9th Inning Results
FHFA today released the results of the ninth stress test it’s run on Fannie and Freddie since Dodd-Frank demanded this in 2010. Using pretty much the same flawed models as the Fed, FHFA finds Fannie and Freddie pretty much as they are even under acute stress.
Our most recent analysis of the inter-agency capital proposal focuses on significant changes to the rules for securitization and credit-risk transfer positions. In short, super-traditional securitizations have an easier path to the secondary market, but GSEs still beat banks. Complex ABS face often-formidable obstacles, as does CRT given or taken by banks.
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Say It’s Simple
Our most recent analysis of the inter-agency capital proposal focuses on significant changes to the rules for securitization and credit-risk transfer positions. In short, super-traditional securitizations have an easier path to the secondary market, but GSEs still beat banks. Complex ABS face often-formidable obstacles, as does CRT given or taken by banks.
A Crushing Capital Burden
No, we’re not talking about the proposals – enormous, complex, and in some cases ill-drafted and confusing though they are. We’re talking about how much work it’s taking to go beyond the top-line analyses and section-by-section repeats we’re seeing in so many releases to give you in-depth, strategy, and market-focused analyses of what key parts of the rules say and how they’ll redefine banking as we and the financial system know it. There’s much not to love about the current construct, but the complexity of the new capital framework makes it stunningly difficult not just for us, but we fear also for the regulators, to know if the new framework will prove a Frankenstein. When we finish our read of all the proposals’ sections and that for GSIBs, we’ll release a final, bottom-line strategic conclusion. Until then, it’s critical to understand each key part of the rule and how it defines individual business lines and the markets that depend on them.
FSOC Considers Nonbank Systemic Risk, Credit-Based LIBOR Replacements
At today’s FSOC meeting, participants as usual said nothing about the closed-door agenda, which notably featured more discussion of the systemic risk that may be posed by nonbank mortgage servicers. Different agencies presented their work to address this risk, which was also flagged when FSOC finalized its new approach to identifying systemic risk (see FSM Report SYSTEMIC95). Whether FSOC as a whole is satisfied with FHFA and Ginnie actions and even if these agencies think their work to date suffices will determine the extent to which FSOC intervenes, but the session reinforced the systemic importance accorded to nonbank mortgage firms and the potential for additional action.
Agencies Take Action to Enhance Emergency Liquidity, Whitewash Discount Window
As presaged at Chair Powell’s press conference earlier this week, the banking agencies today issued liquidity-planning guidance designed both to ensure adequate preparation for acute liquidity stress and take the stigma off discount-window draws. The guidance deals only with liquidity planning and thus does not alter the treatment of discount-window funding for purposes of the LCR, admonishing banks to take account of the hard lessons of the March bank failures and prepare for runs and other extreme-stress scenarios.
UK Targets PE/Private-Credit Interconnections
Although U.S. regulators have begun to talk about inter-connections (see FSM Report SYSTEMIC95), the Bank of England’s top official for international finance today laid out new U.K. policy to address them. Specifically, Nathanaël Benjamin addressed counterparty risk with particular attention to bank private-equity and private-credit exposures. Mr. Benjamin’s concern is principally that, should the U.S. not pull off a soft landing, this sector could experience severe stress that could quickly migrate to asset management.
IOSCO Sticks With SOFR
Acting on concerns often expressed by SEC Chairman Gensler, IOSCO today published its final assessment of USD LIBOR, judging two credit-sensitive alternatives problematic and blessing limited use of certain term SOFRs. The most immediate consequences of this will be to make the Fed still less likely to permit banks to use the limited credit-sensitive exemptions provided in its final alternative-benchmark rule (see FSM Report LIBOR9), with IOSCO emphasizing its point with specific reference to this option by urging only cautious use of these rates and suggesting that regulators (presumably outside the U.S.) review their permissibility.
