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6 12, 2022

DAILY120622

2022-12-06T16:40:03-05:00December 6th, 2022|2- Daily Briefing|

FSB Again Ratifies Focus on Crypto, Climate, Macro Risks

Following its meeting today, the FSB Plenary announced 2023 priorities to be finalized in January.  Focus will center on heightened monitoring of financial stability risks, enhanced NBFI and CCP resilience, work on the global crypto regulatory framework, cross-border payments reform, cyber and operational resilience, and financial risks from climate change.

FinCEN Targets De-Risking Compliance

Pointing to possible enforcement actions, Treasury Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth Rosenberg today noted FinCEN concerns with the extent to which institutions apply a rules-based approach to de-risking rather than a risk-based one, leaving it vulnerable to fast-changing risks and without access to valuable suspicious activity information.

Warren, GOP Senators Put Silvergate On FTX Hotseat

Reflecting at least some bipartisan agreement on the need for new crypto standards, Sens. Warren (D-MA), Kennedy (R-LA), and Marshall (R-KS) late yesterday sent a letter to the CEO of Silvergate Bank demanding detailed information regarding its relationship with FTX and FTX affiliates.

GOP Threatens Woke Asset Managers With BHC Designation

The Senate Banking GOP report today on ESG asset management contains an interesting aside about the extent to which passive ownership of banking organizations could make the three largest asset managers de facto BHCs.

Brown Fires First Shot in 2023 ILC Wars

Putting down a market for the next Congress, Senate Banking Chairman Brown and two Democratic colleagues today introduced their bill end bar ILC charters for nonbank parents.

Daily120622.pdf

5 12, 2022

Karen Petrou: Bank Canaries in the Crypto Mineshaft

2022-12-05T16:34:33-05:00December 5th, 2022|The Vault|

Just because crypto hasn’t triggered a systemic collapse doesn’t mean that it won’t be the perpetrator of quiet banking crashes.  We would do well to remember that the 2008 calamity came shortly after the collapse of small subprime-mortgage finance companies.  These would have been proverbial dead canaries had anyone looked down the mineshaft.  And, even as the U.S. subprime crashes formed into a single, torrential crisis, bank regulators confidently foretold no systemic impact because they comfortably believed that no bank had undue exposure to high-risk mortgages.  So bank regulators still say now when it comes to crypto and let’s hope the outcome is different this time.  However, bits and pieces of bank wreckage are already to be found in FTX’s rubble and may well surface as the crypto tide continues to ebb.  No bank shipwrecks have emerged, but some of the wreckage has the look of a sizeable hull.

The most tantalizing bit of banking wreckage is a super-tiny Washington State bank which FTX appears to have surreptitiously acquired.  As the New York Times reported, one of FTX’s affiliates last March invested more than double all the capital previously held in Farmington State Bank, doing so in a carefully-structured way to avoid triggering legal control thresholds.  The bank is the nation’s 26th smallest and, after this generous investment, it deposits went up about 600 percent from its initial $10 million level via four new accounts.  Sill more intriguingly, Farmington’s crypto ties via shadow owners appear to go back to …

5 12, 2022

M120522

2022-12-05T10:51:04-05:00December 5th, 2022|6- Client Memo|

Bank Canaries in the Crypto Mineshaft

Just because crypto hasn’t triggered a systemic collapse doesn’t mean that it won’t be the perpetrator of quiet banking crashes.  We would do well to remember that the 2008 calamity came shortly after the collapse of small subprime-mortgage finance companies.  These would have been proverbial dead canaries had anyone looked down the mineshaft.  And, even as the U.S. subprime crashes formed into a single, torrential crisis, bank regulators confidently foretold no systemic impact because they comfortably believed that no bank had undue exposure to high-risk mortgages.  So bank regulators still say now when it comes to crypto and let’s hope the outcome is different this time.  However, bits and pieces of bank wreckage are already to be found in FTX’s rubble and may well surface as the crypto tide continues to ebb.  No bank shipwrecks have emerged, but some of the wreckage has the look of a sizeable hull.

