#SVB – Federal Financial Analytics

3 06, 2024

Karen Petrou: Important Lessons in Regulatory Impact

Arezou Rafikian2024-06-03T17:00:05-04:00June 3rd, 2024|The Vault|

With battle lines deeply dug in over so many recent rules, two new studies are important, timely reminders that rewriting rules doesn’t always mean eviscerating rules. Sometimes, it’s a vital corrective to unintended consequences all too evident as proposals turn into rules that turn into a new, destructive market dynamic. It might seem to make nothing more than common sense to recognize that rules need reconsideration, but as the occasional victim of diatribes following what I thought were just pragmatic recommendations, it’s reassuring to see a study from one of the current rules’ architects, Daniel Tarullo, and another from the Fed lay out the need for meaningful revisions to two high-impact rules: big-bank stress tests and – just in time for still more of them – liquidity rules.

First to Mr. Tarullo’s paper. In addition to being the instigator of much in the Dodd-Frank Act and the rules thereafter, Mr. Tarullo inaugurated big-bank stress tests in 2009. Banks then denounced them, but they weren’t exactly in the best of bargaining positions after the 2008 great financial crisis. So, stress tests began as an urgent reality check. But, proving the regulatory-rewrite point, over a decade later they took on a new purpose in concert with still more importance by virtue of the new stress capital buffer inexorably and often ineffectively linking stress testing to the bank regulatory requirements that barely existed in 2009.

In 2009, we needed stress tests because capital rules were essentially toothless. Capital rules are now fanged …

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 …

29 01, 2024

Karen Petrou: The Risks New Capital Rules Can’t Cure

Shane Smith2024-01-29T09:29:45-05:00January 29th, 2024|The Vault|

Part one of my end-game assessment was last week’s memo laying out the growing odds that the agencies will be forced to issue a new proposal which hopefully makes better sense than the current one. Part two here points out how the agencies have so tightly wrapped themselves around the capital rule’s axle that they are unable to see how many even more critical challenges are going unaddressed. Risks overlooked are often risks even the toughest capital rules cannot contain because the cost of new capital rules actually contributes to the arbitrage and risk-migration accelerating the pace of systemic-risk transformation. This is a negative feedback loop if ever there were one.

The new capital rules will be outdated by the time they are finalized because financial institutions of all persuasions will take advantage of every bit of regulatory-arbitrage opportunity within and across borders. That the banking agencies and FSOC aren’t even thinking about how this might happen makes it still more likely that they will. This is not to say that no changes to capital rules are warranted. Some changes are overdue, but capital rules crafted in a vacuum will not stand up to real-world circumstance.

The collective book reports issued by the Federal Reserve in its semi-annual systemic forecast and the FSOC’s annual reports are remarkably backward-looking. Focused more on not saying anything too frightening and bolstering ongoing initiatives, these tomes have long been and sadly still are poor auguries of risks to come perhaps all too soon.

Even …

8 01, 2024

Karen Petrou: Reflections on Regulatory Failure and a Better Way

Eliza Allen2024-01-08T11:25:21-05:00January 8th, 2024|The Vault|

Earlier today, we released our 2024 regulatory outlook, a nice summary of which may be found on Politico’s Morning Money. As I reviewed the draft, I realized how much of what the agencies plan is doomed to do little of what has long been needed to insulate the financial system from repeated shock. This is a most wearisome thought that then prompted the philosophical reflection also to be found in this brief. It asks why lots more bank rules do so little for financial resilience yet are always followed by still more rules and then an even bigger bust. I conclude that financial policy should be founded on Samuel Johnson’s observation that, “when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.” That is, redesign policy from one focused on endless, ever-more-complex rules spawning still larger bureaucracies into credible, certain, painful resolutions to concentrate each financial institution’s mind and that of a market that would no longer be assured of bailout or backstop.

We know in our everyday lives that complex rules backed by empty threats lead to very bad behavior. For example, most parents do not get their kids to brush their teeth by issuing an edict reading something like:

It has long been demonstrated that brushing your teeth from top to bottom, tooth-by-tooth, flossing hereafter and using toothpaste meeting specifications defined herein will achieve cleaner teeth, a brighter smile, improved public acceptance of the tooth-bearer, and lower cost to …

11 12, 2023

Karen Petrou: Unicorns, Zombies, and Capital Regulation

Eliza Allen2023-12-11T10:23:04-05:00December 11th, 2023|The Vault|

As was again clear at last week’s Senate Banking hearing, credit availability is much on the mind when it comes to LMI communities and small business. This makes a good deal of sense given the capital proposal’s unintended consequences, but it’s only part of the story. When start-up ventures are unable to get bank loans, they turn to the capital market. This is often necessary due to the start-up’s risk, but in recent years it’s also been driven by hundreds of billions of investor dollars desperately chasing higher yields as the Fed year-in, year-out kept real rates below zero. Now that rates are finally, really positive, yield-chasing funds have evaporated. As the New York Times made clear, unicorns have turned into zombies. Some of the walking dead deserved to die long ago, but the flood of capital-markets funds exiting this sector also strands ventures that could and should have been vital innovators. Had these entities been buoyed by bank loans as soon as they were viable, many would still be walking.

Not every zombie is an innovator we’ll sorely miss. Many bet big on not-so-critical products such as still more scooters. However, one sector left high and dry – early-stage biomedical research – is literally a matter of life and death.

In February of 2021 when the economy was growing but real yields were negative, the total enterprise value of approximately 700 publicly-traded biotechs was $598 billion. As of the latest data, this is down to $213 billion …

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.…

20 06, 2023

Karen Petrou: Our Baffled, Befuddled Central Bank

Eliza Allen2023-06-20T14:47:39-04:00June 20th, 2023|The Vault|

After SVB failed, Jay Powell told his monthly press conference that he found this “baffling” even though the Fed was the lead bank supervisor and the only one charged with its BHC’s oversight. At Wednesday’s presser, Mr. Powell took a different, but still-indefensible tack avoiding responsibility for a looming threat by stoutly denying his ability to do anything about nonbank financial-stability risk. However, the Board has an express mandate under the Dodd-Frank Act to address it. To be sure, the Fed does not have direct regulatory authority over nonbanks as it now remembers it did over SVB. But to say that the Fed’s only power is over banks as he Wednesday did is at best befuddled. A baffled, befuddled central bank is a national – indeed global – hazard.

Of course, perhaps Mr. Powell isn’t befuddled and instead wants to ensure that a crisis he claims the Fed can’t avert isn’t one that damages its already-scant credibility. This wouldn’t be the first time the Fed defended itself at the expense of sound policy, but that makes it no less inexcusable. I’ll have more to say about this in a talk on the 28^th, but last week’s memo looks at just one threat to financial stability and what the Fed could readily do to combat it.

The threat comes from the $1.4 trillion private-credit market’s ambition to use its regulatory-arbitrage advantage to morph into a $40 trillion fixed-income sector. Mr. Powell says all he can do …

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 …

1 05, 2023

FedFin Analysis: GAO Slams FRB, FDIC Supervision

Arezou Rafikian2023-05-03T15:37:21-04:00May 1st, 2023|The Vault|

Following our analyses of the Fed’s report on SVB (see Client Report REFORM221) and the FDIC’s on SBNY (see Client Report REFORM222), we turn now to one from the General Accountability Office sure to have at least as much impact on bipartisan consideration of what needs next to be done to govern regional banks. HFSC Chairman McHenry (R-NC) has already cited the GAO report in his rebuttal to those from the banking agencies, and it may well have tempered Senate Banking Chairman Brown’s (D-OH) support of a focus solely on new law and rule.

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

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