#holistic capital

6 02, 2023

M020623

2023-02-06T10:56:35-05:00February 6th, 2023|6- Client Memo|

It’s Game-On for End-Game Capital Regulation

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.

m020623.pdf

14 12, 2022

DAILY121422

2022-12-14T17:49:04-05:00December 14th, 2022|2- Daily Briefing|

Basel Blesses Basel III

In its own version of a holistic review, the Basel Committee today pronounced itself satisfied with the post-GFC regime.  Although the new construct increased complexity, Basel finds no redundancy nor any adverse effects.  Banks that were forced to raise the most capital and liquidity as a result of these reforms saw the greatest reduction in their cost of capital and, while these banks may have reduced lending, credit availability across the banking system generally increased.

FSB Advances Preliminary OEF Reforms

In its latest policy conclusions on open-end funds (OEFs), the Financial Stability Board praises its 2017 policies as a success but then goes on to describe the sector’s liquidity risk as still so high as to warrant new global standards.  The FSB and IOSCO now recommend that national regulators quickly review disclosure and stress-testing practices and improve them as briefly described in this release.  The agencies will also advance proposals for public comment that would, among other things, require OEFs either to ensure they can meet daily redemption demands or set a longer redemption period.

Daily121422.pdf

1 12, 2022

DAILY120122

2022-12-01T17:57:37-05:00December 1st, 2022|2- Daily Briefing|

FDIC, FRB-NY Highlight AOCI Losses

In remarks accompanying the banking-sector 3Q report, Acting FDIC Chairman Gruenberg noted that unrealized losses on AFS/HTM securities now total $690 billion, up 47 percent from just the second quarter.  This issue is also highlighted in remarks today from the head of supervision at the Federal Reserve Bank of New York, but neither she nor Mr. Gruenberg indicates if the agencies plan any action in this arena.

Brown Talks Civil Rights, GOP Attacks CFPB

Although Chairman Brown (D-OH) used today’s Fair Lending hearing to renew discussion of his 2020 legislation bringing financial institutions under the Civil Rights Act (see FSM Report FAIRLEND9), most of the focus at the session was on the CFPB.

House Panel Blasts Fintech PPP Practices, Seeks Investigation

A new report from the Select Committee on the Coronavirus investigating the role of fintechs in PPP fraud concludes that fintechs failed to implement appropriate oversight and fraud-prevention strategies despite accruing “massive” profits from administration fees.

Barr Talks Even Tougher on Bank Capital Rewrite

Although Vice Chairman Barr today confirmed statements to the Senate Banking Committee (see Client Report REFORM214) that his holistic-capital review is under way without any immediate conclusions, he also emphasized that it will ensure that ample capitalization is sufficient for severe stress and creates incentives for prudent lending.  Current capital levels are, he said, at the low end of what research suggests they should be.

Daily120122.pdf

18 11, 2022

Al112122

2022-11-18T16:46:22-05:00November 18th, 2022|3- This Week|

Things To Come

Last week, banking-agency supervisory heads found themselves before Congressional Committees that – at least in the House – will look very different in the next Congress.  As Karen Petrou’s remarks last week made clear, only some legislation will be enacted into law, but many inquiries and investigations will put the Fed, OCC, and FDIC on very hot seats.  The heat will be hottest on the right when it comes to HFSC and around the circumference of the seat in the Senate, where only the little bit that’s left of the middle is likely to view many banking-agency actions with the deference that was once the norm for all but the highest-profile or most-disastrous calls.

Al112122.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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7 09, 2022

DAILY090722

2022-11-09T16:08:53-05:00September 7th, 2022|2- Daily Briefing|

Hsu Expands on Crypto, Climate, Merger, Systemic Actions

Acting Comptroller Hsu today made it clear that – contrary to assertions from Sen. Warren (D-MA) and others – his decision not to rescind prior OCC crypto charters and related rulings does not mean the agency is taking anything other than a cautious approach to cryptoassets.  He also indicated that the slow-down in interagency action is warranted as it gives officials time to understand recent shocks to this sector.

New Brainard Position Suggests Fed CBDC Thinking Advances

In addition to hawkish anti-inflation remarks, Fed Vice Chair Brainard today appeared to back away from her prior comments espousing an expansive view of how a U.S. CBDC might work (see Client Report CBDC13).  Now calling CBDC a “neutral settlement layer” affording additional stability and opposing a consumer-facing model.

