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9 03, 2023

GSE-030923

2023-03-09T15:28:01-05:00March 9th, 2023|4- GSE Activity Report|

Now What?

As detailed in our reports earlier this week on Powell’s appearance before Senate Banking and HFSC, much was said about the pending rewrite of big-bank capital standards.  As we’ve noted, this matters a lot to the comparative advantage of GSEs, nonbank mortgage players, and banks large and small.  As a result, we here go in depth on what Powell said – and mostly didn’t – about what’s next on these critical standards.

GSE-030923.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 …

11 07, 2022

m071122

2023-01-24T15:14:56-05:00July 11th, 2022|6- Client Memo|

Holistic-Capital FAQs and Some Priority Answers

Late last week, we released a new issue brief laying out how to quickly take Michael Barr’s suggestion of a holistic regulatory-capital regime from rhetoric to reality.  The American Banker did a fine job summarizing the paper and putting it into the policy context, generating a lot of questions to which I’ll turn in this memo.  By far the most common assertion is that this paper is a stealth big-bank campaign to cut regulatory capital.  If it is, that’s news to all of them, as they saw the paper about the same time the Banker article appeared.  More to the point and as I’ll discuss below, a holistic-capital regime wouldn’t come cheap, it would just be better honed and more effective.

m071122.pdf

11 07, 2022

Karen Petrou: Holistic-Capital FAQs and Some Priority Answers

2023-01-24T15:15:17-05:00July 11th, 2022|The Vault|

Late last week, we released a new issue brief laying out how to quickly take Michael Barr’s suggestion of a holistic regulatory-capital regime from rhetoric to reality.  The American Banker did a fine job summarizing the paper and putting it into the policy context, generating a lot of questions to which I’ll turn in this memo.  By far the most common assertion is that this paper is a stealth big-bank campaign to cut regulatory capital.  If it is, that’s news to all of them, as they saw the paper about the same time the Banker article appeared.  More to the point and as I’ll discuss below, a holistic-capital regime wouldn’t come cheap, it would just be better honed and more effective.

The paper was sparked by what might have been an offhand comment from Mr. Barr at his Senate confirmation hearing for the Fed’s supervision vice chair.  He was asked his views on the “Basel IV” package of regulatory-capital rewrites and said that he favored thinking about capital as a whole rather than finalizing individual standards in the absence of a broader vision.  Or that’s what he seemed to mean because, sensible man that he is, the less said at a confirmation hearing, the better, and talk quickly turned to other matters.  Assuming he meant what we thought he said, FedFin did our best to give it legs.

We did so in part by providing a short taxonomy of key capital requirements showing how they relate to other capital requirements …

27 12, 2021

Daily122721

2023-05-22T13:33:40-04:00December 27th, 2021|2- Daily Briefing|

Thompson Reiterates Need for Climate-Risk Reduction
Acting FHFA Director Thompson today reiterated her near-term climate-risk agenda initially noted when FSOC put out its report (see Client Report GREEN11).

Comment Date Set for FHFA SCB Proposal
The Federal Register today includes FHFA’s proposed capital plan and stress capital buffer (SCB) for Fannie and Freddie, with comment now due February 25.

Daily122721.pdf

17 12, 2021

FedFin: Building Buffers

2023-05-22T15:57:33-04:00December 17th, 2021|The Vault|

As noted on Thursday, FHFA continues to tread carefully through the big-bank rulebook, adopting standards said to be like-kind that aren’t quite so similar when it comes to critical details.  The latest proposal demands capital planning in a construct akin to the one Democrats favored as the agencies finalized the big-bank stress capital buffer (SCB) minus express restrictions on capital distributions.  Although the SCB will make Fannie and Freddie more resilient, it also steepens the climb out of conservatorship unless some new capital comes along.

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

17 12, 2021

GSE-121721

2023-05-22T15:55:52-04:00December 17th, 2021|4- GSE Activity Report|

Building Buffers

As noted on Thursday, FHFA continues to tread carefully through the big-bank rulebook, adopting standards said to be like-kind that aren’t quite so similar when it comes to critical details.  The latest proposal demands capital planning in a construct akin to the one Democrats favored as the agencies finalized the big-bank stress capital buffer (SCB) minus express restrictions on capital distributions.  Although the SCB will make Fannie and Freddie more resilient, it also steepens the climb out of conservatorship unless some new capital comes along.

GSE-121721.pdf

16 12, 2021

Daily121621

2023-05-22T16:01:11-04:00December 16th, 2021|2- Daily Briefing|

FHFA Constructs a GSE Stress-Capital buffer
Building on its pending rewrite of GSE-capital rules, FHFA today proposed capital-planning requirements for Fannie Mae and Freddie Mac akin in many ways to those governing large banks.   

Campaign Advances to Oust McWilliams
Ramping up the FDIC battle, Public Citizen today called on President Biden to oust FDIC Chair McWilliams.  Confirming those who have suggested that the fracas is about more than bank M&A, the letter is signed not only by many consumer-advocacy groups, but also by climate-change interest organizations.

Democrats Demand BNPL Review, CFPB Obliges
Acting quickly on Senate Democrats’ request, the CFPB today launched an inquiry into buy now, pay later (BNPL) credit, requesting information from five BNPL credit providers on BNPL risks and benefits.

FSB Says Global NBFIs are Stable, Shrinking vs. Banks
The FSB today released its annual NBFI monitoring report, concluding somewhat puzzlingly that balance-sheet NBFI vulnerability measures appeared broadly stable comparing 2020 and 2019 despite the market volatility at the pandemic’s outset and massive government intervention.

OCC Begins Climate-Risk Regulatory Build-Out
As promised, the OCC today issued draft climate risk-management principles that, when finalized, would guide future agency action starting next year.

Daily121621.pdf

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