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8 08, 2023

FedFin on: Equity and Securitization Capital Standards

2023-08-08T13:44:33-04:00August 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

2023-08-08T10:52:38-04:00August 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

2023-07-12T17:05:21-04:00July 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

2023-04-10T17:27:00-04:00April 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

2023-03-29T17:30:21-04:00March 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

2023-04-03T12:48:36-04:00March 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

2023-03-28T11:42:40-04:00March 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

27 03, 2023

M032723

2023-03-27T10:27:26-04:00March 27th, 2023|6- Client Memo|

Another SVB Casualty:  U.S. Biomedical Research

As seems always the case when fear has the banking system in its maw, myths have proliferated that are now also magnified and amplified by viral social media.  One such myth about Silicon Valley Bank has it that most of its depositors were high-wealth, high-tech folk whom the government should never bail out.  In fact, many depositors had no choice but to park all their funds at SVB, a more-then-dubious practice at the bank that almost brought biomedical research to its knees.  Had these depositors been forced to bear losses, treatments and cures for life-threatening and-changing diseases would have stalled, likely for years.  We need not only to prevent future researchers from being put at such risk by a single bank, but also to change the biomedical-funding model from one at the mercy of high-cost equity investors to a stable sector for which lower-cost debt is readily at hand for any researcher with demonstrable ability to repay.  Think what debt funding did for sustainable energy via green bonds and you’ll see what a like-kind model for “biobonds” could do to speed urgently-needed treatments and cures.

M032723.pdf

27 03, 2023

Karen Petrou: Another SVB Casualty:  U.S. Biomedical Research

2023-03-27T10:27:35-04:00March 27th, 2023|The Vault|

As seems always the case when fear has the banking system in its maw, myths have proliferated that are now also magnified and amplified by viral social media.  One such myth about Silicon Valley Bank has it that most of its depositors were high-wealth, high-tech folk whom the government should never bail out.  In fact, many depositors had no choice but to park all their funds at SVB, a more-then-dubious practice at the bank that almost brought biomedical research to its knees.  Had these depositors been forced to bear losses, treatments and cures for life-threatening and-changing diseases would have stalled, likely for years.  We need not only to prevent future researchers from being put at such risk by a single bank, but also to change the biomedical-funding model from one at the mercy of high-cost equity investors to a stable sector for which lower-cost debt is readily at hand for any researcher with demonstrable ability to repay.  Think what debt funding did for sustainable energy via green bonds and you’ll see what a like-kind model for “biobonds” could do to speed urgently-needed treatments and cures.

The link between SVB and biomedical research is not the stuff of moral-hazard myth, but rather a complex tale of a specialized institution serving a sector that came to hold unique sway over a vital public good:  lengthening life and easing suffering.  Providing banking services to venture capital (VC) is a high-risk business unless a financial institution devotes expensive intellectual capital to the sector and …

20 03, 2023

FedFin Analysis: Possible Cures for a Viral Run

2023-03-20T16:12:34-04:00March 20th, 2023|The Vault|

Among the most vexing issues in the wake of SVB’s failure is the extent to which social media may have led to the first “viral run,” a run akin to the meme-stock volatility that lead the SEC and others to fear a new form of “flash-crash” risk.  In this report, we assess current policy options related to deposit runs resulting from social media, an issue cited frequently by HFSC Chairman McHenry (R-NC) as a top priority as he begins work on post-SVB financial standards.  We note some remedies – e.g., a ban on deposit-related communication were they permissible under various constitutional and statutory free-speech edicts.

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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