#CAMELS

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11 09, 2023

M091123

2023-09-11T09:40:12-04:00September 11th, 2023|6- Client Memo|

The PCA Cure for Much That Ails New Banking Rules

It’s a cliché, but it’s also true that one can’t beat something with nothing, especially in Washington.  This is an axiom well worth remembering when it comes to all of the new capital and resolution rules befalling the nation’s biggest banks.  I don’t think they need to be beaten back in their entirety – much in the proposals fixes vital flaws.  But the agencies have done a remarkably poor job conjuring the impact of each of these sweeping proposals, let alone their cumulative impact in the context of all the other rules and the grievous supervisory lapses that contributed to recent failures no matter all the rules that could well have sufficed if enforced.  Thus, the most obvious problems with this new construct are opacity, complexity, and most importantly reasonable doubts that, even with all these sharpened arrows, supervisors will still fail to draw their bows and then fire early and often.  All too much in the new rules is false science, as even a cursory read of the impact analyses makes painfully clear.  Instead of setting standards on lofty, unproven models, safeguards should rely on an engineering axiom:  use warning lights that force prompt and corrective action.  Think of the ground warning in an airplane followed by urgent “pull-up” commands and then go to work on the banking dashboard with clear, enforceable rules and new PCA thresholds forcing supervisory action and accountability.

M091123.pdf

11 09, 2023

Karen Petrou: The PCA Cure for Much That Ails New Banking Rules

2023-09-11T09:40:05-04:00September 11th, 2023|The Vault|

It’s a cliché, but it’s also true that one can’t beat something with nothing, especially in Washington.  This is an axiom well worth remembering when it comes to all of the new capital and resolution rules befalling the nation’s biggest banks.  I don’t think they need to be beaten back in their entirety – much in the proposals fixes vital flaws.  But the agencies have done a remarkably poor job conjuring the impact of each of these sweeping proposals, let alone their cumulative impact in the context of all the other rules and the grievous supervisory lapses that contributed to recent failures no matter all the rules that could well have sufficed if enforced.  Thus, the most obvious problems with this new construct are opacity, complexity, and most importantly reasonable doubts that, even with all these sharpened arrows, supervisors will still fail to draw their bows and then fire early and often.  All too much in the new rules is false science, as even a cursory read of the impact analyses makes painfully clear.  Instead of setting standards on lofty, unproven models, safeguards should rely on an engineering axiom:  use warning lights that force prompt and corrective action.  Think of the ground warning in an airplane followed by urgent “pull-up” commands and then go to work on the banking dashboard with clear, enforceable rules and new PCA thresholds forcing supervisory action and accountability.

The need for new PCA triggers is even more urgent than I thought when I first outlined

8 09, 2023

DAILY090823

2023-09-08T16:06:25-04:00September 8th, 2023|2- Daily Briefing|

Barr Backs Away from CBDC, Stands Firm vs. Stablecoins

FRB Vice Chair Barr today for the first time sided firmly with Chair Powell in approaching CBDCs with caution, if at all.  Mr. Barr also emphasized not only that the Fed will not proceed with a CBDC without Executive Branch approval, but also now says that it would require “authorizing legislation,” not just Congressional “approval.”

Examining CBDC and Wholesale Payments

The FDIC today released an internal – but not necessarily independent – review of First Republic’s failure, largely saying that FDIC supervisory staff could have done better identifying emerging risks without strongly criticizing actions ahead of the bank’s collapse.  This is blamed on factors evident at the time: e.g., rapid growth, poor liquidity and interest-rate risk management.

Fed Study: CBDC Unnecessary for Successful Wholesale Tokenization

As JPMorgan and other companies continue to advance wholesale digital payments and Chair Powell has suggested (see Client Report FEDERALRESERVE73) that he may be open to wholesale CBDC, a new Fed staff study finds that tokenized wholesale payment systems do not require a new form of central-bank money.

Daily090823.pdf

13 06, 2023

DAILY061323

2023-06-13T17:11:07-04:00June 13th, 2023|2- Daily Briefing|

Prime Brokers Face New Liquidity-Risk Standards

FINRA today released long-awaited proposals to ensure greater prime-broker liquidity, with prime brokers governed by the largest BHCs presumed to have sufficient liquidity based on Fed supervision of relevant enhanced liquidity standards.

Treasury Presses Private RTP

In remarks today, Treasury Assistant Secretary Graham Steele made it clear that Treasury wants to see private real-time payments continue in concert with FedNow to ensure resilience, noting also that instant payments pose risks that require new tools such as advanced cryptographic methods and controls such as transaction limits.

Chopra Stands Ground; Vance Considers Banking-Agency Overhaul

Today’s Senate Banking Committee hearing with CFPB Director Chopra showcased the usual partisan divide over the Bureau’s mission, with Democrats denouncing the 5th Circuit’s decision and Republicans taking issue with the Bureau’s franchise and activities as well as its credit-card late fee proposal (see FSM Report CREDITCARD36) and small business reporting rule.

Democrats Remain Cautious on Stablecoin Bill, Opposed to Crypto Jurisdiction Rewrite

As anticipated, the full HFSC hearing today on digital assets focused on draft legislation concerning payment stablecoins and digital asset market structure.

Daily061323.pdf

31 05, 2023

DAILY053123

2023-05-31T17:00:40-04:00May 31st, 2023|2- Daily Briefing|

IMF: Housing Risk Not At GFC Level, Still Worrisome

While falling home prices are unlikely to trigger another financial crisis, an IMF blog post today finds that a drop could still harm the global economic outlook.

FDIC Tries Guarded Optimism

The FDIC’s first-quarter report on the condition of the U.S. banking industry was guardedly optimistic, but that in part appears to be due to the way in which the agency foresees its problems.  Problem banks are up by 4 to 43 with $58 billion in assets among them.

