#Federal Reserve

21 04, 2025

Karen Petrou: The Fed Just Puts Ribbons on Rags

2025-04-21T09:14:50-04:00April 21st, 2025|The Vault|

Four months after announcing plans for minimal changes to its stress tests, the Fed last Thursday screwed up its courage and proposed a couple of them.  The remaining, still-small changes will come after the Fed rests up, but none of this seemingly-strenuous effort addresses the fundamental problem with both capital regulation and the testing designed to ensure it suffices:  none of these rules make total sense on its own and all of them taken together are a cacophony of competing demands and ongoing collisions with other standards.  Prettying up the stress-test rule is thus only putting ribbons on a ragged assemblage of ill-fitting pieces in clashing colors with large, large holes.

Now-ousted VCS Michael Barr promised a “holistic” capital construct during his 2022 confirmation hearings, but he nonetheless clung tightly to one-off rulemakings without any cumulative-impact analysis.  Mr. Barr thus opposed last week’s stress-test changes, but for all the wrong reasons.  He thought they went too far; in fact, they don’t go anywhere near as far as they could and should.

The new stress-test proposal most substantively says that banks will henceforth be judged by a three-year rolling average of their tested capital levels, rather than on the current, volatile annual schedule.  But, averaging numbers that don’t make sense tells one nothing about the utility of each test.  Think about a household with two chihuahuas – average dog weight about ten pounds.  Next year, a Labrador romps in, and the average goes up, but the yard can still hold three …

3 06, 2024

Karen Petrou: Important Lessons in Regulatory Impact

2024-06-03T17:00:05-04:00June 3rd, 2024|The Vault|

With battle lines deeply dug in over so many recent rules, two new studies are important, timely reminders that rewriting rules doesn’t always mean eviscerating rules.  Sometimes, it’s a vital corrective to unintended consequences all too evident as proposals turn into rules that turn into a new, destructive market dynamic.  It might seem to make nothing more than common sense to recognize that rules need reconsideration, but as the occasional victim of diatribes following what I thought were just pragmatic recommendations, it’s reassuring to see a study from one of the current rules’ architects, Daniel Tarullo, and another from the Fed lay out the need for meaningful revisions to two high-impact rules:  big-bank stress tests and – just in time for still more of them – liquidity rules.

First to Mr. Tarullo’s paper.  In addition to being the instigator of much in the Dodd-Frank Act and the rules thereafter, Mr. Tarullo inaugurated big-bank stress tests in 2009.  Banks then denounced them, but they weren’t exactly in the best of bargaining positions after the 2008 great financial crisis.  So, stress tests began as an urgent reality check.  But, proving the regulatory-rewrite point, over a decade later they took on a new purpose in concert with still more importance by virtue of the new stress capital buffer inexorably and often ineffectively linking stress testing to the bank regulatory requirements that barely existed in 2009.

In 2009, we needed stress tests because capital rules were essentially toothless.  Capital rules are now fanged …

22 08, 2023

FedFin on: GSIB Surcharge

2023-08-23T10:19:58-04:00August 22nd, 2023|The Vault|

As anticipated in the wake of recent bank failures, the FRB has proposed a significant revision to the current rules calculating systemic-risk scores that lead to GSIB designation.  These indicators are used not only for GSIB designation or a higher surcharge, but also for categorizing U.S. and foreign banks for other purposes and thus would also bring some banking organizations into categories subject to very strict prudential standards.  The Board estimates that the overall impact of the changes to the surcharge and risk-scoring methodology are small and, regardless, warranted to enhance systemic resilience and consistency.  It also estimates that the interaction of this new approach with certain liquidity and TLAC standards is generally minimal.  However, the Fed has not assessed the relationship of scoring revisions to one way to calculate the GSIB charges, nor does the Board assess the cumulative impact of all of the changes proposed here in concert with its sweeping revisions to U.S. capital rules for all banking organizations with assets over $100 billion.  It is also unclear how these changes in concert with all the others interact with the stress capital buffer applicable to large U.S.-domiciled banking organizations…

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

8 03, 2023

FedFin: Red Light For Retail CBDC

2023-03-08T17:02:10-05:00March 8th, 2023|The Vault|

At today’s HFSC hearing, Chairman Powell modulated his hawkish stance just a bit, continuing as he long has done to refuse to take a stand on fiscal policy while advocating for rapid debt-limit action.  Pressed by Republicans for CBDC updates, the chairman today was the most specific of any Fed official to date, stating that a retail CBDC would require express Congressional authorization even though this may not be the case for a wholesale-focused instrument.  As yesterday (see Client Report FEDERALRESERVE72), Republicans pushed hard against the Vice Chairman’s holistic-capital review, leading Mr. Powell to say that he hopes for Board consensus on both end-game rules and broader rewrites but cannot assure this will be the case despite the Board’s consensus culture….

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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