#capital rules – Federal Financial Analytics

26 09, 2023

DAILY092623

Eliza Allen2023-09-26T16:36:09-04:00September 26th, 2023|2- Daily Briefing|

BIS Analysis Blasts Lax Capital Regs, But We See Study Flaws

A new BIS paper uses confidential data to defend tough regulatory capital charges because bank internal measures of expected loss (EL) are “excessively optimistic.” However, this critique in our view is applicable only to internal models. It might be said that standardized-approach charges are also unduly optimistic if based on EL, but the entire Basel construct is intended to cover only EL, with loan-loss reserves, capital-conservation-buffers, the leverage ratio, and stress tests supposed to do the rest.

Basel Sees Large Bank Capital Improvements, Slight Liquidity Reductions

The Basel Committee today released the results of its monitoring exercise for the second half of 2022, finding that the largest banks’ capital ratios increased above pre-pandemic levels while liquidity coverage ratios declined. Under the fully phased-in Basel III framework, the average common equity tier 1 capital ratio increased from 12.5% to 12.7% for Group 1 banks from the first half of 2022 to the end of the year. Group 1 banks also reported regulatory capital shortfalls of $3.42 billion under this framework as of December 31, 2022, all of which was GSIB Tier II capital.

Daily092623.pdf…

25 09, 2023

Karen Petrou: How to Right the Raft of New Rules

William Cross2023-09-25T09:28:19-04:00September 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 …

22 09, 2023

DAILY092223

Eliza Allen2023-09-22T17:19:47-04:00September 22nd, 2023|2- Daily Briefing|

Bowman Stands Firm Opposing Pending Rules

Making clear that her concerns with pending rules have in no way abated, FRB Governor Bowman today stated that any proposal considered by the Board or jointly with the other banking agencies must be focused on remediating the identified concerns, informed by data and genuine discussion within each participating agency and with policymakers, and developed through a transparent process that is open to public comment. Citing the FRB’s recent proposals including the Basel III endgame (see Client Report CAPITAL234), LTD requirements (see FSM Report TLAC9), and the CRA rewrite (see FSM Report CRA32), she acknowledges that multiple interrelated proposals may complicate submitting meaningful comments, emphasizing the importance of stakeholder feedback.

Daily092223.pdf…

20 09, 2023

DAILY092023

Eliza Allen2023-09-20T17:11:25-04:00September 20th, 2023|2- Daily Briefing|

Brown, Rounds Agree: AI Credit-Underwriting Warrants Regulatory Attention

At today’s Senate Banking hearing on AI in financial services, Chairman Brown (D-OH) argued that AI should be governed by the same rules as the rest of the financial system, with new law necessary if existing rules prove inadequate.

HFSC FinCEN Bills Draw Bipartisan Support

HFSC Chairman McHenry (R-NC) at today’s markup praised the scope of bipartisan support on today’s FinCEN, sanctions, and other national security bills.

HFSC Delays Bipartisan Sanction Bill Vote

Today’s HFSC markup also considered two bills addressing sanctions policy: H.R. 5512 from Rep. Sherman (D-CA) to require bank subsidiaries to comply with sanctions on Russia and Belarus and H.R. 760 from Rep. Barr (R-KY) imposing blocking sanctions on Chinese defense or surveillance companies and the third-party companies that supply them.

HFSC Dems Continue Strongly Opposing GOP Anti-CBDC Measure

The bipartisan spirit of today’s HFSC markup dissipated as Members fiercely debated H.R. 5403 from Majority Whip Emmer (R-MN), a bill that would bar the Fed from issuing a CBDC to individuals.

Gruenberg: New Shadow Bank Standards Would Cure a Capital Proposal Problem

FDIC Chairman Gruenberg today gave remarks arguing that FSOC along with OFR should establish a new reporting framework to assess the financial stability risks posed by nonbanks and ensure that public reporting is sufficient for market participants to understand nonbank counterparty risk.

