#Signature

28 05, 2024

Karen Petrou: Why Regulators Fail

Eliza Allen2024-05-28T12:38:29-04:00May 28th, 2024|The Vault|

Last week, the House voted on a bipartisan basis to stick its collective fingers in the SEC’s eye over its cryptoasset jurisdiction. And, in recent weeks, the Vice Chair of the Federal Reserve has been forced to concede that the end-game capital rules that are his handiwork as much as anyone’s will get a “broad, material” rewrite. What do these two comeuppances have in common? Each results from regulatory hubris so extraordinary that even erstwhile allies abandoned the cause. For all MAGA fears about an omnipotent “administrative state,” these episodes show that those seeking sweeping change without plausible rationales are still subject to the will of the people even if the people’s will befuddles those in the government’s corner offices.

First to the SEC. Chairman Gensler’s position on cryptoassets over the past three years is that many ways to use them are securities and anything that’s a security is his for the enforcing. I’m not even going to venture a conclusion on who’s right or wrong when it comes to abstruse Supreme Court rulings on complex definitions. What underpins the SEC’s downfall – temporary though it may be – is that any question as big as what’s a cryptoasset and who can do what with it should be answered by rules subject to public notice and comment, not episodic enforcement actions meant to teach everyone else a lesson.

Most people would learn the lesson if a coherent regulatory policy spelled it out. When policy is set by whack-a-mole instead of …

20 02, 2024

Karen Petrou: How the OCC Made a Bad Bank Both Bigger and Badder

Shane Smith2024-04-12T09:48:06-04:00February 20th, 2024|The Vault|

As I noted last week, the OCC’s proposed bank-merger policy fails to reckon with the strong supervisory and regulatory powers federal banking agencies already have to quash problematic consolidations and concentrations. Here, I turn to one reason why the OCC may not trust these rules: it doesn’t trust itself. A bit of recent history shows all too well why this self-doubt is warranted even though it’s also inexcusable.

I owe my historical recall to the authoritative Bank Reg Blog, which last week looked at the latest on NYCB. This included a troubling reminder of the troubled bank’s merger with Flagstar before it thought it snapped up another great deal from the FDIC via acquiring what was left of Signature Bank.

NYCB first sought approval for the Flagstar acquisition in 2021 when its primary federal regulator was the FDIC. As is often the case with merger applications, this one appeared to go into a dark hole. Unlike many other acquisitions, the banking companies had a go-to Plan B: charter conversion.

NYCB went to the OCC and got rapid approval not just for converting its charter to a national bank, but also then for acquiring Flagstar via a reverse flip that also involved a Flagstar conversion to a national charter. The OCC then readily approved the merger in 2022, just in time for some of the super-rapid growth via the Signature deal both the OCC and FDIC approved even though they should have been well aware that rapid-fire mergers almost always lead …

6 10, 2023

FedFin Assessment: Basel Lays Big Plans for Basel V

Arezou Rafikian2023-10-06T14:47:18-04:00October 6th, 2023|The Vault|

As we noted yesterday, the Basel Committee’s October meeting concluded not only with plans for new disclosure consultations, but also a report on lessons learned from the 2023 crisis. We have long considered the “end-game” standards so substantive as to constitute Basel IV; now, as this report details, Basel is laying plans for Basel V via new liquidity, interest-rate, capital, and structural changes to the current construct. We thus focus on the supervisory and regulatory action steps Basel posits as necessary responses to the financial-market volatility sparked earlier this year by SVB, SBNY, FRC, and CS’s failures. While Basel states that none of its recommendations necessarily presages near-term global standards, …

