#Federalreserve

10 03, 2025

Karen Petrou: Will Bessent Do It Better?

Eliza Allen2025-03-10T10:18:10-04:00March 10th, 2025|The Vault|

There are two ways to consolidate federal bank regulation. First, you can change the law and, as detailed in my memo a few weeks back, transform agency responsibilities to reduce duplication and regulatory arbitrage. The other way is for one federal entity to assert all the power it has under law and maybe more simply to take de facto charge of significant Fed, OCC, and FDIC supervisory and regulatory policy. Secretary Bessent has now made it clear that the Trump Administration will open Door Number Two, setting key policy goals and “coordinating” among the agencies. Will Treasury keep banking within essential guardrails? Mr. Bessent might just pull this off, at least for as long as he’s Treasury Secretary in this super-volatile Administration.

Just weeks ago, I would have said a Treasury putsch was impossible because of the Fed’s inviolable status as an independent agency that, even under a more Trump-ready vice chair, would avoid the appearance of taking Treasury’s orders less this subservience spill over to monetary policymaking. Now, though, the President has claimed via executive order that there are no more independent agencies exempt from Executive Branch control. This covers the OCC and FDIC, which were in any case sure to do what was asked of them in this Administration, but it also covers Fed supervisory and regulatory responsibilities. The Fed’s express statutory independence does not cover these activities, making it likely now that the Fed will concede on most sup-and-reg points to defend the fragile barricades surrounding monetary-policy …

13 01, 2025

Karen Petrou: Bowman’s Most Important Regulatory Recommendation

Eliza Allen2025-01-13T12:42:41-05:00January 13th, 2025|The Vault|

Although bankers have long paid keen attention to FRB. Gov. Bowman’s regulatory thinking, public attention was sparse until last week. In the wake of Michael Barr’s resignation and speculation that Ms. Bowman might take his place as supervisory vice chair, her regulatory thinking finally got the widespread attention her monetary-policy views have long enjoyed. And a good thing too. In a speech last week, she not only reiterated comments about how best to redesign bank regulation and supervision, but also made another, unnoticed point: redesigning these key planks of financial stability need not be the blood sport they have sadly become.

Remarking on a striking change over the past year or so, Gov. Bowman rightly calls out the “adversarial” nature of recent banking-policy deliberations. This is doubtless in part because she is clearly still miffed that Mr. Barr did not engage in Board-wide collaboration, but adversarial combat extends to the Administration, Hill, and the interest groups that influence them. The press too also takes this tone, with the New York Times just last week touting new thinking about bank regulation as a big-bank triumph.

That big banks definitely wanted much of what they may now get is indisputable, but some of what they want also made sense. We know all too well that asymmetric regulation that pushes banks out of otherwise-profitable businesses gives unregulated nonbanks an unbeatable market edge that powers the migration of key intermediation functions and infrastructure beyond regulatory reach. This isn’t necessarily all that bad for …

13 11, 2024

FedFin Assessment: The Fate of the Federal Reserve

Arezou Rafikian2024-11-14T15:45:31-05:00November 13th, 2024|The Vault|

In a recent client brief, we provided our forecast of what might happen to Federal Reserve independence, process, powers, and personnel under either a Harris or Trump presidency. This is of course no longer an either/or matter, with this report thus reviewing and, where needed, updating our initial assessment of what Mr. Trump could do to the central bank even where Chair Powell says he can’t. Sherrod Brown’s defeat makes the Fed particularly vulnerable in the Senate, where Elizabeth Warren (D-MA) stands a strong chance of becoming the Banking Committee’s ranking Democrat. She and incoming chair Tim Scott (R-SC) will agree on a lot about the Fed, especially if Sen. Rick Scott – a frequent Warren ally on the Fed front – becomes Majority Leader….

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

8 11, 2024

FedFin Assessment: Are Crypto’s Wins the Banks’ Losses?

Arezou Rafikian2024-11-08T14:57:19-05:00November 8th, 2024|The Vault|

One of the more striking results of the election is the enormous win crypto firms got for their $135 million of Congressional-campaign spending: victories so far in every race it entered. Much of this is due not just to crypto’s lure; instead, it reflects choices based not only on a candidate’s crypto sentiments, but also on the opponent’s vulnerability. As a result, at least some of crypto’s luster could fade when Congress gets back to work. However, Donald Trump campaigned on a pro-crypto platform, endorsing legislation such as the Lummis (R-WY) bill to create a “strategic reserve” for bitcoins…

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

3 10, 2024

FedFin on: FHLB Advance Availability

Arezou Rafikian2024-10-03T14:41:22-04:00October 3rd, 2024|The Vault|

The FHFA has issued an advisory bulletin (AB) building on its 2023 over-arching plan for FHLB reform and bank-regulatory efforts to clarify and constrain FHLB lending to troubled IDIs which received considerable “lender-of-second-resort” FHLB funding during the 2023 crisis. FHFA says that this bulletin does nothing more than “memorialize” longstanding FHFA standards; in fact, it makes significant changes and is likely to require at least some Home Loan Banks to improve member-related credit-risk management by no longer solely counting on collateral and contacting an IDI’s primary regulator, the FDIC, or a Reserve Bank to confirm that ….

