#repo – Federal Financial Analytics

18 12, 2023

FSOC29

Eliza Allen2023-12-18T11:36:07-05:00December 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…

13 12, 2023

DAILY121323

Eliza Allen2023-12-13T16:50:12-05:00December 13th, 2023|2- Daily Briefing|

HFSC Oversight Subcomm Revisits Iran Sanctions

Today’s HFSC Oversight Subcommittee hearing focused on the Biden Administration’s recent efforts to limit terrorist funding from Iran. Chairman Huizenga (R-MI) questioned the need for the November 14^th renewal of a waiver that allows Iraq to pay Iran for electricity, calling for increased pressure on Iran following Hamas’s October 7^th attack.

SEC Sets Out Treasury Central-Clearing Construct

As anticipated, the SEC this morning voted 4-1 to mandate central clearing for Treasury securities used in many repo and reverse-repo transactions, modifying the proposal in key respects still unsatisfactory to Commissioner Peirce. The rule addresses continuing concerns about Treasury-market fragility, in part by reducing the number of highly-leveraged hedge-fund transactions.

GAO Reaches Equivocal Verdict on Digital-Asset Crypto Evasion Risk

Addressing Congressional concerns such as those in the Warren-Marshall crypto-compliance bill, the GAO today issued a report finding that digital assets pose risk to U.S. sanction implementation and enforcement despite mitigating factors that may reduce certain risks.

Brown Presses Bank CEOs on Servicemember Rights

A week after the GSIB CEOs came before the Senate Banking Committee (see Client Report GSIB23), Banking Committee Chair Brown (D-OH) today sent a letter to the CEOs of the four largest consumer banks encouraging them to ensure that active-duty servicemembers obtain all the financial benefits to which they are entitled.

Daily121323.pdf…

29 09, 2023

M092923

Eliza Allen2023-09-29T11:41:36-04:00September 29th, 2023|6- Client Memo|

How a Shut-Down Stokes Systemic Risk

Although there’s been some talk of what a government shut-down does to the SEC, there’s lots, lots more to worry about. Risks are out there, risks that should be taken very, very seriously by the Members of Congress who seem to think that more chaos stokes their political fortunes. Perhaps it does, but it could well do a lot of damage to their finances, not to mention those of all the voters who might well bear a reasonable grudge.

M092923.pdf…

29 09, 2023

Karen Petrou: How a Shut-Down Stokes Systemic Risk

Eliza Allen2023-09-29T11:41:22-04:00September 29th, 2023|The Vault|

Although there’s been some talk of what a government shut-down does to the SEC, there’s lots, lots more to worry about. Risks are out there, risks that should be taken very, very seriously by the Members of Congress who seem to think that more chaos stokes their political fortunes. Perhaps it does, but it could well do a lot of damage to their finances, not to mention those of all the voters who might well bear a reasonable grudge.

Where’s the systemic scary place? Or, better said, places? Some are right in front of us; others lurk in the closet waiting to pounce.

What worries me the most in the immediate future is the ability of bad actors to exploit what could be lightly- or even unguarded portals into critical financial market infrastructure. There are of course many, many bad actors out there with the sophistication and/or state sponsorship quickly to test and then attack critical points in the payment, settlement, and clearing systems and/or the grids on which they rely.

As I discussed on Tuesday, not all providers of critical financial market infrastructure are under the hopefully-eagle eyes of the federal banking agencies which, funded outside federal appropriations, will remain open. Some fall under the SEC or CFTC, agencies that will be hobbled, and some critical providers are wholly outside the regulatory perimeter. Even if their nodes of market access seem small, disruption has a bad habit of migrating at lightning speed. Even if power outages are …

4 08, 2023

DAILY080423

Eliza Allen2023-08-04T16:31:03-04:00August 4th, 2023|2- Daily Briefing|

Fed Study: GSIB Leverage Ratios No Cause of Treasury-Market Stress

As regulators prepare to extend the supplementary leverage ratio (SLR) to all large banks (see FSM Report CAPITAL230), a new Fed staff research note concludes that the higher leverage ratio did not undermine dealer-bank capacity.

Warren, Dems Use North Korea Case to Press Crypto AML/Sanctions Bill

Ahead of a hard push next month to add crypto AML and sanction standards to the defense authorization, Sens. Warren (D-MA), Van Hollen (D-MD), and Kaine (D-VA) sent a letter to Treasury Under Secretary for Terrorism and Financial Intelligence Nelson and National Security Advisor Sullivan calling on the Administration to crack down on North Korea’s illicit crypto activity.

Warren, Porter Demand Stricter FDIC Crackdown on Uninsured Deposit Underreporting

Following last week’s FDIC financial institutions letter highlighting that some banks incorrectly estimated uninsured deposits in their Call Reports, Sen. Warren (D-MA) and Rep. Porter (D-CA) late yesterday sent a letter to FDIC Chairman Gruenberg taking serious issue with the agency’s “feeble” response.

Daily080423.pdf…

4 08, 2023

FedFin on: Credit-Risk Capital Rewrite

Arezou Rafikian2023-08-04T13:41:04-04:00August 4th, 2023|The Vault|

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 ….

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

4 08, 2023

CAPITAL231

Eliza Allen2023-08-04T13:40:43-04:00August 4th, 2023|1- Financial Services Management|

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.

CAPITAL231.pdf…

28 07, 2023

DAILY072823

Eliza Allen2023-07-28T17:09:55-04:00July 28th, 2023|2- Daily Briefing|

FSOC Considers Nonbank Systemic Risk, Credit-Based LIBOR Replacements

At today’s FSOC meeting, participants as usual said nothing about the closed-door agenda, which notably featured more discussion of the systemic risk that may be posed by nonbank mortgage servicers. Different agencies presented their work to address this risk, which was also flagged when FSOC finalized its new approach to identifying systemic risk (see FSM Report SYSTEMIC95). Whether FSOC as a whole is satisfied with FHFA and Ginnie actions and even if these agencies think their work to date suffices will determine the extent to which FSOC intervenes, but the session reinforced the systemic importance accorded to nonbank mortgage firms and the potential for additional action.

Agencies Take Action to Enhance Emergency Liquidity, Whitewash Discount Window

As presaged at Chair Powell’s press conference earlier this week, the banking agencies today issued liquidity-planning guidance designed both to ensure adequate preparation for acute liquidity stress and take the stigma off discount-window draws. The guidance deals only with liquidity planning and thus does not alter the treatment of discount-window funding for purposes of the LCR, admonishing banks to take account of the hard lessons of the March bank failures and prepare for runs and other extreme-stress scenarios.

Daily072823.pdf…

18 07, 2023

FedFin on: MMF Redemption Fees, Liquidity-Risk Mitigation

Arezou Rafikian2023-07-19T16:52:22-04:00July 18th, 2023|The Vault|

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 ….

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

18 07, 2023

MMF20

Eliza Allen2023-07-18T11:50:28-04:00July 18th, 2023|1- Financial Services Management|

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.

MMF20.pdf…