FedFin on: Antitrust Policy
As required by an executive order (EO) from President Trump mandating both review and then repeal of any rules that adversely affect competition, the FTC is seeking public comment on which rules to target and whether these standards could be modified or must be rescinded to meet the President’s goals. This process will clearly invite new scrutiny of the bank-merger process, also likely to lead to comment from banking organizations seeking relief in areas such as de novo chartering requirements and access to brokered or reciprocal deposits….
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Karen Petrou: The Fed Has Given Itself Nothing But Bad Choices
Much has been written of late about the pickle in which the Fed finds itself due to the President’s quixotic trade war. The Fed is indeed facing a dilemma setting monetary policy, but it confronts a Rubik’s Cube trying also to ensure financial stability. The reason: the more the Fed fights inflation, the less it can secure the financial system and the more it is forced to secure the financial system, the less able it will be to conduct monetary policy. This vise results from the Fed’s huge portfolio, yet another example of why the Fed should have reduced its portfolio as quickly as possible after both 2008 and 2020. Since it didn’t, it now has only bad choices if Treasury-market illiquidity turns toxic.
This negative feedback loop is the result not only of the Fed’s cumbersome trillions, but also of its unwillingness to make another hard decision: meaningful action to address identified systemic risks. Had the Fed heeded its own warnings going back to 2020, it might have done something to reduce Treasury-market dependence on high-risk, leveraged hedge funds. To be fair, the Fed cannot directly regulate hedge funds and the SEC lacks prudential authority, but both agencies had lots of ways to curtail systemic risk long before basis-trading hedge funds came to hold at least $1 trillion in assets.
So far, hedge-fund deleveraging is proceeding in a reasonably-ordered way, but risks such as these have a bad habit of cascading. Jamie Dimon already anticipates this, but he also thinks the Fed will step in. So too does at least one senior Fed official already willing to say so. The Fed can and probably will undertake yet another bailout, but macroeconomic stability could well be the price of this financial-market rescue.
Why? The Fed’s portfolio was rightly […]
Karen Petrou: Why Regulators Will be Flat-Footed if Bad Now Turns Soon to Worse
One of the comforts with which bank regulators will doubtless console themselves after last week’s market rout is that the largest U.S. banks have the capital not only to withstand this, but also the probable, profound consequences of the President’s punitive tariffs. However, because U.S. regulators mismeasure capital resilience, this confidence is misplaced. Using the economic-capital approach I recently endorsed shows that, while U.S. banks still are strong, they are not fortresses.
FedFin recently analyzed two new studies demonstrating that geopolitical risk is hard on bank solvency. To this, one of course can say that there’s no real-world need for exhaustive studies of dozens of countries over decades – common sense buttressed by history makes this all too clear. These hard lessons and the data that describe them do, though, make clear that it’s more than worth revisiting the United States after the Smoot-Hawley tariffs to get a sobering idea of the negative feedback loop between geopolitical risk, macroeconomic hazards, bank vulnerability, and – back to the beginning, geopolitical risk. Any talk of the 1930s is alarmist and also inapplicable in numerous respects, but it is the most pertinent example of geopolitical risk over the past century and thus demonstrates the need now to be very, very careful – not something this White House appears to be good at.
Economic-capital measures are a more robust platform to assess bank resilience than regulatory capital and are thus of particular pertinence at this dangerous moment. Regulatory-capital measurements are so complex and often prove internally contradictory even before one tries to integrate capital resilience with liquidity strength. The liquidity rules are also complex constructs based at least as much on regulatory imagining as on actual circumstance, with none of these abstruse requirements deigning to consult the market for its opinion on franchise value […]
FedFin Assessment: Will There be Banking Battles in This Trade War?
In this report, FedFin provides its first assessment of how the sweeping tariffs on trade-in-goods set last night by the White House are likely to affect financial-services firms. We address first-order effects from trade-in-goods disruptions and resulting macroeconomic consequences as well as the extent to which this trade war – and it’s already a trade war – may spread to trade-in-services that disrupt the course of cross-border finance, transborder data flows, and even financial stability….
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FedFin on: Stablecoin Regulatory Framework
The chair of the House Financial Services Committee, Rep. French Hill (R-AR), the Digital Asset Subcommittee’s chair, Rep. Bryan Steil (R-WI), eight other Republicans and three Democrats have introduced House legislation to create a long-awaited federal framework for dollar-denominated payment stablecoins. The bill differs substantively from Senate language, especially with regard to the scope of federal authority and the extent to which stablecoins might come to supplant bank deposits. However, the bills are similar in many respects and are likely to become still closer as House and Senate consideration continues ahead of final agreement and enactment into law later this spring….
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Karen Petrou: The President Ditches the Dollar
Given the controversies aroused by many of last week’s executive orders, it’s understandable that those redesigning Treasury’s payment system generally escaped notice. They shouldn’t. On purpose or not, President Trump has mandated that digital currency henceforth counts along with the dollar as U.S. fiat currency. That is a very, very big decision with consequences far beyond the ostensible goal of speeding Treasury payments and, yet again, ending waste, fraud, and abuse.
As I laid out in my book, there is nothing preordained about the dollar serving as the U.S. “fiat” currency. The medium of exchange a sovereign demands to honor its obligations is the fiat currency, but nothing forces the citizenry to accept it if the sovereign state is weak, the fiat currency is of dubious value, or options such as gold – the centuries-old go-to or a digital alternative – are better. As the U.S. gained economic power at home and abroad, the fiat currency Lincoln selected to fund the Civil War – the dollar – came to dominate U.S. transactions, especially those with the federal government. Now, the dollar is the dominant fiat currency not only at home, but is also the reserve currency around the globe. This “exorbitant privilege” is preordained by the United States; it was earned.
Now though, the U.S. is stepping back from the once “almighty dollar.” The President said it will accept alternatives to the dollar for tax and all other payments to and apparently also from the Treasury. The executive order centralizing U.S. government payments lays out dollar alternatives including not just those one might expect – direct deposits, debit or credit card payments – but also instruments transmitted via “digital wallets, real-time payment systems” and other “modern electronic payment options.” This gladdens the hearts of those pressing the President’s crypto “golden age”, […]