FedFin on: Stablecoin Regulatory Framework
After extensive controversy and debate, the Senate has passed S. 1582, a bill designed to create the federal framework for dollar-denominated stablecoins subject to U.S. law advocates believe are essential to speed innovation, improve the payment system, protect the dollar’s status, and ensure U.S. leadership in cryptoasset policy. Opponents generally do not dispute these assertions about possible stablecoin benefits, but strongly object to asymmetries between how payment-stablecoin providers would be regulated compared to banking organizations even when it comes just to offering these instruments. Concerns are also raised about the extent to which stablecoins would compete directly with bank deposits and disintermediate the economy as well as the extent ….
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Karen Petrou: How to Rewrite the Leverage Ratio
In 2016, FedFin issued a paper urging a radical rethink of leverage capital standards. Good things come to those who wait. Still, why we had to wait so long is hard to fathom given the predicted, manifest systemic problems due to the leverage standards evident as early as 2019 and in the two systemic crises that followed in short order.
What to do? Revisiting rules he once refused to touch, former Fed supervisory-head Dan Tarullo last week argued for an end to the enhanced supplementary leverage ratio (eSLR), with this add-on charge for the largest U.S. banks replaced by higher risk-based standards And tougher treatment of Treasury holdings. Indeed, Mr. Tarullo opposes taking Treasuries, even just short-term ones, out of the leverage denominator, pressing also for continued inclusion of central-bank deposits. A lower SLR, he suggests, captures the risks of these obligations in concert with his proposed capital add-ons.But what risk to central-bank deposits really pose? If they are at the Fed, which holds the vast majority of U.S. central-bank deposits, then these funds are as liquid and robust as the Federal Reserve itself. If the Fed’s no good, then neither is the dollar and much, much else is wrong that even the toughest eSLR cannot fix.
Further, imposing a capital requirement on reserves held at the Fed makes it less likely that banks will be liquid in any form of run or market crisis. The banking agencies could of course again exempt reserves in a crisis just as they did in 2021, but that could also again be too late and, next time, not enough.
Treasury securities do pose risks, but these are not the risk of nonpayment for which credit-risk standards are designed. This is, though, captured by the market-risk rules and interest-rate risk is supposed to be addressed by […]
FedFin on: The Way Out via a Golden Arch?
The President’s Friday executive order and subsequent statements indicate that the President has taken a “golden share” in U.S. Steel as a condition for the long-delayed Nippon acquisition. Might this be the way the White House could maintain control of Fannie and Freddie while monetizing at least some of Treasury’s stake in the two companies? As we show here, it’s not easy, but it’s also not an impossible way to reconcile all the competing objectives sketched out so far by Bill Pulte and the White House….
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Karen Petrou: Why Republicans Want the Fed’s Money
In the iconic movie “Goldfinger,” a murderous thug with a deadly bowler hat chases James Bond around Fort Knox as our hero stops a maniacal plutocrat from making the nation’s gold stock go radioactive. Compared to current gold conspiracies, that almost makes sense. Both President Trump and Elon Musk, among others, have doubted the security of the nation’s gold supply on nothing more than the fact that they haven’t actually seen it. To the rescue last week rode several super-conservative Members of Congress, who have introduced a bill to force an “independent” audit – read not the GAO or even Treasury – of all the gold held by or entrusted to the U.S. Gold conspiracies have come and gone since at least 1974, but the heights reached now speak to profound, widespread distrust of the government even by those who run it. This paranoia isn’t limited to inert stockpiles. It pervades two of the nation’s three branches of government and even occasionally touches the third. Thus, just because something doesn’t seem to make sense doesn’t mean it won’t happen.
I bring this up because several responses to my memo a couple of weeks back said Congress would never cotton to a sharp reduction in the payment of interest on reserve balances (IORB) or to balances held in the U.S. by foreign central banks. “Fringe thinking,” or so I was told by friends at the Fed, thinking they believed they could easily dismiss without a second thought by reminding critics that the Fed believes it needs IORB to set monetary policy and central-bank swaps to ensure financial stability.
Even critics willing to countenance the Fed counter, backed by reasoned arguments, that the Fed can and should figure out another way to set monetary policy and, less justifiably, arguing that the U.S. has […]
Karen Petrou: How to Fix Regulatory Capital? Think Big, Go Simple, Get Tough
Anyone who was surprised by Miki Bowman’s ambitious agenda hasn’t been paying attention. The new vice chair for supervision on Friday reiterated much she’s said before about supervision and regulation, now also saying more specifically what she’ll do about it given that she’s in a position to do it. Much in her plan is heartening, but one proposal is break taking in both its simplicity and importance: Ms. Bowman wants to make the complex of big-bank capital rules make sense as a whole. Former Vice Chair Barr promised to do this when he was confirmed, but he instead proposed only to complicate the capital construct. Ms. Bowman might just put it right.
As we laid out when Mr. Barr promised a “holistic” capital policy, the current approach pulls in at least three directions, and that’s before one starts thinking about unintended consequences related to liquidity and interest-rate risk. First, there are the risk-based capital (RBC) standards designed to capture the credit risk of every asset and exposure, sometimes more than once based on which numbers come out how. Not content with that much complexity, Mr. Barr and other regulators in 2023 proposed a “dual-stack” approach to credit risk largely because, we concluded, they couldn’t make up their minds which one was right. Then there are standards governing market and operational risk – some forward-looking, some retrospective, and some stuck in the middle distance.
There are also leverage rules designed to capture assets deemed to pose no credit risk even though the leverage standard assumes it that could somehow come back and bite a bank. These standards now are topped off with a supplementary leverage ratio (SLR) for most banks and an “enhanced” – read higher – SLR for the biggest, with two eSLRs imposed because the FDIC and Fed couldn’t agree on […]
Karen Petrou: A New Trade War: Interest on Reserves
Clients will recall that, during his first term, Donald Trump nominated Judy Shelton, a frequent monetary-policy commentator, to the Federal Reserve Board. However, her nomination sparked outrage among Congressional Democrats and many pundits that doomed confirmation. Ms. Shelton nonetheless remains a trusted adviser to many with the President’s ear, making renomination and, this time, confirmation a strong possibility should Ms. Shelton still want a seat on the Board of Governors. We thus took notice when she last week posted an attack on the payment of interest by the Fed on balances held by foreign branches and agencies. She drew in part on another post adding foreign central banks to the complaint. This might seem a remote or even improbable concern, but so does much else in CEA head Stephen Miran’s proposal positing a “user tax” that’s now in the House reconciliation bill attacking foreign investors. Ms. Shelton’s complaint should thus be taken very seriously, especially given all the other demands to curtail interest on reserve balances (IORB).
Ms. Shelton finds that foreign branches and agencies get 42 percent of interest payments from the Fed, or about $78 billion based on total interest payments to banks of $186 billion in 2024. Rates now on IORB stand at about 4.4 percent – one of the very best deals on offer for super-safe, overnight funds. Another post calculates interest payments to foreign central banks at around $16.5 billion a year. In short, it’s a lot of money which the posts rightly say comes from taxpayers given the Fed’s ongoing losses.
The usual argument banks use to defend interest on reserve balances is that terminating it would constitute a tax hike on banks that undermines their lending capacity. Foreign branches and agencies might mount the same argument to defend their IORB […]