FedFin on: SLR Reform
Reflecting a new approach to bank regulation and the strong hand of the Treasury Secretary, federal banking agencies have proposed a sweeping rewrite of the enhanced supplementary leverage ratio (eSLR) applicable to the eight U.S. banking organizations designated as global systemically important banks (GSIBs). The proposal does not expressly exempt Treasury obligations from the eSLR denominator, but it alters the manner in which the ratio is calculated….
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Karen Petrou: Stablecoin Banks and the Increasingly-Uncertain Future of Banking
The CEO of a high-flying conglomerate named Textron once quipped that his investment bank’s c-suite had a long wall of his deal-done plaques and another facing wall just as replete with his deal-undone announcements. The investment bank made money on the way up and down, as did he. The big losers: investors. Is this a lesson for our times as stablecoin issuers line up for bank charters? Banks hope so, but I fear not.
The difference between Textron then and all the nonbanks gunning now for bank charters is that, in the way-back, Textron competed on the proverbial level playing field. The reason most of its acquisitions went bust is because the economies of scale and scope Textron touted were mostly chimeras since technology and data then did not reward consolidation. Now they do.
Even more importantly, the firms Textron bought were also under the same rules – such as they were – as their competitors. Now, of course, this isn’t anywhere close to the case for bank competitors such as auto manufacturers, tech-platform companies, payment entities, and nonbank stablecoin issuers.
We have written before about how regulatory and merger-policy obstacles make it hard for all but the biggest banks to innovate as well as of the inequities of the pending legislation’s stablecoin regime. We’re not the only ones who know this. Nonbank issuers are already looking for additional avenues of regulatory arbitrage and they don’t have to look far.
Last week’s news brought announcements of national-bank applications from Circle and Ripple. The apps aren’t posted yet, so it’s hard to verify if Circle wants a national trust charter and Ripple a full-on national bank, as reported. But whatever charter they seek, Circle and Ripple will get a lot if they get it.
As I noted last week, stablecoin’s value proposition in the […]
Karen Petrou: How Banks Can Beat Stablecoins
Last week, Chair Powell mildly told the Senate Banking Committee that he favors a federal stablecoin framework without yielding to the temptation and saying what it should look like. This is doubtless because Mr. Powell is under such virulent attack in so many quarters that he wisely decided not to pick yet another fight with a President demanding speedy action. But, if pressed, I suspect Mr. Powell would agree with the startling conclusion in an unusually blunt report last week from the Bank for International Settlements:
Society has a choice. The monetary system can transform into a next-generation system built on tried and tested foundations of trust and technologically superior, programmable infrastructures. Or society can re-learn the historical lessons about the limitations of unsound money, with real societal costs, by taking a detour involving private digital currencies that fail the triple test of singleness, elasticity and integrity.
To be sure, one must parse more than a bit of central-bank speak to understand why the BIS is so worried. “Singleness” is a concept rarely spoken of when it comes to money, but it’s the entire point of having a fiat currency. Except when it’s counterfeit, a dollar is treated the same no matter how it’s obtained or from whom thanks to hard lessons learned in the 19th century about “free banking” and the chaos it spawned.
The dollar-for-dollar reserve assets backing stablecoins as in the GENIUS Act legislation is designed to ensure singleness when it comes to ready exchange of a stablecoin for dollars, but each stablecoin issuer is different in terms of its actual capacity to redeem coins at par, especially under stress. Thus, stablecoin elasticity – i.e., ready willingness to accept them — is uncertain, especially under stress. An issuer’s integrity – read honesty and resilience – is also uncertain given the […]
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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