#HFSC

15 07, 2024

Karen Petrou: The Problem With Preemption

2024-07-15T10:20:49-04:00July 15th, 2024|The Vault|

Last week, I wrote about the populist and progressive tie that binds each side of the U.S. political spectrum, pointing in particular to how the left and right are each calling for an end to “financial censorship.”  MAGA Republicans in Florida have taken the lead here for populists with new legislation barring banks from closing accounts based on pretty much anything but the fact that the account holder took out all the money and maybe not even then.  As FedFin subsequently described, Members of the House Financial Services Committee called first on Secretary Yellen and then on Chair Powell to declare that federal law preempts the state statute, noting that the Florida law bars banks from closing accounts even when money laundering is feared, imperiling law enforcement and financial integrity.  Secretary Yellen called for preemption, although it’s hers only to urge, not to grant.  Mr. Powell was more circumspect, but he surely supports preemption.  But, this is also not for the Fed to declare; the power of preemption indeed rests with only the Office of the Comptroller of the Currency.  So far, it’s done nothing and the nothing it’s done points to the consequences of one of the quieter decisions in this year’s tumultuous Supreme Court term and the threat this poses to the national-bank charter.

As you well know, almost all the attention on the Supreme Court that isn’t glued to Donald Trump targeted two end-of-session decisions revoking Chevron and extending ad infinitum the statute of limitations for regulatory …

3 06, 2024

FedFin on: Discount-Window Modernization

2024-06-03T17:00:38-04:00June 3rd, 2024|The Vault|

In addition to controversial provisions affecting bank-merger applications and stress-test transparency, legislation recently approved by the House Financial Services Committee includes a less-contentious provision forcing the Federal Reserve to reckon with longstanding problems affecting the use of its discount window, especially under stress conditions.  These problems were on costly evidence in March of 2023, when both Silicon Valley Bank and Signature Bank had extraordinary difficulty accessing the discount window due in part to ill-segregated collateral and early Fedwire closing….

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

20 11, 2023

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

2023-11-20T12:16:01-05:00November 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 …

3 07, 2023

Karen Petrou: The Unintended Consequence Of Capital Hikes Isn’t Less Credit, It’s More Risk

2023-07-03T12:08:54-04:00July 3rd, 2023|The Vault|

As was evident throughout Chairman Powell’s most recent appearances before HFSC and Senate Banking, conflict between capital and credit availability characterizes what is to come of the “end-game” capital rules set for imminent release.  The trade-off is said to be between safer banks and a sound economy, but this is far too simple.  As we’ve seen over and over again as capital rules rise, credit availability stays the same or even increases.  What changes is who makes the loans and what happens to borrowers and the broader macro framework, which in the past has been irrevocably altered.  The real trade-off is thus between lending from banks and the stable financial intermediation this generally ensures and lending from nonbanks and the risks this raises not just to financial stability, but also to economic equality.

As post-2008 history makes clear, banks do not stop lending when capital requirements go up; they stop taking certain balance-sheet risks based on how the sum total of often-conflicting risk-based, leverage, and stress-test rules drives their numbers.  That all these rules push and pull banks in often-different directions is at long last known to the Fed based on Vice Chair Barr’s call for a “holistic review”.  Whether it plans to do anything about them and their adverse impact on the future of regulated financial intermediation remains to be seen.  Until something is done, banks will look across the spectrum of capital rules, spot the highest requirement, and then figure out how best to remain profitable …

20 03, 2023

FedFin Analysis: Possible Cures for a Viral Run

2023-03-20T16:12:34-04:00March 20th, 2023|The Vault|

Among the most vexing issues in the wake of SVB’s failure is the extent to which social media may have led to the first “viral run,” a run akin to the meme-stock volatility that lead the SEC and others to fear a new form of “flash-crash” risk.  In this report, we assess current policy options related to deposit runs resulting from social media, an issue cited frequently by HFSC Chairman McHenry (R-NC) as a top priority as he begins work on post-SVB financial standards.  We note some remedies – e.g., a ban on deposit-related communication were they permissible under various constitutional and statutory free-speech edicts.