m120522.pdf

1 12, 2022

CRYPTO35

2022-12-02T10:01:16-05:00December 1st, 2022|5- Client Report|

Senate Ag Crypto Bill Faces Uphill Climb Despite CFTC Efforts

In the first Congressional review of crypto since the collapse of FTX, Senate Agriculture leadership largely defended the bill they produced, S.4760.  However, members outside of leadership were more skeptical of CFTC regulation and more broadly of the need for crypto in any part of the financial market.  Senate Banking Chairman Brown (D-OH) reiterated that he is working with Secretary Yellen to create a crypto framework that protects the traditional financial system and consumers.  Sen. Gillibrand (D-NY) seems to have moved away from her unequivocal support of cryptoassets, asking numerous questions on regulatory arbitrage and foreign domiciles, while Sen. Marshall (R-KS) joined Sen. Brown in suggesting that cryptoassets pose national-security risks.  Ag Committee Chair Stabenow (D-MI) countered that the bill would have prevented FTX’s failure, a view Ranking Member Boozman (R-AR) largely supported even as he said additional work may be needed on matters such as inter-affiliate transaction restraints.

CRYPTO35.pdf

30 11, 2022

DAILY113022

2022-11-30T17:09:02-05:00November 30th, 2022|2- Daily Briefing|

Brown Again Asks Treasury for Crypto Action, Recommendations

In a letter today, Senate Banking Chairman Brown (D-OH) continued his press for regulators to do something soon about cryptoassets.  He called on Secretary Yellen to work quickly with regulators to advance the policy recommendations in recent Treasury reports (see Client Report CRYPTO32), noting in particular his concerns with vertical integration, calling for rules as well as recommendations regarding any needed statutory changes.

Confirmation Seems Assured for Full FDIC Board

At today’s confirmation hearing, Republicans raised numerous concerns with Acting Chairman Gruenberg, but appear reconciled to accepting his nomination in order to win confirmation for the two Republican nominees who would fill out the board.  Ranking Member Toomey (R-PA) blasted Mr. Gruenberg over the alleged “power grab” last year and his support for climate risk initiatives, but the bulk of questioning centered around cryptoassets.

Brown Presses CFPB to Stop Silent Second Foreclosures

Chairman Brown (D-OH) today sent a letter today to CFPB Director Chopra urging the Bureau to sanction servicers foreclosing on “zombie” second liens.  These are second liens that were often piggybacks in pre-2008 high-LTV mortgages designed to ensure that first loans could be sold to the GSEs without private mortgage insurance.

Daily113022.pdf

29 11, 2022

DAILY112922

2022-11-30T11:20:13-05:00November 29th, 2022|2- Daily Briefing|

Fed Finalizes Revisions to Interchange Survey

After finalizing a controversial proposal opening up debit-card routing (see FSM Report INTERCHANGE11), the FRB has also set changes to reporting on interchange-fees proposed in July.  The final requirements track the proposal, gathering data now on reporting changes when multiple networks are involved in processing transactions as well as revising the survey to prevent overcounting certain transactions.

Senate Finance Chair Challenges Crypto-Exchange Conduct

Continuing Congressional pressure on crypto following FTX’s collapse, Senate Finance Chairman Wyden (D-OR) today sent six letters to some of the largest crypto exchanges to determine if the factors leading to FTX’s collapse are widespread.  It is unclear what Sen. Wyden intends to do with the information he requests given that his panel does not have jurisdiction over the conflicts of interest and related concerns he cites, but it can surely call hearings and at the least build a record for the kind of legislation Mr. Wyden may support.

