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28 11, 2022

DAILY112822

2022-11-28T16:52:04-05:00November 28th, 2022|2- Daily Briefing|

Fed Staff Paper Counters CBDC First-Mover Arguments

Supporting the Fed’s decision not to move quickly on CBDC (see FSM Report CBDC10), a new Fed staff paper found little evidence of any national first-mover advantages, running counter to many lawmakers’ concerns about the US falling behind China or Europe (see Client Report CBDC13).  The paper argues that the speed of technological innovation, the ability of large economies to dictate technology standards, and the ability of subsequent movers to improve on the design of first movers minimizes any early advantages gained in international payments.  It also reiterates the Fed’s view that the dollar’s position as the global reserve currency is not at risk, citing the slow nature of historical financial transitions.

Basel Turns Focus To NBFI Interconnectedness, Leverage-Ratio Risk

Continuing the global-regulatory focus on nonbank financial intermediation (see Client Report NBFI2), the Basel Committee last week concluded that continued NBFI sector growth poses financial-stability concerns and highlighted interconnectedness risks and inadequate management practices.  Specific concerns center on due-diligence failures, margining practices, and limit frameworks.  The Committee also identifies regulatory arbitrage regarding the leverage ratio, providing no explanation of what this might entail.  Additional areas of concern include NBFI counterparty exposure through derivatives and securities financing, leveraged lending, prime brokerage, and cryptoasset services.

Daily112822.pdf

17 11, 2022

DAILY111722

2022-11-17T17:18:13-05:00November 17th, 2022|2- Daily Briefing|

Warren, Durbin Demand Answers about FTX Collapse

Following FTX’s collapse, Majority Whip Durbin (D-IL) and Sen. Warren (D-MA) sent a letter today to FTX founder Sam Bankman-Fried demanding a detailed accounting of the company’s decisions and business practices.  We doubt they will get an answer anytime soon, with this letter joining a flood of Congressional inquiries and likely hearings (see Client Report REFORM215).

Jefferson Supports Limited Fed Mandate

In remarks today, FRB Gov. Phillip Jefferson disputes those – including many progressive Democrats – who believe that racial equity and economic equality are an intrinsic part of the Fed’s mission.  Specifically, he states that, while consumer protection, community development, and financial stability can promote inclusive growth, monetary policy cannot directly address it or why low-income households are more acutely affected by inflation.

Fed CBDC Survey Suggests Possible CBDC Upside

A new Fed literature review evaluating the macroeconomic implications of CBDC focuses on the financial inclusion and payment system impacts CBDC would have in the U.S. and advanced economies.  As is usually the case with surveys, it reaches cautious conclusions, including that CBDC could increase financial inclusion for the unbanked.  It might also reduce financial frictions in deposit markets, enhance retail payment-system efficiency, facilitate international transactions, and spur private-sector banking and payments innovation.

Daily111722.pdf

16 11, 2022

DAILY111622

2022-11-16T17:14:29-05:00November 16th, 2022|2- Daily Briefing|

Treasury Calls for Tough Fintech and Bank-Partnership Protection, Prudential Standards

Treasury has completed a long-pending study of the extent to which nonbank fintechs compete with banks and how this affects financial stability and consumer protection.  We will shortly provide clients with an in-depth analysis of this report, for which Karen Petrou was extensively interviewed as now noted publicly in the appendix.  The report was ordered by the Secretary in compliance with President Biden’s competition order (see Client Report MERGER6), finding that nonbank fintechs directly compete with banks and thus may reduce current concentration levels, sure to influence the inter-agency bank-merger policy that remains to be finalized.

Williams Presses for NBFI Standards

In remarks today, FRB-NY President John Williams said that the central bank should not adjust monetary policy to address the price-stability challenges of volatile Treasury markets and that financial-stability questions have generally been well-addressed as evident in the sound U.S. banking system.  Noting recent findings in the latest staff report (see Client Report TMARKET3), Mr. Williams also called for structural changes to NBFIs along lines also laid out by the FSB (see Client Report NBFI2), arguing that MMFs and other NBFIs must be a market source of strength, not of vulnerability requiring rescue beyond the Fed’s new standing facility.

G20 Blesses FSB, Basel Work Plans

In addition to top-priority concerns such as Ukraine, the G-20 Leader’s Declaration today tackled the usual financial-policy agenda, supporting the FSB’s recent NBFI report (see Client

15 11, 2022

DAILY111522

2022-11-15T17:28:46-05:00November 15th, 2022|2- Daily Briefing|

Recognizing Early Stage, FSB Still Slams Climate Stress Scenario Analytics

In collaboration with the Network for Greening the Financial System (NGFS), the FSB today concluded that risk exposures and vulnerabilities may be underestimated under current climate-stress scenarios because metrics fail to capture second-round effects, potential climate non-linearities, risk-management costs and externalities, and asset-price corrections triggered by transition shocks.  Further, while orderly scenarios do not yield severe impacts, disorderly scenarios and scenarios involving no financial system transition accompanied by high medium- to long-term physical risks correlate with significant GDP and financial losses.  As a result, the FSB determines that, although the impact of climate risk is concentrated in certain sectors and currently contained from a domestic financial perspective, tail risks may pose notable resilience threats.

