17 07, 2023

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

2023-07-17T16:55:22-04:00July 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 …

11 04, 2023

FedFin Assessment: Top Brainard, Gruenberg Regulatory Rewrites

2023-04-11T16:52:14-04:00April 11th, 2023|The Vault|

In this report, we drill down on prior forecasts (see Client Report REFORM219) of near-term regulatory action to identify the revisions sure to be prioritized as NEC Director Brainard and FDIC Chairman Gruenberg seek to reverse rules finalized over their objections when they were in the minority.  Ms. Brainard does not have a direct role dictating what the Fed will do given central-bank independence, but she has a good deal of influence as evidenced most recently by the White House action list.  Acting Comptroller Hsu was not casting formal votes over these years, but he was an influential staff leader in this area and clearly has his own list – see for example his efforts on bank merger and resolution policy (see FSM Report RESOLVE48).  We expect he will concur with Vice Chairman Barr and Mr. Gruenberg if they all advance the rewrites to the tailoring rules to which Ms. Brainard and Mr. Gruenberg so strongly objected….

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

8 08, 2022

Karen Petrou: Procyclical Capital Rules and the Economy’s Discontent

2023-01-04T13:14:40-05:00August 8th, 2022|The Vault|

In our recent paper outlining the holistic-capital regime regulators should quickly deploy, we noted that current rules are often counter-productive to their avowed goal of bank solvency without peril to prosperity.  However, one acute problem in the regulatory-capital rulebook – procyclicality – does particularly problematic damage when the economy faces acute challenges – i.e., now.  None of the pending one-off capital reforms addresses procyclicality and, in fact, several might make it even worse.  This memo shows how and then what should be quickly done to reinstate the counter-cyclicality all the regulators say they seek.

Last Thursday, the Fed set new, often-higher risk-based capital (RBC) ratios for the largest banks.  The reason for this untimely capital hike lies in the interplay between the RBC rules and the Fed’s CCAR stress test.  Packaged into the stress capital buffer (SCB), these rules determine how much RBC each large bank must hold to ensure it can stay in the agencies’ good graces and, to its thinking, better still distribute capital.

Put very simply, the more RBC, the less RWAS – i.e., the risk-weighted assets, against which capital rules are measured.  The higher the weighting, the lower a capital-strained bank’s appetite to hold it unless risk is high enough also to offset the leverage ratio’s cost – at which point the bank is taking a lot of unnecessary risk to sidestep another set of unintended contradictions in the capital construct.  As a Fed study concludes, all but the very strongest banks sit on their …

10 05, 2022

FedFin: Fed is Cautiously Optimistic re U.S. Systemic Risk

2023-02-21T15:48:57-05:00May 10th, 2022|The Vault|

In this report, we assess the new Federal Reserve financial-stability report. Secretary Yellen is also testifying now about systemic risk and sure to get questions on the Fed’s conclusions. We will shortly send you an in-depth report on this hearing, but key to the Fed’s report is a more cautious, but still sanguine outlook. For example, banks are found to be resilient and well-capitalized despite growing Fed concern about indirect risk channels such as asset-market volatility, sanctions-related disruptions to payment…

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

4 10, 2021

Karen Petrou: How to Ensure Equitable Fed Intervention in the Crisis Next Time

2023-07-05T15:57:30-04:00October 4th, 2021|The Vault|

With her unerring instinct for the jugular on which media thrive, Sen. Warren on Tuesday called Jay Powell a “dangerous man.”  This promptly sent many into still more feverish speculation about the Fed’s next chairman, blotting out coverage of an even more consequential development in the House:  Democratic plans to rewrite the Fed’s powers in the next financial crisis.  Last week, I pointed to the political price for Mr. Powell’s renomination:  the Omarova appointment.  A structural one with even more lasting impact is the rewrite of the Fed’s emergency-liquidity powers to, as Democrats demand, end backstops for “Wall Street” in favor of Fed facilities for everyone else.

Although little noticed, HFSC Chairwoman Waters on Thursday said for the second time in as many weeks that “Our committee is committed to ideas to ensure that facilities like these [the Fed’s in 2020] can more directly support workers and small businesses as well as state and local governments the next time there is a crisis.”  Holding fire on Mr. Powell, Senate Banking Chairman Brown also targeted Fed support for Wall Street in his opening statement on Tuesday.  This follows an inconclusive HFSC hearing a week or so ago on just what these new facilities might look like but make it clear that an array of reforms is under active consideration.

Importantly, these demands for people-focused facilities aren’t an isolated case of progressive pique.  After the 2008 crisis, there was much bipartisan ire over whom the Fed helped how.  This led to a …

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