#nonbanks

2 07, 2024

FedFin: Taking Trump Still More Seriously

2024-07-02T16:24:40-04:00July 2nd, 2024|The Vault|

In the wake of last week’s debate, clients have asked that we advise about what a second Trump term might mean for U.S. mortgage finance.  We reviewed our forecast at the start of this year on exactly this point.  Much of it remains as before, but there are several areas where an update is warranted due to recent Trump fiscal- and monetary-policy trial balloons.  Our updated, complete forecast follows….

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

20 05, 2024

Karen Petrou on: How FSOC Enables Systemic Risk

2024-05-20T11:37:05-04:00May 20th, 2024|The Vault|

One can and should debate the extent to which nonbank mortgage companies (NBMCs) are as systemically-risky as FSOC says they are.  But it’s indisputable that, if FSOC believed what it said, then the paltry and politically-improbable recommendations it announced are proof of only one unhappy conclusion:  all FSOC can meaningfully think to do when it sees a systemic risk is figure out how to bail it out.  This is certainly what taxpayers have learned the hard way and investors have come to expect.  Or, as humorist Dave Barry pointed out after the mid-March systemic deposit bailout, “Eventually the financial community calms down, soothed by the reassuring knowledge that American taxpayers will, as always, step up and cheerfully provide billions of dollars to whichever part of the financial community screwed up this time.”

As we noted in our detailed analysis of FSOC’s report, the Council lays out the rapid-fire growth of NBMCs, the role regulatory arbitrage played in pushing banks to the sidelines of the residential-mortgage business that once defined so many charters, and the direct taxpayer and resulting systemic risk of NBMC liquidity shortfalls.  Asked about this at Wednesday’s HFSC hearing, Acting Comptroller Hsu said that NBMC stress could lead to “widespread contagion risk” that could prove “severe.”

Could NBMCs be pulled off the brink under current law?  In a little-noticed aside, FSOC says no because NBMCs lack the assets that would make viable orderly liquidation by the FDIC under its systemic authority even if the FDIC finally figured out …

13 05, 2024

FedFin on: FSOC’s Analytical Methodology

2024-05-13T16:52:29-04:00May 13th, 2024|The Vault|

Never Mind…

When FSOC released its systemic-designation methodology last year, the Council made it clear that nonbank mortgage companies faced top-down federal regulation.  Never mind.  As with so many other FSOC-declared systemic risks – see, for example, stablecoins – federal regulators have decided not to use the prudential tools they have in favor of asking for statutory change they know they won’t get.

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

 …

4 03, 2024

Karen Petrou: The Madness of a Model and its Unfounded Policy Conclusion

2024-03-04T11:50:02-05:00March 4th, 2024|The Vault|

As the pending U.S. capital rules head into their own end-game, there is finally a good deal of talk about an issue long neglected in both public discourse and banking-agency thinking:  the extent to which higher bank capital rules accelerate credit-market migration.  Simple assertions that more capital means less credit are, as I’ve noted before, simplistic.  One must consider how banks reallocate credit exposures to optimize capital impact and, still more importantly, how the credit obligations banks decide to leave behind take a hike.  Now comes a new paper the Financial Times touts concluding that, thanks to shadow banks, “we can jack up capital requirements more.”  Maybe, but not judging by this study’s design.  Even with considerable charity, it can be given no better than the “very creative” grade which kind primary-school teachers accord nice tries.

The paper in question is by Bank of International Settlements staff.  It looks empirically – or so it says – at what it calls the U.S. banking sector’s share since the 1960s of what it lugubriously calls “informationally-sensitive loans.”  It documents a lot of numbers said to demonstrate lower bank lending share, using a model founded on both erroneous data and wild leaps to conclude in a fit of circular reasoning that more nonbank lending explains why there is less bank lending.  In the study’s words, “intermediaries themselves have adjusted their business models.”  What might have led banks to decades of technological intransigence and strategic indolence is neither clearly explained nor verified.

What …

26 02, 2024

Karen Petrou: The Unintended Consequences of Blocking the Credit-Card Merger

2024-04-12T09:46:02-04:00February 26th, 2024|The Vault|

There is no doubt that the banking agencies have approved all too many dubious merger applications along with charter conversions of convenience.  However, the debate roiling over the Capital One/Discover merger harkens to an earlier age of thousands more prosperous small banks all operating strictly within a perimeter guarded by top-notch consumer, community, and prudential regulators.  Whether this ever existed is at best uncertain.  What is for sure is that all this nostalgia for a halcyon past will hasten a future dominated by GSIBs and systemic-scale nonbanks still operating outside flimsy regulatory guardrails.

The best way to demonstrate this awkward certainty is to run a counter-factual – that is, think about what the world would look like if opponents of the Capital One/Discover deal get their way.  Would we quickly see a return to card competition housed firmly within a tightly-regulated system?  Would the payment system be loosed from Visa and Mastercard’s grip?  Would merchants see the dawn of a new era of itsy-bitsy interchange fees?  Would card rates plummet and rewards stay splendiferous?  I very much doubt it.  Space here does not permit a detailed assessment of the analytics underlying my conclusions, so let’s go straight to each of them.  

