#VC – Federal Financial Analytics

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…

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 …

1 12, 2023

DAILY120123

Eliza Allen2023-12-01T16:39:15-05:00December 1st, 2023|2- Daily Briefing|

Barr Outlines Rationale for LCR, NSFR Rewrite

FRB Vice Chair Barr today reiterated his views that banks must be much better prepared to use the Fed discount-window, this time emphasizing that operational readiness entails regular testing of actual transactions at regular intervals as well as robust collateral pre-positioning.

Reed Presses Synthetic-Securitization Controls

Following his comments at recent hearings (see Client Report REFORM229), Sen. Reed (D-RI) late yesterday sent a letter to FRB Vice Chair Barr, FDIC Chair Gruenberg, and Acting Comptroller Hsu urging them to evaluate CRT transaction risk on financial stability grounds and, should they find an uptick in synthetic securitizations, request public comment on possible remedies to the risks Sen. Reed identifies.

Pending Veto, House Votes Against CFPB

As anticipated (see Client Report CONSUMER53), the House today voted 221 to 202 to authorize Congressional Review Act withdrawal of the CFPB’s small business reporting rule.

OCC Readies Research for Liquidity-Reg Rewrite

Likely readying itself for the raft of new liquidity proposals presaged in Michael Barr’s talk earlier today, the OCC today issued a call for papers on depositor behavior, bank liquidity, and run risk.

Daily120123.pdf…

8 08, 2023

FedFin on: Equity and Securitization Capital Standards

Arezou Rafikian2023-08-08T13:44:33-04:00August 8th, 2023|The Vault|

Based on our analysis of the inter-agency capital proposal’s framework and its credit-risk provisions, FedFin turns now to the proposed approach to equities as well as to that for securitization exposures (i.e., those that are tranched rather than simple secondary-market issuances of packages of loans or other assets backed as needed by a single credit enhancement). The proposal in some cases liberalizes the current, “general” standardized approach (SA), but more often toughens it to account for elimination of the advanced approach…

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

8 08, 2023

CAPITAL232

Eliza Allen2023-08-08T10:52:38-04:00August 8th, 2023|1- Financial Services Management|

Equity and Securitization Capital Standards

Based on our analysis of the inter-agency capital proposal’s framework and its credit-risk provisions, FedFin turns now to the proposed approach to equities as well as to that for securitization exposures (i.e., those that are tranched rather than simple secondary-market issuances of packages of loans or other assets backed as needed by a single credit enhancement). The proposal in some cases liberalizes the current, “general” standardized approach (SA), but more often toughens it to account for elimination of the advanced approach. This will have particular bearing on significant aspects of category III and IV bank activities (e.g., credit-card securitizations, MMF funding), but all covered banking organizations will see significant capital increases as many activities now permitted within the banking book would need to move to the trading book under the new market-risk rules. Securitization-related capital standards are generally brought closer to those for underlying assets in simple securitizations, giving banks more balance-sheet flexibility and credit-risk mitigation opportunities if investors accept these structures. The treatment of equity exposures is generally tightened, sometimes so much as to effectively prohibit certain activities – e.g., non-traditional equity investments in covered funds and BHC subsidiaries. The new treatment of investment funds will also have significant implications for banks that fund themselves through prime MMFs or sponsor investment funds through equity positions.

CAPITAL232.pdf…

12 07, 2023

DAILY071223

Eliza Allen2023-07-12T17:05:21-04:00July 12th, 2023|2- Daily Briefing|

SEC Concedes, Drops MMF Swing Pricing

In a startling bow to industry comments, the SEC today finalized MMF rules for institutional prime and tax-exempt funds that dispense with the proposal’s swing pricing (see FSM Report MMF19).

HFSC Bickers Over ESG, SEC Authority, Investor Rights

Today’s ESG hearing was the partisan show-down we anticipated – indeed, Rep. Sherman (D-CA) denounced the GOP for “waging war” against capitalism like Leon Trotsky.

