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15 08, 2022

DAILY081522

2023-01-04T12:03:15-05:00August 15th, 2022|2- Daily Briefing|

FDIC Study Finds Changing Assessment Rates Had Procyclical Effects During the Financial Crisis

A new FDIC staff study tackles an immediate concern in the wake of the FDIC’s proposal to raise DIF premiums (see FSM Report DEPOSITINSURANCE114): procyclicality.  In what its authors describe as one of the first studies to provide large-scale empirical evidence on deposit insurance’s procyclical effects, this model-driven study looks at the effect of changing deposit insurance assessment rates during the period between 2009 and 2011.  Using credit unions as a control group, it finds a 1.6 percent decrease in bank lending after a 7 bp increase in the assessment rate and a 0.3 increase after a 5-10 bp rate decrease.

Fed Tries to Sooth Payment-Access Critics with New Policy

Doubtless reflecting all the political pressure it’s under regarding payment-system access, the FRB today not only finalized its payment-system access rules, but also made sure to use an e-mail subject line containing the release that these rules are “transparent, risk-based, and consistent.”  The board also states that the final standards are consistent with both its 2021 proposal (see FSM Report PAYMENT22) and the 2022 “supplemental” proposal (see FSM Report PAYMENT24) even though the supplemental was considerably more detailed than the initial attempt to give the Reserve Banks broad discretion without the appearance of inconsistent or even insider decision-making.

Daily081522.pdf

8 08, 2022

m080822

2023-01-04T13:13:40-05:00August 8th, 2022|6- Client Memo|

Procyclical Capital Rules and the Economy’s Discontent

In our recent paper outlining the holistic-capital regime regulators should quickly deploy, we noted that current rules are often counter-productive to their avowed goal of bank solvency without peril to prosperity.  However, one acute problem in the regulatory-capital rulebook – procyclicality – does particularly problematic damage when the economy faces acute challenges – i.e., now.  None of the pending one-off capital reforms addresses procyclicality and, in fact, several might make it even worse.  This memo shows how and then what should be quickly done to reinstate the counter-cyclicality all the regulators say they seek.

m080822.pdf

8 08, 2022

Karen Petrou: Procyclical Capital Rules and the Economy’s Discontent

2023-01-04T13:14:40-05:00August 8th, 2022|The Vault|

In our recent paper outlining the holistic-capital regime regulators should quickly deploy, we noted that current rules are often counter-productive to their avowed goal of bank solvency without peril to prosperity.  However, one acute problem in the regulatory-capital rulebook – procyclicality – does particularly problematic damage when the economy faces acute challenges – i.e., now.  None of the pending one-off capital reforms addresses procyclicality and, in fact, several might make it even worse.  This memo shows how and then what should be quickly done to reinstate the counter-cyclicality all the regulators say they seek.

Last Thursday, the Fed set new, often-higher risk-based capital (RBC) ratios for the largest banks.  The reason for this untimely capital hike lies in the interplay between the RBC rules and the Fed’s CCAR stress test.  Packaged into the stress capital buffer (SCB), these rules determine how much RBC each large bank must hold to ensure it can stay in the agencies’ good graces and, to its thinking, better still distribute capital.

Put very simply, the more RBC, the less RWAS – i.e., the risk-weighted assets, against which capital rules are measured.  The higher the weighting, the lower a capital-strained bank’s appetite to hold it unless risk is high enough also to offset the leverage ratio’s cost – at which point the bank is taking a lot of unnecessary risk to sidestep another set of unintended contradictions in the capital construct.  As a Fed study concludes, all but the very strongest banks sit on their …

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