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

23 09, 2024

Karen Petrou: The New Bank-Regulatory Paradigm We Need

Eliza Allen2024-09-23T11:58:35-04:00September 23rd, 2024|The Vault|

On Friday, we posted a client alert to a new Federal Reserve study that, to put it succinctly, overturns received wisdom about what makes banks fail. It is a paradigm-busting analysis based on solid, validated, empirical evidence, not on the models notoriously replete with assumptions that suit a researcher’s fancy or whomever backs the work. This study’s main finding is that, even before the advent of federal deposit insurance, bank failure is due to and reliably predicted by growing bank insolvency – not illiquidity – at otherwise-solvent banks and generally not even by runs at very weak banks. Depositors and, worse, supervisors are demonstrably slow to catch on to emerging risk, with depositors understandably subject to information asymmetries and supervisors inexcusably distracted, confused, or even captive. Policy should not be based on one study, but this one study warrants immediate attention backed as it is by many others and replete with damning data analyzed with a straightforward methodology using records going back to 1986. Now would be a very good time to take heed – banking agencies in 2024 are building yet another regulatory edifice to compensate for yet another round of critical supervisory lapses. This may well prove as doomed as its predecessors unless regulators stop blaming banks after failure for bad behavior well within supervisory sight and reach long before indisposition turned terminal.

Importantly, I am not saying that this study proves there is no need for capital or liquidity regulation just as our new merger-policy study does …

16 09, 2024

Karen Petrou: What’s Next for the Capital Rewrite

Eliza Allen2024-09-16T11:24:36-04:00September 16th, 2024|The Vault|

Few, if any, regulatory agencies are omniscient. More than a few think they are, but more often than not regulators who fail quickly to see the error of at least some of their ways are regulators who lose a lot more than they might otherwise have lost. Which brings us to the capital proposal and what next befalls this troubled standard after Michael Barr’s belated recognition that something had to give.

In the near term, we’ll see action by the FRB, FDIC, and OCC to clear a revised proposal along with the Fed’s quantitative impact survey for another round of public comment. I have to believe Fed Vice Chair Barr cleared the revisions he previewed last week with his allies at the OCC and FDIC and is confident that the Fed board will mostly agree with him up to the point of issuing a reproposal, if no further. As a result, a reproposal Mr. Barr said will amount to about 450 pages will soon be upon us.

Is this the last word? Having relearned humility the hard way, Mr. Barr promises it is not. What else might have to change to get a final U.S. version of Basel’s end-game standards across the goal line?

I would guess a lot more than would have been the case had the Fed and other tough-rule advocates more quickly recognized policy and political reality. One key, if seemingly-technical, point on which to give is the pesky “output floor.” Basel imposed the output floor because …

12 08, 2024

Karen Petrou: Why the 1951 Fed-Treasury Accord Doesn’t Matter in 2024

Eliza Allen2024-08-12T10:24:30-04:00August 12th, 2024|The Vault|

Later this month, FedFin will issue a brief assessing whether Fed independence is really at risk, taking into account not just what Donald Trump has said, but also what progressives and populists agree should be done to change the U.S. central bank’s governing law. As we’ve frequently noted, Donald Trump can talk tough about the Fed, but Congress has to agree to get tough before he can do anything but gradually change Fed leadership and hope his appointees do his bidding despite formidable resistance across the Fed’s entrenched institutional culture. The forthcoming brief will put much of the daily back-and-forth on this critical question into the often-missing context needed to understand how much risk the Fed really runs. However, I’ve gotten so many questions in the last few days following an American Banker article that I’ll answer a few of them now.

The questions revolve around the Fed-Treasury agreement in 1951 putting Treasury fully in the debt-pricing lane and keeping it out of Fed decisions setting monetary policy based on its macroeconomic judgment, not national fiscal or political demands. The question? It’s whether Treasury under Trump could revoke the 1951 Accord and regain control over monetary policy.

The best independent analysis of the history surrounding the 1951 Accord and its substance comes in a paper written in 2001 on the Accord’s fiftieth anniversary by staff at the Federal Reserve Bank of Richmond. It rightly puts the Accord squarely in the historical context necessary to understand if the 1951 Accord has …

3 06, 2024

FedFin on: Discount-Window Modernization

Arezou Rafikian2024-06-03T17:00:38-04:00June 3rd, 2024|The Vault|

In addition to controversial provisions affecting bank-merger applications and stress-test transparency, legislation recently approved by the House Financial Services Committee includes a less-contentious provision forcing the Federal Reserve to reckon with longstanding problems affecting the use of its discount window, especially under stress conditions. These problems were on costly evidence in March of 2023, when both Silicon Valley Bank and Signature Bank had extraordinary difficulty accessing the discount window due in part to ill-segregated collateral and early Fedwire closing….

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

1 04, 2024

Karen Petrou: The Frightening Similarity Between Key Bridge and Bank Stress Tests

Eliza Allen2024-04-12T09:41:28-04:00April 1st, 2024|The Vault|

On Friday, the Washington Post reported that Key Bridge passed all its stress tests before it fell into the harbor. These were well-established protocols looking at structural resilience – acceptable, if not awesome – and, after 9/11, also at terrorist attack. That a giant container ship might plow into the bridge was not contemplated even though this has happened before in the U.S. and not that long ago. Which brings me to bank stress-testing and how unlikely it is to matter under actual, acute stress because the current U.S. methodology correlates risk across big banks in ways that can make bad a lot worse. Even more troubling, tests still don’t look over the banking parapet.

To be sure, the Fed’s semi-annual financial-stability reports (see Client Report SYSTEMIC97) muse about risks that lurk outside the largest banks, and FSOC dutifully catalogs nonbank risk each and every year in a copious annual report (see Client Report FSOC29). Last year, FSOC also said a lot about what might someday be done to address it via systemic designation (see FSM Report SIFI36). But what’s being done, not just said, about nonbank risk even as inter-connections become ever more entwined? Not much in the U.S. even though other national regulators are taking meaningful steps first to know where it lies and then to curtail it.

For example, the Bank of England and Australia’s Prudential Regulatory Authority are quickly moving past bank-centric stress testing, with Australia importantly looking not just within the financial …