All Stressed Out
In this report, we build on our in-depth analysis yesterday of the Fed’s new stress-test scenarios to focus on their mortgage-market impact. The binding stress tests won’t make portfolio mortgage finance any easier, but they also won’t make it much worse. However, new “exploratory” stress tests will take interest-rate risk into account with particular attention to mortgages and MBS. That won’t help.
Bowman Focuses on Inclusive Cross-Border Payments
FRB Gov. Bowman today emphasized that national and global payment-system improvements must not only work for the financial system and payment providers, but also for end-users and broader inclusive growth. This is a policy challenge that, she said, cannot be resolved only by technology.
Senate Dems Resume Attack on Zelle
Retreating from his stand during a recent hearing that seemed to absolve Zelle (see Client Report PAYMENT28), Senate Banking Chairman Brown, (D-OH) along with Sens. Warren (D-MA) and Reed (D-RI), today sent a letter reiterating calls for Zelle to clarify its reimbursement policy for impostor scams. The letter also demands that Zelle revise its reimbursement policy to cover other scams and to and streamline its reporting process, demanding a new public commitment to doing so.
Waller Sees Impregnable Dollar Dominance
FRB Gov. Waller today mounted a strong defense not only of the dollar as the globe’s reserve currency under current conditions, but also even as digital currencies become more widely deployed. This stand is consistent with those at the FRB opposing proposals in Congress to advance a CBDC on grounds that it is essential to preserve reserve-currency status (see FSM Report CBDC10) and signals no interest in the U.S. central bank to making any other payment-system changes to press sanctions policy with the dollar’s dominance in mind.
FedFin Assessment: New Fed Stress Tests are a lot Like the Old Fed Stress Tests
In this report, we assess the strategic and policy implications of the Fed’s new stress-test regime. Released today, it incorporates new “exploratory” scenarios previewed by Vice Chair Barr as a response to the significant stress-test omissions laid bare in the March banking crisis. However, these exploratory tests will not directly factor into the SCB, which will also be calibrated to current capital rules since the banking agencies are now most unlikely to finalize these in time for SCB calculations later this year. We nonetheless expect bank supervisors to run bank results against internal models premised on new capital requirements, using supervisory discretion to address any capital shortfalls they feel warrant distribution restrictions regardless of formal test results. Similarly, we think supervisors will take near-term action if any of the exploratory scenarios points to near-term risk.
Global Regulators Propose Ways to Limit Variation-Margining Stress
As promised, CPMI and IOSCO have issued a discussion paper on CCP and clearing-member variation-margin practices. The global agencies propose eight principles to enhance the likelihood that margins will be covered in stress situations, a continuing challenge based on a recent IMF paper finding that up to a third of EU active-derivatives users would not be able to meet variation-margin calls under stress and would thus turn to liquidating MMF shares or other assets in a manner likely to amplify market stress.
HFSC Deploys Power of the Purse to Pressure FinCEN
As anticipated, today’s HFSC hearing with Treasury and FinCEN was highly partisan, with Republicans continuing to blast FinCEN for what they call SAR surveillance and now threatening to block any increased funding for FinCEN until it also improves beneficial-ownership reporting to the GOP’s liking. Rep. Loudermilk (R-GA) also criticized FinCEN for failing to release the statutorily-mandated BSA review and the $10,000 threshold review.
Barr Sees Banking System as Strong, Liquid
In remarks today, FRB Vice Chair Barr emphasized that, despite pockets of risk and CRE worries, the banking system is sound and he sees no liquidity-risk concerns across the financial system. Still, March 2023 taught hard lessons, he said, with banks since taking significant steps to reduce HTM holdings and enhance liquidity resilience.
Durbin Tries Another Approach to Advance Card-Fee Limits
After trying various ways to bring his credit-card fee bill to the floor, Senate Judiciary Committee Chair and Majority Leader Durbin (D-IL) has scheduled a hearing on this controversial bipartisan measure (see FSM Report INTERCHANGE10).
FinCEN Reaches SEC Agreement to Bring Investment Advisers Under AML/CFT Standards
As it has repeatedly promised, FinCEN today revised a 2015 proposal and issued a new one to subject investment advisers to AML and CFT requirements similar to, but still less restrictive than, those that have long governed banks.
HFSC Rallies to Crypto AML/CFT Defense
The HFSC staff memo on Thursday’s Digital-Assets Subcommittee hearing makes it clear that cryptoasset entities will be given a strong platform from which to resist calls in the Senate to subject cryptoasset transactions to AML and sanctions law.
Gensler Reinforces AI Concerns
In remarks today, SEC Chair Gensler acknowledged AI’s benefits in a manner consistent with the President’s executive order (see Client Report AI3), but then launched into a sharp critique of its risks in line with the agency’s pending rule in this arena.
Bowman Takes Fed Accountability, Transparency to Task
In an essay today, FRB Gov. Bowman emphasized that regulatory accountability does not undermine the independence also essential to a sound, innovative banking system.
Gensler Turns to Bank/Hedge-Fund Interconnection
In addition to his speech on AI earlier today, SEC Chair Gensler today engaged in a wide-ranging discussion of key financial policy questions.
Agencies Begin Pro Forma Reg Review Likely to Take on New Urgency
The FRB, FDIC, and OCC today released the first of the requisite ten-year request for comment on the extent to which existing rules are outdated or unduly burdensome. We will shortly provide clients with an in-depth analysis of the request if it goes beyond the nominal inquiries in the past that led to little meaningful regulatory reform.
