#liquidity

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 …

9 01, 2023

Karen Petrou: Is Silvergate Solvent?

Arezou Rafikian2023-01-09T16:42:49-05:00January 9th, 2023|The Vault|

Is Silvergate solvent? Media coverage suggests it can stay in business based on the crypto bank’s liquidity. Liquidity is, though, only a necessary condition for a bank to survive. For it actually to remain in business, a bank must also be solvent. For Silvergate and several other crypto-heavy banks this won’t be easy.

The critical criterion determining whether regulators allow a bank to remain in business is the extent to which its capital meets or exceeds the rules and, when it doesn’t, how much below these thresholds it falls and why. Ever since 1991, regulators are supposed to grant banks little leeway on these capital requirements – “prompt corrective action” provisions demand that regulators sanction banks as capital plummets and close them if they haven’t already done so if ratio’s sink to the “critical-capital” threshold.

Faced with a Lehman-like run, Silvergate has understandably focused on assuring stakeholders that it can continue to sell assets to handle all withdrawals. And so it may, but that’s not its only problem. Even if it’s liquid, Silvergate faces a grim future if its regulatory-capital ratios falter – and they might.

To survive, Silvergate must run a gauntlet between the amount of capital it holds on a shrinking pool of assets and the capital costs of losses taken as assets are sold to handle withdrawals. The bank entered the liquidity wringer with ample capital. According to its third-quarter call report, its leverage ratio was over ten percent. And, even when the bank dumped over …

28 02, 2022

FedFin: Servicer 2.0 Strikes

Arezou Rafikian2023-04-04T14:50:44-04:00February 28th, 2022|The Vault|

Responding to continuing FSOC complaints about nonbank servicers, FHFA has proposed new seller-servicer eligibility standards that crack down hard on any nonbank servicer whose size evokes systemic qualms. Although all nonbanks and perhaps a few small bank seller-servicers will come under tougher net-worth requirements that hive off Ginnie servicing, FHFA targets its wrath at large nonbanks. These must not only comply with new capital and liquidity planning standards along with stringent liquidity standards, but are apparently viewed so dubiously by the agency that nonbanks also must get a third party to vouch for their viability under standards that get tougher as the servicer gets bigger.

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

28 02, 2022

Karen Petrou: What’s to Come as SWIFT Sanctions Take Hold

Arezou Rafikian2023-04-04T14:58:10-04:00February 28th, 2022|The Vault|

A few years back, I gave a speech at SWIFT’s annual meeting knowing little of what it did beyond the speakers I was invited to join. While the meeting was in a cavernous conference center, the off-hours discussions in magnificent chateaus were small, serious, and — at least for me — insightful as to the awesome power of a seemingly-simple “messaging system”. Now, of course, the world knows why Swift matters– indeed, Vladimir Putin is taking this so seriously that we’re all reminded of the literal meaning of the “nuclear option.” Putin is right –America’s “soft” economic power gives it a weapon of formidable might.

Will it backfire? One of the questions I’ve repeatedly gotten over the weekend is whether U.S. banks can withstand market disruptions now or under even greater stress if sanctions expand to still more Russian banks and thereafter also to those still doing business with them. In short, there is no doubt that banks in the U.S. will withstand near-term stress and even less-resilient ones in the EU and Japan will do the same.

The reason for this is the demonstrable certainty that central banks will intervene to ensure dollar liquidity across the world and financial-market liquidity wherever it seems threatened. Unlike 2008 and 2020 when Fed windows were opened too wide and too long, this geopolitical crisis is of no financial firm or central bank’s making. What all this new money might do to already-bloated financial markets is yet to be known, but central banks …

22 11, 2021

Analysis of: Global Climate-Risk Management and Supervisory Principles

Arezou Rafikian2023-05-23T15:28:18-04:00November 22nd, 2021|The Vault|

Following the UN’s COP26 climate-risk summit, the Basel Committee has proposed high-level principles guiding risk management and supervision related to both physical and transition climate risk.

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

15 11, 2021

Karen Petrou: The Real Problem in the Omarova Hearing

Arezou Rafikian2023-06-01T13:46:35-04:00November 15th, 2021|The Vault|

Later this week, the Senate Banking Committee will hold Saule Omarova’s confirmation hearing for Comptroller of the Currency. Many expect this to be a knock-down, drag-out between the progressive bank-reform agenda and the banking industry’s antipathy thereto. This it surely will be, but to watch only these fireworks is to miss the longer-burning fire below: renewed questions about whether banks are public utilities or private companies with unique privileges fully reimbursed by virtue of unduly-burdensome regulation. It is by this choice — not Ms. Omarova’s most-uncertain confirmation — that the future of U.S. finance will be decided.

Although Ms. Omarova has surely moved on from the Marxist views of which she is accused based on an early academic paper, she clearly sides with those who think that banking is for public purpose, not private profit. Indeed, according to at least some of her work, banking can’t be trusted to banks and thus should be seconded to the federal government or outside experts presumed to be not just objective, but also disinterested in all but the public good.

This is not a new view. After the S&L crisis of the 1980s and the subsequent banking debacle in the early part of the next decade, much was made of the subsidy banks were said to enjoy from unique access to FDIC insurance and the Fed’s discount window. Bankers strongly disputed any subsidy, but I said then and believe now that banks then indeed enjoyed special-purpose charters that warranted not just tough safety-and-soundness …

18 10, 2021

FedFin on: Global MMF-Reform Options

Arezou Rafikian2023-06-07T15:52:59-04:00October 18th, 2021|The Vault|

Global regulators have now finalized a framework on which national regulators may base the reforms they deemed necessary after the pandemic sparked profound disruptions in this sector. However, as with the FSB’s proposed approach, the final framework sets few parameters for jurisdictional action beyond a strong plea for action of some sort that would meaningfully address the redemption and/or liquidity risk the FSB continues to believe presents a threat to national and even global financial stability.

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

4 10, 2021

Karen Petrou: How to Ensure Equitable Fed Intervention in the Crisis Next Time

Arezou Rafikian2023-07-05T15:57:30-04:00October 4th, 2021|The Vault|

With her unerring instinct for the jugular on which media thrive, Sen. Warren on Tuesday called Jay Powell a “dangerous man.” This promptly sent many into still more feverish speculation about the Fed’s next chairman, blotting out coverage of an even more consequential development in the House: Democratic plans to rewrite the Fed’s powers in the next financial crisis. Last week, I pointed to the political price for Mr. Powell’s renomination: the Omarova appointment. A structural one with even more lasting impact is the rewrite of the Fed’s emergency-liquidity powers to, as Democrats demand, end backstops for “Wall Street” in favor of Fed facilities for everyone else.

Although little noticed, HFSC Chairwoman Waters on Thursday said for the second time in as many weeks that “Our committee is committed to ideas to ensure that facilities like these [the Fed’s in 2020] can more directly support workers and small businesses as well as state and local governments the next time there is a crisis.” Holding fire on Mr. Powell, Senate Banking Chairman Brown also targeted Fed support for Wall Street in his opening statement on Tuesday. This follows an inconclusive HFSC hearing a week or so ago on just what these new facilities might look like but make it clear that an array of reforms is under active consideration.

Importantly, these demands for people-focused facilities aren’t an isolated case of progressive pique. After the 2008 crisis, there was much bipartisan ire over whom the Fed helped how. This led to a …