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

FedFin on: An Implacable Problem With a Policy Solution

As the Fed has hiked interest rates, mortgage rates have of course also gone up, sending a sudden chill through the residential market and putting home ownership even more out of reach for all but those for whom the home equity they still have after prices correct suffices for long-term wealth accumulation.  However, mortgage rates have often risen higher than expected from usual yield spreads and thus Fed tightening is even more excruciating not just for the mortgage market, but also for FHFA’s equitable-finance mission and the Fed’s hoped-for soft landing…

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January 11th, 2023|Tags: , , , , , , , |

Karen Petrou: Is Silvergate Solvent?

Is Silvergate solvent?  Media coverage suggests it can stay in business based on the crypto bank’s liquidity.  Liquidity is, though, only a necessary condition for a bank to survive.  For it actually to remain in business, a bank must also be solvent.  For Silvergate and several other crypto-heavy banks this won’t be easy.

The critical criterion determining whether regulators allow a bank to remain in business is the extent to which its capital meets or exceeds the rules and, when it doesn’t, how much below these thresholds it falls and why.  Ever since 1991, regulators are supposed to grant banks little leeway on these capital requirements – “prompt corrective action” provisions demand that regulators sanction banks as capital plummets and close them if they haven’t already done so if ratio’s sink to the “critical-capital” threshold.

Faced with a Lehman-like run, Silvergate has understandably focused on assuring stakeholders that it can continue to sell assets to handle all withdrawals.  And so it may, but that’s not its only problem.  Even if it’s liquid, Silvergate faces a grim future if its regulatory-capital ratios falter – and they might.

To survive, Silvergate must run a gauntlet between the amount of capital it holds on a shrinking pool of assets and the capital costs of losses taken as assets are sold to handle withdrawals.  The bank entered the liquidity wringer with ample capital.  According to its third-quarter call report, its leverage ratio was over ten percent.  And, even when the bank dumped over $5 billion to absorb its initial run, the capital ratio remained relatively robust.  This is because the bank’s capital then backed only about two-thirds of the assets against which it scored so well the quarter before even though Silvergate also took a $718 million loss.  After the sale and loss, the ratio was […]

January 9th, 2023|Tags: , , , |

FedFin on: Bank Crypto Safety-and-Soundness Standards

The Basel Committee has finalized its second try at global standards governing bank cryptoasset exposures,1 laying out a path that U.S. agencies plan quickly to implement even as Congress continues to wrestle with this fast-changing sector. In general, the final Basel approach allows banks both to undertake cryptoasset activities and hold exposures in this sector. However, the conditions applied to all but the most straightforward digital assets issued by regulated entities and to all stablecoins are extensive and costly…..

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January 4th, 2023|Tags: , , |

Karen Petrou: Why Congress will Try to Recapture Fed Payments to Banks in 2023 and Why It Can’t

Among the unmourned victims of 2022 is to be found modern monetary theory.  Although it seemed clear from the start that MMT was a product of magical thinking, it engendered insouciance that kept fiscal deficits rising ever higher. Now, Republicans will press for fiscal austerity.  Democrats will fight back, but they too will seek as much fiscal constraint as compatible with gaining power in 2024.  Congress thus will look for new revenue sources that aren’t taxes and quickly find one at the Fed on which both sides agree: cutting payments to the nation’s biggest financial institutions.

It is difficult to calculate just how much the Fed is sending back over the transom into the financial system.  One recent paper estimates it as over $100 billion a year and this might well be the case once interest on bank reserves is totaled up with the interest the Fed pays within the gigantic overnight reverse repo program (ONRRP). Whatever the sum now, it’s large and it will only go up in 2023.  The more rates rise, the more the Fed pays out even as it is still saddled with billions of low-yield portfolio assets.

These interest payments are already on the radar of at least one conservative analyst.  His arguments channel those Republicans raised when these interest payments were last on the fiscal chopping block, a time when Democrats also said pretty much the same about wanting billions for taxpayers, not banks.

To be sure, nothing came of all these calls to recapture Fed interest.  When battles raged over what was then called interest on excess reserves in the mid-2010s, Republicans and Democrats were briefly united in wanting all the money paid to banks, but this bipartisan agreement quickly broke down once Democrats decided not to attack Jay Powell over […]

January 3rd, 2023|Tags: , , , |

FedFin on: New to You

Finally taking what was supposed to be an “interim” final rule in 2009, FHFA yesterday finalized a variation on Mark Calabria’s 2020 new-product proposal.  FHFA still has more discretion over which activities go into this process and what the market then knows about them….

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December 21st, 2022|Tags: , , , |

FedFin on: Nonbank Enforcement-Order Registry

The CFPB is proposing to create a public registry of certain enforcement actions that would initially cover nonbanks (including BHCs) with a goal of drawing public and enforcement-agency attention to what the Bureau’s director calls “serial offenders.” …

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