#Trump

3 03, 2025

Karen Petrou: The Casualties of Slash-and-Burn Regulatory Rewrites

Eliza Allen2025-03-03T10:54:41-05:00March 3rd, 2025|The Vault|

There’s no doubt that many U.S. institutions have grown such long teeth over the years that they bit themselves in the foot. As a result, radical reform challenging conventional wisdom is long overdue. But, there are two ways to do this: the break-first/fix-later approach taken by the Trump Administration in biomedical research and other vital arenas; the other is to think first, then act decisively within the boundaries of current law or the better ones you demand. Radical reform to U.S. biomedical research is already leaving near-term treatments and cures on the cutting-room floor. If slash-and-burn transformation is also applied to financial-services supervision and regulation, systemic-risk guardrails could be unintentionally, but dangerously, dismantled.

The risks to biomedical research are not so much in what the Trump Administration has done, but that it’s more often than not done retroactively regardless of contractual commitments for continuing funding authorized under longstanding appropriations and by frenetic, indiscriminate firings of well-performing staff. You simply can’t suddenly stop a clinical trial without endangering patients and putting treatments years behind, if they continue at all. You also can’t stop basic biomedical research all of a sudden without leaving labs with a lot of mice, dogs, and primates to feed and no money for kibble. It also takes years to train good biomedical researchers; suddenly firing thousands of them endangers this pipeline and, with it, treatments and cures.

Biomedical research and financial-system governance have little in common, but leaving financial policy in tatters will also have unintended consequences …

24 02, 2025

Karen Petrou: How the White House Could Have Fun with the Fed

Shane Smith2025-02-24T09:11:47-05:00February 24th, 2025|The Vault|

President Trump has an awesome ability to keep even his closest allies perplexed by nonstop announcements that often break precedent, accepted norms, and even the law. Just as opponents begin to rally against one initiative, the White House launches another, sending dissenters off in a different direction, leaving the actions they initially targeted unchanged or even forgotten. Still, several policy themes are coming through loud and clear through all these different actions that have far-reaching financial-market cumulative impact. One is the sheer volatility all this chaos creates; another to which I turn here is the President’s sure and certain effort to make the Federal Reserve a tool of the executive branch, going beyond setting interest rates to turn it into America’s sovereign wealth fund.

As we noted, The President’s executive-order barrage includes one demanding a U.S. sovereign wealth fund (SWF). The tricky bit here is not the lines that would quickly blur between public and private enterprise, an historic U.S. economic principle that won’t slow Mr. Trump down for a minute. Instead, it’s where the money funding the SWF comes from given the lack of a nationalized commodities enterprise such as Norway’s and the Administration’s hell-bent campaign to reduce the federal deficit. Solution? The Fed.

U.S. law is seemingly an obstacle to deploying the Fed as an SWF since it allows the Fed to hold only direct obligations of the U.S. Treasury and its agencies as well as – a Fed sleight of hand in the 2008 crisis – Fannie …

10 02, 2025

Karen Petrou: Payment-System Politics and the Havoc It Wreaks

Shane Smith2025-02-10T09:16:53-05:00February 10th, 2025|The Vault|

Any bank that granted even just “read-only” access to its payment services with as few controls as the U.S. Treasury would and should be harshly sanctioned by its supervisors. Who steps in to ensure the smooth functioning of the multi-trillion Treasury payment system? Do any of Mr. Musk’s operatives know what would happen if they pulled the wrong plug and disabled critical payments on U.S. debt or to American citizens such as those for Social Security? And, what if they don’t care if they disrupt payments if they believe this suits a political purpose?

When I wrote my memo last week hoping that these fears are alarmist, we didn’t know then what we know now about unlimited payment system access by a key DOGE warrior since named to head the Fiscal Service and the youth, inexperience, and dubious histories of the payment-system teams. Do any of them know that payment-system finality is an essential element of payment-system credibility and financial-system stability or do they view the payment system as a video game with a prize for the team member who finds the target that rings the loudest political bell? Do any of these Trump appointees know that making even a little mistake could be catastrophic in a system handling trillions of dollars in billions of transactions or are they looking for viral moments on encrypted social-media platforms so they become the envy of like-minded young men?

As FedFin noted last week, what Congress and the press took as a pledge …

3 02, 2025

Karen Petrou: Why Playing with Treasury’s Payment System is Playing with Fire

Shane Smith2025-02-03T09:04:54-05:00February 3rd, 2025|The Vault|

In just two weeks, Donald Trump has done something no one ever expected which he may not even intend: overturning the axiomatic expectation that a full-faith-and-credit obligation of the United States government is the best there is. Now, the U.S. will honor its commitments only if it still likes them. Anything that upends financial-market axioms stokes systemic risk and stoking is now so heated that it threatens even the multi-trillion Treasury market on which U.S. prosperity and global financial stability depend.

