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

Karen Petrou: For the Next Vice Chair: Stringent Enforcement and Meaningful Supervision

As we noted last week, the Fed decided to issue some post-Archegos guidance telling big banks to watch their counterparty credit-risk exposures.  As a banker with all too much experience dodging risk bullets told me, this guidance followed lots of prior guidance saying the same thing after each big boo-boo – think Long-Term Capital Management more than two decades ago and follow the trail of Fed statements thereafter.  Each time, the Fed looks stern and banks say they’re sorry but soon go back to following the money, not the risk.  And, over and over, examiners fail to notice anything amiss until the amount of realized risk is impossible to ignore.  Interestingly, the Bank of England acted with the Fed but with far more force.  Unlike the Fed’s renewed “you better watch out” guidance, the BoE demanded an immediate review of prime-brokering, reports back to regulators, and senior-management pay cuts if flaws go unrepaired.  Thus, unlike the Fed, the Bank of England’s response to costly and thoroughly avoidable lapses has teeth.  Whether the British then bite anyone is another question – the record is not replete with supervisory success – but the difference should nonetheless be instructive to the Fed’s next supervisory vice chair.

This difference is just like that between telling a child that she’ll be sorry next time and ensuring that the kid immediately knows that bad actions have tangible, actual consequences.  One doesn’t have to beat the kid silly – indeed, of course one more than shouldn’t.  But, vague injunctions to do better from a parent known to be more interested in watching the game are sure to lead to repeat instances of even worse behavior and then to parental temptations to so over-correct the child as to stifle the creativity that enhances competitiveness.

So it is […]

December 20th, 2021|

FedFin: Building Buffers

As noted on Thursday, FHFA continues to tread carefully through the big-bank rulebook, adopting standards said to be like-kind that aren’t quite so similar when it comes to critical details.  The latest proposal demands capital planning in a construct akin to the one Democrats favored as the agencies finalized the big-bank stress capital buffer (SCB) minus express restrictions on capital distributions.  Although the SCB will make Fannie and Freddie more resilient, it also steepens the climb out of conservatorship unless some new capital comes along.

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December 17th, 2021|

FedFin: Bank Merger Policy

Released in a highly-controversial fashion (see below) by two Democrats on the FDIC’s board, this RFI posits the need for a significant review of mergers involving insured depository institutions (IDIs) due to many changes in the financial industry and, so it says, the lack of substantive competitive analysis over past decades even of the largest transactions.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.

December 16th, 2021|

Karen Petrou: Why Pro-Competition Consumer Finance May Not be Pro-Consumer Consumer Finance

On Wednesday, several major crypto companies told Congress that the best way to govern them – should this be needed at all – is to create a new federal regulator that knows its way around the blockchain.  One trusts this proposal is a sincere effort at constructive engagement, but anyone who has run the financial-regulatory traps longer than a DLT minute knows that proposing a single regulator is the most effective way to look earnest and yet still roam free outside the regulatory perimeter.  There is simply no way Congress will pull itself together to enact a single crypto regulator.  And, even if Congress could do so, it shouldn’t.

Congressional obdurace about regulatory-agency rationalization isn’t because the financial-regulatory construct makes sense or even that Congress somehow thinks it does.  Congress knew that the multiplicity of banking agencies created undue opportunities for arbitrage and captivity at least as early as the 1971 Hunt Commission report arguing for what the then head of the Senate Banking Committee, William Proxmire, called the “Federal Banking Commission” when he tried to create one throughout the 1970s and early 1980s.  As banking blurred into financial services in the 1990s, the regulatory perimeter became even fuzzier and Congress tried to rationalize it in the 1999 Gramm-Leach-Bliley Act, ultimately having only minimal impact on the alphabet soup.

A new regulator – the Office of Federal Housing Enterprise Oversight – was created in 1992 for Fannie, Freddie, and the Home Loan Banks, but that was because the S&L crisis of the 1980s disgraced its predecessor along with Fannie Mae.  Fannie and Freddie immediately captured OFHEO until a new regulator, the Federal Housing Finance Agency, was created after a still more cataclysmic disgrace in 2008.

Dodd-Frank did lead to the Bureau of Consumer Financial protection in 2010 when we were also belatedly […]

December 13th, 2021|

FedFin: Super-Special

On Tuesday, HUD and the CFPB opened the door to special-purpose mortgage finance.  Now, we expect FHFA to use this safe harbor to mandate express GSE equitable-finance programs and for banks to take much of what’s left in all their commitments after George Floyd’s murder and turn it into mortgage and other community-finance products.

The full report is available to subscription clients. To find out how you can sign up for the service, click here.

December 9th, 2021|

FedFin: Super-Special

On Tuesday, HUD and the CFPB opened the door to special-purpose mortgage finance.  Now, we expect FHFA to use this safe harbor to mandate express GSE equitable-finance programs and for banks to take much of what’s left in all their commitments after George Floyd’s murder and turn it into mortgage and other community-finance products.

The full report is available to subscription clients. To find out how you can sign up for the service, click here.

December 9th, 2021|
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