First, banning the CapOne/Discover deal would not ensure robust card competition under strict bank regulation.  JPMorgan’s and American Express’ formidable stakes could grow because credit-card lending is a business dependent on economies of scale and scope vital to capital-efficiency through the secondary market.  However, large banks will

8 01, 2024

Karen Petrou: Reflections on Regulatory Failure and a Better Way

2024-01-08T11:25:21-05:00January 8th, 2024|The Vault|

Earlier today, we released our 2024 regulatory outlook, a nice summary of which may be found on Politico’s Morning Money.  As I reviewed the draft, I realized how much of what the agencies plan is doomed to do little of what has long been needed to insulate the financial system from repeated shock.  This is a most wearisome thought that then prompted the philosophical reflection also to be found in this brief.  It asks why lots more bank rules do so little for financial resilience yet are always followed by still more rules and then an even bigger bust.   I conclude that financial policy should be founded on Samuel Johnson’s observation that, “when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”  That is, redesign policy from one focused on endless, ever-more-complex rules spawning still larger bureaucracies into credible, certain, painful resolutions to concentrate each financial institution’s mind and that of a market that would no longer be assured of bailout or backstop.

We know in our everyday lives that complex rules backed by empty threats lead to very bad behavior.  For example, most parents do not get their kids to brush their teeth by issuing an edict reading something like:

It has long been demonstrated that brushing your teeth from top to bottom, tooth-by-tooth, flossing hereafter and using toothpaste meeting specifications defined herein will achieve cleaner teeth, a brighter smile, improved public acceptance of the tooth-bearer, and lower cost to …

4 12, 2023

Karen Petrou: Why Curbing Banks Won’t Curtail Private Credit

2023-12-04T11:03:15-05:00December 4th, 2023|The Vault|

Last Wednesday, Sens. Brown and Reed wrote to the banking agencies pressing them to cut the cords they believe unduly bind big banks to private-credit companies.  The IMF and Bank of England have also pointed to systemic-risk worries in this sector, as have I.  Still, FSOC is certainly silent and perhaps even sanguine.  This is likely because FSOC is all too often nothing more than the “book-report club” Rohit Chopra described, but it’s also because it plans to use its new systemic-risk standards to govern nonbanks outside the regulatory perimeter by way of cutting the banking-system connections pressed by the senators.  Nice thought, but the combination of pending capital rules and the limits of FSOC’s reach means it’s likely to be just thought, not the action needed ahead of the private-credit sector’s fast-rising systemic risk.

One might think that banks would do all they can to curtail private-credit competitors rather than enable them as the senators allege and much recent data substantiate.  But big banks back private capital because big banks will do the business they can even when regulators block them from doing the business they want.  Jamie Dimon for one isn’t worried that JPMorgan will find itself out in the cold.

Of course, sometimes banks should be forced out of high-risk businesses.  There is some business banks shouldn’t do because it’s far too risky for entities with direct and implicit taxpayer backstops.  This is surely the case with some of the wildly-leveraged loans private-credit companies …

23 10, 2023

Karen Petrou: Why the New CRA Rules Won’t Serve Communities Any Better Than the Old CRA Rules

2023-10-23T12:03:22-04:00October 23rd, 2023|The Vault|

On Tuesday, the banking agencies will release the final version of their 679-page proposal to rewrite the Community Reinvestment Act.  Regrettably, much of the proposal reflected the worst of false-science staff seeking complex new models defining subjective goals combined with certainty-loving compliance officers and lawyers who just want to be told the number they need to hit, not if the number makes any sense.  Unsurprisingly, there were hundreds of comment letters in which banks generally said the agencies should ease up and community groups urged still more stringent standards.  But the story doesn’t end with this unremarkable line-up– in just the last few months, two major bank trade associations and one often-virulently anti-bank advocacy group agreed on one crucial thing:  anything close to what the agencies proposed won’t work.

There are of course sharp differences between what banks and public advocates want in a new CRA rule, but what unites them is the over-arching understanding that the new approach is a cumbersome exercise remote from the reality confronting both banks and borrowers in the least-served urban and rural communities.  Banks complain – often with good reason as I showed in my book on economic inequality – that risk-based capital rules over-estimate the risk of lending to many community-focused borrowers.  The new capital proposals would ameliorate some of this in their “enhanced” risk weightings, but these weightings actually don’t count for much of anything since the proposed “higher-of” standards applies current, higher weightings.

The agencies in fact acknowledge as much …

10 10, 2023

Karen Petrou: The Urgent Financial Reform the Fed and FDIC Hope we Forget

2023-10-10T11:29:16-04:00October 10th, 2023|The Vault|

Even after the great financial crisis in 2008, the repo meltdown of 2019, a financial-market bailout of unprecedented proportions in 2020, and three bank failures so far this year, the FDIC and Fed are no closer than they were in 2007 to knowing what to do if a medium-size bank fails, a nonbank barrels down on the banking system, or critical financial-infrastructure flickers.  Bond markets are back on the brink and geopolitical risk have become a still-greater concern.  The agencies may think new capital and resolution rules are an iron dome allowing them to forego agency repair, but history – see the Gaza Strip – provides no comfort – as I hope we don’t have to learn again, fortifications aren’t enough in the absence of effective surveillance and rapid response.

The hard truth is the banking agencies after 2008 did what politicians and lawyers know best: they identified gaps in the law that the agencies self-defensively said barred them from preventing a crisis, asking for and then getting a new rulebook without also meaningfully addressing and then correcting their own structural weaknesses. And so it goes again.  Thinking dominated by lawyers and politicians – for every successful public leader is a politician no matter his or her nominal independence – is writing lots and lots more rules.  Some fix gaps found in the old law and rule, many pave over problems that could have been fixed under old law and rule, and some are as counter-productive as we’ve noted in …

20 07, 2023

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

2023-07-21T17:03:13-04:00July 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….

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