#FDIC – Page 4 – Federal Financial Analytics

22 05, 2023

Karen Petrou: How to Ensure That Independent Study of Regulatory Mistakes Leads to Near-Term, Meaningful Redress and Reform

Eliza Allen2023-05-22T11:47:33-04:00May 22nd, 2023|The Vault|

Last week, a moderate Senate Democrat was joined by a Republican in yet another letter demanding an independent investigation of regulatory actions related to recent bank failures. But, as the absence of specifics in any of these letters makes clear, it’s a lot easier to call for independent inquiry than to lay out how to conduct one that might make a meaningful difference. Precedent is not encouraging – for example, Congress created a Financial Crisis Inquiry Commission after 2008, but it was an unqualified waste of time and money. Still, we urgently need an independent assessment of what went so wrong combined with another providing near-term, actionable reforms. Having served on one post-crisis national commission that did a bit of good, I recommend separating the forensic inquiry from the one focused on the future, guarding against conflicts without eliminating expertise, and assessing only a few clear questions suitable for practical answers that can be readily accomplished under current law.

The first decision point determines all the rest: whether the independent analysis is to be forensic – who dropped which heavy ball on whose toes – or focused on the future – what we learned and what to do about it. Many of the proposals for an independent commission, including the Congressional letter noted above, want their commission to do both, but none could do so well and asking for this is thus asking for trouble.

A good forensic analysis will reduce the moral hazard enjoyed by federal supervisors long exempt …

15 05, 2023

Karen Petrou: How An Ill-Designed Special Assessment Is Sure To Scramble The Structure Of Federal Deposit Insurance

Eliza Allen2023-05-15T11:52:36-04:00May 15th, 2023|The Vault|

As our forthcoming in-depth analysis will detail, the FDIC’s proposed special assessment raises a raft of policy problems not contemplated by the FDIC despite a steep price tag warranting careful thought at a time of financial instability and recessionary risk. The FedFin analysis will detail the proposal, what the FDIC thinks, and what the proposal might do to whom, but here’s my opinion: the FDIC’s decision to allocate blame for SVB and Signature’s failures to a select group of surviving larger banks is a politically-expedient violation of the principal of insurance and a terrible precedent for the future of federal deposit coverage.

First problem: the FDIC assigns blame to a large group of bigger banks even though its own analysis of the SVB and SBNY failures points to a different underlying reason for the systemic designation. In the proposal, the FDIC targets large holdings of uninsured deposits even though both its post-mortem and the Fed’s of the two systemic failures cites bad management as the most important cause of death. Both agencies do note the new risks posed by social-media runs that hastened the banks’ passing, but each also makes it clear that these new-age runs are an endemic challenge to bank resilience, not a risk unique to SVB and Signature or other banks with large amounts of uninsured deposits. The FDIC proposal contains no explanation of why uninsured-depositories are the systemic rescue’s fall guys even though these deposits aren’t the cause of the two bank failures and the risks …

2 05, 2023

FedFin Analysis: FDIC Presses Targeted Coverage; Open to Excess Coverage, Collateralization, MBRs

Arezou Rafikian2023-05-03T15:32:35-04:00May 2nd, 2023|The Vault|

In this report, we follow our initial assessment of the FDIC’s deposit-insurance reform report with an in-depth analysis of its recommendations and their prospects. Aspects of this report reiterate conclusions initially noted in the agency’s Friday report on Signature Bank’s failure (see Client Report REFORM222), noting in particular the sharp growth of uninsured deposits at larger banks and the growing risk of social-media runs. The new report also states that FedNow is likely to exacerbate run risk which increases if open banking advances.

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

1 05, 2023

FedFin Analysis: GAO Slams FRB, FDIC Supervision

Arezou Rafikian2023-05-03T15:37:21-04:00May 1st, 2023|The Vault|

Following our analyses of the Fed’s report on SVB (see Client Report REFORM221) and the FDIC’s on SBNY (see Client Report REFORM222), we turn now to one from the General Accountability Office sure to have at least as much impact on bipartisan consideration of what needs next to be done to govern regional banks. HFSC Chairman McHenry (R-NC) has already cited the GAO report in his rebuttal to those from the banking agencies, and it may well have tempered Senate Banking Chairman Brown’s (D-OH) support of a focus solely on new law and rule.

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

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1 05, 2023

Karen Petrou: What the FRB and FDIC Left Out: Why They Still Can’t Shutter Regional Banks Without a Bailout

Arezou Rafikian2023-05-03T15:38:36-04:00May 1st, 2023|The Vault|

Although the Fed’s “unflinching” self-assessment of SVB’s inglorious demise and the FDIC’s still more exculpatory analysis of SBNY talk much of supervisory gaffes, neither addresses a critical unanswered question: why were both agencies so ill-prepared for such large resolutions? That they were is still more grievous when it comes to First Republic, where the agencies are flat-footed even though they’ve had over a month of warnings that FRC might not make it. As the Fed says, a banking system without failure is a financial system without intermediation. It and the FDIC clearly know that failures are inevitable, but still turn to one or another form of the taxpayer bailouts U.S. policy-makers swore after 2008 would never again disfigure the nation’s financial system. The agencies did not answer the urgent question of why even mid-sized bank resolutions are still systemic or lead to still more concentrated market power, but we must and then hold them as accountable for this failure as for all the others mentioned or not in each of their reports.