Daily112922.pdf

21 11, 2022

M112122

2022-11-21T16:48:57-05:00November 21st, 2022|6- Client Memo|

What Will Be Done, Not Just Said, To Fix FTX

The only question left unanswered about FTX is whether it was a purposeful scam as more than a few clients conclude or a case of implacable forces ending the era of easy money that just got the better of another wunderkind whose awesome skills turned out to be largely confined to costumery conveying inspired innovation to all too many vulnerable investors and gullible politicians.  No matter which it is or even – as I think – if it’s a bit of both, FTX is a debacle that will change U.S. financial policy for the better unless FTX drives still more crypto chaos that then spills over to core financial infrastructure and intermediation.

m112122.pdf

21 11, 2022

Karen Petrou: What Will Be Done, Not Just Said, To Fix FTX

2022-11-22T13:18:11-05:00November 21st, 2022|The Vault|

The only question left unanswered about FTX is whether it was a purposeful scam as more than a few clients conclude or a case of implacable forces ending the era of easy money that just got the better of another wunderkind whose awesome skills turned out to be largely confined to costumery conveying inspired innovation to all too many vulnerable investors and gullible politicians. No matter which it is or even – as I think – if it’s a bit of both, FTX is a debacle that will change U.S. financial policy for the better unless FTX drives still more crypto chaos that then spills over to core financial infrastructure and intermediation. I’ve gotten a lot of questions about crypto policy after my brief discussion in last week’s talk on the midterm’s policy impact. Here, more on both the legislative outlook and what regulators may finally bring themselves to do even if Congress can’t get itself together any better next year than in so many before it.

First more on why stablecoins are the cryptoasset most likely to come under a new federal gun. This isn’t because they deserve it more than any other cryptoasset – although they might – but because policy thinking about what to do with stablecoins is most advanced and, thus, bipartisan negotiations in the House are closest to the finish line.

That said, even stablecoin standards aren’t going to be easy. The clearest articulation of how new law might work is S. 4356, the Lummis-Gillibrand …

17 11, 2022

DAILY111722

2022-11-17T17:18:13-05:00November 17th, 2022|2- Daily Briefing|

Warren, Durbin Demand Answers about FTX Collapse

Following FTX’s collapse, Majority Whip Durbin (D-IL) and Sen. Warren (D-MA) sent a letter today to FTX founder Sam Bankman-Fried demanding a detailed accounting of the company’s decisions and business practices.  We doubt they will get an answer anytime soon, with this letter joining a flood of Congressional inquiries and likely hearings (see Client Report REFORM215).

Jefferson Supports Limited Fed Mandate

In remarks today, FRB Gov. Phillip Jefferson disputes those – including many progressive Democrats – who believe that racial equity and economic equality are an intrinsic part of the Fed’s mission.  Specifically, he states that, while consumer protection, community development, and financial stability can promote inclusive growth, monetary policy cannot directly address it or why low-income households are more acutely affected by inflation.

Fed CBDC Survey Suggests Possible CBDC Upside

A new Fed literature review evaluating the macroeconomic implications of CBDC focuses on the financial inclusion and payment system impacts CBDC would have in the U.S. and advanced economies.  As is usually the case with surveys, it reaches cautious conclusions, including that CBDC could increase financial inclusion for the unbanked.  It might also reduce financial frictions in deposit markets, enhance retail payment-system efficiency, facilitate international transactions, and spur private-sector banking and payments innovation.

Daily111722.pdf

16 11, 2022

REFORM215

2022-11-22T15:02:46-05:00November 16th, 2022|5- Client Report|

HFSC Session Brings Crypto Action to Fore, “Holistic” Capital Under Scrutiny

HFSC today largely focused bank regulators on the same range of questions posed at yesterday’s Senate Banking session (see Client Report REFORM214).  However, Chairwoman Waters (D-CA) emphasized the importance of federal legislation in sharp contrast to Chairman Brown (D-OH), also announcing a hearing in December on FTX.  Ranking Member McHenry (R-NC), who will become HFSC chairman in the next Congress, concurred with the chairwoman’s views on the need for digital-finance statutory reform.  However, he took strong issue with inter-agency policy with regard to new capital rules, merger restrictions, and third-party relationship constraints.  Republican members also targeted Vice Chairman Barr’s holistic capital review, arguing that banks are currently well capitalized and that additional standards would hamper lending.  Mr. Barr indicated that an SLR rewrite is part of the holistic review but not immediately necessary to quell Treasury-market volatility or illiquidity.  As discussed in more detail below, regulators promised banking-sector crypto rules at least as stringent as Basel’s proposal.

REFORM215.pdf

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