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 ….
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.
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.
Yellen Highlights Investor – Not Uninsured-Deposit – Runs, Buoys Sector Mergers
In an interview over the weekend, Treasury Secretary Yellen struck a decidedly different tone on bank mergers than voiced in the Administration’s policy prior to recent failures.
Gensler Outlines Top Financial Stability Concerns
In remarks today, SEC Chair Gensler outlined his financial-stability priorities.
Failed-Bank CEOs Defend Themselves, Contest Need For Receivership
Ahead of testimony tomorrow before Senate Banking, the CEOs of SVB and Signature have filed statements defending their actions and those of their colleagues.
FHFA Seeks Views On New Pricing Framework
Following last week’s announcement that it would postpone its controversial decision to retain an upfront fee related to a borrower’s debt-to-income level, the FHFA today released a Request for Input on the Enterprises’ single-family pricing framework as well as the process for setting their upfront guarantee fees.
Barr Stands His Supervisory, Regulatory Ground
Gruenberg Sticks To His Guns
FDIC Chairman Gruenberg’s Congressional testimony largely recounts prior statements about the condition of the banking system, recent bank failures, the new special-assessment proposal (see FSM Report DEPOSITINSURANCE120), and the agency’s deposit-insurance reform conclusion (see Client Report DEPOSITINSURANCE119).
Treasury Presses Fed Efforts to Contain Systemic Liquidity Risk
In remarks today, Treasury Under-Secretary Nellie Liang addressed systemic liquidity risks such as the 2020 dash-for-cash and recent bank failures. Treasury is cautiously optimistic about increasing regional-bank stability, but systemic liquidity risk is now structural.
FDIC Proposes Special, Costly Uninsured-Deposit Assessment
The FDIC today voted 3-2 to propose the special assessments presaged in Chairman Gruenberg’s Congressional testimony after SVB and SBNY’s failures (see Client Report REFORM218). Notably, the assessment does not also cover the $13 billion of cost estimated for the FRC rescue in conjunction with JPMorgan’s purchase; its rescue was not technically systemic and its cost will thus be covered as the FDIC reviews DIF ratios in coming meetings at which more broadly-shared, traditional premiums are likely also to increase.
GOP Endorses GAO Recommendations; Dems Point To Bank Management
At today’s HFSC Oversight Subcommittee hearing on the GAO’s report (see Client Report REFORM223), Subcommittee Chair Huizenga (R-MI) built the case that the Fed has historically been unable to properly supervise troubled banks and noted that the committee will investigate this along with the Systemic-Risk Exception used in recent failures.
Waller Disavows Fed Climate-Risk Action
Confirming the Fed’s omission of climate risk in its new financial-stability report (see Client Report SYSTEMIC96), Gov. Waller today said not only is climate risk not now a threat to financial stability, but it also does not pose a safety-and-soundness hazard to large banks.
FRB-NY Data Contradict Story …
HFSC GOP Hammers Gensler on Crypto, Climate
As anticipated, HFSC’s hearing today with Chairman Gensler was a raucous affair which, while divided sharply on party lines when it comes to Mr. Gensler, also laid out general agreement on matters such as the need for stablecoin legislation (the topic of a high-profile hearing tomorrow). Mr. Gensler did not begin on a positive note, providing what many on both sides saw as a confusing answer when asked for a clear distinction between securities and commodities. Democrats were also not united in his defense when it came to governing cryptoasset by enforcement, not regulation; as noted in this report, they were more aligned when it comes to climate-risk disclosures.
HFSC Prepares for Gensler Grilling
As expected, the staff memo ahead of HFSC’s hearing tomorrow with SEC Chairman Gensler reiterates much that has previously played out in highly-critical correspondence and subpoena threats.
Senate GOP Again Slam CFPB
Ranking Member Scott (R-SC) along with eight other Senate Banking Republicans sent a letter to CFPB Director Chopra last Thursday again taking serious issue with the CFPB’s “junk fee” initiative (see FSM Report CONSUMER38), calling many targeted fees “legal” and “reasonable.”
FRB-Philadelphia Study: U.S. Banking Not Concentrated
A new paper from the Federal Reserve Bank of Philadelphia finds that data suggesting undue banking-sector concentration may be misleading.
Fed Study: EU Banks Dress Up As Supervisors Approach
In a most timely study, the FRB has released a staff paper assessing how bank supervision alters short- and medium-term bank risk-taking.
FedFin Forecast: Probable Changes to Bank Supervision, Regulation, Law
With Thursday’s White House announcement, we know that the Administration will do its best to support Fed and FDIC efforts to color recent events as a failure of Republican-led rulemaking, not also one of agency supervisory acumen, speed, and even competence. So far, key Democrats are instead pursuing a two-track strategy: complaining mightily about Trump-era rules but also joining with Republicans to cite an array of supervisory lapses they want quickly remediated by new standards, new rules, and – if need be – also by new law. Indeed, on Friday, Democrats made it clear that they want considerably more from the Administration than the fixes on which the agencies prefer to focus. Given how much is in motion and how much could advance, this report details FedFin’s forecast for near-term action in each of these arenas, focusing on matters with broad industry impact rather than specific SVB/Signature- enforcement issues. We thus provide forecast for immediate supervisory actions, those Congress will demand, new rules (tailoring and beyond), and the few legislative initiatives we believe have a reasonable chance of passage and Presidential approval.
Yellen Calls for Bank, Nonbank Regulatory Rewrite
Implicitly confirming press reports that the White House will soon press for tougher bank rules, Treasury Secretary Yellen today said that, as beneficial as the rules imposed since the great financial crisis have been, more stringent standards are necessary.
Hsu Sets Dual OCC Mission: Safety, Fairness
In remarks today, Acting Comptroller Hsu emphatically echoed statements of other top regulators that the banking system is safe and sound, emphasizing that the OCC is monitoring the market and is prepared to use its tools to protect the system.
Basel Updates Global Liquidity, Operational Standards
Although the U.S. has still not even proposed the Basel IV “end-game” standards, the Basel Committee continues to refine them and today issued its latest set of FAQs.
White House Sets Reg-Reform Agenda
As anticipated early this morning, the White House has issued a statement calling on federal banking agencies to roll back rules the President describes as weakening “common-sense bank safety and supervision.”
Senate Dems Press Agencies to Strengthen Capital Rules
Following this week’s hearings (see Client Report REFORM218), Sens. Warren (D-MA), Blumenthal (D-CT), and Duckworth (D-IL) sent a letter to Vice Chair Barr, Chairman Gruenberg, and Acting Comptroller Hsu urging them to strengthen large-bank capital requirements.
CFPB Stands By Its Small-Business Reporting Rules
Despite strong industry and GOP opposition, the CFPB today finalized its small business data collection rulemaking in a sweeping final rule the Bureau says will increase transparency in small business lending, promote economic …
FedFin First Take: Failure Fall-out
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; whether rules or enforcement are to blame for its failure, that of Signature Bank, and systemic fragility; and – even if rules are generally robust – which revisions to them are needed. The overall construct of reactions to this emergency and then the likelihood of substantive response beyond the Congressional statements and President’s commitment to new rules this morning will emerge in more specific form over the next few days if market strains continue to ease. FedFin will of course continue to apprise clients of key considerations.