Are regional banks truly systemic or is it just that the FDIC doesn’t know what to do with them? Mass regional-bank failures are clearly problematic, but would these be likely if the FDIC knew how to resolve mid-sized banks when supervisors spot problems or, failing that as seems sadly likely, if a regional bank comes unglued? The FDIC is clearly ill-prepared to handle them even when the bank is the principal subsidiary of a non-complex BHC as is …

24 04, 2023

Karen Petrou: The Price of Higher FDIC Protection and How to Prevent It

Eliza Allen2023-04-24T10:40:22-04:00April 24th, 2023|The Vault|

Last week’s memo stirred up a lot of comment about ways to provide at least some private-sector deposit insurance. The consensus is that, while nothing is easy about a private-sector backstop for federal coverage, the concept warrants careful consideration because all the other reform ideas on their own are still more problematic. This isn’t just because proposals for expanded federal coverage – my own included – extend the federal safety net at resulting moral hazard. In some cases, as I said, this risk is worth taking because some depositors warrant protection. Still, there’s sure to be a price for more federal coverage – super-costly premiums and/or more bank regulation – that argue for market-based solutions to the greatest extent compatible with social welfare and stable finance.

This trade-off was most recently addressed last week by John Vickers, a former U.K. regulator. Commenting on proposals across the pond akin to those in the U.S. to expand the sovereign deposit backstop, Mr. Vickers cautioned that added coverage should come with higher regulatory capital to ensure that banks do not take undue advantage of the comfy quilt into which the current, porous safety net would be transformed.

The U.K. deposit insurance system is different than that in the U.S., most notably by the absence of costly, ex ante bank premiums for the privilege of deposit-insurance coverage. However, the U.S. risk-based premium system that sets bank premium payments is asset – not insured deposit – based. As a result, coverage could go up considerably …

17 04, 2023

Karen Petrou: Why FDIC Privatization Isn’t a Pipe Dream

Eliza Allen2023-04-17T12:02:05-04:00April 17th, 2023|The Vault|

As night follows day, so proposals to privatize the FDIC have again followed bank failures. While debate over deposit-insurance privatization was, is, and will be an ideological tug of war between free-market conservatives and government safety-net progressives, it’s nonetheless an important option that warrants careful analysis as the FDIC yet again faces huge losses, banks are charged crippling and procyclical premiums, and talk turns to still more federal coverage at still greater risk not just to insured banks, but also to taxpayers. Pure FDIC privatization remains impossible, but target risk transfers warrant careful, but quick consideration.

Privatization was last seriously discussed when Congress rewrote FDIC coverage in 2006. This was a halcyon time when the FDIC was so sanguine about all the rules put in place after the S&L and bank crises that its 2007 study confidently predicted that systemic risk was a thing of the past, uninsured deposits would never again be covered, and the Deposit Insurance Fund more than sufficed for any systemic situation.

Of course, the great financial crisis that began later that same year put the lie to all this happy talk. Privatization proposals now aren’t anywhere near as happy nor do they repeat past assertions that, with FDIC privatization, the nation could also dispense with bank regulation. Instead, and for good reason, talk has now returned to private options because, without them, moral hazard seems sure to be embedded in a financial system that is still more shadowy.

A modern rethink of FDIC privatization must …

11 04, 2023

FedFin Assessment: Top Brainard, Gruenberg Regulatory Rewrites

Arezou Rafikian2023-04-11T16:52:14-04:00April 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.…

10 04, 2023

Karen Petrou: Why the Fed is a Repeat Offender

Eliza Allen2023-04-10T17:29:46-04:00April 10th, 2023|The Vault|

As we noted in a recent report, a divided Congress that may not even be able to keep the U.S. Government in business is one unlikely to enact substantive financial reform. Thus, we’re in for yet another episode of political damage control, regulatory excuses, and a few heads on enforcement spikes without meaningful, measurable, and accountable supervisory reform. Been there, done that, had another financial crash, or so my dispiriting read of recent efforts to force post-crash supervisory reform makes all too clear. It’s probably too much to ask that Congress not flit off to the next election before it ensures meaningful regulatory-agency accountability for manifold supervisory lapses, but if it does what it usually does, then we are doomed to more crashes with worse consequences unless it and the White House force the Fed to do what it’s never done before: meaningfully and transparently improve supervisory rigor and enforcement might.

In my memo three weeks ago, I showed how regulators by 2001 had failed to act on the lessons of the 1980s and 1990s before the largest bank failure at the time presaged the great financial crisis hot on its heels. After the GFC, the U.S. convened the Financial Crisis Inquiry Commission (FCIC). When it issued its report in 2011, it drew scathing conclusions not only about all the “light-touch” regulation before the crash, but also supervisory unwillingness or inability to ensure that what rules there were were rules that were obeyed.

Despite this report and …

28 03, 2023

FedFin Assessment: Policy Implications of FDIC-Resolution Innovations

Arezou Rafikian2023-04-03T12:48:36-04:00March 28th, 2023|The Vault|

As noted yesterday, the FDIC’s recent rescues have had several unusual features with implications not only for future policy, but also for pending special assessments to replenish the DIF for the $22.5 billion estimated costs to the Deposit Insurance Fund. Analyzed here, new tools – e.g., voluntary liquidation, equity-appreciation rights, lines of credit – have determine the extent to which this estimate holds, how FHLB advances are treated in future resolutions, and the role the FDIC may play in companies that acquire failed IDIs….

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