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

18 09, 2023

FedFin on: Large-IDI Resolution Plans

Arezou Rafikian2023-09-19T18:09:58-04:00September 18th, 2023|The Vault|

Although a pending FDIC/FRB proposal imposes a raft of new requirements for resolution plans from IDIs with over $100 billion in assets, the FDIC has also issued a freestanding proposal doing the same, also setting information-filing standards for IDIs below $100 billion but above $50 billion. Aspects of the resolution-plan filing standards for large covered IDIs (CIDIs) echo and in some cases allow reliance on aspects of the joint rule with the Fed, but the FDIC notes that this rule is, as required by the Dodd-Frank Act, focused on financial stability. Its own IDI resolution rules now and as proposed instead address how the FDIC is to meet its own statutory requirements (e.g., least-cost resolution). The NPR mandates many new planning or filing requirements to achieve its goals, most notably adding new severability standards that may require new inter-affiliate or -branch firewalls that reduce operating efficiencies and, when it comes to broker-dealer or other entities, lead to indirect resolution requirements not mandated by functional regulators.

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

11 09, 2023

Karen Petrou: The PCA Cure for Much That Ails New Banking Rules

Eliza Allen2023-09-11T09:40:05-04:00September 11th, 2023|The Vault|

It’s a cliché, but it’s also true that one can’t beat something with nothing, especially in Washington. This is an axiom well worth remembering when it comes to all of the new capital and resolution rules befalling the nation’s biggest banks. I don’t think they need to be beaten back in their entirety – much in the proposals fixes vital flaws. But the agencies have done a remarkably poor job conjuring the impact of each of these sweeping proposals, let alone their cumulative impact in the context of all the other rules and the grievous supervisory lapses that contributed to recent failures no matter all the rules that could well have sufficed if enforced. Thus, the most obvious problems with this new construct are opacity, complexity, and most importantly reasonable doubts that, even with all these sharpened arrows, supervisors will still fail to draw their bows and then fire early and often. All too much in the new rules is false science, as even a cursory read of the impact analyses makes painfully clear. Instead of setting standards on lofty, unproven models, safeguards should rely on an engineering axiom: use warning lights that force prompt and corrective action. Think of the ground warning in an airplane followed by urgent “pull-up” commands and then go to work on the banking dashboard with clear, enforceable rules and new PCA thresholds forcing supervisory action and accountability.

The need for new PCA triggers is even more urgent than I thought when I first outlined…

15 05, 2023

Karen Petrou: How An Ill-Designed Special Assessment Is Sure To Scramble The Structure Of Federal Deposit Insurance

Eliza Allen2023-05-15T11:52:36-04:00May 15th, 2023|The Vault|

As our forthcoming in-depth analysis will detail, the FDIC’s proposed special assessment raises a raft of policy problems not contemplated by the FDIC despite a steep price tag warranting careful thought at a time of financial instability and recessionary risk. The FedFin analysis will detail the proposal, what the FDIC thinks, and what the proposal might do to whom, but here’s my opinion: the FDIC’s decision to allocate blame for SVB and Signature’s failures to a select group of surviving larger banks is a politically-expedient violation of the principal of insurance and a terrible precedent for the future of federal deposit coverage.

First problem: the FDIC assigns blame to a large group of bigger banks even though its own analysis of the SVB and SBNY failures points to a different underlying reason for the systemic designation. In the proposal, the FDIC targets large holdings of uninsured deposits even though both its post-mortem and the Fed’s of the two systemic failures cites bad management as the most important cause of death. Both agencies do note the new risks posed by social-media runs that hastened the banks’ passing, but each also makes it clear that these new-age runs are an endemic challenge to bank resilience, not a risk unique to SVB and Signature or other banks with large amounts of uninsured deposits. The FDIC proposal contains no explanation of why uninsured-depositories are the systemic rescue’s fall guys even though these deposits aren’t the cause of the two bank failures and the risks …

17 04, 2023

Karen Petrou: Why FDIC Privatization Isn’t a Pipe Dream

Eliza Allen2023-04-17T12:02:05-04:00April 17th, 2023|The Vault|

As night follows day, so proposals to privatize the FDIC have again followed bank failures. While debate over deposit-insurance privatization was, is, and will be an ideological tug of war between free-market conservatives and government safety-net progressives, it’s nonetheless an important option that warrants careful analysis as the FDIC yet again faces huge losses, banks are charged crippling and procyclical premiums, and talk turns to still more federal coverage at still greater risk not just to insured banks, but also to taxpayers. Pure FDIC privatization remains impossible, but target risk transfers warrant careful, but quick consideration.

