#liquidity

20 07, 2023

FedFin on: Senate Banking Kicks Deposit-Insurance Reform Down the Road

Arezou Rafikian2023-07-21T17:03:13-04:00July 20th, 2023|The Vault|

In the wake of today’s Senate Banking deposit-insurance reform hearing, it seems certain that there will be no legislation in the near term and most likely in this Congress to increase FDIC-insurance thresholds. Although the FDIC recommended a new approach to transaction accounts in its policy review following recent bank failures (see Client Report DEPOSITINSURANCE119), Senators on both sides of the aisle demurred. Chairman Brown (D-OH) made it clear that any change in FDIC-coverage limits is conditioned on final, tougher bank regulations, essentially telling banks that successfully opposing new rules means keeping FDIC coverage as is….

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

18 07, 2023

FedFin on: MMF Redemption Fees, Liquidity-Risk Mitigation

Arezou Rafikian2023-07-19T16:52:22-04:00July 18th, 2023|The Vault|

The SEC has significantly revised its proposed MMF-reform standards, eliminating a controversial swing-pricing approach to reduce first-mover advantage in favor of new redemption fees at institutional prime and tax-exempt funds. These and most other funds now also come under stiff new liquidity requirements, which may combine to impose new and costly disciplines that may enhance the relevant appeal of bank deposits without early-redemption risk. Changes in MMF liquidity requirements may also alter demand for commercial paper, municipal obligations, bank debt, and ….

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

24 04, 2023

Karen Petrou: The Price of Higher FDIC Protection and How to Prevent It

Eliza Allen2023-04-24T10:40:22-04:00April 24th, 2023|The Vault|

Last week’s memo stirred up a lot of comment about ways to provide at least some private-sector deposit insurance. The consensus is that, while nothing is easy about a private-sector backstop for federal coverage, the concept warrants careful consideration because all the other reform ideas on their own are still more problematic. This isn’t just because proposals for expanded federal coverage – my own included – extend the federal safety net at resulting moral hazard. In some cases, as I said, this risk is worth taking because some depositors warrant protection. Still, there’s sure to be a price for more federal coverage – super-costly premiums and/or more bank regulation – that argue for market-based solutions to the greatest extent compatible with social welfare and stable finance.

This trade-off was most recently addressed last week by John Vickers, a former U.K. regulator. Commenting on proposals across the pond akin to those in the U.S. to expand the sovereign deposit backstop, Mr. Vickers cautioned that added coverage should come with higher regulatory capital to ensure that banks do not take undue advantage of the comfy quilt into which the current, porous safety net would be transformed.

The U.K. deposit insurance system is different than that in the U.S., most notably by the absence of costly, ex ante bank premiums for the privilege of deposit-insurance coverage. However, the U.S. risk-based premium system that sets bank premium payments is asset – not insured deposit – based. As a result, coverage could go up considerably …

13 04, 2023

FedFin Assessment: Implications Of An IRR Capital Charge, New Liquidity Rules

Arezou Rafikian2023-04-13T14:02:25-04:00April 13th, 2023|The Vault|

As we noted yesterday, the head of the Basel Committee has targeted two capital and liquidity compromises included in the current Basel III construct not addressed in the end-game rules to which the U.S. plans shortly to turn. Actions whether by Basel or, even without it, the U.S. to return to Basel’s initial proposals have significant strategic consequence. Thus, this report assesses these options and how the U.S. might act on them. We conclude that the U.S. will quickly impose a de facto interest-rate risk (IRR) capital charge and tighten LCR assumptions related to uninsured deposits.

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

11 04, 2023

FedFin Assessment: Top Brainard, Gruenberg Regulatory Rewrites

Arezou Rafikian2023-04-11T16:52:14-04:00April 11th, 2023|The Vault|

In this report, we drill down on prior forecasts (see Client Report REFORM219) of near-term regulatory action to identify the revisions sure to be prioritized as NEC Director Brainard and FDIC Chairman Gruenberg seek to reverse rules finalized over their objections when they were in the minority. Ms. Brainard does not have a direct role dictating what the Fed will do given central-bank independence, but she has a good deal of influence as evidenced most recently by the White House action list. Acting Comptroller Hsu was not casting formal votes over these years, but he was an influential staff leader in this area and clearly has his own list – see for example his efforts on bank merger and resolution policy (see FSM Report RESOLVE48). We expect he will concur with Vice Chairman Barr and Mr. Gruenberg if they all advance the rewrites to the tailoring rules to which Ms. Brainard and Mr. Gruenberg so strongly objected….

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

28 03, 2023

FedFin Assessment: Policy Implications of FDIC-Resolution Innovations

Arezou Rafikian2023-04-03T12:48:36-04:00March 28th, 2023|The Vault|

As noted yesterday, the FDIC’s recent rescues have had several unusual features with implications not only for future policy, but also for pending special assessments to replenish the DIF for the $22.5 billion estimated costs to the Deposit Insurance Fund. Analyzed here, new tools – e.g., voluntary liquidation, equity-appreciation rights, lines of credit – have determine the extent to which this estimate holds, how FHLB advances are treated in future resolutions, and the role the FDIC may play in companies that acquire failed IDIs….

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

22 03, 2023

FedFin Assessment: GSIB Rules Set For Post-CS Rewrite

Arezou Rafikian2023-03-22T16:34:58-04:00March 22nd, 2023|The Vault|

In this report, we assess the implications of recent events on two assumptions underlying current U.S. and global policy affecting GSIBs and those considered domestic SIBs: first, all are likely to be well insulated from illiquidity and/or insolvency and, when this is not the case, then orderly resolution without taxpayer bailout can be readily deployed. Credit Suisse’s failure and subsequent, subsidized acquisition is just one of the “Minsky moments” rattling regulators and other policy-makers, with the conclusions drawn from all of them surely to lead to significant reevaluation of each of these assumptions. To be sure, CS was an outlier in terms of idiosyncratic culture-and-control problems, but the Swiss regulatory and resolution system is considered reasonably robust, thus making the bank’s failure…

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

…

20 03, 2023

FedFin Analysis: Possible Cures for a Viral Run

Eliza Allen2023-03-20T16:12:34-04:00March 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.…

20 03, 2023

FedFin on: The Collateral Damage of the Banking Crisis

Eliza Allen2023-03-20T14:30:07-04:00March 20th, 2023|The Vault|

In this report, we build on FedFin’s in-depth reports about recent bank failures to detail new risks for all of the innocent bystanders in the U.S. mortgage market along with a not so-innocent bystander: the Federal Home Loan Banks. We note also some take-aways FHFA may draw from the crisis with regard to GSE regulation, resolution, and supervision. In short, things will be different assuming they don’t get worse and then still more of a paradigm shift.

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

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.…