A New Cover
As we noted earlier today, the FRB has issued a seemingly technical FAQ liberalizing the treatment of certain credit-linked notes. Fed supervised banks that find this approach appealing – and we think several big ones will – thus now have a new way to achieve risk-based capital relief for mortgages akin to certain GSE CRT products.
In this report, we proceed from our assessment of the proposed regulatory capital framework to an analysis of the rules governing credit risk. In addition to eliminating the advanced approach, the proposal imposes higher standards for some assets than under the old standardized approach (SA) via new “expanded” requirements. As detailed here, many expanded risk weightings are higher than current requirements either due to specific risk-weighted assessments (RWAs) or definitions and additional restrictions. This contributes to the added capital costs identified by the banking agencies in their impact assessment, suggesting that lower risk weightings in the expanded approach reflected the reduced risks described in the proposal for other assets and will ultimately have little bearing on regulatory-capital requirements and thus ….
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Credit-Risk Capital Rewrite
In this report, we proceed from our assessment of the proposed regulatory capital framework to an analysis of the rules governing credit risk. In addition to eliminating the advanced approach, the proposal imposes higher standards for some assets than under the old standardized approach (SA) via new “expanded” requirements. As detailed here, many expanded risk weightings are higher than current requirements either due to specific risk-weighted assessments (RWAs) or definitions and additional restrictions. This contributes to the added capital costs identified by the banking agencies in their impact assessment, suggesting that lower risk weightings in the expanded approach reflected the reduced risks described in the proposal for other assets and will ultimately have little bearing on regulatory-capital requirements and thus on the overall ability of banks to expand into lower-risk areas and compete more effectively with nonbanks and foreign banks. Big banks forced to abandon certain activities may expand others receiving capital discounts in the new rules, increasing their footprint in traditional banking in ways that may increase industry consolidation.
The Quiescent QRM
Although there were signs earlier this year that the QRM risk-retention exemption might get a long-delayed overhaul, the agencies yesterday ducked any decisions. Thus, the QM=QRM construct continues unchanged except to the extent the QM gets narrower, the GSEs leave conservatorship, or other externalities affect what equals what for purposes of absolving MBS issuers from costly risk retention.
Chopra Reorienting CFPB’s Focus to Competition, Tech, Large Institutions
As anticipated, HFSC’s hearing today with CFPB Director Chopra skidded over a wide range of policy issues. Chairwoman Waters (D-CA) again lauded Mr. Chopra, urging him to prioritize foreclosure protection, consumer-data ownership, fair lending, and bigtech. In unsurprisingly sharp contrast, Ranking Member McHenry (R-NC) castigated the agency’s design, leadership, and agenda. However, the hearing was generally non-confrontational even though Director Chopra announced several significant policy initiatives. These include prioritizing enforcement actions for the largest providers and taking a hard look not only at competitiveness when it comes to bigtech, but also in other arenas. Although he did not indicate any specific initiatives, Mr. Chopra argued that retail-finance interest rates do not appear competitive; if this question is pursued, the Bureau could intervene across an array of disclosure, M&A, and product arenas.
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McWilliams Positions Herself as Crypto Liberal Among Agency Skeptics
In remarks posted this morning, FDIC Chair McWilliams provided an update on the inter-agency “crypto sprint.” Ms. McWilliams made it clear that her intent is not to prohibit bank crypto activities but instead to govern them, announcing that a series of policy statements will be issued in “coming months.”
U.S. Adds Voice to Health/Finance G20 Construct
The U.S. Treasury has now joined other G20 finance ministers in calling for a new forum coordinating health and finance policy. The proposal was sparked by an earlier report from former government officials such as Larry Summers based on the need to ensure that all national and global resources are prepositioned to prevent the next pandemic.
Global Regulators Tackle Margining, CCP Resilience
Advancing an FSB priority most recently emphasized in the Board’s forward-looking plan, the Basel Committee, IOSCO, and the Committee on Payment and Market Infrastructures today invited comment on additional margining standards addressing problems identified in the March 2020 COVID crisis.
House Advances Open-Source Regulatory Data
The House late yesterday passed 400-19 the Financial Transparency Act (H.R. 2989), legislation reintroduced by Reps. Maloney (D-NY) and McHenry (R-NC) requiring the federal financial regulatory agencies to adopt data collection-and-distribution standards on format, searchability, and transparency.
OCC Stands Firm on LIBOR Transition, Supervisory Priorities
In remarks generally focused on LIBOR transition, Acting Comptroller Hsu today emphasized that the U.S. agencies fully intend to end LIBOR and “zombie LIBOR” as of year-end and that even banks that think …