End-Game Starts Soon

FRB Governor and Vice-Chair nominee Jefferson today expanded on the Fed’s financial-stability objectives, resolutely disavowing any of the credit-allocation ambitions Republicans sometimes ascribe to its work on climate risk.

CFPB Small-Business Disclosures Go Live

The Federal Register today includes the CFPB’s controversial final rule on small business data collection published late March which the Bureau says will increase transparency in small business lending, promote economic development, and combat unlawful discrimination.

FHA Expands Pandemic Mortgage Relief As Rates Rise

FHA today requested comment on a new loss mitigation proposal called the Payment Supplement Partial Claim allowing servicers to use FHA funds to bring a borrower’s mortgage current and temporarily reduce principal payments.

Daily0523123.pdf

30 05, 2023

FedFin on: Enforcement Policy

2023-05-30T17:09:49-04:00May 30th, 2023|The Vault|

Following a speech earlier this year by the Acting Comptroller arguing that some banks are “too big to manage” and the furor caused by recent failures, the OCC has significantly revised its enforcement policy.  The new framework requires examiners promptly to intervene if any of a bank’s CAMELS scores slips to 3 for unsatisfactory or if the bank is what CFPB Director Chopra would call a “repeat offender” of law, rule, or express supervisory actions or found deficient in practices necessary to ensuring safety and soundness.

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

30 05, 2023

SUPERVISION2

2023-05-30T16:54:05-04:00May 30th, 2023|1- Financial Services Management|

Enforcement Policy

Following a speech earlier this year by the Acting Comptroller arguing that some banks are “too big to manage” and the furor caused by recent failures, the OCC has significantly revised its enforcement policy.  The new framework requires examiners promptly to intervene if any of a bank’s CAMELS scores slips to 3 for unsatisfactory or if the bank is what CFPB Director Chopra would call a “repeat offender” of law, rule, or express supervisory actions or found deficient in practices necessary to ensuring safety and soundness.

SUPERVISION2.pdf

19 05, 2023

DAILY051923

2023-05-19T17:03:07-04:00May 19th, 2023|2- Daily Briefing|

Bowman Strengthens Stand Against New Rules, Possible Supervisory Overkill

In case anyone doubted her meaning last week, FRB Gov. Bowman today repeated her strong opposition to the regulatory rewrites spelled out in what at first seemed the Fed’s but is now apparently only Vice Chairman Barr’s report (see Client Report REFORM221).  Ms. Bowman also reiterates her call for an independent study, continued tailoring, and improved supervision.

Bills To Reduce Regulatory Independence Advance

As anticipated at his last hearing, HFSC Financial Institutions Subcommittee Chairman Barr (R-KY) has now formally introduced three regulatory transparency bills.  We will shortly provide clients with in-depth analyses of these bills, which we expect quickly to proceed to mark-up on largely party-line votes.

Warren Pounces On Reports Of Treasury-Bond Assessment Proposal

Sen. Warren (D-MA) yesterday sent a strongly-worded letter to FDIC Chairman Gruenberg demanding that the FDIC reject reported big bank plans to replenish the DIF with at-par Treasury bonds rather than the proposed special assessment (see FSM Report DEPOSITINSURANCE120).

BIS’s Carstens Dismisses Crypto, Calls For Tighter Non-bank Controls

In a wide-ranging speech today, BIS General Manager Agustín Carstens sharply criticized cryptocurrencies and called for greater regulation of the nonbank sector to avert a systemic financial crisis.

Daily051923.pdf

15 05, 2023

M051523

2023-05-15T11:52:42-04:00May 15th, 2023|6- Client Memo|

How An Ill-Designed Special Assessment Is Sure To Scramble The Structure Of Federal Deposit Insurance

As our forthcoming in-depth analysis will detail, the FDIC’s proposed special assessment raises a raft of policy problems not contemplated by the FDIC despite a steep price tag warranting careful thought at a time of financial instability and recessionary risk.  The FedFin analysis will detail the proposal, what the FDIC thinks, and what the proposal might do to whom, but here’s my opinion:  the FDIC’s decision to allocate blame for SVB and Signature’s failures to a select group of surviving larger banks is a politically-expedient violation of the principal of insurance and a terrible precedent for the future of federal deposit coverage.

M051523.pdf

15 05, 2023

Karen Petrou: How An Ill-Designed Special Assessment Is Sure To Scramble The Structure Of Federal Deposit Insurance

2023-05-15T11:52:36-04:00May 15th, 2023|The Vault|

As our forthcoming in-depth analysis will detail, the FDIC’s proposed special assessment raises a raft of policy problems not contemplated by the FDIC despite a steep price tag warranting careful thought at a time of financial instability and recessionary risk.  The FedFin analysis will detail the proposal, what the FDIC thinks, and what the proposal might do to whom, but here’s my opinion:  the FDIC’s decision to allocate blame for SVB and Signature’s failures to a select group of surviving larger banks is a politically-expedient violation of the principal of insurance and a terrible precedent for the future of federal deposit coverage.

First problem: the FDIC assigns blame to a large group of bigger banks even though its own analysis of the SVB and SBNY failures points to a different underlying reason for the systemic designation.  In the proposal, the FDIC targets large holdings of uninsured deposits even though both its post-mortem and the Fed’s of the two systemic failures cites bad management as the most important cause of death.  Both agencies do note the new risks posed by social-media runs that hastened the banks’ passing, but each also makes it clear that these new-age runs are an endemic challenge to bank resilience, not a risk unique to SVB and Signature or other banks with large amounts of uninsured deposits.  The FDIC proposal contains no explanation of why uninsured-depositories are the systemic rescue’s fall guys even though these deposits aren’t the cause of the two bank failures and the risks …

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