Is this alarmist? Yes, but then who would have thought the White House would issue an edict freezing all federal funding or maybe just some federal funding even though more than just some federal funding was frozen? Who would have thought the U.S. would cease all but a very few foreign-aid payments including those with other sovereign governments no matter which geopolitical or humanitarian interests are sacrificed? Even if some of this was audible on the campaign trail, none of it was thinkable to anyone counting on constitutional checks and balances along with a sound sense by someone in the White House of second-order effects.

It is in this context that one more Trump Administration action is particularly worrisome and why I fear even for the once-sacrosanct promise that the U.S. will not just honor its commitments, but also pay its bills. Elon Musk’s acolytes at DOGE have now been granted unfettered access to the Treasury payment system. Why?

Maybe it’s just curiosity or maybe DOGE wants to update …

27 01, 2025

Karen Petrou: Why It is Hard to Damn Debanking

Shane Smith2025-01-27T09:07:41-05:00January 27th, 2025|The Vault|

As we noted last week, one of the next executive orders flying off the resolute desk in the Oval Office is likely to demand an end to debanking. In sharp contrast to the executive orders eviscerating DEI, the independent banking agencies need not follow a presidential debanking order. This affects their independent safety-and-soundness powers unlike personnel policy subject to the Executive Branch. But, independent or not, the banking agencies are nothing if not politically aware and at least two of the three agencies are also now politically-aligned with the president. It’s thus not a question of whether there will be anti-debanking standards, but rather what they do to banks trying to make a buck.

Wanting debanking doesn’t mean that getting debanking will be easy or inconsequential to the thousands of banks that never consciously debanked a dollar’s worth of deposits. One of the thorniest debanking problems derives from the fact that banks and other financial companies quite properly make business decisions based on qualitative factors, not just the quantitative ones on which anti-debanking efforts relied. Some of these qualitative factors are quite simply what makes some bankers better bankers than other bankers when it comes to decisions about whom to serve how based on expectations of future profitability. As history all too often proves, strategic insights are often at least as subjective as quantifiable.

Banks have also long chosen not to serve complex businesses that require costly underwriting and risk-management capacity unless they have the economies of scope and scale …

6 01, 2025

Karen Petrou: Oval Office Bluster at a Time of Fed Confusion

Shane Smith2025-01-06T09:08:37-05:00January 6th, 2025|The Vault|

There is no doubt after last year’s last-minute debacle that U.S. fiscal policy is in still tinier tatters. But, unnoticed so far is the still greater danger of confused fiscal policy combined as it now is with feckless monetary policy. An economy resting on fiscal- and monetary-policy disarray is an economy at grave risk that sure-and-certain volatility will break through fragile guardrails. Strained financial systems could then quickly compound the inflationary pressures likely from Trump trade and fiscal policy along with an array of supply-chain and employment risks. And these are just the slow-burning hazards. What happens if the financial system is shocked?

Although there has long been much about Fed policymaking that strains credulity, global financial markets have looked to the Fed as to a star in the East. After 2008, markets had so much faith in the Fed that it was rightly dubbed “the only game in town” in a highly-influential 2016 book. Now, though, investors and traders are increasingly fearful that, while the game based on Fed actions is still being played with its usual ferocity, there’s no longer an umpire or safety net.

Like adolescents suddenly facing the fact that parents are far from infallible, markets have had a rude, hard awakening in 2024’s last quarter. Much has been written in recent weeks about the Fed’s steadfast assertion that it’s “data-driven” even as its decisions veer wildly from easing to tightening and back again. That a stalwart Democratic economist recently endorsed longstanding Republican calls for …

16 12, 2024

Karen Petrou: The Likely Banking-Agency Rewrite

Shane Smith2024-12-16T09:09:18-05:00December 16th, 2024|The Vault|

Will the Trump Administration and an agreeable Congress really make sense of U.S. bank regulation? I’m not sure that what they do will indeed make sense, but there’s so little sense in the current system that I’m confident they’ll have no qualms about vaunting the institutional barricades that have thwarted due-process reformers since a Senate Banking chair proposed to create a “Federal Banking Commission” in the early 1980s. Little in the U.S. regulatory colossus is in as much need of creative disruption as banking; the tricky bit will be to ensure that tearing down the current framework doesn’t leave it in ruins.

One reason for decades of inaction is the federalist structure of U.S. bank regulation, which allows for choice among a federal, state, or hybrid (state member) charter. Whatever is done to federal bank regulation and federal charters, there is no way Congress will even try to redesign the state-based option. It might expand preemption, but that’s as far as even this group of radicals will go because Congress will not allow each Member’s state to lose much in the federal reform many of them otherwise want.

