#TLAC – Page 3 – Federal Financial Analytics

17 05, 2023

REFORM225

Eliza Allen2023-05-17T16:03:47-04:00May 17th, 2023|5- Client Report|

HFSC Subcommittees Plow More Ground for Supervisory Accountability, Capital Reform, Clawbacks

A joint hearing today of HFSC’s Financial Institutions and Oversight Subcommittees expanded on themes at yesterday’s full Committee session with bank regulators (see Client Report REFORM224) and Senate Banking’s session with SVB’s and SBNY’s CEOs, with First Republic’s CEO now added to the Congressional firing line. Much in this session repeated prior themes, with Rep. Dave Scott (D-GA) going beyond prior, sharp criticism to accuse SVB’s CEO of being the worst CEO in U.S. financial history. Democrats demanded that he give up the bonus he received the day SVB failed and he went to Hawaii, receiving little satisfaction on this score and continuing demands for clawback legislation. Rep. Bill Foster (D-IL) continued to argue that contingent-capital instruments would ensure smooth resolutions, a position he said is shared by Chairman McHenry (R-NC) even though it supports a controversial Fed/FDIC proposal for regional-bank TLAC (see FSM Report RESOLVE48).

REFORM225.pdf…

16 05, 2023

DAILY051623

Eliza Allen2023-05-16T17:44:43-04:00May 16th, 2023|2- Daily Briefing|

Hsu Presses Reg Harmonization, Resolution Reform, Merger-Policy Rewrite

We now add our assessment of Acting Comptroller’s Hsu’s testimony to our analyses of those from Messrs. Barr and Gruenberg ahead of HFSC’s hearing later this morning.

Yellen Says White House Supports Community-Bank Exemptions

Speaking today to the ICBA, Secretary Yellen today joined the parade of policy-makers affirming the national importance of community banks.

JEC GOP Counter FRB on SVB Causality

JEC Republican staff today released a memo finding that tailored liquidity rules did not contribute to SVB’s failure, a contrast to the FRB’s SVB report (see Client Report REFORM221).

LLPAs Set for GOP Frying Pan

The majority-staff memo for tomorrow’s Housing Subcommittee hearing makes it clear that, as anticipated, the sole topic will be FHFA’s controversial LLPAs and related GSE pricing.

Senate Banking: Tough Grilling For Failed-Bank CEOs, Growing Consensus For Clawback Bill/Tough Rules

As predicted, today’s Senate Banking hearing with the CEOs of SVB and SBNY was a feisty session in which Democrats built their case for executive clawback legislation and the failed bank executives defended management while repeatedly placing blame on what they called an “unprecedented series of events.”

Daily051623.pdf…

17 04, 2023

M041723

Eliza Allen2023-04-17T12:01:55-04:00April 17th, 2023|6- Client Memo|

Why FDIC Privatization Isn’t a Pipe Dream

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.

M041723.pdf…

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 …

3 04, 2023

REFORM219

Eliza Allen2023-04-03T11:07:12-04:00April 3rd, 2023|5- Client Report|

FedFin Forecast: Probable Changes to Bank Supervision, Regulation, Law

With Thursday’s White House announcement, we know that the Administration will do its best to support Fed and FDIC efforts to color recent events as a failure of Republican-led rulemaking, not also one of agency supervisory acumen, speed, and even competence. So far, key Democrats are instead pursuing a two-track strategy: complaining mightily about Trump-era rules but also joining with Republicans to cite an array of supervisory lapses they want quickly remediated by new standards, new rules, and – if need be – also by new law. Indeed, on Friday, Democrats made it clear that they want considerably more from the Administration than the fixes on which the agencies prefer to focus. Given how much is in motion and how much could advance, this report details FedFin’s forecast for near-term action in each of these arenas, focusing on matters with broad industry impact rather than specific SVB/Signature- enforcement issues. We thus provide forecast for immediate supervisory actions, those Congress will demand, new rules (tailoring and beyond), and the few legislative initiatives we believe have a reasonable chance of passage and Presidential approval.

REFORM219.pdf…

30 03, 2023

DAILY033023

Eliza Allen2023-03-30T17:27:30-04:00March 30th, 2023|2- Daily Briefing|

Yellen Calls for Bank, Nonbank Regulatory Rewrite

Implicitly confirming press reports that the White House will soon press for tougher bank rules, Treasury Secretary Yellen today said that, as beneficial as the rules imposed since the great financial crisis have been, more stringent standards are necessary.

