#FSB

21 01, 2025

Karen Petrou: Will There Also be a Financial Firestorm?

2025-01-21T13:57:41-05:00January 21st, 2025|The Vault|

I live two short blocks from Rock Creek National Park, one of D.C.’s hidden wonders.  As befits a national park, Rock Creek is very large and densely wooded, but no one has thought much about fire hazard until last summer’s drought led to some significant brush fires.  I thus asked a forestry professor next to whom I happened to be seated waiting for a plane if those of us living near Rock Creek Park should worry.  Instantly and unequivocally, his answer was emphatically, “Yes.”  I’m still not sure what I or any of us now at risks we never contemplated can do, but I’m even less sure that what can clearly be done to reduce financial-system risk due to natural disasters will be done until after it’s too late.

Is risk really this frightening?  A report last week from the Financial Stability Board lays out what it believes to be plausible, yet-severe scenarios demonstrating that the extent to which property insurers and reinsurers are able to absorb natural-disaster risk determines whether a disaster leads to systemic financial risk.  In the U.S., this is a thin reed.

We know that the National Flood Insurance Program is woefully unable to address the scale of recent hurricanes and inundations.  A treasury study last Friday shows that private insurance is in at least as much disarray.  Homeowners in the highest climate-risk zip codes pay premiums about eighty percent higher than those in the lowest-risk codes and have far, far higher non-renewal rates.  Fifteen of …

25 11, 2024

Karen Petrou: Why the World Needs a Financial Stability Board That Isn’t This Financial Stability Board

2024-11-25T09:04:12-05:00November 25th, 2024|The Vault|

Donald Trump often upends conventional neoliberal wisdom, but one of the seemingly most frightening things the President-Elect espouses is contempt for the global order embodied in bastions such as the Bretton Woods international financial institutions, NATO, the UN, and the World Trade and Health Organizations.  A less-known archetype of right global-order thinking is the Financial Stability Board.  It has so far been spared by Mr. Trump, likely only because it has yet to come to his attention.  Moving out ahead, two House Republicans vying for HFSC Chair are already insisting that each will, Samson-like, pull down the FSB’s banking, insurance, and securities pillars.  Will the global financial system crumble to the lowest common denominator as FSB advocates proclaim?  I doubt it.  Indeed, shaking global financial standard-setters out of their well-stocked echo chamber could actually do global finance a world of good.

Like all the other global-order monuments, the FSB was founded with the very best of intentions.  The 2008 crisis and warning tremors in the late 1990s proved at grave cost how financial earthquakes know no borders.  What better than a new body of global financial standards akin to those that keep cross-border telecommunications humming to protect global banking, insurance, securities, commodities, and payments?  And thus, the G20 brought forth the FSB in 2009.

The FSB promptly did the best it could as quickly as it could not only to ramp up subgroups such as a renewed Basel Committee, but also to tackle the absence of resolution protocols for the …

18 07, 2023

FedFin on: MMF Redemption Fees, Liquidity-Risk Mitigation

2023-07-19T16:52:22-04:00July 18th, 2023|The Vault|

The SEC has significantly revised its proposed MMF-reform standards, eliminating a controversial swing-pricing approach to reduce first-mover advantage in favor of new redemption fees at institutional prime and tax-exempt funds.  These and most other funds now also come under stiff new liquidity requirements, which may combine to impose new and costly disciplines that may enhance the relevant appeal of bank deposits without early-redemption risk.  Changes in MMF liquidity requirements may also alter demand for commercial paper, municipal obligations, bank debt, and ….

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

22 03, 2023

FedFin Assessment: GSIB Rules Set For Post-CS Rewrite

2023-03-22T16:34:58-04:00March 22nd, 2023|The Vault|

In this report, we assess the implications of recent events on two assumptions underlying current U.S. and global policy affecting GSIBs and those considered domestic SIBs:  first, all are likely to be well insulated from illiquidity and/or insolvency and, when this is not the case, then orderly resolution without taxpayer bailout can be readily deployed.  Credit Suisse’s failure and subsequent, subsidized acquisition is just one of the “Minsky moments” rattling regulators and other policy-makers, with the conclusions drawn from all of them surely to lead to significant reevaluation of each of these assumptions.  To be sure, CS was an outlier in terms of idiosyncratic culture-and-control problems, but the Swiss regulatory and resolution system is considered reasonably robust, thus making the bank’s failure…

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

 …

21 02, 2023

Karen Petrou: FSOC’s NBFI Plans Will Cost Big Banks Dearly

2023-02-21T11:15:33-05:00February 21st, 2023|The Vault|

Although the always-inscrutable FSOC’s read-out of its last meeting was clear only with respect to approval of prior meeting minutes, the brief mention of ongoing U.S. work to address nonbank financial intermediation (NBFI) was so tantalizing that we ventured down darkened corners of key agencies to get a read-out of our own.  Two conclusions came to light:  the U.S. will take tough action on limiting bank/NBFI interconnections in its pending bank capital rewrite and FSOC is fine with the SEC’s recent MMF and open-end fund proposals even if pretty much no one else is.