Congress will also tread softly on one political demand: that from small banks for a regulator more likely to listen to their pleas. Right now, that’s the FDIC, which owes its supervisory role over the decades to small banks despite numerous grievous FDIC mistakes along with the agency’s tunning inability to resolve banks bigger than a bread box.

New leadership may remove …

9 12, 2024

Karen Petrou: Do We Need the Financial Stability Oversight Council?

Shane Smith2024-12-09T09:17:27-05:00December 9th, 2024|The Vault|

On Friday, the Biden Administration’s FSOC proved yet again that it deserved Rohit Chopra’s dismissive description as a “book report club.” As far as we can tell, all it has done for all of the last four years is issue some nice papers about digital assets and the payment system about which nothing was ever done and put forth dutiful annual reports along with two new systemic-designation standards with which it has since done absolutely nothing. We’ll take our usual look at this year’s annual report, but it will be even less relevant than usual because FSOC is likely to do at least as little in Trump 2.0 as it did with its own recommendations during Trump 1.0. Given this sorry record, should the Department of Government Efficiency eviscerate the Council?

Sure, why not if all FSOC plans to do is as meaningless as all is town over the past eight years. Still, Congress wasn’t wrong when it created a Council designed to force communication across super-siloed regulators and to look hard at nonbanks outside their reach. Indeed, as nonbanks increasingly dominate core intermediation and infrastructure functions, a forward-looking, effective FSOC would be a vital safeguard against market success derived principally from regulatory arbitrage.

Effective system-wide governance is not impossible. Late last month, the Bank of England showed what can and should be done to address systemic risk. Using the Bank’s authority to govern across the financial industry, it released a “System-Wide Exploratory Scenario” (SWES), essentially a financial-system wide stress …

25 11, 2024

Karen Petrou: Why the World Needs a Financial Stability Board That Isn’t This Financial Stability Board

Shane Smith2024-11-25T09:04:12-05:00November 25th, 2024|The Vault|

Donald Trump often upends conventional neoliberal wisdom, but one of the seemingly most frightening things the President-Elect espouses is contempt for the global order embodied in bastions such as the Bretton Woods international financial institutions, NATO, the UN, and the World Trade and Health Organizations. A less-known archetype of right global-order thinking is the Financial Stability Board. It has so far been spared by Mr. Trump, likely only because it has yet to come to his attention. Moving out ahead, two House Republicans vying for HFSC Chair are already insisting that each will, Samson-like, pull down the FSB’s banking, insurance, and securities pillars. Will the global financial system crumble to the lowest common denominator as FSB advocates proclaim? I doubt it. Indeed, shaking global financial standard-setters out of their well-stocked echo chamber could actually do global finance a world of good.

Like all the other global-order monuments, the FSB was founded with the very best of intentions. The 2008 crisis and warning tremors in the late 1990s proved at grave cost how financial earthquakes know no borders. What better than a new body of global financial standards akin to those that keep cross-border telecommunications humming to protect global banking, insurance, securities, commodities, and payments? And thus, the G20 brought forth the FSB in 2009.

The FSB promptly did the best it could as quickly as it could not only to ramp up subgroups such as a renewed Basel Committee, but also to tackle the absence of resolution protocols for the …

18 11, 2024

Karen Petrou: Why Banks Need More Than Just New Capital Rules

Shane Smith2024-11-18T09:27:52-05:00November 18th, 2024|The Vault|

Bankers complain with considerable fervor about a “tsunami of new rules.” There has certainly been a flood of standards indirectly implemented by supervisors, simply demanded by the CFPB, proposed, and finalized. It’s thus understandable that bankers think they’re drowning. But, as forest fires rage in Brooklyn and much of the nation is conserving water, it’s important to recall that too little rain is also dangerous. Which brings me to the strategic hazard banks run if deregulation, while alleviating a bit of bank burden, leaves untouched all the regulatory asymmetries that make it easy for shadow banks to dominate still more profitable activities once considered core banking services. If shadow banks offer better products, so be it. However, much of their market power derives only from adroit regulatory arbitrage. That’s not just bad for banks; it’s also dangerous to financial consumers, investors, and stability.

Regulators can go only so far in easing banks’ burden because the law requires many of the rules that bind them. Nonbanks are not governed by much federal law and there are scant state safety-and-soundness standards. Tech-platform companies are outside the law unless federal regulators use their inter-connection and antitrust powers to rein them in. That these nonbanks have their eyes on core intermediation and payment services is now indisputable. That banks will end up as little more than bedraggled “partners” or ancillary-service providers to nonbanks is inevitable unless necessary bank-regulatory reform comes with long-overdue nonbank safety-and-soundness and resolution standards.

Our forecasts of financial policy under President …