Would a Trump Victory Set the GSEs Free?
Common-stock investors clearly think so, but they’re a notably speculative lot and more than likely wrong. In this report, we lay out why we think the limbo in which the GSEs have languished since 2008 is now a permanent quasi-vegetative state.
FedFin Assessment: FSOC Worries A Lot, Watches, Waits
This year’s FSOC report trods much old ground with two exceptions. The first pertains to a new focus on artificial intelligence, machine learning, and new, generative technologies. That said, the report does little beyond highlight this risk and include it among all the others federal agencies are told to monitor. Private credit now also alarms FSOC, with insurance company investment in this sector of particular systemic concern in concert with the sectors’ CRE and junk-bond exposures, offshore reinsurance, and PE ownership. As detailed in this report, banks are found to be resilient and have ample capital even as the report supports consideration of pending regulatory revisions. Banking agencies are also asked to monitor uninsured-deposit levels and assess run-risk in light of social media and other accelerants. In sharp contrast to more alarmist statements in the past and extensive Treasury reports (see Client Report CRYPTO32), this year’s report downplays cryptoasset risk because federal regulators are said to have taken steps to contain it. The report also reiterates FSOC’s continuing focus on cyber and climate risk, with the closed session preceding the meeting considering a framework being developed by the OCC to measure and monitor financial risks and bank exposures. Agencies are also encouraged to pursue comparable, “decision-useful” climate disclosures. The LIBOR transition is considered a success and no longer poses a systemic risk.
BIS: CCP Collateral Holdings Pose Systemic Risk
A new BIS study looks at the risk that the transformation of OTC markets to centrally-cleared ones has in turn transformed markets based in part on know-your-counterparty into those dependent principally on collateral backing margin positions – an inherently more fragile market structure.
White House Presses FHLB Affordable-Housing Action
In remarks today, National Economic Advisor Lael Brainard not only highlighted the Biden Administration’s actions to address housing affordability, but also mentioned plans for new financing programs.
Ambitious CFPB Regulatory Plans Come Into View
The CFPB’s fall 2023 regulatory agenda provides status updates for several significant rulemaking items.
Basel to Set IRR, Window-Dressing, Crypto Standards
The Basel Committee’s year-end meeting advanced plans to address interest-rate risk (IRR) with a concrete agreement to issue a new consultation later this month updating current global IRR standards (see FSM Report IRR7).
BIS Points to MMF Risk When Rates Rise
Another new BIS paper concludes that the record size of MMFs poses significant threat to dollar-funding market stability.
OCC Warns Banks of AI Risk, Possible Supervisory Action
Reflecting growing Congressional, regulatory, and industry concerns over AI, today’s OCC semiannual risk assessment for federal banks states that national banks should be mindful of AI risks as these fall under current supervisory procedures.
Senate GOP Goes for Gruenberg’s Jugular
Despite efforts by the FDIC to reassure critics about its independent investigation, Senate Banking Republicans today fired off a ferocious letter demanding that FDIC Chair Gruenberg immediately resign …
An Advanced View of Regulatory Capital?
The most significant thing in FHFA’s final capital rule is not what is to be done, but what FHFA left out: ending the GSEs’ advanced-approach requirement. As a result, Fannie and Freddie can still use models for key calculations, a requirement that makes more sense for two complex organizations than it did for the regional banks also long subject to advanced-approach requirements even though the rules required them, like GSIBs, to hold the higher of the standardized or advanced approach.
BIS Study: Low-Profit GSIBs are High-Risk GSIBs
A new BIS paper assesses the systemic consequences of GSIBs with low market capitalization, an issue with immediate relevance given investor concerns about the long-term earnings impact of numerous pending rules. The methodology leads the authors to focus on price-to-book ratios (PTBRs) which are found to be directly linked to investor-predicted return on equity. Although GSIB capital requirements dramatically increased over the course of the study, there is said to be no significant impact on franchise value.