Barr Takes Stage With Bold Plans For Capital, Resolution, Mergers

In his maiden speech today, Fed supervisory Vice Chair Michael Barr made several significant announcements.  Reiterating the support for holistic capital regulation noted during his confirmation, Mr. Barr confirmed that the Fed will undertake a sweeping review of standards to address unintended consequences without reducing capital requirements.  The Board will also begin action on the Basel “end-game” later this fall.

Daily090722.pdf

8 08, 2022

m080822

2023-01-04T13:13:40-05:00August 8th, 2022|6- Client Memo|

Procyclical Capital Rules and the Economy’s Discontent

In our recent paper outlining the holistic-capital regime regulators should quickly deploy, we noted that current rules are often counter-productive to their avowed goal of bank solvency without peril to prosperity.  However, one acute problem in the regulatory-capital rulebook – procyclicality – does particularly problematic damage when the economy faces acute challenges – i.e., now.  None of the pending one-off capital reforms addresses procyclicality and, in fact, several might make it even worse.  This memo shows how and then what should be quickly done to reinstate the counter-cyclicality all the regulators say they seek.

m080822.pdf

8 08, 2022

Karen Petrou: Procyclical Capital Rules and the Economy’s Discontent

2023-01-04T13:14:40-05:00August 8th, 2022|The Vault|

In our recent paper outlining the holistic-capital regime regulators should quickly deploy, we noted that current rules are often counter-productive to their avowed goal of bank solvency without peril to prosperity.  However, one acute problem in the regulatory-capital rulebook – procyclicality – does particularly problematic damage when the economy faces acute challenges – i.e., now.  None of the pending one-off capital reforms addresses procyclicality and, in fact, several might make it even worse.  This memo shows how and then what should be quickly done to reinstate the counter-cyclicality all the regulators say they seek.

Last Thursday, the Fed set new, often-higher risk-based capital (RBC) ratios for the largest banks.  The reason for this untimely capital hike lies in the interplay between the RBC rules and the Fed’s CCAR stress test.  Packaged into the stress capital buffer (SCB), these rules determine how much RBC each large bank must hold to ensure it can stay in the agencies’ good graces and, to its thinking, better still distribute capital.

Put very simply, the more RBC, the less RWAS – i.e., the risk-weighted assets, against which capital rules are measured.  The higher the weighting, the lower a capital-strained bank’s appetite to hold it unless risk is high enough also to offset the leverage ratio’s cost – at which point the bank is taking a lot of unnecessary risk to sidestep another set of unintended contradictions in the capital construct.  As a Fed study concludes, all but the very strongest banks sit on their …

11 07, 2022

m071122

2023-01-24T15:14:56-05:00July 11th, 2022|6- Client Memo|

Holistic-Capital FAQs and Some Priority Answers

Late last week, we released a new issue brief laying out how to quickly take Michael Barr’s suggestion of a holistic regulatory-capital regime from rhetoric to reality.  The American Banker did a fine job summarizing the paper and putting it into the policy context, generating a lot of questions to which I’ll turn in this memo.  By far the most common assertion is that this paper is a stealth big-bank campaign to cut regulatory capital.  If it is, that’s news to all of them, as they saw the paper about the same time the Banker article appeared.  More to the point and as I’ll discuss below, a holistic-capital regime wouldn’t come cheap, it would just be better honed and more effective.

m071122.pdf

11 07, 2022

Karen Petrou: Holistic-Capital FAQs and Some Priority Answers

2023-01-24T15:15:17-05:00July 11th, 2022|The Vault|

Late last week, we released a new issue brief laying out how to quickly take Michael Barr’s suggestion of a holistic regulatory-capital regime from rhetoric to reality.  The American Banker did a fine job summarizing the paper and putting it into the policy context, generating a lot of questions to which I’ll turn in this memo.  By far the most common assertion is that this paper is a stealth big-bank campaign to cut regulatory capital.  If it is, that’s news to all of them, as they saw the paper about the same time the Banker article appeared.  More to the point and as I’ll discuss below, a holistic-capital regime wouldn’t come cheap, it would just be better honed and more effective.

The paper was sparked by what might have been an offhand comment from Mr. Barr at his Senate confirmation hearing for the Fed’s supervision vice chair.  He was asked his views on the “Basel IV” package of regulatory-capital rewrites and said that he favored thinking about capital as a whole rather than finalizing individual standards in the absence of a broader vision.  Or that’s what he seemed to mean because, sensible man that he is, the less said at a confirmation hearing, the better, and talk quickly turned to other matters.  Assuming he meant what we thought he said, FedFin did our best to give it legs.

We did so in part by providing a short taxonomy of key capital requirements showing how they relate to other capital requirements …

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