#nonbanks – Page 2 – Federal Financial Analytics

23 10, 2023

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

Eliza Allen2023-10-23T12:03:22-04:00October 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

Eliza Allen2023-10-10T11:29:16-04:00October 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

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.…

17 07, 2023

Karen Petrou: Counter-Cyclicality is One Critical Missing Piece of Barr’s Unholistic Construct

Arezou Rafikian2023-07-17T16:55:22-04:00July 17th, 2023|The Vault|

Banks and Republicans are beating up on Michael Barr for much in his new capital construct. The furor focuses on the high cost of the new capital rules, cost glossed over in Mr. Barr’s talk via an over-arching assumption that banks can readily do without two years of post-dividend retained earnings. Maybe they can; investors not so much. This is a big problem, but a little-noticed one also warrants more scrutiny: the decision to leave untouched and apparently not even considered the U.S. version of the counter-cyclical capital buffer (CCyB). This makes the new framework still more procyclical and even less holistic. CCyBs have worked well around the world and a well-designed one in the U.S. would obviate the need for some – not all, but some – of Mr. Barr’s most counter-productive ideas even as it makes banks more resilient, the financial system safer, and the economy less volatile.

What are CCyBs? The basic idea is that these are capital charges triggered in good times that are released under stress, making banks and the economies they serve better able to ride out macroeconomic boom-bust cycles. The final U.S. version of the global CCyB framework acknowledges this global standard, but it goes on to say only that the Federal Reserve will know a boom or bust when it sees it and will do something about it via some sort of CCyB should it feel inclined to do so possibly after a rulemaking process on the up- and down-sides that …

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

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

Karen Petrou: Our Baffled, Befuddled Central Bank

Eliza Allen2023-06-20T14:47:39-04:00June 20th, 2023|The Vault|

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.

Of course, perhaps Mr. Powell isn’t befuddled and instead wants to ensure that a crisis he claims the Fed can’t avert isn’t one that damages its already-scant credibility. This wouldn’t be the first time the Fed defended itself at the expense of sound policy, but that makes it no less inexcusable. I’ll have more to say about this in a talk on the 28^th, but last week’s memo looks at just one threat to financial stability and what the Fed could readily do to combat it.

The threat comes from the $1.4 trillion private-credit market’s ambition to use its regulatory-arbitrage advantage to morph into a $40 trillion fixed-income sector. Mr. Powell says all he can do …

8 06, 2023

FedFin on: Under Their Thumb and What a Big Thumb It Is

Arezou Rafikian2023-06-14T16:20:52-04:00June 8th, 2023|The Vault|

As we will detail in a forthcoming in-depth report, the banking agencies’ new “guidance” on third-party vendors essentially brings all nonbank counterparties with whom banking organizations deal under the agencies’ enforcement thumb. As a result, nonbank mortgage companies, MIs, credit enhancers, and tech providers and even the GSEs – Home Loan Banks included – will be forced at the least to answer a lot of questions from the banking entities with whom they do pretty much any kind of business. And, if the agencies don’t like the answers, they now assert that they will issue enforcement orders not just against banks, but also nonbank entities to ensure they comply with the full panoply of safety-and-soundness standards referenced in the guidance along with ensuring appropriate consumer protection.

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

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3 05, 2023

FedFin on: Nonbank SIFI Designation

Arezou Rafikian2023-05-03T17:03:24-04:00May 3rd, 2023|The Vault|

In concert with proposing a new systemic-risk methodology, the Financial Stability Oversight Council sought comment on guidance that significantly rewrites the manner in which nonbanks are designated as systemically important financial institutions (SIFIs). The new approach retracts key aspects of the Trump FSOC’s approach, for example eliminating the necessity of determining if a possible designee is likely to fail and what the costs and benefits of new systemic standards are likely to be. Although the new approach retains numerous procedural opportunities for the possible designee to know of and protest action, these and other changes…

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

27 04, 2023

FedFin on: How To Say It’s Systemic

Arezou Rafikian2023-04-27T17:04:10-04:00April 27th, 2023|The Vault|

FSOC’s newly-proposed analytical methodology for systemic risk identification is most immediately important for nonbank mortgage companies and the regulated institutions that love them. It may look as if a U.S. systemic framework is months away, but FSOC has signaled that, in some cases, systemic interventions could well come sooner.

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