CFTC Realigns Client-Fund Segregation Standards
The CFTC today proposed to make significant changes to client-fund segregation rules governing futures commission merchants and derivatives clearing organizations covering both how FCMs and DCOs handle client funds and the manner in which they may be deposited with banks. The proposal redefines permissible investments that must still be housed at a bank or similar entity, adding foreign sovereigns, limiting MMFs to government funds, and removing certain corporate bonds and similar instruments.
Basel Points to Problematic Climate-Risk Implementation
The Basel Committee today issued a “newsletter” addressing issues raised since it finalized global climate-risk management principles (see Client Report CLIMATE14), now codified for large U.S. banking organizations (see Client Report CLIMATE17).
FDIC Sets Up Special Committee to Address Widespread Concerns
In a major concession surely necessary to appease at least some in Congress and ensure continuing agency function, the FDIC board today announced formation of a special committee to be chaired by Acting Comptroller Michael Hsu and Director …
Thompson: No Regulatory “Silos” in a Crisis
Reiterating much in FHFA’s sweeping FHLB report, FHFA Director Thompson today reinforced suggestions that FHLBs can avoid acting as lenders of last resort because there are no regulatory “silos” in a crisis.
IMF Reconsiders CBDC
On Friday, the IMF updated its CBDC work, concluding that it is prudent for most countries to consider CBDC implementation even though nations are increasingly hesitant to do so.
IMF: Nations Should Block Fintech Reg Arbitrage
A new IMF study finds that Fintechs adversely affect bank profitability, concluding that “well-designed” fintech regulations are necessary to foster a level bank-fintech playing field.
House Opens New Front vs. FDIC
Following an official HFSC investigation and a raft of letters from Democrats and Republicans, House Oversight Subcommittee on Health and Financial Services Chairwoman McClain (R-MI) along with Rep. Biggs (R-AZ) today sent a letter to Chairman Gruenberg requesting briefings, documents, and communications regarding harassment and workplace practices.
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 …
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Rebirth at 91
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 like-kind instruments, get into the CRT business, or do anything much but provide ordinary advances to mission-focused members and up its own contributions to affordable housing. A series of near-term regulations are also contemplated to ensure tighter mission compliance and more certain resilience, steps sure also to cut into the Banks’ already-challenged bottom lines.
Treasury Advances Financial-Inclusion Agenda
In conjunction with its read-out of yesterday’s meeting of its most recent financial-inclusion discussion group, Treasury announced that it will shortly release a request for information about how best to accomplish the national financial-inclusion strategy demanded in the Department’s FY23 appropriations.
HFSC GOP Challenges Motives, Process of Basel, NGFS Standard-Setting
As anticipated, today’s Financial Institutions Subcommittee hearing on global banking accords was acrimonious, with Republicans strongly attacking what they characterized as Democratic agency head’s participation in a range of global banking accords as well as the Network for Greening the Financial System.
CFPB Proposes to Extend its Supervisory Reach to Tech-Payment Providers
The CFPB today proposed a sweeping rule bringing tech-platform or fintech companies offering general-use digital-payment services under bank-like consumer-protection standards via more direct CFPB supervision.
Bowman Stands by Basel
Perhaps due to today’s HFSC hearing on global accords, FRB Gov. Bowman today went beyond her ongoing critiques of pending rules to defend participation in the Basel Committee and other forums.
FHFA Starts FHLB Redesign
FHFA today released its long-awaited assessment of the Federal Home Loan Banks, laying out an ambitious program of supervisory, regulatory, and statutory issues.
McHenry Slams CFPB Digital-Payment Proposal
HFSC Chairman McHenry (R-NC) today slammed the CFPB not for usual causes, but because he believes the agency’s proposed supervisory standards for nonbank general-use digital-payment providers will “entrench the status quo” – i.e., the role of banks – by eliminating consumer choice and impeding innovation.
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.
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