#capitalization – Federal Financial Analytics

20 06, 2023

DAILY062023

Eliza Allen2023-06-20T17:15:39-04:00June 20th, 2023|2- Daily Briefing|

ECB Targets Bank Risk to NBFIs

A speech earlier today from the ECB’s top bank supervisor makes it clear that the EU is pressing ahead with FSOC’s proposed limits on bank inter-connections with NBFIs (see FSM Report SYSTEMIC95). Karen Petrou’s memo today also addresses this issue.

New M&A Policy Sets High Bar For Banking-Agency Approval, Increases Odds Of DOJ Rejection

Making M&A a good deal harder to pull off, Assistant Attorney General Jonathan Kanter today redefined U.S. bank-merger policy in light of comments on a recent RFI (see FSM Report MERGER10) and dramatic changes since current policy was set in 1995. The new approach reflects Biden Administration competition policy (see Client Report MERGER6) and will make it considerably more difficult for banks of all sizes to win DOJ approval if the banking agencies approve their proposed transaction after getting a new, likely more dire competitive-factor report from the Department of Justice.

FRB-KC: Community Banks Better Capitalized than GSIBs

The Kansas City Fed today released an analysis of 2022 bank capital, finding that community banks continued to hold higher levels of capital compared to G-SIBS: ten percent to six percent, respectively. The study also found that G-SIB supplementary leverage ratios (SLR) increased thirty basis points to 5.94 percent, the first increase since the beginning of the pandemic, excluding the impact of the Fed’s temporary capital relief.

Daily062023.pdf…

31 05, 2023

DAILY053123

Eliza Allen2023-05-31T17:00:40-04:00May 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…

20 04, 2023

DAILY042023

Eliza Allen2023-04-20T17:02:29-04:00April 20th, 2023|2- Daily Briefing|

Reed-Grassley Bill Lays Out Another Clawback Construct

Sens. Reed (D-RI) and Grassley (R-IA) introduced yesterday S. 1181, a bill allowing the FDIC to claw back the prior two years of failed bank executive compensation and prohibits them from working at another financial institution for at least two years.

FRB-NY Staff Find Severe Climate Risk At Big Four U.S. Banks But We Wonder

Based on a more in-depth study, a new FRB-NY post measures the market risk to financial institutions related to climate change.

FSB Report Shows Growing Supervisory Interest In Climate-Related Compensation Frameworks

A new FSB report on climate-related financial risk factors in compensation frameworks across the banking, insurance and asset management sectors concludes that financial institutions will need to continuously revise their climate-related criteria to ensure effective alignment of compensation with prudent risk management.

Brown Presses For Stringent FHLB Mission Standards

Following considerable furor over the role of the FHLBs in recent bank failures, Senate Banking Chairman Brown (D-OH) has written to FHFA Director Thompson requesting that the agency’s planned FHLB report also include a detailed assessment of this issue.

Waller Sees Promise In Tokenization, AI

Following prior comments about crypto risk, FRB Gov. Waller today highlighted two innovations he believes may well have natural use cases if their risks can be contained or mitigated.

Fed Study: Bank Enforcement Action Resolution Improves Minority Lending Outcomes

A new Federal Reserve paper concludes that enhancing bank loan and internal governance policies is critical to improving access to credit for minority …

13 04, 2023

DAILY041323

Eliza Allen2023-04-13T17:09:21-04:00April 13th, 2023|2- Daily Briefing|

KC Fed: AOCI Recognition Boosts Credit Availability

A new staff study from the Kansas City Fed finds that significant holdings of unrealized losses adversely affect loan growth in addition to posing the solvency challenges all to evident in recent failures. The channels through which dampening occurs are first higher equity costs due to investor perceptions of greater risk and lower return. Debt-funding costs are also likely to rise, with higher capital and liquidity costs then passed on to borrowers in terms of higher rates that reduce demand.

Daily041323.pdf…

10 04, 2023

DAILY041023

Eliza Allen2023-04-10T17:27:00-04:00April 10th, 2023|2- Daily Briefing|

FRB-NY Study: When Franchise Value Flies Out the Window

In a timely Friday post ahead of earnings season, the Federal Reserve Bank of New York’s staff posted an assessment of the impact of higher interest rates on bank franchise value. This is judged by both going concern valuations (i.e., the economic value of equity, known as EVE) and how much tangible common equity (TCE) is left after liquidating a gone concern. Stylized models are developed of “traditional banks” – i.e., those where sticky core deposits constitute most liabilities and assets are principally adjustable-rate – versus “alternative banks” with large holdings of floating rate liabilities along with large books of fixed-rate assets.

