#mortgage finance – Page 4 – Federal Financial Analytics

31 07, 2023

M073123

Eliza Allen2023-07-31T10:40:52-04:00July 31st, 2023|6- Client Memo|

Two Tenets of the Capital Proposal That Make No Sense No Matter How Much One Might Want to Love The Rest of It

In the wake of the 1,089-page capital proposal, debate is waging on well-trod battlegrounds such as whether the new approach will dry up credit and thus stifle growth. I’ve my own view on this, but my initial read of the proposal points to a still more fundamental issue: some of it makes absolutely no sense even if one agrees with the agencies’ goals. Here, I lay out two bedrock assumptions that contradict the rule’s express intent and will have adverse unintended consequences to boot. God knows what lurks in the details.

M073123.pdf…

31 07, 2023

Karen Petrou: Two Tenets of the Capital Proposal That Make No Sense No Matter How Much One Might Want to Love The Rest of It

Eliza Allen2023-07-31T10:40:41-04:00July 31st, 2023|The Vault|

In the wake of the 1,089-page capital proposal, debate is waging on well-trod battlegrounds such as whether the new approach will dry up credit and thus stifle growth. I’ve my own view on this, but my initial read of the proposal points to a still more fundamental issue: some of it makes absolutely no sense even if one agrees with the agencies’ goals. Here, I lay out two bedrock assumptions that contradict the rule’s express intent and will have adverse unintended consequences to boot. God knows what lurks in the details.

The first “say what” in the sweeping rules results from the new “higher-of” construct. Credit and operational -risk models are entirely gone and market-risk models are largely eviscerated. Instead, big banks must hold the higher of the old, “general” standardized approach (SA) or the new, “expanded” SA. Each of these requirements is set by the agencies – models mostly never allowed. Further, a new “output floor” – different from Basel’s approach to this model’s constraint – is also mandated as yet another safety net preventing anyone gaining any advantage from any possible regulatory-capital arbitrage.

Why then not just demand that big banks use a standardized weighting the agencies think suffices? Must banks be put through the burden of calculating two ratios when they have no ability to arbitrage requisite capital weights? Do the agencies not even trust themselves to set capital standards that are now sometimes higher, sometimes lower as God gives them to know probability of default …

28 07, 2023

Al073123

Eliza Allen2023-07-28T17:05:25-04:00July 28th, 2023|3- This Week|

Few Surprises, Much Consternation

There is little in the new capital framework we did not forecast for new capital rules after the March bank failures (see Client Report REFORM219) and what we missed was later presaged in Vice Chair Barr’s recent speech (see Client Report CAPITAL228). However, as we’ve also said many times, many devils lurk in regulatory-capital details. We know the agencies’ capital-impact bottom line because the FDIC and Fed each outlined this at contentious meetings approving the proposal for public comment. We also know that Republicans really don’t like the rule even if they haven’t read it and that key decision-makers – most notably Chair Powell – are hedging their affirmative votes for releasing the proposal with careful caveats of what they want to see in a final rule. Thus, careful analytics are essential to effective assessments of winners and losers as a result of this complex package, especially if one looks – as FedFin will – at big-picture implications – i.e., those for the economy, financial system, and economic equality – as well as at sector- and institution-specific provisions not just in key asset classes based on specific risk weightings.

Al073123.pdf…

28 07, 2023

DAILY072823

Eliza Allen2023-07-28T17:09:55-04:00July 28th, 2023|2- Daily Briefing|

FSOC Considers Nonbank Systemic Risk, Credit-Based LIBOR Replacements

At today’s FSOC meeting, participants as usual said nothing about the closed-door agenda, which notably featured more discussion of the systemic risk that may be posed by nonbank mortgage servicers. Different agencies presented their work to address this risk, which was also flagged when FSOC finalized its new approach to identifying systemic risk (see FSM Report SYSTEMIC95). Whether FSOC as a whole is satisfied with FHFA and Ginnie actions and even if these agencies think their work to date suffices will determine the extent to which FSOC intervenes, but the session reinforced the systemic importance accorded to nonbank mortgage firms and the potential for additional action.

