The Vault

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

FedFin on: Steady As They Go Scores

We have reviewed the 2024 scorecards FHFA released for Fannie and Freddie.  Unlike prior years, it contains no new initiatives or aspirations, largely holding Fannie and Freddie to account for much of what they’ve been asked to do before.  Fannie is given indirect encouragement to continue its title-insurance plans, but that’s only if it comports with added cost-efficiency under several longstanding FHFA goals….

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January 31st, 2024|Tags: , , , , , |

FedFin on: NSF Fees

The CFPB has followed up a controversial proposal to set prices for larger-bank overdrafts exempt from certain consumer standards with a proposal to simply ban certain non-sufficient fund (NSF) fees when banks decide in real time to decline a consumer-payment request.  The Bureau readily acknowledges that banks in fact generally do not now charge NSF fees in these cases, but it fears they might and wishes to preemptively prohibit this as part of the Administration’s campaign against “junk fees.”  Although the rule is aimed principally at electronic declinations, it would apply to check and ACH transactions as declination capability grows via instant-payment system adoption.

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January 29th, 2024|

Karen Petrou: The Risks New Capital Rules Can’t Cure

Part one of my end-game assessment was last week’s memo laying out the growing odds that the agencies will be forced to issue a new proposal which hopefully makes better sense than the current one.  Part two here points out how the agencies have so tightly wrapped themselves around the capital rule’s axle that they are unable to see how many even more critical challenges are going unaddressed.  Risks overlooked are often risks even the toughest capital rules cannot contain because the cost of new capital rules actually contributes to the arbitrage and risk-migration accelerating the pace of systemic-risk transformation.  This is a negative feedback loop if ever there were one.

The new capital rules will be outdated by the time they are finalized because financial institutions of all persuasions will take advantage of every bit of regulatory-arbitrage opportunity within and across borders.  That the banking agencies and FSOC aren’t even thinking about how this might happen makes it still more likely that they will.  This is not to say that no changes to capital rules are warranted.  Some changes are overdue, but capital rules crafted in a vacuum will not stand up to real-world circumstance.

The collective book reports issued by the Federal Reserve in its semi-annual systemic forecast and the FSOC’s annual reports are remarkably backward-looking.  Focused more on not saying anything too frightening and bolstering ongoing initiatives, these tomes have long been and sadly still are poor auguries of risks to come perhaps all too soon.

Even as the FRB and FSOC are unable to act, two recent Financial Times articles are important reminders of threats they neglect.  The first points to the cause of the mid-March failures:  not capital shortfalls, but liquidity chasms.  We’ll never know if the viral runs that toppled SVB and precipitated […]

January 29th, 2024|Tags: , , , , |

FedFin on: The Next Mortgage Round in the Capital End-Game

In this report, we build on our previous analyses of the mortgage implications of the pending capital rules, forecasting what’s next for mortgage assets as the FRB, FDIC, and OCC wrestle with the mess Karen Petrou has elsewhere argued they brought upon themselves by careless analytics and political misjudgment. We think the odds for significant changes to mortgage risk weightings are high, but this won’t be enough to quell demands for a brand-new proposal….

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January 24th, 2024|

Karen Petrou: How the Banking Agencies Dealt Themselves Such a Weak End-Game Hand

We said from the start that finalizing the capital rules as proposed would be difficult because I have truly never seen a sweeping rule buttressed by such shoddy analytics.  It’s of course true that lots of rules make little sense, but rules that cost companies as much as the capital rules are uniquely vulnerable to substantive and legal challenges.  This is even more likely when, as now, the proposal’s victims know how to temper political claims with well-founded assertions of analytical flaws and unintended consequences.  When regulatory credibility is effectively undermined, even those who might otherwise side with the regulators become cautious, if not actually averse to doing so.  And thus, it has come to pass for the end-game rules.

As our analyses of all of the comment letters filed last week by dozens of Democrats make clear, only a few super-progressive Democrats now stand firmly with the regulators and even they have a few qualms.  Maybe the agencies will try to bull it out – we thought so as recently as early this month in our outlook.  We were clear there that major changes would need to be made to finalize the end-game rules; now, we’re not sure even these will do.  The odds now are considerably higher for the re-proposal pressed last week by FRB Govs. Waller and Bowman.

The agencies are of course not naïve.  They knew that the final rule would have to show a few concessions to its critics.  As a result, the proposal included a transparent maneuver in which the agencies offered to give the banks a bit when it comes to mortgage loans for low-and-moderate income households.  This tiny olive branch was supposed to show that the agencies cared about vulnerable communities and weren’t unwilling to change, but how they […]

January 22nd, 2024|Tags: , , , , , |

FedFin on: New Fed Study: Stringent Rules, Certain CBDCs Accelerate Shift to Shadows

A new Fed staff paper assesses monetary-policy transmission in a world of CBDCs, stablecoins, nonbanks, and tough new bank rules.  We think this a significant advance in Fed research because the paper’s models (see below) reflect the substitutability of bank for nonbank assets and liabilities across the broader market made still more frictionless by the Fed’s ONRRP.  We focus here on policy decisions other than those specific to monetary-policy transmission, focusing first on how the models test the impact of rules akin to Basel III, also illuminating the end-game standard impact and that of other pending rewrites.  As banks have found in practice, tougher liquidity requirements are found to lead banks away from lending to larger holdings of Treasury obligations and reserves.  This is well known, but the model also reinforces concerns about shadow banking by finding that, when banks move out, nonbanks move in with a small net deduction in total credit availability.  A similar effect is observed when modelling higher capital requirements.  The paper observes that all the new rules may well make banks safer, but the resulting larger nonbank role offsets this benefit.  New rules are also found to affect the ability of the Fed to administer rates through interest on reserves, making the Fed more dependent on the ONRRP to transmit monetary policy – a challenge given ONRRP drawdowns as rates rise and the hopes of Gov. Waller and others at the Fed to phase it out.  In a particularly novel finding, the paper’s models also show that higher leverage-capital requirements spark transformation of bank deposits into other products such as stablecoins, also increasing the role of nonbank financial intermediation…..

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January 17th, 2024|
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