Warren, AOC Challenge SVB’s Large Depositors

Following her request and that of Sen. Blumenthal (D-CT), Sen. Warren (D-MA) and Rep. Ocasio-Cortez (D-NY) yesterday sent a series of letters to fourteen of SVB’s largest corporate depositors seeking to get at any abuses that may have precipitated the $42 billion run the day before the bank failed on March 10. The letters thus demand explanations for what they call a “mutual backscratching dynamic,” any actions related to deposit withdrawals, and the rationales behind large uninsured deposits.

Daily041023.pdf…

6 04, 2023

GSE-040623

Eliza Allen2023-04-06T10:33:08-04:00April 6th, 2023|4- GSE Activity Report|

Extra Equitable?

FHFA, Fannie, and Freddie yesterday updated the sometimes-controversial equitable-finance plans FHFA approved last year. Notably, Fannie’s new plan no longer focuses exclusively on Black households, a feature that garnered vitriolic Wall Street Journal criticism and negative Republican reactions. Freddie’s plan delays and may even back away from efforts to set MI and title insurance pricing.

GSE-040623.pdf…

3 04, 2023

DAILY040323

Eliza Allen2023-04-03T17:05:54-04:00April 3rd, 2023|2- Daily Briefing|

BIS: Banning Capital Distributions Proved Good for Banks, Borrowers

If macroeconomic or market conditions worsen, it seems likely that anxious regulators will look to preserve bank capital and turn to the ban on capital distributions briefly in place at the height of the Covid crisis. A new BIS study of the impact these restrictions had on the EU at the time is thus a timely guide to regulatory thinking under new leadership at the White House, Fed, OCC, and FDIC.

CFPB Loads Its UDAAP Bazooka

The CFPB today released what to our initial review appears an explosive new policy statement even though the agency asserts that it sets no new policy.

BIS Study Finds Retail CBDCs May Counter Financial Shocks

Supporting its overall goal of two-tier CBDC, the BIS released a model-based working paper today finding that the introduction of a retail CBDC that is perfectly substitutable with bank deposits in an open, large economy (i.e., the U.S.) could lower real interest rates and be an effective tool for countering financial shocks.

Why MMFs Beat Bank Deposits

A new FRB-NY post uses recent evidence to confirm an earlier study that MMFs are more responsive than bank deposits to monetary-policy tightening. Indeed, the data are striking, with MMF rates since March of 22 matching fed funds moves by 97 percent versus an only eight percent match for three-month CDs.

Daily040323.pdf…

24 03, 2023

FedFin Analysis: Whom and What the FDIC and Fed Can Save How

Arezou Rafikian2023-03-24T17:05:38-04:00March 24th, 2023|The Vault|

Recent editorials and other media have often said that the FRB and/or FDIC have powers or taken actions that is not the factual case as we understand it. Members of Congress also appear sometimes willing to make assertions about what agencies can do now even if it is unclear if there is statutory authority to do so. We have provided individual clients with key clarifications, but do so now more generally to support strategic and advocacy decision-making. Of particular importance is the authority the FDIC is said to have or lack related to uninsured deposits; as detailed below, the agency actually has significant authority to do so as well as even to back BHC debt, as long as certain stringent conditions are met. As detailed in FSM Report RESCUE65, Congress limited both the FDIC and Fed in hopes that….

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

24 03, 2023

RESCUE79

Eliza Allen2023-03-24T16:30:20-04:00March 24th, 2023|5- Client Report|

FedFin Analysis: Whom and What the FDIC and Fed Can Save How

Recent editorials and other media have often said that the FRB and/or FDIC have powers or taken actions that is not the factual case as we understand it. Members of Congress also appear sometimes willing to make assertions about what agencies can do now even if it is unclear if there is statutory authority to do so. We have provided individual clients with key clarifications, but do so now more generally to support strategic and advocacy decision-making. Of particular importance is the authority the FDIC is said to have or lack related to uninsured deposits; as detailed below, the agency actually has significant authority to do so as well as even to back BHC debt, as long as certain stringent conditions are met. As detailed in FSM Report RESCUE65, Congress limited both the FDIC and Fed in hopes that the Dodd-Frank orderly-liquidation authority (OLA, see FSM Report SYSTEMIC30) would permit orderly resolution of even the largest banks and nonbanks without long-term federal support; a subsequent FedFin report will bring the assessment of OLA powers into the current crises’ context given that Congress will surely seek to determine why the FDIC and its sister authorities chose to provide taxpayer support rather than deploy OLA.

RESCUE79.pdf…

20 03, 2023

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

Eliza Allen2023-03-20T11:35:24-04:00March 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 …