Privatization was last seriously discussed when Congress rewrote FDIC coverage in 2006. This was a halcyon time when the FDIC was so sanguine about all the rules put in place after the S&L and bank crises that its 2007 study confidently predicted that systemic risk was a thing of the past, uninsured deposits would never again be covered, and the Deposit Insurance Fund more than sufficed for any systemic situation.

Of course, the great financial crisis that began later that same year put the lie to all this happy talk. Privatization proposals now aren’t anywhere near as happy nor do they repeat past assertions that, with FDIC privatization, the nation could also dispense with bank regulation. Instead, and for good reason, talk has now returned to private options because, without them, moral hazard seems sure to be embedded in a financial system that is still more shadowy.

A modern rethink of FDIC privatization must …

28 03, 2023

FedFin Assessment: Policy Implications of FDIC-Resolution Innovations

Arezou Rafikian2023-04-03T12:48:36-04:00March 28th, 2023|The Vault|

As noted yesterday, the FDIC’s recent rescues have had several unusual features with implications not only for future policy, but also for pending special assessments to replenish the DIF for the $22.5 billion estimated costs to the Deposit Insurance Fund. Analyzed here, new tools – e.g., voluntary liquidation, equity-appreciation rights, lines of credit – have determine the extent to which this estimate holds, how FHLB advances are treated in future resolutions, and the role the FDIC may play in companies that acquire failed IDIs….

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

24 03, 2023

FedFin Analysis: Whom and What the FDIC and Fed Can Save How

Arezou Rafikian2023-03-24T17:05:38-04:00March 24th, 2023|The Vault|

Recent editorials and other media have often said that the FRB and/or FDIC have powers or taken actions that is not the factual case as we understand it. Members of Congress also appear sometimes willing to make assertions about what agencies can do now even if it is unclear if there is statutory authority to do so. We have provided individual clients with key clarifications, but do so now more generally to support strategic and advocacy decision-making. Of particular importance is the authority the FDIC is said to have or lack related to uninsured deposits; as detailed below, the agency actually has significant authority to do so as well as even to back BHC debt, as long as certain stringent conditions are met. As detailed in FSM Report RESCUE65, Congress limited both the FDIC and Fed in hopes that….

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

20 03, 2023

Karen Petrou: Three Fast, Urgent Fixes to U.S. Bank Supervision and One Major Change to End Bailouts

Eliza Allen2023-03-20T11:35:24-04:00March 20th, 2023|The Vault|

In the wake of recent bank failures, much has rightly been said about how supervisors failed to act even though warning claxons blared. Nothing that happened to Silvergate, SVB, or Signature is due to forces beyond supervisory control, but there are deep, structural weaknesses in how banks have long been supervised. How long? I went back to my 2001 Senate Banking testimony about what was then the largest-ever failure to find that many of the lessons that should have been learned never sunk in.

Given that this hearing was in 2001, a good deal of what I said about bank capital requirements was about Basel I and is thus long out of date. However, one key point isn’t: the capital triggers used to spark prompt corrective action (PCA) were and are an unduly-simplistic way to identify the need for rapid supervisory intervention.

Silvergate, SVB, and Signature were all “well” capitalized right up to the brink of collapse because each of the banks in its own way arbitraged the capital rules to enormous – and obvious – advantage. Nothing in law or rule bars bank supervisors from stepping in well before PCA ratios sink but nothing seems to stir supervisors to do so. 1991’s PCA requirements were an important advance at the time, but it was outdated only a decade later. Now, it’s a dangerous supervisory distraction.

What else noted in 2001 remains an urgent fix? Over two decades ago, I urged the FDIC to reinstate the high-growth early-warning system it …