The Vault2020-07-14T15:00:29-04:00

Karen Petrou: The Fed’s Political Peril

Last Wednesday, the American Banker quoted me on the politics behind President Biden’s contradictory campaign to demand inflation-stifling policies while at the same time championing Fed independence.  The article quoted me accurately, but as I read it, the brevity of my comments made them seem unduly pointed.  As in Renaissance Florence, modern-day Washington is awash with nuance.  To understand what President Biden meant, one has to watch for the equivalent of a carefully-arched eyebrow or a seemingly-offhand remark.  Those I see and hear say that the White House will not hesitate to turn the Fed into the fall guy for inflation and then defenestrate it in political self-defense.

This isn’t to say that President Biden wants to sacrifice the central bank on the midterm’s altar.  Despite entreaties of his more bloody-minded political aides, the President has so far heeded Secretary Yellen and given Jay Powell the equivalent of a royal pass.  Still, the carefully calibrated comments last week show that this pass is increasingly conditional.

It’s not hard to understand why those frightened of a return to what Martin Wolf last week called a U.S. autocracy are willing to push the Fed in front of the firing line. I am less and less alone in thinking that Democrats in 2016 lost it all because they trusted conventional economic thinking far too much.   Still, the Biden Administration has so far made the same mistake.

Starting in 2015, the Fed said that the American economy was a “good place.”  President Obama took credit for the post-2008 recovery, which it was for the most affluent, and Hillary Clinton followed his lead, promising to do more of the same.  Black voters whose economic lives were far from a “good place” stayed home and younger, less-educated men succumbed to Donald Trump’s blandishments because he was the […]

June 6th, 2022|

FedFin: AI Adverse-Action Requirements

Continuing its use of novel rulings that preclude public notice and comment, the CFPB has issued a landmark ruling on artificial intelligence (AI) and other forms of algorithmic underwriting stipulating lender responsibility for sending out the adverse action notices required under the Equal Credit Opportunity Act (ECOA).  The CFPB recently added a broader range of credit decisions on outstanding loans (e.g., granting or reducing lines), to these notice requirements, making the reach of this new policy still broader.  Lenders are responsible for adherence to these requirements even if their underwriting models are provided by third parties or credit decisions are made by third parties such as fintechs or auto dealers.  However, when these nonbanks are the lender, they are then subject to CFPB enforcement even if the Bureau does not have formal supervisory power over them under another recent CFPB ruling…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.

June 1st, 2022|

FedFin: How Adverse Is This?

As detailed in our new in-depth report, the CFPB has issued another sweeping rule by way of a seemingly innocuous circular not subject to public notice and comment.  Under it, lenders that use third-party underwriting are responsible for ensuring that borrowers receive thorough adverse action notices even if the lender has no authority over the AI or other complex models determining credit outcome.

The full report is available to subscription clients. To find out how you can sign up for the service, click here.


June 1st, 2022|

Karen Petrou: The Moral Obligation of Stablecoin Issuers

At the height of what proved his fleeting power, the founder of a now-evaporated stablecoin said, “I never debate the poor.”  And, perhaps he doesn’t have to – his was not among tall the fiat-currency wallets emptied in the course of this high-flying venture.  Those were mostly in the virtual pockets of young and often minority households.  Regardless, this statement is stark evidence of the difference between the social-welfare obligations demanded of banks and the get-it-while-you-can ethos embodied by this entrepreneur, Elon Musk, and all their acolytes.  We demand much of banks because they take other people’s money.  The same obligations should bind stablecoins because they also take other people’s money and thus need to be governed not just for safety and soundness, but also for equality and equity.

It might be argued that a community-service rationale isn’t warranted for crypto-currency because stablecoin issuers are not intermediaries – indeed, this was a defense against new rules laid out at a recent hearing and it’s the rationale behind the Toomey draft bill to craft a federal stablecoin construct, which eschews most prudential and any community obligations for nonbank stablecoin issuers.

Leaving aside the competitive inequity of a two-tier regulatory framework for the same business, there are three compelling public-welfare arguments for subjecting stablecoins and many other virtual currencies to critical components of bank regulation even if they don’t emulate every aspect of a full-service bank.

First, taking money from other people and promising that they can get it back is deposit-taking even if the promise isn’t accompanied by a promise also to pay interest on the funds taken in hand or to make loans.  As the FDIC made clear last week, consumers no longer understand the difference between deposits with FDIC insurance and funds put at limitless risk.  How […]

May 23rd, 2022|

FedFin on: CRA Regulatory Rewrite

Following much talk about the need to update Community Reinvestment Act (CRA) rules since this was last done in 1995, federal banking agencies have finally agreed on a proposed redesign of standards essential to banks that wish to expand or acquire as well as those seeking strong community ties and the policy and political benefit these afford.  Much of the complexity in the NPR results from the agencies’ decision to allow only partial credit for activities (e.g., mortgages) largely assumed in the past…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.

May 17th, 2022|

FedFin: Minimizing Mortgages, Maximizing Community Service

As we noted last week, the federal banking agencies sighed a mighty sigh and heaved up a massive inter-agency proposal rewriting decades-old standards detailing which activities earn the Community Reinvestment Act (CRA) points essential for any bank’s strategic objectives and national reputation.  As discussed below, the new proposal is lengthy, complex, and in some cases analytically daunting or flat-out confusing.  Still one critical conclusion is clear…

The full report is available to subscription clients. To find out how you can sign up for the service, click here.


May 16th, 2022|
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