FRBNY Launches CBDC Feasibility Project

Advancing more of the U.S. CBDC infrastructure, the Federal Reserve Bank of New York today announced that its Innovation Center (NYIC) will engage in a proof-of concept project testing the technical, legal, and business feasibility of distributed ledger technology to settle financial institution liabilities through transfer of central bank liabilities.  Work includes collaboration between NYIC and private sector organizations and will harness simulated data to explore the feasibility of central bank wholesale and commercial digital money interoperating on a shared multi-entity distributed ledger, but will not advance policy outcomes or signal imminent Federal Reserve CBDC adoption or design specifications.

Daily111522.pdf

8 11, 2022

DAILY110822

2022-11-08T16:54:50-05:00November 8th, 2022|2- Daily Briefing|

EU Council Eases Basel End-Game Rules

Ahead of U.S. action on what is now being called the Basel “end-game,” the Council of the European Union today announced a set of compromises and delays to finalize the standard.  The output floors (see FSM Report CAPITAL220) will apply at both the parent banking group and subsidiary banks, but EU banks will have the discretion to consolidate capital at the highest parent level in each EU nation.  The Council release provides no details, indicating only “technical improvements” were made to the Basel credit-, market-, and operational- risk standards and small banks now have unspecified breaks, including with regard to disclosure.

BIS: CBDC Could Boost Deposit Rates, Small Banks

A new BIS staff paper differentiates its analysis of CBDC’s monetary-policy transmission impact by distinguishing between the extent to which large and small U.S. banks respond to different rates paid in interest on reserves (IOR).  Large banks are found to be unresponsive to IOR changes, making CBDC necessary to force them to increase rates on deposits via the competition channel rather than a traditional monetary-policy tool.  To the extent this reasoning takes hold, it could prove potent with Democrats who not only often favor CBDC, but are also increasingly angry about what they see as large-bank failures to raise deposit rates in lock-step with Fed hikes.

Daily110822.pdf

4 11, 2022

DAILY110422

2022-11-04T17:11:14-04:00November 4th, 2022|2- Daily Briefing|

Big Banks Pressed on Sluggish, Inequitable Deposit-Rate Hikes

Advancing an initiative with political “legs,” Sen. Jack Reed (D-RI) has demanded answers from the nation’s largest banks on why small-deposit rates have barely budged even as the Fed sharply hiked interest rates now reflected in higher loan costs.

FRB-NY Official Details Wholesale CBDC Prototype

Remarks today from a senior FRB-NY official, Michelle Neal, continued the Fed’s ambivalent stand on a CBDC (see FSM Report CBDC10).

Fed Fixes Advanced-Approach Glitches

The FRB is proposing to implement three changes to Regulation Q data collection/disclosure rules governing advanced-approach capital adequacy at BHCs, SLHCs, and state member banks.

Fed to Name Master-Account Names

Reflecting ongoing concerns on Capitol Hill, the Fed is proposing to make what our analysis suggests were opaque payment-system access guidelines (see FSM Report PAYMENT24) “a bit more transparent.”

Toomey Presses for SLR Rewrite

Ranking Senate Banking Member Toomey (R-PA) today released his letter to Chairman Powell cautioning the central bank not to handle any Treasury-market liquidity events with new backstop facilities.

Waters Adds To Fed’s Political Woes

In a letter today, HFSC Chairwoman Waters (D-CA) joined Sens. Warren (D-MA), Brown (D-OH), and Hickenlooper (D-CO) in sharply criticizing the recent Fed “super-sized” rate hike.

Fed Worry Level Goes Up

The Federal Reserve likely hoped for the torpor of a Friday afternoon to quell frightened replies to the latest financial-stability report released today.

Daily110422.pdf

2 11, 2022

DAILY110222

2022-11-02T16:14:20-04:00November 2nd, 2022|2- Daily Briefing|

SEC Turns to Swing Pricing, Structural OEF Redesign

As anticipated, the SEC today voted 3-2 to advance swing pricing and other structural changes to open-end funds (OEFs).  Key to this proposal is to the Commission’s controversial MMF draft (see FSM Report MMF19) is swing pricing, with Chairman Gensler laying out how he believes swing pricing would end first-mover advantage and thus improve fund stability.  The proposal also imposes stiff new liquidity standards, with Commissioner Uyeda dissenting from this and the rest of the proposal on grounds that only bank-loan funds have proven to be demonstrably illiquid under stress.

