#Federalreserve

8 01, 2024

Karen Petrou: Reflections on Regulatory Failure and a Better Way

Eliza Allen2024-01-08T11:25:21-05:00January 8th, 2024|The Vault|

Earlier today, we released our 2024 regulatory outlook, a nice summary of which may be found on Politico’s Morning Money. As I reviewed the draft, I realized how much of what the agencies plan is doomed to do little of what has long been needed to insulate the financial system from repeated shock. This is a most wearisome thought that then prompted the philosophical reflection also to be found in this brief. It asks why lots more bank rules do so little for financial resilience yet are always followed by still more rules and then an even bigger bust. I conclude that financial policy should be founded on Samuel Johnson’s observation that, “when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.” That is, redesign policy from one focused on endless, ever-more-complex rules spawning still larger bureaucracies into credible, certain, painful resolutions to concentrate each financial institution’s mind and that of a market that would no longer be assured of bailout or backstop.

We know in our everyday lives that complex rules backed by empty threats lead to very bad behavior. For example, most parents do not get their kids to brush their teeth by issuing an edict reading something like:

It has long been demonstrated that brushing your teeth from top to bottom, tooth-by-tooth, flossing hereafter and using toothpaste meeting specifications defined herein will achieve cleaner teeth, a brighter smile, improved public acceptance of the tooth-bearer, and lower cost to …

20 11, 2023

Karen Petrou: The Fate of the End-Game Rules Does not Lie in the FDIC’s Hands

Eliza Allen2023-11-20T12:16:01-05:00November 20th, 2023|The Vault|

It’s a hard fact of life that nothing good comes to federal agencies caught up in scandal even when scandal is misplaced. So the real question for the FDIC is whether the bad already all too evident at the divided banking agency will grow still worse, threatening the FDIC’s ability to participate in pending rulemakings or, even worse, resolutions. It likely will be no accident if the FDIC comes unglued and the capital and other proposals fall apart. I think new rules will proceed, but the FDIC’s threat is far from out of the blue.

Is this cynical? I prefer to think of it as an observation born of experience, but this is a city about which Harry S. Truman famously said, “If you want a friend in Washington, get a dog.”

FedFin reports last week tracked Marty Gruenberg’s travails before Senate Banking and then again at House Financial Services, with Ranking Member Waters surprisingly aligning herself with her usual GOP enemies when it came to castigating Mr. Gruenberg over sexual-harassment problems at the agency reported by the Wall Street Journal as the week of hearings broke two days before.

And, as the hearing went on, Mr. Gruenberg found himself in even more of a pickle. In another uncoincidental moment, Chairman McHenry got wind of 2008 allegations against the chair, allegations Mr. Gruenberg belatedly recalled when prompted by yet another poke from the Journal. Now, Mr. McHenry has opened a formal investigation even as a statement from GOP members of …

8 11, 2023

FedFin on: Rebirth at 91

Arezou Rafikian2023-11-08T16:55:16-05:00November 8th, 2023|The Vault|

Although FHFA calls its FHLB report a centenary event ahead of the System’s 2032 birthday, the agency clearly plans structural substantive reform well before that milestone. Much of what’s planned will crimp FHLB profitability, increasing the importance of what would otherwise seem like tidying-up operational improvements to protect the viability of the System’s weaker Banks. With its eye on keeping the System in line, FHFA does not even suggest it should be allowed by law or regulatory sleight-of-hand to issue MBS or …

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

6 11, 2023

Karen Petrou: How Regulators Unwittingly Run Roughshod Over the Public Good

Eliza Allen2023-11-06T15:47:01-05:00November 6th, 2023|The Vault|

Friday’s American Banker included a Kyle Campbell article quoting me reiterating some points in my recent testimony about the need for cumulative-impact analyses of the raft of pending rules. This led others to suggest ulterior motives, arguing that calls for cumulative-impact analyses are fig-leaves dangling over efforts to gut the rules. While advocates do not often argue for analytical purity when obscurity suits them, the absence of analytical rigor is nonetheless an abrogation of the public good by public officials. Setting rules based on airy assertions that it will all come right in the end since there most likely won’t be financial crises or at least new financial crises like the old financial crises ensures that this regulatory round will have at least as much wreckage as those that came before.

The public good when it comes to financial policy is best measured by careful consideration of something wholly absent in all of the agencies’ thinking: economic equality. In its absence, the nation will suffer from still-worse political acrimony, an even worse public-health crisis, growing populations of Americans without fundamental financial security, and even higher odds for still more devastating financial crises. How do I know this? Look at American financial policy since at least 2000 and see what happened.

The Fed is particularly high-handed when it comes to public-good rationales not just for its rules, but also for its still more vital monetary-policy responsibilities. The Fed cloaks itself with the “dual” mandate of “maximum employment” and “price stability” even …

31 10, 2023

FedFin Assessment: New White House AI Policy Promises New KYC Requirements, Banking-Agency Guidance

Arezou Rafikian2023-10-31T13:33:25-04:00October 31st, 2023|The Vault|

In this report, we assess the detailed executive order (EO) issued late Monday afternoon after days of private showings of selected versions. Much in the EO’s binding provisions address near-term AI-related threats to national-security, pandemic-risk, and infrastructure vulnerabilities and much related to AI-related opportunities derive from internal procedures Mr. Biden urges the federal government to develop along with workforce protections and biomedical research. The EO also reiterates the Administration’s values and presses agencies to work still harder on voluntary industry standards that many have been drafting or disagreeing on since the White House and Congress first called attention to AI risk. What comes of these provisions in the EO remains to be seen, but the Administration has also used tools such as the Defense Production Act’s authorization for direct economic intervention to mandate an array of new AI commercial and technology safeguards.

