The Vault2020-07-14T15:00:29+00:00

FedFin on: GSEs Get a New, If Familiar, Gig

As noted yesterday, Treasury and the FHFA pulled the Trump PSPA’s plug, although importantly and widely overlooked is that this is true only when it comes to near-term asset-purchase considerations.  Still, with this action atop all the others redefining Fannie and Freddie since Sandra Thompson took over, the GSEs are being reconfigured into agents of Administration policy in concert with being still more critical agencies for housing finance.

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September 15th, 2021|

Karen Petrou: Are Federal Reserve Banks Forever?

After my latest opinion piece appeared in Barron’s on Thursday, I was stunned by the virulence with which Barron’s readers — not exactly a bunch of Democratic Socialists — agreed with me not because of my reasoning, but because they believe the Fed in general and Jay Powell in particular are engaged in a sweeping conspiracy on behalf of the wealthiest global capitalists.  The new controversy over Reserve Bank president stock holdings only adds fuel to this fire.  Are Federal Reserve Banks forever?  Their history suggests maybe not.

Reserve Banks are creatures of 1913, created in concert with the Federal Reserve Board in Washington as part of the awkward compromise that persuaded those who feared a dominant federal banking powerhouse that the central bank would have roots outside the largest cities and thus be beyond the reach of New York’s powerful bankers.

This balancing act is in fact one reason the Board is headquartered in Washington, not New York, and also why the New York Fed is the most powerful among nominal equals when it comes to its fellow Reserve Banks.  The fundamental anachronism of the System is evident in its geographic footprint — a heavy concentration of Reserve banks up to Kansas City and St. Louis and then not a single Reserve Bank for all of the mountain and western states but the lone edifice still standing apart in San Francisco.

The ethics rules now at issue due to recent revelations are also artifacts of not just the Reserve Bank construct as it was over a century ago, but also of the limited central-bank role the Fed only fully abandoned after the 2008 crisis.  The U.S. central bank became ever more powerful in the 1980s and 1990s thanks to the combination of two mega-authoritative chairs and the Fed’s then-new dominance […]

September 13th, 2021|

FedFin on: Small-Business Lending Disclosures

Turning again to a provision in the 2010 Dodd-Frank Act, the Bureau of Consumer Financial Protection has issued a sweeping proposal to implement small-business and small-farm lending disclosure requirements akin to those long required under the Home Mortgage Disclosure Act (HMDA).  Although the law focuses on lender reports to discern different loan-approval rates based on gender or ethnic/racial groups, the notice of proposed rulemaking (NPR) goes farther also to require extensive detail on loan amounts and pricing on approved loans a borrower chooses not to accept.  Data would be required from all but the very smallest bank and nonbank lenders.

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September 8th, 2021|

Karen Petrou: The Coming Fair-Lending Fracas

A week ago Thursday, I was honored to participate in a Congressional Black Caucus Foundation forum assessing the extent to which the Fed exacerbates U.S. economic inequality.  Views were mixed on that front, but several panelists stoutly condemned financial institutions for actively discriminating against people and communities of color and the Fed for allowing them to get away with it.  That won’t be the last we hear of this.

As our recent assessment of the latest mortgage data make clear, these allegations are not without merit.  That underlying factors are complex and sometimes include contradictory evidence does not belie the fact that data remain problematic, the industry is deeply distrusted, and the White House has made racial equity a top-priority Presidential action item.  First to what the data do and don’t show and then to what will be done about them unless some of the things that can instead be done are quickly done.

The latest HMDA data show troubling denial disparity ratios (DDRs), interest-rate, and cost disparities when minorities are compared to whites.  The DDR for Blacks was 2.6:1, rates were .125 percentage points higher, and the cost of a loan was 38% more.  Black credit scores were the lowest among demographic groups (690) and loan amounts were the smallest, but these differences are still striking.

Little noticed but even more puzzling are the DDRs for Asians versus whites.  Asian DDRs were 1.4:1 even though credit score and loan amounts were the highest of all demographic groups. Asian interest rates were .125 percentage points lower than white borrowers, but they paid 13% more for their mortgages.

These data reflect all purchase mortgages and thus to some degree also reflect the higher rates and costs associated with the FHA mortgages on which Blacks disproportionately rely.  The higher Asian loan-cost numbers also might […]

September 7th, 2021|

FedFin on: Green Risk-Based Capital Requirements

House Democrats are considering legislation to mandate a punitive capital construct for bank and, in some cases, also to certain nonbank exposures to companies with fossil-fuel links.  A still higher capital surcharge would also govern large-BHC activities that may increase greenhouse-gas emissions, a criterion bank regulators would have to define ahead of deciding what surcharge to set.  This surcharge appears to contemplate a capital requirement on some of the so-called “Scope 3” climate exposures and thus could prove particularly problematic given ongoing methodological uncertainties in this area.

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August 27th, 2021|

FedFin on: Climate-Risk Stress Testing

Legislation from House and Senate Democrats would force the Federal Reserve quickly to implement mandatory stress testing for all large banking organizations and large nonbanks judged by asset size if they are principally engaged in finance.  The measure attempts to address concerns about climate-risk uncertainties in areas such as data, models, and comparability by convening expert groups.

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August 26th, 2021|
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