First to the capital rewrites and how costly they could be.  In its most recent NBFI review, the FSB took sharp issue with the extent to which the U.S. has taken sufficient steps to curb the inter-connected risks to NBFIs evident even before the 2020 market collapse.  We expect the banking agencies not only to issue the end-game rules discussed in my last memo, but also to make good on the U.S. promise to Basel well before the game nominally ended with the 2017 revisions.

This means new capital standards costing banks big when it comes to bank equity investments in funds and higher risk weightings for exposures to unregulated financial institutions.  It also means new capital requirements absorbing “step-in” risk – i.e., the extent to which reputational risk forces banks to stand by their off-balance sheet funds, SIVs, or other instrumentalities.  Two banks in fact supported affiliated funds in MMFs during the 2020 …

14 11, 2022

FedFin on:  Global Regulators Prioritize CCP, End-User Resilience

2022-11-14T16:00:23-05:00November 14th, 2022|The Vault|

As promised, this FedFin report provides an in-depth analysis of the FSB’s latest policy on nonbank financial intermediation.  As is often the case, much in the report discusses data gaps, presses for international cooperation, and details FSB and national work to date on the issues identified in its initial analysis after the 2020 crisis (see FSM Report NBFI).  Most of FSB’s work since has focused on MMFs (see FSM Report MMF18), with this latest report going on to lay out ….

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

5 05, 2022

FedFin Analysis: Global Climate-Risk Disclosures and Standards

2023-03-01T14:37:09-05:00May 5th, 2022|The Vault|

The FSB’s report is aimed at establishing global standards that prevent fragmentation along national or regional lines as well as ensuring that regulatory and supervisory actions mitigate climate risk to the greatest extent possible in the face of an array of data and measurement challenges. Although the FSB proposes no specific requirements….

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

29 03, 2022

FedFin: Global Securities Regulators Diss DeFi

2023-03-27T15:46:19-04:00March 29th, 2022|The Vault|

As promised, this report provides an in-depth analysis of IOSCO’s new paper on decentralized finance, one sure to advance the FSB’s efforts to bring DeFi systems under greater regulatory scrutiny due to the findings we here detail.  In the U.S., President Biden’s crypto-focused executive order (see FSM Report CRYPTO26) highlights DeFi’s risk with regard to illicit finance.  IOSCO’s work on this report was headed by the SEC, suggesting rapid U.S. action not only on this concern, but also on many other risks by the Commission, as well as the FSOC and other U.S. agencies…

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

28 03, 2022

Karen Petrou: Why the Fed Might Bail Out the Commodity Market

2023-03-27T15:57:01-04:00March 28th, 2022|The Vault|

In the midst of chaos, volatility always makes matters worse and this is very much the case with the commodities sector.  This has led to growing speculation that central banks will step in should unprecedented price swings show signs of systemic impact.  As we noted, we don’t know a central banker that wants to bail out commodities.  But none of them wanted to bail out anyone else either.  If market stress turns systemic, then central banks will step in.  Indeed, they may intervene even if stress seems manageable if they also believe that public welfare is at risk when core commodities go from pricey to prohibitive.

In the U.S., the Fed will resist calls to backstop commodities companies or traders for as long as it can by citing what it believes to be its limited mandate even as it argues that its anti-inflation policies will stabilize markets – just you wait.  However, whatever the Fed is able to do about inflation will take time and whatever it does about its portfolio to address inflation will exacerbate commodity-market stress.

Three possible sources of extreme volatility are already on the horizon.

First, there’s the liquidity stress sparked by CCP margin demands.  This was the culprit in the letter from energy traders to the European Central Bank and it’s at least as much of a factor in the U.S.  The more commodity-market volatility, the higher clearinghouse initial and variation margin demands and the harder it is to post eligible assets already scarce …

18 10, 2021

FedFin on: Global MMF-Reform Options

2023-06-07T15:52:59-04:00October 18th, 2021|The Vault|

Global regulators have now finalized a framework on which national regulators may base the reforms they deemed necessary after the pandemic sparked profound disruptions in this sector.  However, as with the FSB’s proposed approach, the final framework sets few parameters for jurisdictional action beyond a strong plea for action of some sort that would meaningfully address the redemption and/or liquidity risk the FSB continues to believe presents a threat to national and even global financial stability.

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

Go to Top