Securitization and Systemic Risk
A new Fed staff study uses models to conclude that government-backed mortgage securitization exacerbates financial crises, contradicting conventional wisdom that – GSE blow-ups notwithstanding – properly-regulated GSEs create a liquid, diversified asset pool for an otherwise illiquid, risky asset class. However, our read of the study leads us to side with conventional wisdom.
HFSC’s HUD Hearing to Trod Partisan Ground
HFSC’s majority staff memo on Thursday’s hearing with HUD Secretary Fudge makes it still clearer that the session will focus on affordable housing, homelessness, and public-housing agencies in cities such as New York and Washington, D.C.
HFSC GOP Slams DOL Fiduciary Rule
At today’s HFSC Capital Markets Subcommittee hearing on the DOL’s Fiduciary Rule, Subcommittee Chairwoman Wagner (R-MO) argued that the proposal should be withdrawn, calling it a partisan effort to eliminate “junk fees.”
HFSC Takes Partisan Approach to FSOC
At today’s HFSC Digital Assets Subcommittee hearing on FSOC’s systemic-designation framework (see FSM Report SYSTEMIC98), Subcommittee Chairman Hill (R-AR) questioned FSOC’s approach to addressing systemic risk, claiming that the Council’s revised guidance is vulnerable to abuse and unintended consequences.
CFPB Small-Business Reg Survives
Senate Republicans tried today to override the President’s veto of the Congressional Review Act resolution approved by both Houses of Congress to repeal the CFPB’s small-business reporting rule.
OFR Sees Heightened Systemic Risk
Striking a considerably more somber note than the FRB (see Client Report SYSTEMIC97), OFR today concluded that systemic risk is elevated due to an upcoming economic slowdown, heightened inflation, and geopolitical risk and global conflict.
OCC Cracks Down on BNPL Finance
Reflecting continuing CFPB concerns about buy-now/pay-later finance, the OCC today sets new risk-management standards for federally-chartered entities in this arena.
HFSC Housing Subcommittee Revisits Housing Debate
Today’s HFSC Housing Subcommittee hearing largely followed the staff memo’s outlined political playbook, with Chairman Davidson (R-OH) calling for market-based solutions and Ranking Member Presley (D-MA) arguing that expanded subsidies are necessary alongside zoning reform to make housing affordable.
Fed Proposes Market-Risk Valuation Reporting
Readying disclosures for the market-risk capital rewrite (see FSM Report CAPITAL233), the Federal Reserve has proposed new reporting standards that would require covered banks to disclose valuations of their covered positions taking into account unearned credit spreads, close-out costs, early termination costs, investing and funding costs, liquidity, and model risk.
Fed Proposes New Liquidity Risk Reporting Standards
Reflecting growing fears that banks could not actually monetize HQLAs under stress as proved the case for Credit Suisse, the FRB is also proposing new reporting standards requiring covered companies to report on qualifying master netting agreement compliance with current liquidity-risk measurement standards.
HFSC GOP to Press Regulatory-Agency Financial Innovation
Tuesday’s HFSC Digital Assets Subcommittee hearing will focus on regulatory-agency offices focused on financial innovation, a session sure to give GOP Members an opportunity to closely question the OCC’s witnesses about her agency’s hiring offer to a person heading this activity who turned out to have a fraudulent resume.
HFSC GOP Lays Out “Market-Based” Affordable Housing Approach
The HFSC majority-staff memo for Wednesday’s Housing Subcommittee hearing emphasizes GOP goals with regard to “market-based” solutions addressing affordable housing. In this context, Fannie, Freddie, and FHA come in for criticism with regard to driving out private capital, but the memo makes no specific recommendations about how to address this or, indeed, many of the zoning, supply-chain, and other challenges it identifies.
FSB Toolkit Focuses on Critical Interdependencies
Following its initial consultation, the FSB today published its final report on enhancing third-party risk management, now laying out a flexible and nonbinding toolkit focused on incident reporting, identification of critical dependencies, interjurisdictional comparability and interoperability, and systemic risk management. In addition to a list of terms and definitions, the report provides tools to help financial institutions and supervisors identify critical third-party services and manage their risks.
A new FRB-NY study confirms that 83% of loans from 2000-2022 went to first-time homebuyers, compared to 56% for the GSEs and 57% for private lenders. FHA loans of course have very high LTVs and low scores, with scores improving after 2008 when the PLS market stopped adversely selected FHA even though over half of FHA loans still have scores under 680. FHA sustainability has varied based on these and other factors, but 21.8% of borrowers from 2011-2016 still lost their homes.