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

2023-03-15T16:50:33-04:00March 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.…

8 03, 2023

FedFin: Red Light For Retail CBDC

2023-03-08T17:02:10-05:00March 8th, 2023|The Vault|

At today’s HFSC hearing, Chairman Powell modulated his hawkish stance just a bit, continuing as he long has done to refuse to take a stand on fiscal policy while advocating for rapid debt-limit action.  Pressed by Republicans for CBDC updates, the chairman today was the most specific of any Fed official to date, stating that a retail CBDC would require express Congressional authorization even though this may not be the case for a wholesale-focused instrument.  As yesterday (see Client Report FEDERALRESERVE72), Republicans pushed hard against the Vice Chairman’s holistic-capital review, leading Mr. Powell to say that he hopes for Board consensus on both end-game rules and broader rewrites but cannot assure this will be the case despite the Board’s consensus culture….

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

6 02, 2023

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

2023-02-06T10:56:45-05:00February 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 …

30 01, 2023

Karen Petrou: M&Ms, McHenry, and the Making of Financial Policy

2023-01-30T11:28:41-05:00January 30th, 2023|The Vault|

It’s a sad commentary on American politics to observe, as I feel we must, that the experienced chairman of the House Financial Services Committee, Patrick McHenry, has followed M&M’s “spokescandies” as a target of Tucker Carlson’s bilious, yet widely-watched, wrath.  The fundamental frivolity of this contrast is self-evident, but that has yet to dampen the credibility of this combustible commentator with his super conservative acolytes.  That Mr. Carlson matters so much to public discourse is deeply distressing given some of his other targets – Nancy Pelosi’s husband after a brutal attack is only one that comes immediately to mind.  Unlike him and many other Carlson targets, Mr. McHenry can more than take care of himself.  Still, going after him means super-conservatives will blast any Member or measure that falls short of purity on their rightward-loaded scale.  Since nothing these folks like can be enacted into law, all this does is reduce the hopeful odds we cast earlier this year for constructive financial-policy legislation.  Too bad – the nation could use some.

The nub of the accusation lies in his chairman’s decision to leave the word “inclusive” in the name of one of his panel’s revamped subcommittees.  Clearly, the concept of inclusion has become accursed because Democrats often used it in concert with what might seem an equally innocuous word:  diversity.  Democrats did use diversity and inclusion demands to press for racial, gender, and sexual-orientation equity in ways that rubbed many republicans raw, but the idea of inclusion is fundamental to …

18 07, 2022

Karen Petrou: A Pragmatic Vision of a Purposeful Home Loan Bank System

2023-01-06T14:56:42-05:00July 18th, 2022|The Vault|

Although a new paper by former FRB Gov. Tarullo and Fed staffers on the FHLB stirred considerable consternation across the Federal Home Loan Bank System, it’s a crushing and persuasive critique of a giant GSE that has long preferred to go unnoticed.  That’s not unreasonable since the System has evolved from an essential small-bank funding source for mortgages into a taxpayer-subsidized capital-markets investment option.  When public wealth is not allocated for public welfare, resources are misallocated and market integrity is compromised.  But, unless the Home Loan Banks blow themselves up, they are here to stay.  Thus, the policy challenge is not how to abolish them, but how best to redirect an established funding channel back to servicing the public good.  Traditional single-family mortgages don’t need the Banks anymore, but much else does.

The paper’s criteria for considering taxpayer subsidies are a very helpful guide for moving forward and thus worth quoting at length:

“There is, of course, nothing inherently wrong with government subsidies. But subsidies should meet two conditions if they are to be sound public policy. First, they must be shown to be correctives for identified market failures or instruments of targeted redistribution policies.  Second, there must be governance mechanisms to ensure that the subsidies are used to achieve the ends specified by the legislature or regulator, and not for other purposes.”

I suspect the authors would agree with a third point:  if a credible, forward-looking case for the subsidy cannot be made by virtue of demonstrable public benefits …

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