HFSC Reports FinCEN, Sanctions, CBDC Bills

HFSC today unanimously reported H.R 760 sanctioning Chinese defense companies, H.R. 5512 requiring bank subsidiaries to comply with sanctions …

19 09, 2023

DAILY091923

Eliza Allen2023-09-19T18:11:29-04:00September 19th, 2023|2- Daily Briefing|

FSB Finally Takes Concrete CCP-Resolution Action

Following longstanding announcements that it would advance CCP resolvability, the FSB today released a consultative report recommending a toolbox approach to CCP resolution providing sufficient loss absorption and liquidity that is readily available and mitigates adverse effects on financial stability.

Treasury Advances Climate-Risk Principles, Not Mandates

Cautiously advancing the President’s climate-risk order (see FSM Report GREEN8), Treasury today released nine nonbinding principles for net-zero financing and investment encouraging financial institutions to focus on limiting scope 3 emissions by implementing robust net-zero transition plans.

CFPB Expands AI Crackdown

Expanding on last year’s adverse action guidance (see FSM Report FAIRLEND11), the CFPB today issued a circular stating that lenders – especially those using AI – cannot use CFPB sample adverse actions forms and checklists to deny consumers credit if the samples do not accurately portray the reasoning behind the denial.

HFSC Republicans Expand Attack From Capital to LTD Rules

Today’s HFSC Financial Institutions Subcommittee hearing on the economic consequences of the banking agencies’ slate of recent proposals showcased strong Republican concerns.

Daily091923.pdf…

15 09, 2023

Al091823

Eliza Allen2023-09-15T16:53:45-04:00September 15th, 2023|3- This Week|

Let It Be Resolved…

Or, maybe not. As detailed below, FedFin has delved into the depths of three new proposals designed to ensure that any big U.S. bank that isn’t made still more impregnable by all the new rules proposed and to come is also indestructible. Karen Petrou has written about the wisdom – if there is any – of making big banks de facto utilities, but this will occur only if all of the new rules work as intended. We’ve had our doubts about that with regard to recent proposals, and our review of the new resolution proposals raises still greater concerns.

Al091823.pdf…

14 09, 2023

CAPITAL235

Eliza Allen2023-09-14T14:23:57-04:00September 14th, 2023|5- Client Report|

GOP Blasts Basel End-Game Regs, Dems Seek a Few Changes

With HFSC Chairman McHenry (R-NC) leading the way, GOP Members of the panel’s Financial Institutions Subcommittee today blasted the banking agencies’ end-game proposal (see Client Report CAPITAL234). Republicans were unanimous in joining leadership’s attack on the proposal’s process and substance, pointing to what they called incomplete impact analyses, an inexplicably short comment period, and adverse macroeconomic and regional-bank implications. Democrats led by Ranking Member Waters (D-CA) were more restrained and in some cases supported the proposal, but concerns were also noted with specific provisions (e.g., re the treatment of certain mortgage and securitization assets) and the interface with the pending CRA final rule. We continue to expect the banking agencies to hold firm to the proposal in broad terms and make minimal, if any, changes to the comment deadline. However, pressure from Republicans and the industry could well force renewed and what many would consider improved impact analyses designed not only to allay political opposition, but also the courts if litigation challenges the final rule.

CAPITAL235.pdf…

11 09, 2023

M091123

Eliza Allen2023-09-11T09:40:12-04:00September 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

Eliza Allen2023-09-11T09:40:05-04:00September 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

Al091123

Eliza Allen2023-09-08T16:03:06-04:00September 8th, 2023|3- This Week|

We’re Flummoxed

FedFin’s in-depth analyses continue to plumb the strategic import of the post-SVB regulatory rewrite U.S. agencies have initiated and are determined to finish no matter industry and Congressional concern. As with our impact assessment of the capital proposal (see FSM Report CAPITAL230), our resolution-standard analyses look at key strategic points in what the agencies say they are doing and then also at what they leave out, what seems not to make as much sense as the agencies suggest, and where the sanguine impact analyses that always accompany these proposals may be at fault.

Al091123.pdf…