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

23 10, 2023

Karen Petrou: Why the New CRA Rules Won’t Serve Communities Any Better Than the Old CRA Rules

Eliza Allen2023-10-23T12:03:22-04:00October 23rd, 2023|The Vault|

On Tuesday, the banking agencies will release the final version of their 679-page proposal to rewrite the Community Reinvestment Act. Regrettably, much of the proposal reflected the worst of false-science staff seeking complex new models defining subjective goals combined with certainty-loving compliance officers and lawyers who just want to be told the number they need to hit, not if the number makes any sense. Unsurprisingly, there were hundreds of comment letters in which banks generally said the agencies should ease up and community groups urged still more stringent standards. But the story doesn’t end with this unremarkable line-up– in just the last few months, two major bank trade associations and one often-virulently anti-bank advocacy group agreed on one crucial thing: anything close to what the agencies proposed won’t work.

There are of course sharp differences between what banks and public advocates want in a new CRA rule, but what unites them is the over-arching understanding that the new approach is a cumbersome exercise remote from the reality confronting both banks and borrowers in the least-served urban and rural communities. Banks complain – often with good reason as I showed in my book on economic inequality – that risk-based capital rules over-estimate the risk of lending to many community-focused borrowers. The new capital proposals would ameliorate some of this in their “enhanced” risk weightings, but these weightings actually don’t count for much of anything since the proposed “higher-of” standards applies current, higher weightings.

The agencies in fact acknowledge as much …

10 10, 2023

Karen Petrou: The Urgent Financial Reform the Fed and FDIC Hope we Forget

Eliza Allen2023-10-10T11:29:16-04:00October 10th, 2023|The Vault|

Even after the great financial crisis in 2008, the repo meltdown of 2019, a financial-market bailout of unprecedented proportions in 2020, and three bank failures so far this year, the FDIC and Fed are no closer than they were in 2007 to knowing what to do if a medium-size bank fails, a nonbank barrels down on the banking system, or critical financial-infrastructure flickers. Bond markets are back on the brink and geopolitical risk have become a still-greater concern. The agencies may think new capital and resolution rules are an iron dome allowing them to forego agency repair, but history – see the Gaza Strip – provides no comfort – as I hope we don’t have to learn again, fortifications aren’t enough in the absence of effective surveillance and rapid response.

The hard truth is the banking agencies after 2008 did what politicians and lawyers know best: they identified gaps in the law that the agencies self-defensively said barred them from preventing a crisis, asking for and then getting a new rulebook without also meaningfully addressing and then correcting their own structural weaknesses. And so it goes again. Thinking dominated by lawyers and politicians – for every successful public leader is a politician no matter his or her nominal independence – is writing lots and lots more rules. Some fix gaps found in the old law and rule, many pave over problems that could have been fixed under old law and rule, and some are as counter-productive as we’ve noted in …

6 10, 2023

FedFin Assessment: Basel Lays Big Plans for Basel V

Arezou Rafikian2023-10-06T14:47:18-04:00October 6th, 2023|The Vault|

As we noted yesterday, the Basel Committee’s October meeting concluded not only with plans for new disclosure consultations, but also a report on lessons learned from the 2023 crisis. We have long considered the “end-game” standards so substantive as to constitute Basel IV; now, as this report details, Basel is laying plans for Basel V via new liquidity, interest-rate, capital, and structural changes to the current construct. We thus focus on the supervisory and regulatory action steps Basel posits as necessary responses to the financial-market volatility sparked earlier this year by SVB, SBNY, FRC, and CS’s failures. While Basel states that none of its recommendations necessarily presages near-term global standards, …

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

11 09, 2023

Karen Petrou: The PCA Cure for Much That Ails New Banking Rules

Eliza Allen2023-09-11T09:40:05-04:00September 11th, 2023|The Vault|

It’s a cliché, but it’s also true that one can’t beat something with nothing, especially in Washington. This is an axiom well worth remembering when it comes to all of the new capital and resolution rules befalling the nation’s biggest banks. I don’t think they need to be beaten back in their entirety – much in the proposals fixes vital flaws. But the agencies have done a remarkably poor job conjuring the impact of each of these sweeping proposals, let alone their cumulative impact in the context of all the other rules and the grievous supervisory lapses that contributed to recent failures no matter all the rules that could well have sufficed if enforced. Thus, the most obvious problems with this new construct are opacity, complexity, and most importantly reasonable doubts that, even with all these sharpened arrows, supervisors will still fail to draw their bows and then fire early and often. All too much in the new rules is false science, as even a cursory read of the impact analyses makes painfully clear. Instead of setting standards on lofty, unproven models, safeguards should rely on an engineering axiom: use warning lights that force prompt and corrective action. Think of the ground warning in an airplane followed by urgent “pull-up” commands and then go to work on the banking dashboard with clear, enforceable rules and new PCA thresholds forcing supervisory action and accountability.

The need for new PCA triggers is even more urgent than I thought when I first outlined…

7 09, 2023

FedFin on: Living-Will Requirements

Arezou Rafikian2023-09-07T16:39:01-04:00September 7th, 2023|The Vault|

In conjunction with proposing a new long-term debt (LTD) requirement for categories II, III, and IV banks, the Fed and FDIC are pursuing other ways to enhance resolvability. Among these is new guidance for large domestic and foreign banking organizations that requires U.S. banking organizations and foreign banking organization (FBO) intermediate holding companies (IHCs) along with all their insured depositories when any is over $100 billion to file resolution plans. These are also redesigned to make the plans much closer in substance to those mandated for GSIBs.

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