The Vault

The Vault2023-11-21T07:33:18-05:00

FedFin on: Discount-Window Modernization

In addition to controversial provisions affecting bank-merger applications and stress-test transparency, legislation recently approved by the House Financial Services Committee includes a less-contentious provision forcing the Federal Reserve to reckon with longstanding problems affecting the use of its discount window, especially under stress conditions.  These problems were on costly evidence in March of 2023, when both Silicon Valley Bank and Signature Bank had extraordinary difficulty accessing the discount window due in part to ill-segregated collateral and early Fedwire closing….

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June 3rd, 2024|Tags: , , , , , , , , , |

Karen Petrou: Important Lessons in Regulatory Impact

With battle lines deeply dug in over so many recent rules, two new studies are important, timely reminders that rewriting rules doesn’t always mean eviscerating rules.  Sometimes, it’s a vital corrective to unintended consequences all too evident as proposals turn into rules that turn into a new, destructive market dynamic.  It might seem to make nothing more than common sense to recognize that rules need reconsideration, but as the occasional victim of diatribes following what I thought were just pragmatic recommendations, it’s reassuring to see a study from one of the current rules’ architects, Daniel Tarullo, and another from the Fed lay out the need for meaningful revisions to two high-impact rules:  big-bank stress tests and – just in time for still more of them – liquidity rules.

First to Mr. Tarullo’s paper.  In addition to being the instigator of much in the Dodd-Frank Act and the rules thereafter, Mr. Tarullo inaugurated big-bank stress tests in 2009.  Banks then denounced them, but they weren’t exactly in the best of bargaining positions after the 2008 great financial crisis.  So, stress tests began as an urgent reality check.  But, proving the regulatory-rewrite point, over a decade later they took on a new purpose in concert with still more importance by virtue of the new stress capital buffer inexorably and often ineffectively linking stress testing to the bank regulatory requirements that barely existed in 2009.

In 2009, we needed stress tests because capital rules were essentially toothless.  Capital rules are now fanged and set to grow still more ferocious.  This might seem to make stress-testing better, but Mr. Tarullo shows convincingly why it’s worse.  He looks hard at the gradual integration of stress testing and capital requirements, finding it has numerous unintended consequences.

Once, forward-looking stress-testing was an important complement to point-in-time capital standards.  But, […]

Karen Petrou: Why Regulators Fail

Last week, the House voted on a bipartisan basis to stick its collective fingers in the SEC’s eye over its cryptoasset jurisdiction.  And, in recent weeks, the Vice Chair of the Federal Reserve has been forced to concede that the end-game capital rules that are his handiwork as much as anyone’s will get a “broad, material” rewrite.  What do these two comeuppances have in common?  Each results from regulatory hubris so extraordinary that even erstwhile allies abandoned the cause.  For all MAGA fears about an omnipotent “administrative state,” these episodes show that those seeking sweeping change without plausible rationales are still subject to the will of the people even if the people’s will befuddles those in the government’s corner offices.

First to the SEC.  Chairman Gensler’s position on cryptoassets over the past three years is that many ways to use them are securities and anything that’s a security is his for the enforcing.  I’m not even going to venture a conclusion on who’s right or wrong when it comes to abstruse Supreme Court rulings on complex definitions.  What underpins the SEC’s downfall – temporary though it may be – is that any question as big as what’s a cryptoasset and who can do what with it should be answered by rules subject to public notice and comment, not episodic enforcement actions meant to teach everyone else a lesson.

Most people would learn the lesson if a coherent regulatory policy spelled it out.  When policy is set by whack-a-mole instead of a clear administrative edict, even friends turn skeptical and courts are far more sympathetic to crypto companies that might otherwise have been reined in had the Commission’s rules told the courts why the SEC gets to do what it wants and how this benefits everyone else.

And, friends turn still more skeptical when […]

FedFin on: Pledging the Public Good

As our in-depth analysis earlier today makes clear, FHFA’s RFI on FHLB mission compliance outlines a regulatory rewrite intended to handcuff Home Loan Banks not just to the housing mission expressly set in law, but also to a broader vision of the public good the agency believes the System’s taxpayer benefits are meant to serve.  Home Loan Banks don’t exactly see it that way, but their hand is weak unless or until the election gives them new allies….

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May 20th, 2024|

FedFin on: FHLB Mission

FHFA is now advancing an in-depth 2023 report on the Federal Home Loan Banks (FHLBs) with an RFI intended to lay the foundation for regulatory revisions tightening the FHLBs’ mission and thus the extent to which members benefit from low-cost advances without also disbursing these benefits to promote affordable housing and the public interest.  Although the RFI does not take a position on key changes, the questions it poses and the preamble explaining them make it clear that….

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May 20th, 2024|

Karen Petrou on: How FSOC Enables Systemic Risk

One can and should debate the extent to which nonbank mortgage companies (NBMCs) are as systemically-risky as FSOC says they are.  But it’s indisputable that, if FSOC believed what it said, then the paltry and politically-improbable recommendations it announced are proof of only one unhappy conclusion:  all FSOC can meaningfully think to do when it sees a systemic risk is figure out how to bail it out.  This is certainly what taxpayers have learned the hard way and investors have come to expect.  Or, as humorist Dave Barry pointed out after the mid-March systemic deposit bailout, “Eventually the financial community calms down, soothed by the reassuring knowledge that American taxpayers will, as always, step up and cheerfully provide billions of dollars to whichever part of the financial community screwed up this time.”

As we noted in our detailed analysis of FSOC’s report, the Council lays out the rapid-fire growth of NBMCs, the role regulatory arbitrage played in pushing banks to the sidelines of the residential-mortgage business that once defined so many charters, and the direct taxpayer and resulting systemic risk of NBMC liquidity shortfalls.  Asked about this at Wednesday’s HFSC hearing, Acting Comptroller Hsu said that NBMC stress could lead to “widespread contagion risk” that could prove “severe.”

Could NBMCs be pulled off the brink under current law?  In a little-noticed aside, FSOC says no because NBMCs lack the assets that would make viable orderly liquidation by the FDIC under its systemic authority even if the FDIC finally figured out how to deploy OLA.  Given the prospect of severe contagion risk and little chance of federal intervention short of a bailout, what did FSOC say should be done?

Other than the “monitoring” and “inter-agency cooperation” that are bywords of not having pretty much anything else to recommend, the Council lays out a […]

May 20th, 2024|Tags: , , , , , , , |
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