#GOP – Federal Financial Analytics

13 11, 2024

FedFin Assessment: The Fate of the Federal Reserve

Arezou Rafikian2024-11-14T15:45:31-05:00November 13th, 2024|The Vault|

In a recent client brief, we provided our forecast of what might happen to Federal Reserve independence, process, powers, and personnel under either a Harris or Trump presidency. This is of course no longer an either/or matter, with this report thus reviewing and, where needed, updating our initial assessment of what Mr. Trump could do to the central bank even where Chair Powell says he can’t. Sherrod Brown’s defeat makes the Fed particularly vulnerable in the Senate, where Elizabeth Warren (D-MA) stands a strong chance of becoming the Banking Committee’s ranking Democrat. She and incoming chair Tim Scott (R-SC) will agree on a lot about the Fed, especially if Sen. Rick Scott – a frequent Warren ally on the Fed front – becomes Majority Leader….

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

8 07, 2024

Karen Petrou: What MAGA Republicans and Rohit Chopra Both Want

Eliza Allen2024-07-08T13:20:21-04:00July 8th, 2024|The Vault|

Following last week’s celebration of American independence, my thoughts turned to the confluence of concern from both sides of the political spectrum about an issue at the heart of the Bill of Rights: “financial censorship.” When Florida Gov. Ron DeSantis and CFPB Director Chopra agree – as they do – on a hot-button point such as freedom of thought as it may be expressed in financial transactions, a new framework is upon us no matter who wins in November. Virtuous as this ideal is, putting it into practice is fraught with consequences, more than a few unintended.

That Mr. Chopra chose to address the Federalist Society is notable in and of itself. I’ve done this more than a few times and emerged not only unscathed, but often enlightened. But that was before Democrats viewed the Society as a cabal meant to subvert rules such as those Mr. Chopra is fond of issuing. But the CFPB director knew his crowd – he and even super-MAGA conservatives fear that powerful financial companies threaten freedom of thought because giant platforms have undue control over each of our wallets. This may not be true, but at least one such company gave it a try and those taking aim at financial censorships think that once is enough, and they are right.

However, the focus on financial censorship goes beyond what payment companies allow us to express via what we purchase. The debate is over a decade old, beginning as it did when Obama Administration banking …

20 11, 2023

Karen Petrou: The Fate of the End-Game Rules Does not Lie in the FDIC’s Hands

Eliza Allen2023-11-20T12:16:01-05:00November 20th, 2023|The Vault|

It’s a hard fact of life that nothing good comes to federal agencies caught up in scandal even when scandal is misplaced. So the real question for the FDIC is whether the bad already all too evident at the divided banking agency will grow still worse, threatening the FDIC’s ability to participate in pending rulemakings or, even worse, resolutions. It likely will be no accident if the FDIC comes unglued and the capital and other proposals fall apart. I think new rules will proceed, but the FDIC’s threat is far from out of the blue.

Is this cynical? I prefer to think of it as an observation born of experience, but this is a city about which Harry S. Truman famously said, “If you want a friend in Washington, get a dog.”

FedFin reports last week tracked Marty Gruenberg’s travails before Senate Banking and then again at House Financial Services, with Ranking Member Waters surprisingly aligning herself with her usual GOP enemies when it came to castigating Mr. Gruenberg over sexual-harassment problems at the agency reported by the Wall Street Journal as the week of hearings broke two days before.

And, as the hearing went on, Mr. Gruenberg found himself in even more of a pickle. In another uncoincidental moment, Chairman McHenry got wind of 2008 allegations against the chair, allegations Mr. Gruenberg belatedly recalled when prompted by yet another poke from the Journal. Now, Mr. McHenry has opened a formal investigation even as a statement from GOP members of …

29 09, 2023

Karen Petrou: How a Shut-Down Stokes Systemic Risk

Eliza Allen2023-09-29T11:41:22-04:00September 29th, 2023|The Vault|

Although there’s been some talk of what a government shut-down does to the SEC, there’s lots, lots more to worry about. Risks are out there, risks that should be taken very, very seriously by the Members of Congress who seem to think that more chaos stokes their political fortunes. Perhaps it does, but it could well do a lot of damage to their finances, not to mention those of all the voters who might well bear a reasonable grudge.

Where’s the systemic scary place? Or, better said, places? Some are right in front of us; others lurk in the closet waiting to pounce.

What worries me the most in the immediate future is the ability of bad actors to exploit what could be lightly- or even unguarded portals into critical financial market infrastructure. There are of course many, many bad actors out there with the sophistication and/or state sponsorship quickly to test and then attack critical points in the payment, settlement, and clearing systems and/or the grids on which they rely.

As I discussed on Tuesday, not all providers of critical financial market infrastructure are under the hopefully-eagle eyes of the federal banking agencies which, funded outside federal appropriations, will remain open. Some fall under the SEC or CFTC, agencies that will be hobbled, and some critical providers are wholly outside the regulatory perimeter. Even if their nodes of market access seem small, disruption has a bad habit of migrating at lightning speed. Even if power outages are …

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 …

22 05, 2023

Karen Petrou: How to Ensure That Independent Study of Regulatory Mistakes Leads to Near-Term, Meaningful Redress and Reform

Eliza Allen2023-05-22T11:47:33-04:00May 22nd, 2023|The Vault|

Last week, a moderate Senate Democrat was joined by a Republican in yet another letter demanding an independent investigation of regulatory actions related to recent bank failures. But, as the absence of specifics in any of these letters makes clear, it’s a lot easier to call for independent inquiry than to lay out how to conduct one that might make a meaningful difference. Precedent is not encouraging – for example, Congress created a Financial Crisis Inquiry Commission after 2008, but it was an unqualified waste of time and money. Still, we urgently need an independent assessment of what went so wrong combined with another providing near-term, actionable reforms. Having served on one post-crisis national commission that did a bit of good, I recommend separating the forensic inquiry from the one focused on the future, guarding against conflicts without eliminating expertise, and assessing only a few clear questions suitable for practical answers that can be readily accomplished under current law.