BIS Announces DeFi Foreign Exchange Pilot for CBDCs

Continuing its CBDC pilots, the BIS today announced the launch of Project Mariana, a system seeking to use DeFi protocols to automate CBDC foreign-exchange settlements.  Project Mariana will operate in Switzerland, France, and Singapore, exchanging wholesale CBDCs.  The BIS is interested in exploring the application and design of automated market markers in wholesale CBDC exchanges, the effectiveness of a supra-regional network for cross-border settlement, and potential governance models of wholesale CBDCs.

Daily110222.pdf

26 10, 2022

DAILY102622

2022-10-26T17:02:07-04:00October 26th, 2022|2- Daily Briefing|

BIS Announces Successful Multi-CBDC Platform Pilot

Following their retail crypto pilot last week, the BIS announced a successful pilot blockchain ledger – dubbed the mBridge Ledger – connecting twenty commercial banks in China, Hong Kong, Thailand, and the UAE via a multi-CBDC common platform.  Both domestic and foreign commercial banks are permitted to directly hold and transact in CBDCs on the platform to ensure seamless cross-border payments.  To protect monetary sovereignty, the platform allows governments to flexibly control CBDC issuance and redemption, transaction currencies and amounts, and visibility into usage.

With President at His Side, Chopra Sanctions Overdraft, Deposit Fees

President Biden today took aim at junk fees, slamming them in general even as he praised the CFPB’s initiative today sharply to limit “surprise” overdraft and deposit fees.  The agency did so by issuing a circular on unanticipated overdraft fee assessment practices and a bulletin on Returned Deposited Item Fee Assessment Practices, again using its non-regulatory tools to enact new policy and set stringent enforcement standards.  We will shortly provide clients with in-depth analyses of each release.

Daily102622.pdf

21 10, 2022

DAILY102122

2022-10-21T16:31:13-04:00October 21st, 2022|2- Daily Briefing|

Ginnie Gives Ground on Controversial RBC Requirements

Following its long-delayed release of eligible seller-servicers standards with FHFA, Ginnie Mae announced today that it is extending by one year its mandatory compliance date for the new risk-based capital standards. The announcement cites stakeholder feedback and evolving market dynamics –doubtless the economic downturn and concerns about procyclicality – in the agency’s decision for this extension, which sets a new RBC implementation date of December 31, 2024.

BIS Unveils Two-Tier CBDC Prototype

Reflecting the BIS’ preferred two-tier CBDC structure (see Client Report CBDC6), the BIS today announced the launch of a prototype two-tier retail CBDC called Aurum comprised of a wholesale interbank system and a retail e-wallet.  The wholesale interbank system is designed to ensure that banks do not issue more retail CBDCs than the wholesale CBDCs that the bank owns or double issue the same wholesale CBDC asset as a retail CBDC asset.  This system also tracks unspent transaction output, allowing users to prove ownership even if an issuing bank has ceased operations.

Daily102122.pdf

14 10, 2022

DAILY101422

2022-10-14T17:04:18-04:00October 14th, 2022|2- Daily Briefing|

Along with a Squeaker Merger Approval, Fed/FDIC Begin Work on Large-Bank Resolvability

As anticipated in Karen Petrou’s speech yesterday, the Fed today unanimously approved and the FDIC will shortly do the same on an advance notice of proposed rulemaking re-enforcing large-bank resolvability.  That this complex rulemaking will not slow near-term merger decisions was made clear today also by the Fed and OCC decisions to clear USB’s acquisition of MSFG’s California banking organization.

Covid Comm Presses CFPB for Still More Credit-Reporting Reform

The Chairman of the Select Subcommittee on the Coronavirus Crisis, Rep. James Clyburn (D-NC) sent a letter to CFPB Director Chopra requesting that the Bureau investigate the three nationwide consumer reporting agencies (NCRAs) for failing to properly address credit reporting errors.  Citing data, the Subcommittee obtained from the NCRAs, Chairman Clyburn alleges that reporting errors occurred far more often than previously thought, that the majority of disputes do not result in consumer relief, and that the NCRAs discarded “tens of millions” of submissions without investigation by claiming they came from unauthorized third-parties.

Waller Dismisses Threat To Reserve Dollar Without A CBDC

In remarks today, FRB Governor Waller reiterated his skepticism of foreign-issued CBDCs and stablecoins, arguing that the underlying reasons for dollar dominance are non-technological and CBDCs will not affect them.  He dismisses concerns that foreign CBDCs would undermine dollar dominance because they could neither reduce payment frictions nor prevent illicit finance.

Daily101422.pdf

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