Agencies Take Action to Enhance Emergency Liquidity, Whitewash Discount Window

As presaged at Chair Powell’s press conference earlier this week, the banking agencies today issued liquidity-planning guidance designed both to ensure adequate preparation for acute liquidity stress and take the stigma off discount-window draws. The guidance deals only with liquidity planning and thus does not alter the treatment of discount-window funding for purposes of the LCR, admonishing banks to take account of the hard lessons of the March bank failures and prepare for runs and other extreme-stress scenarios.

Daily072823.pdf…

18 07, 2023

GSE-071823

Eliza Allen2023-07-18T11:42:19-04:00July 18th, 2023|4- GSE Activity Report|

40 Percent!?

Reuters is reporting today and other sources are echoing three regulatory sources saying that the impending capital rewrite will propose risk weighted assessments (RWAs) between 40 and 90%, up from the minimum 20 and 70% Basel standards. The rationale according to Reuters is a desire not to set big-bank RWAs lower than those applicable to smaller banks. However, the rule could also amend smaller-bank RWAs if regulators are or become so inclined.

GSE071823.pdf…

10 07, 2023

M071023

Eliza Allen2023-07-10T14:18:21-04:00July 10th, 2023|6- Client Memo|

The Bankruptcy of Bank-Merger Policy

On Wednesday, a Senate Banking subcommittee will consider bank-merger policy, surely providing a platform for its chair, Sen. Warren’s pronounced views opposing all but the smallest bank mergers and maybe not even those. Many other senators are not as adamant, but even pro-business Republicans – see J.D. Vance – think bank mergers beyond the itty-bitty are at best problematic. The politics of this debate is obvious; the substance not so much. As with many other questions, bank-merger policy is best set with a keen understanding of recent, objective research and what it actually says about concentration as it occurs outside the gaze of those fearful only of still bigger big banks.

M071023.pdf…

10 07, 2023

Karen Petrou: The Bankruptcy of Bank-Merger Policy

Eliza Allen2023-07-10T14:18:07-04:00July 10th, 2023|The Vault|

On Wednesday, a Senate Banking subcommittee will consider bank-merger policy, surely providing a platform for its chair, Sen. Warren’s pronounced views opposing all but the smallest bank mergers and maybe not even those. Many other senators are not as adamant, but even pro-business Republicans – see J.D. Vance – think bank mergers beyond the itty-bitty are at best problematic. The politics of this debate is obvious; the substance not so much. As with many other questions, bank-merger policy is best set with a keen understanding of recent, objective research and what it actually says about concentration as it occurs outside the gaze of those fearful only of still bigger big banks.

That there is undue market power in a financialized economy that brings a raft of woes is all too clear. I thus hoped that Assistant Attorney General Kanter’s remarks last month would be a meaningful update of the Department of Justice’s anachronistic 1995 policy. It helped, but only a bit because Mr. Kanter focused principally on enforcement, leaving “broader” questions solely to the banking agencies.

They in turn have long promised a transparent merger policy, but it’s still deal-by-deal, case-by-case, crisis-by-crisis. More than a few mid-sized banks will wither away as deliberations continue because the sheer uncertainty and delays of most bank mergers undermine their economic value, particularly at a time of high interest rates, slow or no growth, tough new rules, and withering competition.

Recent antitrust research does not substantiate easy, blanket assertions about the benefits or …

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 …

30 06, 2023

GSE-063023

Eliza Allen2023-06-30T11:00:43-04:00June 30th, 2023|4- GSE Activity Report|

The Ides of IRR

In non-public remarks ahead of a presentation by FedFin managing partner Karen Petrou, Sen. Jack Reed (D-RI) laid out what he thinks banking agencies will do next, doubtless based on what they’ve told him that they’ll do next. We have predicted that new interest-rate risk (IRR) standards are high odds, but Reed’s comments suggest they are a near-term for-sure.

GSE-063023.pdf…