#SVB – Federal Financial Analytics

6 03, 2024

DAILY030624

Eliza Allen2024-03-06T16:51:12-05:00March 6th, 2024|2- Daily Briefing|

Bowman Renews Tailoring Defense

In dinner remarks last night, FRB Gov. Bowman argued that tailoring is a “grounding principle” of bank regulation ignored in the pending capital rules and final climate guidance (see FSM Report CLIMATE17), standards she also said are intended to allocate capital, not ensure effective supervision.

GAO Reviews Fed, FDIC Supervisory Practices

The GAO today issued a report examining the Fed and FDIC’s communication and escalation of supervisory concerns towards SVB and Signature prior to their collapse, finding that a lack of clarity and specificity in the Fed’s enforcement procedures contributed to delays in escalation towards SVB.

Scope 3 Removed From Final SEC Climate Disclosure Rule

The SEC today voted 3-2 to finalize its 2022 climate-risk disclosure proposal, opting to remove its controversial Scope 3 provisions.

Daily030624.pdf…

23 02, 2024

AL022624

Arezou Rafikian2024-02-23T16:40:22-05:00February 23rd, 2024|3- This Week|

Anniversary Party

March 10 is the one-year anniversary of Silicon Valley Bank’s costly failure, although one might better date the beginning of the end of regional-bank regulation as we knew it to March 8, the date Silvergate bit the digital dust. Congress has talked much of these failures ever since, but actually done nothing but chide the banking agencies from different sides of the political spectrum based on what Members think of the massive regulatory rewrite proposed in SVB’s wake and ongoing internal work at the banking agencies to improve woefully-inadequate supervision. We would add the value also of focusing on the FDIC’s inability to resolve troubled banks to the urgent to-do list, but Congress has yet to turn to it and so neither does the FDIC. Still, lack of action does not mean lack of talk. There will in fact be much, much talk about recent failures when Chair Powell comes to Congress next week and even, we expect, a bit of legislative action that just might change a little bit of banking law.

Al022624.pdf…

23 02, 2024

Daily022324

Arezou Rafikian2024-02-23T16:39:26-05:00February 23rd, 2024|2- Daily Briefing|

FDIC’s OIG: Agency Faces Severe Staffing, Resolution Challenges

The FDIC’s Office of the Inspector General (OIG) late yesterday issued an assessment of ongoing FDIC challenges. These only indirectly address the workplace-culture inquiry now gripping the agency and Congress, focusing principally on the extent to which the agency has made progress addressing the significant internal failings identified in its reports on Signature Bank’s failure (see Client Report REFORM222) and that of First Republic.

Progressive Dems Argue that De-Risking is Discriminatory

Late yesterday, Sens. Warren (D-MA) and Sanders (D-VT) alongside Reps. Omar (D-MN), Tlaib (D-MI), and Pressley (D-MA) sent letters to the heads of JP Morgan Chase, Wells Fargo, Bank of America, and Citibank criticizing the banks for what they describe as shutting down consumer accounts as part of AML de-risking practices. Calling this harmful to consumers and a threat to equitable access, Muslim-Americans and other minority communities are said to be disproportionately affected in violation of Treasury policy.

Basel Head Continues Capital-Reg Defense, Work on NBFI Standards

The head of the Basel Committee, Pablo Hernández de Cos, today reiterated his defense of the global capital rules, spending much of the talk arguing against those seeking to roll them back and those who consider bank capital “idle money.” The talk also emphasized the inter-connected risk to banks highlighted by new exploratory Fed stress tests (see Client Report STRESS32), Acting Comptroller Hsu’s speech earlier this week, and FSOC’s systemic methodology (see FSM Report SYSTEMIC98), noting …

16 02, 2024

DAILY021624

Eliza Allen2024-02-16T15:55:14-05:00February 16th, 2024|2- Daily Briefing|

Barr Points to Tough New Fed Supervisory Strategy

FRB Vice Chair Barr today updated FRB efforts to enhance bank supervision since its SVB post mortem revealed severe failings (see Client Report REFORM221). Various internal efforts are under way, but the talk indicates no specific new initiatives beyond far greater focus on near-term CRE risk with an eye in particular to adequate provisioning. The System is now improving supervisory rigor, coordination, and escalation protocols, with Mr. Barr also laying out how Fed supervision has become significantly more rigorous in the last year.

CFPB Report Continues Credit Card Attack

Buttressing its controversial credit-card late-fee proposal (see FSM Report CREDITCARD36), the CFPB today issued a report finding that the 25 largest credit card issuers charged interest rates eight to ten percentage points higher than small-and-medium-sized banks and credit unions. The report states that higher rates among large issuers persist across credit scores, with large issuers also more likely to charge annual fees.

House GOP Tries to Speed Bank M&A

Following up a letter sent to the federal banking agencies in October, HFSC Financial Institutions Subcommittee Chair Barr (R-KY) and Rep. Fitzgerald (R-WI) today introduced the Bank Failure Prevention Act, a bill to require the Federal Reserve to act on bank merger applications within ninety days. The bill would also require the central bank to acknowledge the application’s completion within thirty days, with approval automatically granted for any application not serviced within the ninety-day window.

Daily021624.pdf…

29 01, 2024

M012924

Shane Smith2024-01-29T15:16:08-05:00January 29th, 2024|6- Client Memo|

The Risks New Capital Rules Can’t Cure

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.

m012924.pdf…

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

M010824

Eliza Allen2024-01-08T11:25:26-05:00January 8th, 2024|6- Client Memo|

Reflections on Regulatory Failure and a Better Way

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.

m010824.pdf…

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 …

12 12, 2023

DAILY121223

Eliza Allen2023-12-12T17:09:22-05:00December 12th, 2023|2- Daily Briefing|

IMF Calls for Enhanced Climate-Risk Analyses, Stress-Testing

Calling for implementation of the Basel Committee’s climate-related financial risk principles (see FSM Report CLIMATE14), the IMF’s Monetary and Capital Markets Department Director, Tobias Adrian, today pressed central banks to enhance their climate risk analyses and adapt stress-testing frameworks to better reflect climate-financial risk transmission and amplification channels.

Agencies Come Under Still More Workplace-Practice Scrutiny, Political Pressure

As we noted last week, House Republicans are now using ongoing assertions of FDIC workplace dysfunction to attack the OCC.

HFSC Subcomm Considers Sanctions Enforcement

Today’s HFSC National Security Subcommittee hearing focused primarily on critiques of US energy sanctions enforcement related to Russia, Iran, and Venezuela.

House Select Committee Calls on Fed to Stress Test China Risk

The House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party today released a bipartisan report urging Congress to direct the Fed to stress-test U.S. banks for their ability to withstand Chinese market risk, produce classified reports on these assessments, and consider the financial market impact of potential sanctions on Chinese financial firms.

Basel Proposes Modest Fix to IRR Standards, Post-SVB Revisions Await

As anticipated, the Basel Committee today released a consultation revising global interest-rate risk (IRR), standards updating current banking-book standards (see FSM Report IRR7) to toughen the IRR-shock calibration.

McKernan Extends Capital Olive Branch

FDIC Director McKernan today offered an end-game compromise that might actually lead to final rules in 2024 that defer some of the …

11 12, 2023

M121123

Eliza Allen2023-12-11T10:22:58-05:00December 11th, 2023|6- Client Memo|

Unicorns, Zombies, and Capital Regulation

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.

m121123.pdf…