The first decision point determines all the rest: whether the independent analysis is to be forensic – who dropped which heavy ball on whose toes – or focused on the future – what we learned and what to do about it. Many of the proposals for an independent commission, including the Congressional letter noted above, want their commission to do both, but none could do so well and asking for this is thus asking for trouble.

A good forensic analysis will reduce the moral hazard enjoyed by federal supervisors long exempt …

17 03, 2023

FedFin Assessment: Future of U.S. Bank Capital, Liquidity, Structural Regulation

Eliza Allen2023-03-17T16:50:38-04:00March 17th, 2023|The Vault|

In this report, we continue our policy postmortem of SVB/SBNY and, now, so much more. Prior reports have assessed the overall political context (see Client Report RESOLVE49) and likely changes to FDIC insurance (see Client Report DEPOSITINSURANCE118), with a forthcoming Petrou op-ed in Barron’s focusing on specific ways to reform federal deposit insurance to protect only the innocent. In this report, we look at some key regulatory changes likely as the banking agencies reevaluate the regional-bank capital, liquidity, and the IDI/BHC construct. As noted in our initial assessment and thereafter, we do not expect meaningful legislative action on the Warren, et. al. bill to repeal “tailoring” requirements, but we do expect bipartisan political pressure not just for supervisory accountability (see another forthcoming report), but also regulatory revisions.

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

13 03, 2023

FedFin First Take: Failure Fall-out

Arezou Rafikian2023-03-15T16:50:33-04:00March 13th, 2023|The Vault|

As we noted last night, the President concurred with Treasury, the Fed, and FDIC in deciding that SVB’s Friday failure and imminent runs on Signature Bank and, most likely, others posed a systemic risk. This determination permits the FDIC to override all the efforts to end the moral hazard feared when uninsured depositors are fully protected in bank resolutions and came with a new Fed facility making it still easier for banks to obtain liquidity from the Federal Reserve. As we also observed, much effort is being made to assert that none of these backstops is a bailout, a conclusion sure to draw considerable discussion and dissent even from those who concur that the scale of potential run risk Monday morning could not otherwise have been averted. With this risk hopefully now resolved, much policy and political debate will begin about the Administration’s decision; why Silicon Valley Bank was so vulnerable;…

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

6 03, 2023

Karen Petrou: Why Way-Woke Won’t Work in 2023

Arezou Rafikian2023-03-06T16:31:48-05:00March 6th, 2023|The Vault|

The fact that both the House and Senate passed a Congressional Review Act resolution overturning the Department of Labor’s ESG standards makes it clear that striking an anti-woke blow is deemed good politics by red and purple politicians. The President’s certain veto also makes it clear that a blue man sees matters quite differently, as did 204 House Democrats and 46 of their Senate colleagues. This stalemate will continue for changes to federal law, but it won’t stop Republicans from taking a lot out on financial regulators and big banks that they can’t get into the law books. Thus, anyone deemed even a bit woke-ful will get an earful.

Even if all these excoriations are only rhetorical, they will prove meaningful because even federal regulators immune from the appropriations process are susceptible to political influence – as well they should be if they are not also to be unaccountable. That anti-wokeness is already making its mark is evident in many ways, most recently in the inter- agency crypto-liquidity risk statement at great pains to refute any Republican suggestion that tough new standards amount to a blanket ban on engaging in any form of legal cryptoasset activity. In essence, the new statement says, “banks can do crypto if it’s legal, but they almost surely shouldn’t do crypto because it’s way risky and we’re watching.”

To be sure, anything crypto isn’t always toxic. Another way the agencies will handle accusations that they are conducting a stealth-woke anti-crypto campaign is to make it …

6 02, 2023

Karen Petrou: It’s Game-On for End-Game Capital Regulation

Arezou Rafikian2023-02-06T10:56:45-05:00February 6th, 2023|The Vault|

Many rules determine the terms of combat in key financial markets, but none is as fundamental as bank-capital standards because every decision a bank makes first factors capital costs or benefits. These are axiomatic because, even if every other business assumption a company makes is good, a financial product or service will still prove unprofitable if capital requirements are high enough to doom returns sufficient for insatiable investors. Said by some only to be a tidy Basel III clean-up, the Basel IV “end-game” capital rules set to come in the next month or so are actually a substantive recalibration of which businesses make banks how much money compared to all the competitors empowered over the years by the happy – if highly risky – absence of like-kind requirements. It’s thus no wonder that it’s already game-on for the future of the end-game regulations.

As we’ve noted in recent client updates, Rep. Andy Barr (R-KY) now chairs the HFSC subcommittee with power over both financial-institution regulation and monetary policy. Although one of his first bills in this Congress deals only with loosening capital rules for de novo banks (H.R. 758), he has made it very clear that he fears that the new big-bank capital construct will prove unduly costly and anti-competitive. Senate Banking Ranking Member Tim Scott (R-SC) said the same thing in more guarded tones when he released his priorities, making it clear that the GOP has its eyes on the new capital rules.

No coincidence, conservative critics are …