FedFin on: ILC Charters
A divided FDIC board has approved a proposal retracting key sections of the agency’s 2020 rule meant to open the way to new ILC charters. Strongly opposed at the time by now-Chair Gruenberg, the proposal subjects parent companies applying to establish what the NPR calls “captive” or “shell” ILCs to more stringent review when applying for a charter that are likely to lead to denial in most cases. The NPR also expands the scope of FDIC review when it comes to Change-in-Bank-Control Act (CBCA) notices to charter conversions and certain other actions. The analysis presented in the proposal along with questions on which it seeks comment suggest the agency could go considerably farther to rein in ILCs, although most additional actions would require new rulemakings.
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Karen Petrou: What the Fed Must Do to Make Monetary Policy Work
Later this week, monetary-policy disciples – at least those who agree with the Fed – will gather around the campfire atop Jackson Hole to ponder the question set before them: whether monetary-policy transmission has been effective and, since it’s awesomely obvious it hasn’t, what might be done about that. The plan is clearly to float trial balloons in the clear mountain air to see if the Fed’s thinking about the new plan slated for 2025 is any better than that which lay behind its disastrous 2019 monetary-policy rewrite. Those allowed into these August precincts will have much of value to say this time around much as they sought to do the last time the Fed asked for all their views. Odds are, though, that Jackson Hole will not consider three non-econometric phenomena that lie behind recent policy misfires: economic inequality, NBFI migration, and the strong counter-cyclical impact of Fed supervisory policy.
Why do these matter so much?
First to economic inequality. The last time the Fed rewrote its monetary-policy model, it deigned to consider economic inequality, but promptly dismissed any reasons to worry. There were, though, lots of them.
The 2019 inequality exercise suffered from the same problem as most Fed models: reliance on representative-agent, not heterogeneous data showing distributional disparities. This approach thus reaffirmed blithe convictions that anything that keeps employment high and inflation in check is good for lower-wealth and -income households because it’s good for everyone else. See my book for why that’s grievously wrong and recent Fed policy for how much damage it does when the Fed sweeps inequality under the rug.
This damage isn’t just to lower-prosperity households – it’s also to the Fed. Assumptions that easing policy will support sustainable, robust growth are wildly off-base when lower rates lead as they did and will to still more […]
FedFin on: Deposit Composition and Risk
In conjunction with its proposal to take a far tougher stand on brokered deposits, the FDIC is seeking information on the configuration of U.S. bank deposits that cannot be discerned from current call report data. If these data persuade the FDIC and other agencies to act, then call-report data could be far more extensive and impose greater market discipline, FDIC premiums could be redesigned, pressure would grow for reliance on core deposits and FHLB advances, and FDIC-coverage reform might gain renewed Congressional attention.
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Karen Petrou: Why the 1951 Fed-Treasury Accord Doesn’t Matter in 2024
Later this month, FedFin will issue a brief assessing whether Fed independence is really at risk, taking into account not just what Donald Trump has said, but also what progressives and populists agree should be done to change the U.S. central bank’s governing law. As we’ve frequently noted, Donald Trump can talk tough about the Fed, but Congress has to agree to get tough before he can do anything but gradually change Fed leadership and hope his appointees do his bidding despite formidable resistance across the Fed’s entrenched institutional culture. The forthcoming brief will put much of the daily back-and-forth on this critical question into the often-missing context needed to understand how much risk the Fed really runs. However, I’ve gotten so many questions in the last few days following an American Banker article that I’ll answer a few of them now.
The questions revolve around the Fed-Treasury agreement in 1951 putting Treasury fully in the debt-pricing lane and keeping it out of Fed decisions setting monetary policy based on its macroeconomic judgment, not national fiscal or political demands. The question? It’s whether Treasury under Trump could revoke the 1951 Accord and regain control over monetary policy.
The best independent analysis of the history surrounding the 1951 Accord and its substance comes in a paper written in 2001 on the Accord’s fiftieth anniversary by staff at the Federal Reserve Bank of Richmond. It rightly puts the Accord squarely in the historical context necessary to understand if the 1951 Accord has contemporary import. As it turns out, what went around isn’t coming back.
Importantly, the Fed sacrificed its ability to stand aloof from fiscal policy during the darkest days of the Second World War, when the central bank heeded the importance of raising as much money as cheaply as possible to save the […]
FedFin on: Discount-Window Readiness
After promising almost since the 2023 crisis to do so, Sen. Mark Warner (D-VA) has introduced legislation designed to force the Federal Reserve’s hand to quickly implement discount-window improvements discussed since it became clear in post-failure analyses that operational challenges accelerated bank failures. The bill also requires the banking agencies to reflect discount-window capacity in their liquidity standards, a change that would make them less onerous even now and perhaps prove necessary under pending requirements for discount-window preparedness that might involve pre-positioned collateral….
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FedFin on: Changes in Bank Control
Noting it is committed to developing an inter-agency approach to the issues it addresses in this NPR, the FDIC is seeking to take greater control over holdings in the state non-member banks under its jurisdiction when these come under the Change-in-Bank Control Act (CIBCA), especially when this involves an entity with a passivity exemption from “control” under applicable FRB rules. The FDIC would not ban large, passive holdings in state non-member banks, but it would likely look askance at at least some, especially when these are in large IDIs that pose the concentration and safety-and-soundness risks identified in this NPR and accompanying questions about still broader …
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