Senate GOP Turns to FHFA, FHLB on “Woke” Standards
Criticizing what they call the FHFA’s and FHLBs “politically contentious social agendas,” Senate Banking Republicans Hagerty (R-TN), Tillis (R-NC), Britt (R-AL), and Vance (R-OH) sent a letter to FHFA Director Thompson late yesterday arguing that several FHLB pilot programs are “racially discriminatory” and defy congressional intent. They also argue that the pilot programs highlight a potential gap in FHFA oversight because the final rule governing Fannie and Freddie pilot programs does not also apply to the FHLBs.
SEC Finalizes Contentious Treasury-Market Registration Standards
The SEC today voted 3-2 to approve a revised version of an earlier proposal subjecting certain hedge funds and other Treasury-market participants to registration and SRO regulation, thus reducing their competitive advantages vis-à-vis banks in the secondary-dealer arena. The new approach uses a qualitative test based on the extent to which a covered entity acts as a market-maker as well as Treasury investor.
Why Lower Rates Won’t Lead to More Affordable Housing
As Politico rightly pointed out last week, the inability of anyone who doesn’t already own a home to get one is turning into a significant political problem for incumbents of all persuasions. It might also come to be one for the Federal Reserve based on a call I got from a senior senator a couple of weeks ago. This is not exactly what the Fed needs given how hot a political potato it’s already become.
As Politico rightly pointed out last week, the inability of anyone who doesn’t already own a home to get one is turning into a significant political problem for incumbents of all persuasions. It might also come to be one for the Federal Reserve based on a call I got from a senior senator a couple of weeks ago. This is not exactly what the Fed needs given how hot a political potato it’s already become.
Having read my economic-inequality book, the senator called to ask if I thought the Fed had any responsibility for the acute shortage of affordable housing. As in all too many other states, his has seen a migration of teachers, first responders, and the middle class as a whole from cities and resort areas, with these vital workers forced to live hours from their jobs and thus in a state of perpetual commuting which they fear puts their children at risk.
This isn’t news, but it’s worse than ever and thus not just a daily grind for many Americans, but also a serious political threat to this moderate Democrat. His state is deep purple and he believes it’s getting redder by the minute thanks to Donald Trump’s ability to mobilize voter anger on day-to-day economic challenges such as the critical one facing those who cannot find affordable, desirable housing within reasonable distance of their jobs.
As might be expected, the senator wasn’t calling to ask an academic question; he wanted to know not just …
Powell, Hsu Add to Pressure on SEC Crypto-Custody Standards
As we noted yesterday, Congressional Republicans are now mounting a Congressional Review Act effort to repeal the SEC’s staff accounting bulletin (see FSM Report CUSTODY5) requiring balance-sheet recognition of crypto-custody deposits at considerable cost to banking institutions.
Trump to Dump Powell
As we expected, Donald Trump today said that, if elected, he will not reappoint Jerome Powell. This decision will not present itself to the next president until Mr. Powell’s term ends in January of 2026, but we do not think either of the candidates is likely to reappoint Mr. Powell should he seek a third term.
GOP Bill Challenges Capital Proposal
Echoing long-held concerns of other HFSC Republicans, Rep. Ogles (R-TN) along with Rep. Donalds (R-FL) have introduced legislation (H.R. 7143) forcing regulators to withdraw the capital proposal (see FSM Report CAPITAL230).
Senate Presses for Anti-Hungary Sanctions
In a statement that may lead financial institutions to review their exposures, Senate Foreign Relations Chair Cardin (D-MD) called on the Biden Administration to consider sanctions against Hungary due to its government’s refusal until late yesterday to support EU efforts for Ukraine and its broadly anti-democratic program in general and with specific regard to pressuring the U.S. and its ambassador to Hungary.
HFSC Republicans Take Another Shot at FDIC
Continuing their campaign against FDIC Chair Gruenberg, HFSC Chair McHenry (R-NC) along with Subcommittee Chairs Barr (R-KY) and Hill (R-AR) sent a letter today to the FDIC questioning …
FinCEN Estimates High Bank-BOI Reporting Costs
FinCEN via the Federal Register today requested comment on the estimated total annual reporting and recordkeeping burden for new Access Rule beneficial ownership information (BOI) reporting requirements (see FSM Report AML135).
Brown Puts More Pressure on Powell
Following Sen. Warren’s rate-cut demands and affordable housing concerns yesterday, Senate Banking Committee Chairman Brown (D-OH) today sent a letter to FRB Chair Powell also calling for less restrictive monetary policy on grounds that elevated rates negatively impact home affordability, limit the housing supply, restrict small business growth, and dampen wages.
HFSC Targets China Sanctions, Outbound Investments
Today’s HFSC National Security Subcommittee Hearing focused on China sanctions and restrictions on outbound investments.
GOP Demands Retraction of CFPB Tech-Payment Proposal
Reiterating their opposition to the Bureau’s pending digital-payment rule (see FSM Report PAYMENT27), HFSC Chairman McHenry (R-NC) alongside Digital Assets Subcommittee Chairman Hill (R-AR) and Rep. Flood (R-NE) sent a letter today urging the CFPB to reopen and extend the comment period and reconsider finalizing the rule as proposed.