The full report is available to subscription clients. To find out how you can sign up for the service, click here.…
FHA’s Mission and Mishaps
A new FRB-NY study confirms that 83% of loans from 2000-2022 went to first-time homebuyers, compared to 56% for the GSEs and 57% for private lenders. FHA loans of course have very high LTVs and low scores, with scores improving after 2008 when the PLS market stopped adversely selected FHA even though over half of FHA loans still have scores under 680. FHA sustainability has varied based on these and other factors, but 21.8% of borrowers from 2011-2016 still lost their homes.
FinCEN Bows to BOI Pressure
Responding to bipartisan concerns, FinCEN today issued an NPR to extend the beneficial ownership information (BOI) report filing deadline from thirty to ninety days for companies created or registered in 2024.
Chopra Considering Refi, Point Rules
The CFPB today released its annual report on residential mortgage lending, finding that mortgage applications, originations, and affordability declined significantly in 2022 while costs, loan denials, HELOC originations, and the percentage of cash-out refinances all increased.
HFSC GOP Presses Gensler on Banking-Reg Cumulative Impact
During Chairman Gensler’s as-always contentious HFSC hearing today, Rep. Barr (R-KY) asked if the SEC is in consultation with the Federal Reserve regarding the combined CRE effects of recent SEC proposals and the Basel III endgame standards (see Client Report CAPITAL234).
Carstens Says Law Must Catch Up To CBDC
BIS General Manager Agustín Carstens today emphatically called for rapid development of clear CBDC legal frameworks based on defined rights and obligations for privacy, AML compliance, and user choice.
In this report, we proceed from our assessment of the proposed regulatory capital framework to an analysis of the rules governing credit risk. In addition to eliminating the advanced approach, the proposal imposes higher standards for some assets than under the old standardized approach (SA) via new “expanded” requirements. As detailed here, many expanded risk weightings are higher than current requirements either due to specific risk-weighted assessments (RWAs) or definitions and additional restrictions. This contributes to the added capital costs identified by the banking agencies in their impact assessment, suggesting that lower risk weightings in the expanded approach reflected the reduced risks described in the proposal for other assets and will ultimately have little bearing on regulatory-capital requirements and thus ….
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…
Credit-Risk Capital Rewrite
In this report, we proceed from our assessment of the proposed regulatory capital framework to an analysis of the rules governing credit risk. In addition to eliminating the advanced approach, the proposal imposes higher standards for some assets than under the old standardized approach (SA) via new “expanded” requirements. As detailed here, many expanded risk weightings are higher than current requirements either due to specific risk-weighted assessments (RWAs) or definitions and additional restrictions. This contributes to the added capital costs identified by the banking agencies in their impact assessment, suggesting that lower risk weightings in the expanded approach reflected the reduced risks described in the proposal for other assets and will ultimately have little bearing on regulatory-capital requirements and thus on the overall ability of banks to expand into lower-risk areas and compete more effectively with nonbanks and foreign banks. Big banks forced to abandon certain activities may expand others receiving capital discounts in the new rules, increasing their footprint in traditional banking in ways that may increase industry consolidation.
IMF: Housing Risk Not At GFC Level, Still Worrisome
While falling home prices are unlikely to trigger another financial crisis, an IMF blog post today finds that a drop could still harm the global economic outlook.
FDIC Tries Guarded Optimism
The FDIC’s first-quarter report on the condition of the U.S. banking industry was guardedly optimistic, but that in part appears to be due to the way in which the agency foresees its problems. Problem banks are up by 4 to 43 with $58 billion in assets among them.
End-Game Starts Soon
FRB Governor and Vice-Chair nominee Jefferson today expanded on the Fed’s financial-stability objectives, resolutely disavowing any of the credit-allocation ambitions Republicans sometimes ascribe to its work on climate risk.
CFPB Small-Business Disclosures Go Live
The Federal Register today includes the CFPB’s controversial final rule on small business data collection published late March which the Bureau says will increase transparency in small business lending, promote economic development, and combat unlawful discrimination.
FHA Expands Pandemic Mortgage Relief As Rates Rise
FHA today requested comment on a new loss mitigation proposal called the Payment Supplement Partial Claim allowing servicers to use FHA funds to bring a borrower’s mortgage current and temporarily reduce principal payments.