Large-Bank Climate-Risk Principles
The banking agencies have joined together to issue inter-agency climate-risk guidance based on proposed standards from the FDIC, OCC and FRB. Most notably, the new standards expressly cover banking organizations over $100 billion, including FBO branches, but are indicative of the new approach to climate risk the agencies expect at any banking organization with elevated climate-risk exposure.
FedFin Assessment: FRB Tries to Link Stability Conclusions to Regulatory Objectives
As promised, this in-depth report assesses Friday’s semiannual financial-stability report from the Federal Reserve. As in its most recent reports, the Fed again eschews any clear conclusion about financial stability even as it observes that some risks are hard to quantify and thus may be overlooked. Prior reports of “moderate” risk were shortly followed as in 2020 with considerable systemic challenge, leading the Fed thereafter and in this report to limit itself principally to quantification of emerging issues with few conclusions and, other than with regard to banks, no direct regulatory recommendations. Where the Fed points to significant systemic challenges, it does so only by citing third-party survey results.
Long-Term Debt Requirements
Building on an advance notice of proposed rulemaking, the banking agencies have issued several proposals to enhance the resolvability of large banking organizations not covered by stringent GSIB standards. Among these is a proposal mandating long-term debt (LTD) to increase regional-bank total loss-absorbing capacity (TLAC) and, the agencies believe, reduce resolution costs and/or increase the FDIC’s options, thus avoiding the systemic designation and costly resolutions that occurred for regional banks earlier this year. The LTD requirements for category II, III, and IV banking organizations do not go as far as those mandated for GSIBs, based instead exclusively on a “capital-refill” construct in which eligible LTD is issued in amounts the agencies believe sufficient to provide enough capital-equivalent funding to achieve the proposal’s expected results.
Building on an advance notice of proposed rulemaking, the banking agencies have issued several proposals to enhance the resolvability of large banking organizations not covered by stringent GSIB standards. Among these is a proposal mandating long-term debt (LTD) to increase regional-bank total loss-absorbing capacity (TLAC) and, the agencies believe, reduce resolution costs and/or increase the FDIC’s options, thus avoiding the systemic designation and costly resolutions that occurred for regional banks earlier this year. The LTD requirements for category II, III, and IV banking organizations do not go as far as those mandated for GSIBs, based instead exclusively on a “capital-refill” construct in which eligible LTD is issued in amounts the agencies believe sufficient to provide enough capital-equivalent funding to achieve the proposal’s expected results.
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In conjunction with issuing a new supervisory policy for “novel” activities, the FRB has instituted a new process requiring non-objection letters before state member banks proceed with stablecoin or dollar-tokenization activities. Although the new non-objection process makes it clear that Fed approval will require clear adherence to a raft of policy and legal obligations, the non-objection process clears the way for state member banks to offer products with a growing role in retail and wholesale payment, settlement, and clearing activities.
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…
Stablecoin/Tokenization Activities
In conjunction with issuing a new supervisory policy for “novel” activities,[1] the FRB has instituted a new process requiring non-objection letters before state member banks proceed with stablecoin or dollar-tokenization activities. Although the new non-objection process makes it clear that Fed approval will require clear adherence to a raft of policy and legal obligations, the non-objection process clears the way for state member banks to offer products with a growing role in retail and wholesale payment, settlement, and clearing activities.
Although the Fed’s “unflinching” self-assessment of SVB’s inglorious demise and the FDIC’s still more exculpatory analysis of SBNY talk much of supervisory gaffes, neither addresses a critical unanswered question: why were both agencies so ill-prepared for such large resolutions? That they were is still more grievous when it comes to First Republic, where the agencies are flat-footed even though they’ve had over a month of warnings that FRC might not make it. As the Fed says, a banking system without failure is a financial system without intermediation. It and the FDIC clearly know that failures are inevitable, but still turn to one or another form of the taxpayer bailouts U.S. policy-makers swore after 2008 would never again disfigure the nation’s financial system. The agencies did not answer the urgent question of why even mid-sized bank resolutions are still systemic or lead to still more concentrated market power, but we must and then hold them as accountable for this failure as for all the others mentioned or not in each of their reports.
Are regional banks truly systemic or is it just that the FDIC doesn’t know what to do with them? Mass regional-bank failures are clearly problematic, but would these be likely if the FDIC knew how to resolve mid-sized banks when supervisors spot problems or, failing that as seems sadly likely, if a regional bank comes unglued? The FDIC is clearly ill-prepared to handle them even when the bank is the principal subsidiary of a non-complex BHC as is …