#MMF – Federal Financial Analytics

22 08, 2023

DAILY082223

Max Camateros-Mann2023-08-23T10:19:39-04:00August 22nd, 2023|2- Daily Briefing|

Waters Presses GAO to Study AI Mortgage Lending Discrimination

Reflecting ongoing concerns at the CFPB and the IMF when it comes to generative AI (see earlier today), HFSC Ranking Member Waters (D-CA) today sent a letter requesting that the GAO study the extent to which AI and especially AVMs may lead to housing discrimination.

IMF Spots Systemic Macro Risk as Gen-AI Advances

A new IMF Fintech Note concludes that generative AI (GenAI) may heighten risk, undermine institutional trust, and accelerate procyclicality. It thus advises policymakers to ensure close human GenAI supervision as regulatory frameworks take shape, pressing also that this be done in conjunction with strengthened regulation and effective monitoring.

FRB-NY Staff: SEC Proposals May Not Prevent MMF, OEF Run Risk

A New York Fed blog post yesterday concluded that, while the SEC’s recent MMF liquidity reforms (see FSM Report MMF20) and proposed OEF rules make significant progress ensuring resilience, open- and closed-end funds may nonetheless remain vulnerable.

Daily082223.pdf…

8 08, 2023

FedFin on: Equity and Securitization Capital Standards

Arezou Rafikian2023-08-08T13:44:33-04:00August 8th, 2023|The Vault|

Based on our analysis of the inter-agency capital proposal’s framework and its credit-risk provisions, FedFin turns now to the proposed approach to equities as well as to that for securitization exposures (i.e., those that are tranched rather than simple secondary-market issuances of packages of loans or other assets backed as needed by a single credit enhancement). The proposal in some cases liberalizes the current, “general” standardized approach (SA), but more often toughens it to account for elimination of the advanced approach…

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

8 08, 2023

CAPITAL232

Eliza Allen2023-08-08T10:52:38-04:00August 8th, 2023|1- Financial Services Management|

Equity and Securitization Capital Standards

Based on our analysis of the inter-agency capital proposal’s framework and its credit-risk provisions, FedFin turns now to the proposed approach to equities as well as to that for securitization exposures (i.e., those that are tranched rather than simple secondary-market issuances of packages of loans or other assets backed as needed by a single credit enhancement). The proposal in some cases liberalizes the current, “general” standardized approach (SA), but more often toughens it to account for elimination of the advanced approach. This will have particular bearing on significant aspects of category III and IV bank activities (e.g., credit-card securitizations, MMF funding), but all covered banking organizations will see significant capital increases as many activities now permitted within the banking book would need to move to the trading book under the new market-risk rules. Securitization-related capital standards are generally brought closer to those for underlying assets in simple securitizations, giving banks more balance-sheet flexibility and credit-risk mitigation opportunities if investors accept these structures. The treatment of equity exposures is generally tightened, sometimes so much as to effectively prohibit certain activities – e.g., non-traditional equity investments in covered funds and BHC subsidiaries. The new treatment of investment funds will also have significant implications for banks that fund themselves through prime MMFs or sponsor investment funds through equity positions.

CAPITAL232.pdf…

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.…

18 07, 2023

MMF20

Eliza Allen2023-07-18T11:50:28-04:00July 18th, 2023|1- Financial Services Management|

MMF Redemption Fees, Liquidity-Risk Mitigation

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 other assets widely held by these funds, perhaps increasing funding cost in certain short-term funding markets as demand from MMF drops. MMF use of the Fed’s overnight reverse-repo facility could also grow to facilitate liquidity compliance, creating new risks for the Federal Reserve and its longstanding goal of reducing its role as a dominant market maker.

MMF20.pdf…

12 07, 2023

DAILY071223

Eliza Allen2023-07-12T17:05:21-04:00July 12th, 2023|2- Daily Briefing|

SEC Concedes, Drops MMF Swing Pricing

In a startling bow to industry comments, the SEC today finalized MMF rules for institutional prime and tax-exempt funds that dispense with the proposal’s swing pricing (see FSM Report MMF19).

HFSC Bickers Over ESG, SEC Authority, Investor Rights

Today’s ESG hearing was the partisan show-down we anticipated – indeed, Rep. Sherman (D-CA) denounced the GOP for “waging war” against capitalism like Leon Trotsky.

Fed Nominations Advance

As anticipated, Senate Banking today approved the nominations of all three Federal Reserve Board nominees for the full Senate.

Warren Heightens Anti-Merger Campaign

Republicans were absent today from Senate Banking’s Economic Policy bank-merger hearing. Chair Warren (D-MA) reiterated her strong opposition to virtually all mergers, indicating her plans to reintroduce anti-merger legislation from prior Congresses (see FSM Report MERGER8).

Daily071223.pdf…

5 07, 2023

DAILY070523

Eliza Allen2023-07-05T16:15:35-04:00July 5th, 2023|2- Daily Briefing|

Basel Targets Credit-Risk Models, Assumptions

The Basel Committee yesterday issued a newsletter highlighting recent internal credit-risk discussions as well as supervisory action and remaining concerns in this area. Although few specifics are provided, national supervisors’ main priorities include governance controls around model risk management, capturing economic uncertainty, and identifying credit deterioration in vulnerable sectors and borrowers. The newsletter also notes that supervisors have issued guidance on IRB models and taken remedial action for some banks with under-calibrated probability-of-default models—issues not yet addressed in the U.S. that may come in concert with the pending end-game capital rules.

FSB/IOSCO Focus on OEF Redemption Risk

Departing from the SEC’s swing-pricing approach to open-end fund risk, global regulators today proposed a new exit-fee construct. If the U.S. chooses to advance this – as it well may given the SEC’s role on these bodies – it will almost surely require a new SEC proposal, significantly delaying U.S. action in this controversial area. The FSB’s consultation proposes three OEF “buckets” intended to reduce liquidity mismatch risk by mandating new “anti-dilutive” liquidity-risk mitigation tools that not only create new daily-redemption obstacles as OEF assets become increasingly illiquid, but also impose new fees stipulated in the accompanying the IOSCO consultation.

Daily070523.pdf…

3 07, 2023

M070323

Eliza Allen2023-07-03T12:09:08-04:00July 3rd, 2023|6- Client Memo|

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

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.

M070323.pdf…

3 07, 2023

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

Eliza Allen2023-07-03T12:08:54-04:00July 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 06, 2023

M062023

Eliza Allen2023-06-20T14:47:44-04:00June 20th, 2023|6- Client Memo|

Our Baffled, Befuddled Central Bank

After SVB failed, Jay Powell told his monthly press conference that he found this “baffling” even though the Fed was the lead bank supervisor and the only one charged with its BHC’s oversight. At Wednesday’s presser, Mr. Powell took a different, but still-indefensible tack avoiding responsibility for a looming threat by stoutly denying his ability to do anything about nonbank financial-stability risk. However, the Board has an express mandate under the Dodd-Frank Act to address it. To be sure, the Fed does not have direct regulatory authority over nonbanks as it now remembers it did over SVB. But to say that the Fed’s only power is over banks as he Wednesday did is at best befuddled. A baffled, befuddled central bank is a national – indeed global – hazard.

M062023.pdf…