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18 12, 2023

FSOC29

2023-12-18T11:36:07-05:00December 18th, 2023|5- Client Report|

FedFin Assessment: FSOC Worries A Lot, Watches, Waits

This year’s FSOC report trods much old ground with two exceptions.  The first pertains to a new focus on artificial intelligence, machine learning, and new, generative technologies.  That said, the report does little beyond highlight this risk and include it among all the others federal agencies are told to monitor.  Private credit now also alarms FSOC, with insurance company investment in this sector of particular systemic concern in concert with the sectors’ CRE and junk-bond exposures, offshore reinsurance, and PE ownership.  As detailed in this report, banks are found to be resilient and have ample capital even as the report supports consideration of pending regulatory revisions.  Banking agencies are also asked to monitor uninsured-deposit levels and assess run-risk in light of social media and other accelerants.  In sharp contrast to more alarmist statements in the past and extensive Treasury reports (see Client Report CRYPTO32), this year’s report downplays cryptoasset risk because federal regulators are said to have taken steps to contain it.  The report also reiterates FSOC’s continuing focus on cyber and climate risk, with the closed session preceding the meeting considering a framework being developed by the OCC to measure and monitor financial risks and bank exposures.  Agencies are also encouraged to pursue comparable, “decision-useful” climate disclosures.  The LIBOR transition is considered a success and no longer poses a systemic risk.

FSOC29.pdf

8 12, 2023

Al121123

2023-12-08T16:55:05-05:00December 8th, 2023|3- This Week|

Another Book Report?

At a recent hearing (see Client Report CONSUMER54), CFPB Director Chopra wasn’t shy in his critique of the Financial Stability Oversight Council.  He called it a “book report club,” a moniker Karen Petrou last week suggested was not wholly untrue when it comes to emerging risks such as private credit.  FSOC’s meeting this Thursday is likely to show the Council at its bookwormy best given that the agenda consists largely of ritual release of yet another FSOC report.  We’ve dutifully catalogued these year-in, year-out as hundreds of FSOC blessed pages spew forth about what the Council did, how many facts its staff gathered about whom in the past year, and what it thinks might go wrong where in concert with little indication of what the Council might then do to prevent the worst from happening.

Al121123.pdf

12 07, 2023

DAILY071223

2023-07-12T17:05:21-04:00July 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

3 07, 2023

DAILY070323

2023-07-03T16:12:30-04:00July 3rd, 2023|2- Daily Briefing|

UK Targets PE/Private-Credit Interconnections

Although U.S. regulators have begun to talk about inter-connections (see FSM Report SYSTEMIC95), the Bank of England’s top official for international finance today laid out new U.K. policy to address them.  Specifically, Nathanaël Benjamin addressed counterparty risk with particular attention to bank private-equity and private-credit exposures.  Mr. Benjamin’s concern is principally that, should the U.S. not pull off a soft landing, this sector could experience severe stress that could quickly migrate to asset management.

IOSCO Sticks With SOFR

Acting on concerns often expressed by SEC Chairman Gensler, IOSCO today published its final assessment of USD LIBOR, judging two credit-sensitive alternatives problematic and blessing limited use of certain term SOFRs.  The most immediate consequences of this will be to make the Fed still less likely to permit banks to use the limited credit-sensitive exemptions provided in its final alternative-benchmark rule (see FSM Report LIBOR9), with IOSCO emphasizing its point with specific reference to this option by urging only cautious use of these rates and suggesting that regulators (presumably outside the U.S.) review their permissibility.

Daily070323.pdf

3 07, 2023

M070323

2023-07-03T12:09:08-04:00July 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

2023-07-03T12:08:54-04:00July 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 …

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