Capital – Federal Financial Analytics

18 08, 2023

Al082123

William Cross2023-08-22T09:52:13-04:00August 18th, 2023|3- This Week|

Capital Regulation Deconstructed

Last week, we provided clients with several more in-depth analyses of the interagency capital proposal. Of particular note is our wrap-up report (see Client Report CAPITAL234) which looks hard at the agencies’ own quantitative and qualitative impact assessments to see what the raw numbers say, how the numbers comport with current data and market realities, and – most importantly – how to interpret the agencies’ qualitative conclusions in light of these analytics, as well as our understanding of many of the studies on which key assumptions are premised. As the report details, we agree that the agencies’ rationale for every possible capital woe – that anything is better than a financial crisis – is right. But it’s only right if the result of the rules is to make financial crises less likely and that, as our reports make clear, is far from assured. Many provisions of each key section combined with overall quantitative results could well prove profoundly destabilizing.

Al082123.pdf…

1 08, 2023

CAPITAL230

Max Camateros-Mann2023-08-01T16:23:31-04:00August 1st, 2023|1- Financial Services Management|

U.S. Regulatory-Capital Rewrite: Framework

In this in-depth report, we begin our analysis of the 1089-page capital proposal released by the U.S. banking agencies not only to make U.S. standards more consistent with Basel’s 2017 “end-game” rules, but also to correct failings in the current capital framework the agencies believed were laid bare by recent bank failures. The new standards rewrite the 2019 “tailoring” rule with regard to application of the toughest capital standards, now covering all BHCs with assets over $100 billion along with their insured depository institutions (IDIs) regardless of size. For smaller BHCs, the most significant impact of the new approach requires recognition of accumulated other comprehensive income (AOCI) unrealized gains and losses related to available-for-sale (AFS) and held-to-maturity (HTM) securities; the agencies recognize this cost but believe the proposed three-year transition reduces any adverse impact.

CAPITAL230.pdf…

1 08, 2023

FedFin on: Capital Winners – GSEs – and Losers – MI

Eliza Allen2023-08-04T09:44:41-04:00August 1st, 2023|The Vault|

We’ve much more to do to determine the strategic and policy impact of the new credit-, market-, and operational-risk capital rules singly and collectively – a complex task given the 1,089-page rulemaking made harder by some extremely-arcane language that may either mask what the agencies mean or differ from what they meant to mean. Still, several conclusions about mortgage finance are clear: the rules would be less demanding than those at present for many mid-LTV loans, the GSEs’ risk weighting continue to give them a considerable advantage over bank originators and securitizes, and MI lost the limited luster the banking agencies were forced to concede in 2013.

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

1 08, 2023

FedFin Analysis: U.S. Regulatory-Capital Rewrite: Framework

Eliza Allen2023-08-01T16:31:19-04:00August 1st, 2023|The Vault|

In this in-depth report, we begin our analysis of the 1089-page capital proposal released by the U.S. banking agencies not only to make U.S. standards more consistent with Basel’s 2017 “end-game” rules, but also to correct failings in the current capital framework the agencies believed were laid bare by recent bank failures. The new standards rewrite the 2019 “tailoring” rule with regard to application of the toughest capital standards, now covering all BHCs with assets over $100 billion along with their insured depository institutions (IDIs) regardless of size. For smaller BHCs, the most significant impact of the new approach requires recognition of accumulated other comprehensive income (AOCI) unrealized gains and losses related to available-for-sale (AFS) and held-to-maturity (HTM) securities; the agencies recognize this cost but believe the proposed three-year transition reduces any adverse impact.

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

28 07, 2023

GSE-072823

William Cross2023-08-14T10:29:36-04:00July 28th, 2023|4- GSE Activity Report|

Capital Winners – GSEs – and Losers – MI

We’ve much more to do to determine the strategic and policy impact of the new credit-, market-, and operational-risk capital rules singly and collectively – a complex task given the 1,089-page rulemaking made harder by some extremely-arcane language that may either mask what the agencies mean or differ from what they meant to mean. Still, several conclusions about mortgage finance are clear: the rules would be less demanding than those at present for many mid-LTV loans, the GSEs’ risk weighting continue to give them a considerable advantage over bank originators and securitizes, and MI lost the limited luster the banking agencies were forced to concede in 2013.