Hsu Sets Dual OCC Mission: Safety, Fairness

In remarks today, Acting Comptroller Hsu emphatically echoed statements of other top regulators that the banking system is safe and sound, emphasizing that the OCC is monitoring the market and is prepared to use its tools to protect the system.

Basel Updates Global Liquidity, Operational Standards

Although the U.S. has still not even proposed the Basel IV “end-game” standards, the Basel Committee continues to refine them and today issued its latest set of FAQs.

White House Sets Reg-Reform Agenda

As anticipated early this morning, the White House has issued a statement calling on federal banking agencies to roll back rules the President describes as weakening “common-sense bank safety and supervision.”

Senate Dems Press Agencies to Strengthen Capital Rules

Following this week’s hearings (see Client Report REFORM218), Sens. Warren (D-MA), Blumenthal (D-CT), and Duckworth (D-IL) sent a letter to Vice Chair Barr, Chairman Gruenberg, and Acting Comptroller Hsu urging them to strengthen large-bank capital requirements.

CFPB Stands By Its Small-Business Reporting Rules

Despite strong industry and GOP opposition, the CFPB today finalized its small business data collection rulemaking in a sweeping final rule the Bureau says will increase transparency in small business lending, promote economic …

28 03, 2023

DAILY032823

Eliza Allen2023-03-29T12:03:14-04:00March 28th, 2023|2- Daily Briefing|

CFPB Expands Scope of State Law

Reaffirming its preliminary determination, the CFPB today concluded that business-loan disclosure laws in several states are not preempted by TILA. This continues the Bureau’s reversal of prior preemption determinations from the OCC that gave national banks considerable protection from more stringent state standards. The grounds on which the CFPB did so in this case are that TILA is expressly intended for consumers and those state laws now allowed to stand cover businesses and “entrepreneurs” who are not consumers.

Global Regulators to Review Resolution Process

In an unusual plenary statement following a previously-scheduled meeting today, FSB members stated that recent events warrant review of the global resolution framework. The statement is brief and does not indicate how or when this might proceed, but – as noted in our previous report on CS-s failure’s fallout (see Client Report GSIB21), we expect a hard look at TLAC as well as renewed interest in ring-fencing.

Daily032823.pdf…

22 03, 2023

FedFin Assessment: GSIB Rules Set For Post-CS Rewrite

Arezou Rafikian2023-03-22T16:34:58-04:00March 22nd, 2023|The Vault|

In this report, we assess the implications of recent events on two assumptions underlying current U.S. and global policy affecting GSIBs and those considered domestic SIBs: first, all are likely to be well insulated from illiquidity and/or insolvency and, when this is not the case, then orderly resolution without taxpayer bailout can be readily deployed. Credit Suisse’s failure and subsequent, subsidized acquisition is just one of the “Minsky moments” rattling regulators and other policy-makers, with the conclusions drawn from all of them surely to lead to significant reevaluation of each of these assumptions. To be sure, CS was an outlier in terms of idiosyncratic culture-and-control problems, but the Swiss regulatory and resolution system is considered reasonably robust, thus making the bank’s failure…

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22 03, 2023

GSIB21

Eliza Allen2023-03-22T10:52:22-04:00March 22nd, 2023|5- Client Report|

FedFin Assessment: GSIB Rules Set For Post-CS Rewrite

In this report, we assess the implications of recent events on two assumptions underlying current U.S. and global policy affecting GSIBs and those considered domestic SIBs: first, all are likely to be well insulated from illiquidity and/or insolvency and, when this is not the case, then orderly resolution without taxpayer bailout can be readily deployed. Credit Suisse’s failure and subsequent, subsidized acquisition is just one of the “Minsky moments” rattling regulators and other policy-makers, with the conclusions drawn from all of them surely to lead to significant reevaluation of each of these assumptions. To be sure, CS was an outlier in terms of idiosyncratic culture-and-control problems, but the Swiss regulatory and resolution system is considered reasonably robust, thus making the bank’s failure a global policy concern. The flood of deposits out of regional banks to the largest U.S. banks also further concentrates the sector, a result the Fed and Department of Justice will view with alarm even though they recognize that recent events are not the fault of the largest banking organizations. In this report, we assess implications for U.S. merger policy, OLA, TLAC, resolution planning, and other standards. See our Client Report RESOLVE49 for a discussion of capital and liquidity standards, Client Report DEPOSITINSURANCE118 for revisions to FDIC thresholds, and Client Report LIQUIDITY33 for run-specific policy actions.

GSIB21.pdf…

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 …