#First Republic – Federal Financial Analytics

15 09, 2023

Al091823

Eliza Allen2023-09-15T16:53:45-04:00September 15th, 2023|3- This Week|

Let It Be Resolved…

Or, maybe not. As detailed below, FedFin has delved into the depths of three new proposals designed to ensure that any big U.S. bank that isn’t made still more impregnable by all the new rules proposed and to come is also indestructible. Karen Petrou has written about the wisdom – if there is any – of making big banks de facto utilities, but this will occur only if all of the new rules work as intended. We’ve had our doubts about that with regard to recent proposals, and our review of the new resolution proposals raises still greater concerns.

Al091823.pdf…

11 09, 2023

M091123

Eliza Allen2023-09-11T09:40:12-04:00September 11th, 2023|6- Client Memo|

The PCA Cure for Much That Ails New Banking Rules

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.

M091123.pdf…

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…

8 09, 2023

DAILY090823

Eliza Allen2023-09-08T16:06:25-04:00September 8th, 2023|2- Daily Briefing|

Barr Backs Away from CBDC, Stands Firm vs. Stablecoins

FRB Vice Chair Barr today for the first time sided firmly with Chair Powell in approaching CBDCs with caution, if at all. Mr. Barr also emphasized not only that the Fed will not proceed with a CBDC without Executive Branch approval, but also now says that it would require “authorizing legislation,” not just Congressional “approval.”

Examining CBDC and Wholesale Payments

The FDIC today released an internal – but not necessarily independent – review of First Republic’s failure, largely saying that FDIC supervisory staff could have done better identifying emerging risks without strongly criticizing actions ahead of the bank’s collapse. This is blamed on factors evident at the time: e.g., rapid growth, poor liquidity and interest-rate risk management.

Fed Study: CBDC Unnecessary for Successful Wholesale Tokenization

As JPMorgan and other companies continue to advance wholesale digital payments and Chair Powell has suggested (see Client Report FEDERALRESERVE73) that he may be open to wholesale CBDC, a new Fed staff study finds that tokenized wholesale payment systems do not require a new form of central-bank money.

Daily090823.pdf…

29 08, 2023

DAILY082923

Eliza Allen2023-08-29T16:55:20-04:00August 29th, 2023|2- Daily Briefing|

Agencies Advance Controversial Long-Term Debt, Resolution Proposals

The FDIC, OCC, and FRB today tackled several critical resolution issues in the wake of recent bank failures, proposals that raise strong objections from regional banks despite FDIC and FRB unanimity today on at least one of them. As anticipated, the FDIC and FRB approved an NPR that would impose minimum long-term debt requirements for banks and BHCs with assets over $100 billion, with the FDIC and Fed boards voting unanimously in favor even as FRB Gov. Bowman strongly dissented despite a three-year transition period. Similar to the ANPR floating this rule (see FSM Report RESOLVE48), the proposal would require large banks to hold a minimum amount of eligible long-term debt equal to the greater of six percent of risk weighted assets, 3.5% of average total consolidated assets, or 2.5% of total leverage exposure for banks subject to the SLR.

Daily082923.pdf…

9 08, 2023

DAILY080923

Eliza Allen2023-08-09T16:35:20-04:00August 9th, 2023|2- Daily Briefing|

Brown, Other Senate Dems Demand Fast Action on Fed Merger Policy Rewrite

Building on Sen. Warren’s (D-MA) longstanding Fed criticism, Chairman Brown (D-OH) along with Sens. Warren, Reed (D-RI), and Fetterman (D-PA) today directly demanded a substantive and speedy rewrite of Fed merger policy to ensure that statutory requirements related to financial-stability impact are met. The letter not only criticizes past mergers Sen. Warren has long said are “rubber-stamped” and JPMorgan’s acquisition of First Republic, but also cites the Fed’s decision to allow UBS to acquire Credit Suisse.

Waters Doubles Down On Opposition To GOP Stablecoin Bill

In stark contrast to HFSC Chairman McHenry’s (R-NC) comments praising PayPal’s new payment stablecoin, Ranking Member Waters (D-CA) today sharply criticized the product and the risks its poses given that the HFSC GOP has advanced a bill she thinks both highly problematic and unlikely to be enacted.

Daily080923.pdf…

25 07, 2023

DAILY072523

Eliza Allen2023-07-25T17:18:26-04:00July 25th, 2023|2- Daily Briefing|

Key Democrat Takes On Fed Rate Hikes

Ahead of today’s FOMC meeting, Joint Economic Committee Chair Heinrich (D-NV) yesterday sent a letter to Fed Chair Powell cautioning against additional policy tightening.

