#GSIBs

Karen Petrou: Why Scoring is Better Than Tailoring

Shane Smith2025-10-27T09:28:58-04:00October 27th, 2025|The Vault|

A friend of mine last week commented that she was a size 2 in high school, but somehow has become a size 8. If she were a bank, she’d still be forced into her size 2 jeans even if she could only pull them up over one leg and her ability to appear in public was, to say the least, impaired.

Current “tailoring” rules take no account of inflation or, even worse, much that matters when it comes to risk. In 2020, the banking agencies issued tailoring standards categorizing banks via a series of size and “complexity” thresholds that determine applicable prudential standards and supervisory vigilance, or so it was said at the time. The final rule also reserved the regulators’ right to alter a bank’s category –presumably to a tougher one – based on whatever worried them. In practice, the standards have been implemented almost exclusively by reference to a bank’s size and nothing – not even all of the risks evident at some mid-sized banks ahead of the 2023 crisis – led supervisors to look harder.

A bank below $250 billion was deemed simple and safe; any above that threshold, almost certainly not. Further, any bank above $700 billion turned into a pumpkin – that is, a GSIB – even if it is neither global nor systemically-important. Big equals bad even though bad is remarkably indifferent to asset size when there is rapid growth, ill-begotten incentives, lax supervision, or negligent risk management.

The banking agencies rightly plan to …

Karen Petrou: The Fed’s Sudden GSIB Jihad

Shane Smith2025-02-18T09:06:45-05:00February 18th, 2025|The Vault|

Even as he stoutly assured Congress last week that the Fed is staunchly apolitical, Chair Powell acknowledged several post-inauguration epiphanies. These include sudden recognition of the supplementary leverage ratio’s impact on Treasury-market liquidity and the importance of cost-benefit and cumulative regulatory-impact analyses along with disavowal of all things climate risk. Another Fed U-turn relates to merger policy, but this escaped broad notice. It shouldn’t have – bank-merger policy is due for a major makeover and that matters.

In a detailed FedFin analysis of banking-industry competition last year, we looked at current market realities and years of research showing that the dramatic erosion in U.S. bank charters is not due to voracious big-bank gobbling of small-bank charters. Instead, it’s the result of inexorable technological advances combined with an array of new rules that challenge the ability of all but the very biggest banks to achieve the economies of scale and scope now vital to charter survival. Many new rules, warranted or not, have also had the inexorable effect of enabling regulatory arbitrage, empowering massive nonbank competitors who easily quash vulnerable companies unable to match technological prowess and network effects.

Sudden Fed policy reversals did not escape Republican notice, with Senate Banking Chair Scott commenting acidly about Fed “flip-flops.” But, unless Members of Congress make Jay Powell angry – and that’s hard to do in public – nothing the Fed chair says in public is offhand even if it seems that way at the time. During last week’s hearings, Mr. Powell changed …