Karen Petrou: How to End the Sins of Supervisory Omissions and Bail-Out Commissions
The reason the FDIC sold First Republic to JPMorgan is that it didn’t want to do yet another resolution that bailed out uninsured depositors. The reason the FDIC didn’t want to backstop more uninsured depositors is that it would have had to say First Republic was as systemic as SVB and Signature Bank and this was nowhere near as credible. The reason the FDIC had to find these two earlier failures systemic was because it couldn’t think of anything better and the reason it couldn’t think of anything better in any of these resolutions is that it was wholly unprepared for them and, now, for any of the others that may come suddenly upon us. The FDIC must quickly rewrite its resolution playbook, but even a good one won’t work without a new set of triggers for meaningful prompt corrective action that forces change at troubled banks and readies the FDIC for resolution – not bail-out – if change doesn’t come quickly.
Last week’s near-death spirals show how quickly banks with respectable earnings and deposit inflows go down for the count when market sentiment turns on them. Unlike the March failures, regional banks on the ropes since then were punched by investors, not the uninsured depositors who are now big winners on their moral-hazard bet. These investors weren’t all short-sellers – many of them were equity stockholders who seemed suddenly to realize that the FDIC wouldn’t protect them when a troubled regional is sold to a bigger banking organization. Why investors thought they would be bailed out is hard to say; that they did and now they don’t is the risk we face.
Investors and regulators have learned the super-hard way that very well-capitalized banks as adjudged by their regulatory-capital ratios can sometimes fall quickly into […]
FedFin on: Nonbank SIFI Designation
In concert with proposing a new systemic-risk methodology, the Financial Stability Oversight Council sought comment on guidance that significantly rewrites the manner in which nonbanks are designated as systemically important financial institutions (SIFIs). The new approach retracts key aspects of the Trump FSOC’s approach, for example eliminating the necessity of determining if a possible designee is likely to fail and what the costs and benefits of new systemic standards are likely to be. Although the new approach retains numerous procedural opportunities for the possible designee to know of and protest action, these and other changes…
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
FedFin Analysis: FDIC Presses Targeted Coverage; Open to Excess Coverage, Collateralization, MBRs
In this report, we follow our initial assessment of the FDIC’s deposit-insurance reform report with an in-depth analysis of its recommendations and their prospects. Aspects of this report reiterate conclusions initially noted in the agency’s Friday report on Signature Bank’s failure (see Client Report REFORM222), noting in particular the sharp growth of uninsured deposits at larger banks and the growing risk of social-media runs. The new report also states that FedNow is likely to exacerbate run risk which increases if open banking advances.
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
FedFin Analysis: GAO Slams FRB, FDIC Supervision
Following our analyses of the Fed’s report on SVB (see Client Report REFORM221) and the FDIC’s on SBNY (see Client Report REFORM222), we turn now to one from the General Accountability Office sure to have at least as much impact on bipartisan consideration of what needs next to be done to govern regional banks. HFSC Chairman McHenry (R-NC) has already cited the GAO report in his rebuttal to those from the banking agencies, and it may well have tempered Senate Banking Chairman Brown’s (D-OH) support of a focus solely on new law and rule.
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
FedFin Assessment: FDIC Blames Signature Governance, Clarifies Failure Scenario
In this report, we build on our assessment earlier today of the Fed’s SVB autopsy (see Client Report REFORM221) with an assessment of the FDIC’s self-review of Signature’s failure. As noted on Friday, the FDIC confines this report to Signature’s supervision; a separate report will address policy recommendations. Although the analysis has some findings in common with the Fed’s SVB assessment with regard to matters such as supervisors’ failure to keep up with a fast-growing bank, the FDIC principally focuses on key risk indicators at the bank rather than supervisory shortcomings.
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
FedFin Assessment: Fed Contemplates Supervisory Reform, Promises Regulatory Rewrite
In this and subsequent reports, we build on our initial reactions to SVB/SBNY reports from the Fed, FDIC, and GAO, focusing in more depth on the agencies’ plans for near-term action with strategic consequence and key points in the GAO’s report that will strongly influence Hill reactions on both sides of the aisle. Informed by today’s rescue of First Republic – on which more is to come from us shortly – FedFin starts here with the Fed, not going into detail on the results of its extensive fact-finding unless new facts are likely to influence near-term policy and political response. As previously noted, the Fed’s report acknowledges serious supervisory shortcomings, with the detailed analysis concluding that the “root cause” of this is “difficult to ascertain, especially given the impact of the pandemic on remote supervision in 2020 and 2021.”
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.