Fed Nominations Advance

As anticipated, Senate Banking today approved the nominations of all three Federal Reserve Board nominees for the full Senate.

Warren Heightens Anti-Merger Campaign

Republicans were absent today from Senate Banking’s Economic Policy bank-merger hearing. Chair Warren (D-MA) reiterated her strong opposition to virtually all mergers, indicating her plans to reintroduce anti-merger legislation from prior Congresses (see FSM Report MERGER8).

Daily071223.pdf…

10 04, 2023

DAILY041023

Eliza Allen2023-04-10T17:27:00-04:00April 10th, 2023|2- Daily Briefing|

FRB-NY Study: When Franchise Value Flies Out the Window

In a timely Friday post ahead of earnings season, the Federal Reserve Bank of New York’s staff posted an assessment of the impact of higher interest rates on bank franchise value. This is judged by both going concern valuations (i.e., the economic value of equity, known as EVE) and how much tangible common equity (TCE) is left after liquidating a gone concern. Stylized models are developed of “traditional banks” – i.e., those where sticky core deposits constitute most liabilities and assets are principally adjustable-rate – versus “alternative banks” with large holdings of floating rate liabilities along with large books of fixed-rate assets.

Warren, AOC Challenge SVB’s Large Depositors

Following her request and that of Sen. Blumenthal (D-CT), Sen. Warren (D-MA) and Rep. Ocasio-Cortez (D-NY) yesterday sent a series of letters to fourteen of SVB’s largest corporate depositors seeking to get at any abuses that may have precipitated the $42 billion run the day before the bank failed on March 10. The letters thus demand explanations for what they call a “mutual backscratching dynamic,” any actions related to deposit withdrawals, and the rationales behind large uninsured deposits.

Daily041023.pdf…

29 03, 2023

DAILY032923

Eliza Allen2023-03-29T17:30:21-04:00March 29th, 2023|2- Daily Briefing|

Barr Keeps CRA Hope Alive

Ahead of what is certainly going to be a trying HFSC hearing later today, FRB Vice Chairman Barr told an audience that pending CRA rules (see FSM Report CRA32) are still in the works, declining to provide any completion timeline.

Chopra Expands Post-SVB Policy Action Items

In remarks posted after a panel discussion yesterday, CFPB director and FDIC board member Rohit Chopra reaffirmed Chairman Gruenberg’s comments that changes are likely to capital and liquidity rules, but added action related to interest-rate risk management, resolution planning and stress-testing to the to-do list.

Senate Finance Dems Demand Tougher Penalties, Enforcement to Prevent Swiss Tax-Evasion Activities

Senate Finance Democrats today released a damning investigative report accusing Credit Suisse of persistently and often criminally enabling U.S. tax evasion despite a 2014 plea agreement with the U.S. Chairman Wyden (D-OR) presses for additional civil and criminal actions, noting that the UBS acquisition does not “wipe the slate clean.”

Bipartisan Senate Clawback Bill Reaches to BHC Investors, Creditors

Preempting Chairman Brown’s plans to introduce clawback legislation (see Client Report REFORM217), Sens. Warren (D-MA), Cortez Masto (D-NV), Hawley (R-MO), and Braun (R-IN) today introduced their own bill to do so.

CFPB Sets Comment Deadline For Controversial Credit Card Proposal

The Federal Register today includes the CFPB’s proposed rule on Credit Card Penalty Fees.

Daily032923.pdf…

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.…

28 03, 2023

RESOLVE50

Eliza Allen2023-03-28T11:42:40-04:00March 28th, 2023|5- Client Report|

FedFin Assessment: Policy Implications of FDIC-Resolution Innovations

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. A forthcoming FedFin report will assess another issue sure to come up at Congressional hearings: why the FDIC and other agencies used these options in concert with a systemic designation protecting uninsured depositors rather than their OLA powers designed to prevent both uninsured-depositor protection and the most recent of the Fed’s facilities backing the banking system.

RESOLVE50.pdf…