Second HFSC Markup Targets Stablecoins, Regulatory Restrictions, ESG

Thursday’s HFSC has now added another day to its mark-up calendar this week, moving the stablecoin and ESG bills to Thursday doubtless in order to avoid an endurance contest before the August recess and still meet Chairman McHenry’s (R-NC) commitments.

Senate GOP Tries to Block Capital Rewrite

Just days before the banking agencies take up new capital rules, Senate Banking Ranking Member Scott (R-SC) and ten other committee Republicans sent a letter to Chairman Powell demanding greater transparency and prior consultation.

Waters Presses FHFA for FHLB Reform

Following FHFA listening sessions and in anticipation of a final report this September on the FHLB system, HFSC Ranking Member Waters (D-CA) late yesterday sent a letter to FHFA Director Thompson laying out a series of recommendations to significantly reform the system.

Ag Committees Slam SEC Custody Proposal

In a letter to SEC Chairman Gensler released today, Senate Agriculture Committee Ranking Member Boozman (R-AR) and Chairwoman Stabenow (D-MI) along with House Ag. Committee Chairman Thompson (R-PA) and Ranking Member Scott (D-GA) raised strong objections to what they called serious flaws in the SEC’s proposed custody rule (see FSM Report CUSTODY5).

Warren, Scott Renew Fed-Ethics Campaign

Continuing their bipartisan campaign against the Fed, Sens. Warren (D-MA) and Scott (R-FL) yesterday sent a letter…

12 07, 2023

DAILY071223

Eliza Allen2023-07-12T17:05:21-04:00July 12th, 2023|2- Daily Briefing|

SEC Concedes, Drops MMF Swing Pricing

In a startling bow to industry comments, the SEC today finalized MMF rules for institutional prime and tax-exempt funds that dispense with the proposal’s swing pricing (see FSM Report MMF19).

HFSC Bickers Over ESG, SEC Authority, Investor Rights

Today’s ESG hearing was the partisan show-down we anticipated – indeed, Rep. Sherman (D-CA) denounced the GOP for “waging war” against capitalism like Leon Trotsky.

Fed Nominations Advance

As anticipated, Senate Banking today approved the nominations of all three Federal Reserve Board nominees for the full Senate.

Warren Heightens Anti-Merger Campaign

Republicans were absent today from Senate Banking’s Economic Policy bank-merger hearing. Chair Warren (D-MA) reiterated her strong opposition to virtually all mergers, indicating her plans to reintroduce anti-merger legislation from prior Congresses (see FSM Report MERGER8).

Daily071223.pdf…

10 07, 2023

M071023

Eliza Allen2023-07-10T14:18:21-04:00July 10th, 2023|6- Client Memo|

The Bankruptcy of Bank-Merger Policy

On Wednesday, a Senate Banking subcommittee will consider bank-merger policy, surely providing a platform for its chair, Sen. Warren’s pronounced views opposing all but the smallest bank mergers and maybe not even those. Many other senators are not as adamant, but even pro-business Republicans – see J.D. Vance – think bank mergers beyond the itty-bitty are at best problematic. The politics of this debate is obvious; the substance not so much. As with many other questions, bank-merger policy is best set with a keen understanding of recent, objective research and what it actually says about concentration as it occurs outside the gaze of those fearful only of still bigger big banks.

M071023.pdf…

10 07, 2023

Karen Petrou: The Bankruptcy of Bank-Merger Policy

Eliza Allen2023-07-10T14:18:07-04:00July 10th, 2023|The Vault|

On Wednesday, a Senate Banking subcommittee will consider bank-merger policy, surely providing a platform for its chair, Sen. Warren’s pronounced views opposing all but the smallest bank mergers and maybe not even those. Many other senators are not as adamant, but even pro-business Republicans – see J.D. Vance – think bank mergers beyond the itty-bitty are at best problematic. The politics of this debate is obvious; the substance not so much. As with many other questions, bank-merger policy is best set with a keen understanding of recent, objective research and what it actually says about concentration as it occurs outside the gaze of those fearful only of still bigger big banks.

That there is undue market power in a financialized economy that brings a raft of woes is all too clear. I thus hoped that Assistant Attorney General Kanter’s remarks last month would be a meaningful update of the Department of Justice’s anachronistic 1995 policy. It helped, but only a bit because Mr. Kanter focused principally on enforcement, leaving “broader” questions solely to the banking agencies.

They in turn have long promised a transparent merger policy, but it’s still deal-by-deal, case-by-case, crisis-by-crisis. More than a few mid-sized banks will wither away as deliberations continue because the sheer uncertainty and delays of most bank mergers undermine their economic value, particularly at a time of high interest rates, slow or no growth, tough new rules, and withering competition.

Recent antitrust research does not substantiate easy, blanket assertions about the benefits or …