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20 03, 2023

Karen Petrou: Three Fast, Urgent Fixes to U.S. Bank Supervision and One Major Change to End Bailouts

2023-03-20T11:35:24-04:00March 20th, 2023|The Vault|

In the wake of recent bank failures, much has rightly been said about how supervisors failed to act even though warning claxons blared.  Nothing that happened to Silvergate, SVB, or Signature is due to forces beyond supervisory control, but there are deep, structural weaknesses in how banks have long been supervised.  How long?  I went back to my 2001 Senate Banking testimony about what was then the largest-ever failure to find that many of the lessons that should have been learned never sunk in.

Given that this hearing was in 2001, a good deal of what I said about bank capital requirements was about Basel I and is thus long out of date.  However, one key point isn’t:  the capital triggers used to spark prompt corrective action (PCA) were and are an unduly-simplistic way to identify the need for rapid supervisory intervention.

Silvergate, SVB, and Signature were all “well” capitalized right up to the brink of collapse because each of the banks in its own way arbitraged the capital rules to enormous – and obvious – advantage.  Nothing in law or rule bars bank supervisors from stepping in well before PCA ratios sink but nothing seems to stir supervisors to do so.  1991’s PCA requirements were an important advance at the time, but it was outdated only a decade later.  Now, it’s a dangerous supervisory distraction.

What else noted in 2001 remains an urgent fix?  Over two decades ago, I urged the FDIC to reinstate the high-growth early-warning system it …

20 03, 2023

M032023

2023-03-20T11:35:13-04:00March 20th, 2023|6- Client Memo|

Three Fast, Urgent Fixes to U.S. Bank Supervision and One Major Change to End Bailouts

In the wake of recent bank failures, much has rightly been said about how supervisors failed to act even though warning claxons blared.  Nothing that happened to Silvergate, SVB, or Signature is due to forces beyond supervisory control, but there are deep, structural weaknesses in how banks have long been supervised.  How long?  I went back to my 2001 Senate Banking testimony about what was then the largest-ever failure to find that many of the lessons that should have been learned never sunk in.

m032023.pdf

18 11, 2022

DAILY111822

2022-11-18T16:59:14-05:00November 18th, 2022|2- Daily Briefing|

GAO Study Hikes Pressure on SEC Process

Adding to the Chairman Gensler’s woes, the GAO today released a report finding that the SEC Division of Enforcement did not document its work reviewing staff procedure assessments, hindering future internal reviews.  Republicans have been harshly critical of SEC procedures and processes, as well as of the Commission’s enforcement-focused approach to cryptoassets.  The GAO’s finding adds fuel to a campaign sure to gain force next year, recommending as it does that the Division Director ensure that information is collected and reported in its memorandum as required by Dodd-Frank.

Fed Study Endorses Bank Supervision

A new Fed staff study uses their unique access to bank examination reports from banks with less than $10 billion in assets to evaluate the extent to which supervisory reports and associated CAMELS ratings predict bank outcomes.  Looking at reports from 2004 through 2016 and thus capturing the great financial crisis, the study concludes that ratings for capital, assets, management, and earnings are effective even after controlling for factors including the ratings themselves.  Ratings are also associated with bank improvement in areas censured in earlier supervisory reports.  The analytical method is textual – i.e., based on a reading of supervisory reports then run through various models to determine impact.

Daily111822.pdf

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