO Anticipating Mark-Ups, Calls for Stablecoin, Crypto Spot Market Legislation

Ahead of HFSC’s mark-up, GAO today released a report sure to be cited as it calls for statutory change to address regulatory gaps in stablecoins and spot markets. It notes that the lack of stablecoin reserve, disclosure, and redemption requirements may pose consumer-protection and financial-stability risks.

Daily072423.pdf…

3 07, 2023

DAILY070323

Eliza Allen2023-07-03T16:12:30-04:00July 3rd, 2023|2- Daily Briefing|

UK Targets PE/Private-Credit Interconnections

Although U.S. regulators have begun to talk about inter-connections (see FSM Report SYSTEMIC95), the Bank of England’s top official for international finance today laid out new U.K. policy to address them. Specifically, Nathanaël Benjamin addressed counterparty risk with particular attention to bank private-equity and private-credit exposures. Mr. Benjamin’s concern is principally that, should the U.S. not pull off a soft landing, this sector could experience severe stress that could quickly migrate to asset management.

IOSCO Sticks With SOFR

Acting on concerns often expressed by SEC Chairman Gensler, IOSCO today published its final assessment of USD LIBOR, judging two credit-sensitive alternatives problematic and blessing limited use of certain term SOFRs. The most immediate consequences of this will be to make the Fed still less likely to permit banks to use the limited credit-sensitive exemptions provided in its final alternative-benchmark rule (see FSM Report LIBOR9), with IOSCO emphasizing its point with specific reference to this option by urging only cautious use of these rates and suggesting that regulators (presumably outside the U.S.) review their permissibility.

Daily070323.pdf…

9 08, 2022

DAILY080922

Eliza Allen2023-01-04T12:53:47-05:00August 9th, 2022|2- Daily Briefing|

Dems Demand Tougher CRA Standards

HFSC Chairwoman Waters (D-CA) today released the comment letter she and 76 Democrats filed on the CRA proposal (see FSM Report CRA32). As anticipated, it strongly supports community-group comments on issues such as the need for express CRA recognition of a bank’s demographic record. The letter also supports the proposed, tougher approach to scoring, although it argues that it should be made still more stringent via component scores that emphasize LMI and community-of-color performance largely on a facilities-based methodology.

BoE Staff: Regulators Must Tackle Cryptoassets Before They Pose Systemic Risks

Echoing concerns now troubling the Financial Stability Board, a new article from the Bank of England concludes that growth of an open and decentralized metaverse could augment existing cryptoasset risks and trigger systemic financial stability consequences. The article first describes volatility, hacking risks inherent to oracles and smart contracts, transaction front-running and potential negative effects on market confidence, and leverage. More cryptoasset use and interconnectedness – especially for household investments, payment, and bank and non-bank financial institutions – might exacerbate existing risks via new vulnerabilities to macroeconomic shocks, balance-sheet losses, fire-sales, and declines in bank profitability.

Daily080922.pdf…

13 01, 2022

FEDERALRESERVE68

Arezou Rafikian2023-04-24T15:39:54-04:00January 13th, 2022|5- Client Report|

Brainard Navigates Troubled Waters; Looks Like Smooth Sailing for Thompson

At today’s confirmation hearing, Gov. Brainard took a lot of the heat on inflation Republicans only mildly mentioned during Mr. Powell’s Tuesday confirmation hearing (see Client Report FEDERALRESERVE67). As we anticipated (see Client Report FEDERALRESERVE66) this reflects the fact that the GOP is united in opposition to her appointment as Fed vice chair; should she hold Sen. Manchin (D-WV) she will be confirmed; if not, perhaps not. Ranking Member Toomey (R-PA) also used the occasion to signal – again unsurprisingly – GOP opposition should Sarah Bloom Raskin be nominated as the Fed’s supervisory vice chair.

FEDERALRESERVE68.pdf…

13 01, 2022

FedFin on: Brainard Navigates Troubled Waters; Looks Like Smooth Sailing for Thompson

Arezou Rafikian2023-04-24T15:40:10-04:00January 13th, 2022|The Vault|

At today’s confirmation hearing, Gov. Brainard took a lot of the heat on inflation Republicans only mildly mentioned during Mr. Powell’s Tuesday confirmation hearing (see Client Report FEDERALRESERVE67). As we anticipated (see Client Report FEDERALRESERVE66) this reflects the fact that the GOP is united in opposition to her appointment as Fed vice chair; should she hold Sen. Manchin (D-WV) she will be confirmed; if not, perhaps not. Ranking Member Toomey (R-PA) also used the occasion to signal – again unsurprisingly – GOP opposition should Sarah Bloom Raskin be nominated….

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

20 12, 2021

Karen Petrou: For the Next Vice Chair: Stringent Enforcement and Meaningful Supervision

Arezou Rafikian2023-05-22T15:43:38-04:00December 20th, 2021|The Vault|

As we noted last week, the Fed decided to issue some post-Archegos guidance telling big banks to watch their counterparty credit-risk exposures. As a banker with all too much experience dodging risk bullets told me, this guidance followed lots of prior guidance saying the same thing after each big boo-boo – think Long-Term Capital Management more than two decades ago and follow the trail of Fed statements thereafter. Each time, the Fed looks stern and banks say they’re sorry but soon go back to following the money, not the risk. And, over and over, examiners fail to notice anything amiss until the amount of realized risk is impossible to ignore. Interestingly, the Bank of England acted with the Fed but with far more force. Unlike the Fed’s renewed “you better watch out” guidance, the BoE demanded an immediate review of prime-brokering, reports back to regulators, and senior-management pay cuts if flaws go unrepaired. Thus, unlike the Fed, the Bank of England’s response to costly and thoroughly avoidable lapses has teeth. Whether the British then bite anyone is another question – the record is not replete with supervisory success – but the difference should nonetheless be instructive to the Fed’s next supervisory vice chair.

This difference is just like that between telling a child that she’ll be sorry next time and ensuring that the kid immediately knows that bad actions have tangible, actual consequences. One doesn’t have to beat the kid silly – indeed, of course one more than shouldn’t. But, …