The Ides of IRR
In non-public remarks ahead of a presentation by FedFin managing partner Karen Petrou, Sen. Jack Reed (D-RI) laid out what he thinks banking agencies will do next, doubtless based on what they’ve told him that they’ll do next. We have predicted that new interest-rate risk (IRR) standards are high odds, but Reed’s comments suggest they are a near-term for-sure.
Bipartisan Cash-Acceptance Bill Reintroduced
The chairman of Senate Foreign Relations and Banking Committee member Menendez (D-NJ) yesterday reintroduced bipartisan legislation (S. 1984) along with Rep. Payne (D-NJ) (H.R. 4128) to require retail businesses to accept cash for in-person transactions.
CFPB Renews Mortgage-Servicing Rewrite
In a blog post today, CFPB Director Chopra highlighted an issue that failed to come up at hearings earlier this week (see Client Report CONSUMER51): mortgage servicing.
Senate Democrats Focus On P2P Consumer Protection
Reflecting recent CFPB concerns and a consumer warning, Senate Banking Committee Chairman Brown (D-OH) along with Sens. Reed (D-RI), Warren (D-MA), and Menendez (D-NJ) today sent letters to the CEOs of PayPal and Cash App requesting consumer-fraud and scam data as well as steps the companies are taking to protect consumers.
IMF Sees Regional-Bank Risk, Urges Fast Action
The IMF’s financial-stability report for the United States today details recent macroeconomic-, fiscal-, monetary-, and financial-policy developments, with the Fund’s executive directors (including that of the U.S.) emphasizing in response the need to prioritize inflation-fighting over fiscal tightening.
FHFA Housing Equity Session Provides Little Insight
We had intended to listen through today’s FHFA equitable finance listening session, but its opening indicated that it will not address the pending regulatory rewrite.
House Advances Consensus Anti-China Reporting Legislation
The House yesterday voted 400-5 to approve H.R. 1156, bipartisan legislation addressing Congress’ China concerns by mandating a new study.
Gruenberg Endorses Bank On Accounts, Notes Continuing Racial Gaps
In remarks today largely devoid of policy implications, Chairman Gruenberg praised Bank On’s impact on financial inclusion, but noted that racial divides still persist as Black and Hispanic households are more likely to be unbanked than White ones at every income level.
IOSCO Aims at Ending Crypto-Market Arbitrage
Advancing global crypto standards, the International Organization of Securities Commissions today released a consultative report on the contentious question of centralized-market regulation with which a joint HFSC/AG Committee process is now wrestling (see Client Report CRYPTO43).
HFSC GOP Blasts GSE Fees, Supports FHLB System
Today’s HFSC hearing with FHFA Director Thompson was largely the LLPA battle we anticipated, with Republicans lambasting recent actions and Democrats tartly responding that Republicans did not know what they were talking about.
Hsu Echoes Gruenberg’s Bank-On Praises
Following Chairman Gruenberg’s remarks earlier today, Acting Comptroller Hsu similarly praised Bank On’s impact on financial inclusion while highlighting racial and income gaps.
Bipartisan Senate Consensus Demands Structural Change To Fed IG
At today’s Senate Banking Subcommittee on Economic Policy hearing on Fed accountability, Chairwoman Warren (D-MA) was unsparing in her criticism of the Fed and its current IG, Mark Bialek. She elicited the fact that he is the Fed’s highest-paid employee and, while he may be dismissed only by two-thirds of the Board, she argued that he is essentially captive and thus cannot be relied upon to investigate ethics challenges, bank failures, and internal operations.
HFSC GOP Demands LLPA Changes No Matter FHFA’s RFI
As anticipated, Chairman Davidson (D-OH) reiterated GOP demands that the FHFA rescind the entirety of its LLPA proposal at today’s HFSC Subcommittee on Housing and Insurance hearing, despite FHFA conceding to some Republican demands and issuing an RFI on the Enterprises’ single-family pricing framework earlier this week. Mr. Davidson also pushed back on FHFA’s assertion that LLPA pricing must be set with regard to private mortgage insurance, saying that MI does not reduce taxpayer risk or GSE capital even though it is required for risk reduction and captured in the GSE capital standards.