GSE-072823.pdf…

17 07, 2023

Karen Petrou: Counter-Cyclicality is One Critical Missing Piece of Barr’s Unholistic Construct

William Cross2023-07-17T16:55:22-04:00July 17th, 2023|The Vault|

Banks and Republicans are beating up on Michael Barr for much in his new capital construct. The furor focuses on the high cost of the new capital rules, cost glossed over in Mr. Barr’s talk via an over-arching assumption that banks can readily do without two years of post-dividend retained earnings. Maybe they can; investors not so much. This is a big problem, but a little-noticed one also warrants more scrutiny: the decision to leave untouched and apparently not even considered the U.S. version of the counter-cyclical capital buffer (CCyB). This makes the new framework still more procyclical and even less holistic. CCyBs have worked well around the world and a well-designed one in the U.S. would obviate the need for some – not all, but some – of Mr. Barr’s most counter-productive ideas even as it makes banks more resilient, the financial system safer, and the economy less volatile.

What are CCyBs? The basic idea is that these are capital charges triggered in good times that are released under stress, making banks and the economies they serve better able to ride out macroeconomic boom-bust cycles. The final U.S. version of the global CCyB framework acknowledges this global standard, but it goes on to say only that the Federal Reserve will know a boom or bust when it sees it and will do something about it via some sort of CCyB should it feel inclined to do so possibly after a rulemaking process on the up- and down-sides that …

17 07, 2023

M071723

William Cross2023-07-17T09:36:14-04:00July 17th, 2023|6- Client Memo|

Counter-Cyclicality is One Critical Missing Piece of Barr’s Unholistic Construct

Banks and Republicans are beating up on Michael Barr for much in his new capital construct. The furor focuses on the high cost of the new capital rules, cost glossed over in Mr. Barr’s talk via an over-arching assumption that banks can readily do without two years of post-dividend retained earnings. Maybe they can; investors not so much. This is a big problem, but a little-noticed one also warrants more scrutiny: the decision to leave untouched and apparently not even considered the U.S. version of the counter-cyclical capital buffer (CCyB). This makes the new framework still more procyclical and even less holistic. CCyBs have worked well around the world and a well-designed one in the U.S. would obviate the need for some – not all, but some – of Mr. Barr’s most counter-productive ideas even as it makes banks more resilient, the financial system safer, and the economy less volatile.

M071723.pdf…

10 07, 2023

CAPITAL228

Max Camateros-Mann2023-07-10T12:49:19-04:00July 10th, 2023|5- Client Report|

Going Up?

FRB Vice Chairman Barr’s speech today outlines near-term U.S. regulatory-capital policy, confirming our earlier assessment that a sweeping proposal will soon be released. There are few surprises in the speech, which outlines a “holistic” construct comprised of U.S. action on the “endgame” rules and revisions presaged in the Fed’s response to SVB’s failure (see Client Report REFORM221). As detailed in this new FedFin report, the agencies also plan to retain the GSIB surcharge largely as is despite technical flaws in order to reduce GSIB size and give super-regionals a fighting chance.

CAPITAL228.pdf…

21 06, 2023

FEDERALRESERVE74

William Cross2023-06-21T17:06:47-04:00June 21st, 2023|5- Client Report|

Powell Tries to Deflect GOP Capital Assault

Chairman Powell’s HFSC appearance today led to unusually substantive discussion of pending financial-policy actions. As detailed in this report, Republicans renewed their vigorous campaign against new capital rules, refusing to be put off by Mr. Powell’s assurances that they would apply only to the largest banks, would be phased in, and will have less impact on growth than interest rates. Even though Mr. Powell also said he recognized capital trade-offs and had taken no position on new rules, Chairman McHenry (R-NC) is so opposed to these and other recent proposals from Vice Chairman Barr that his opening statement includes the suggestion of legislation to separate monetary from regulatory policy, presumably moving regulation to another agency perhaps in the manner recently proposed by Sen. J.D. Vance (R-OH). However, neither Mr. McHenry nor other Republicans raised this idea in their questioning, suggesting it is not a near-term legislative-agenda item. What is near-term are mark-ups announced today for the HFSC/Ag bill on crypto jurisdiction strongly opposed by Democrats and the stablecoin bill to which they are considerably more amenable.

FEDERALRESERVE74.pdf…

14 06, 2023

REFORM227

Max Camateros-Mann2023-06-14T15:34:59-04:00June 14th, 2023|5- Client Report|

Yellen Demurs on Resolutions, Capital Changes

Treasury Secretary Yellen was pressed at today’s HFSC hearing to comment on pending bank capital standards, the scope of FDIC coverage, and failed-bank resolutions. Although she deferred to the banking agencies, she did agree to work with Rep. Foster (D-IL) to determine if additional guidance is needed to clarify the difference between the least-cost test and systemic stability. Ms. Yellen was closely questioned about IFI policies to China and the need for U.S. sanctions, continuing to make clear that the U.S. is seeking what NSC Director Sullivan calls derisking, not decoupling. The Secretary also stood by FSOC’s positions in favor of swing pricing, stablecoin and crypto reform, and careful CBDC consideration.

REFORM227.pdf…