FedFin on: Will the Sovereign Wealth Fund Buy Scorched Earth?
In this report, we do our damnedest to make sense of what’s been wrought at Fannie, Freddie, and FHFA in the few days since Bill Pulte took charge and Treasury Secretary Bessent mused about folding the GSEs into the sovereign wealth fund….
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Semafor, Monday, March 24, 2025
Treasury’s play for regulatory control puts it on collision course with Fed
Eleanor Mueller and Rachel Witkowski
Treasury Secretary Scott Bessent’s play for more control over US banking regulators, including the Federal Reserve, is about to enter a contentious new phase. The Treasury Department is drafting recommendations for streamlining banking regulators like the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation, three people familiar with the process told Semafor — after concluding that the agencies and their workers likely can’t be merged without a green light from Congress….“There are two ways to consolidate federal bank regulation. First, you can change the law,” Karen Petrou, co-founder of Federal Financial Analytics, wrote in a recent note to clients. “The other way is for one federal entity to assert all the power it has under law, and maybe more simply to take de facto charge of significant Fed, OCC, and FDIC supervisory and regulatory policy. “Secretary Bessent has now made it clear that the Trump Administration will open Door Number Two,” Petrou added. Bessent’s plan builds on a recent order Trump signed directing the central bank and other independent agencies to submit regulations to the Office of Management and Budget for review, according to three other people familiar with the secretary’s thinking.
FedFin on: Why an SWF Might Solve the Conservatorship Conundrum
An intriguing op-ed in today’s Financial Times posits a solution to the GSE-privatization problem: including them in the sovereign wealth fund (SWF) already being established by the White House. Could this work? It just might.
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Karen Petrou: A New, Unified Theory of Effective Bank Regulation
There is one perennial, overlooked, and devastating irony in the vast body of bank capital and liquidity regulation: the better a bank’s liquidity score, the less regulatory capital it has. Although liquidity and capital are inexorably linked when it comes to preserving bank solvency, the need to comply with two contradictory standards forces banks to change their business model to meet both ends in the middle at considerable cost to profitability and long-term franchise value. This is of course a major threat to solvency of which bank regulators are either blissfully unaware or, worse, heedless. Federal banking agencies have stoutly refused to undertake the essential cumulative-impact analysis we’ve fruitlessly urged on them most recently in Congressional testimony. A new Federal Reserve Bank of New York study shows not just why they should judge rules by sum-total impact, but also how they could do so and thereby have a much better sense of which banks might actually go broke before they do.
I refer you to the full FRB-NY paper for details. It crafts an economic-capital construct calculated by netting the net present value of financeable assets versus par liabilities as a baseline measure which can then be tested under various stress scenarios that start with illiquidity and end in insolvency and vice versa. This leads to a robust measure of survivability that combines the impact of credit risk, liquidity, and the real-world market conditions current rules ignore. In essence, economic capital is derived from the hard-nosed, real-time factors that wise investors and counterparties use to determine market capitalization and the cost at which banks gather funds. This is clearly preferable to the backward-looking, book-value way each bank regulatory requirement comes up with a different measure of resilience essentially irrelevant in the real world of shifting market values that can quickly […]
Karen Petrou: Will Bessent Do It Better?
There are two ways to consolidate federal bank regulation. First, you can change the law and, as detailed in my memo a few weeks back, transform agency responsibilities to reduce duplication and regulatory arbitrage. The other way is for one federal entity to assert all the power it has under law and maybe more simply to take de facto charge of significant Fed, OCC, and FDIC supervisory and regulatory policy. Secretary Bessent has now made it clear that the Trump Administration will open Door Number Two, setting key policy goals and “coordinating” among the agencies. Will Treasury keep banking within essential guardrails? Mr. Bessent might just pull this off, at least for as long as he’s Treasury Secretary in this super-volatile Administration.
Just weeks ago, I would have said a Treasury putsch was impossible because of the Fed’s inviolable status as an independent agency that, even under a more Trump-ready vice chair, would avoid the appearance of taking Treasury’s orders less this subservience spill over to monetary policymaking. Now, though, the President has claimed via executive order that there are no more independent agencies exempt from Executive Branch control. This covers the OCC and FDIC, which were in any case sure to do what was asked of them in this Administration, but it also covers Fed supervisory and regulatory responsibilities. The Fed’s express statutory independence does not cover these activities, making it likely now that the Fed will concede on most sup-and-reg points to defend the fragile barricades surrounding monetary-policy independence. More than a few Fed Governors would even be keen to see these responsibilities move elsewhere to permit them to focus full-time on sacrosanct macro obligations.
What would Treasury-led banking standards look like? Much like Gov. Bowman’s last comments, the Secretary’s speech made it clear that he wants supervision focused on […]
Karen Petrou: The Casualties of Slash-and-Burn Regulatory Rewrites
There’s no doubt that many U.S. institutions have grown such long teeth over the years that they bit themselves in the foot. As a result, radical reform challenging conventional wisdom is long overdue. But, there are two ways to do this: the break-first/fix-later approach taken by the Trump Administration in biomedical research and other vital arenas; the other is to think first, then act decisively within the boundaries of current law or the better ones you demand. Radical reform to U.S. biomedical research is already leaving near-term treatments and cures on the cutting-room floor. If slash-and-burn transformation is also applied to financial-services supervision and regulation, systemic-risk guardrails could be unintentionally, but dangerously, dismantled.
The risks to biomedical research are not so much in what the Trump Administration has done, but that it’s more often than not done retroactively regardless of contractual commitments for continuing funding authorized under longstanding appropriations and by frenetic, indiscriminate firings of well-performing staff. You simply can’t suddenly stop a clinical trial without endangering patients and putting treatments years behind, if they continue at all. You also can’t stop basic biomedical research all of a sudden without leaving labs with a lot of mice, dogs, and primates to feed and no money for kibble. It also takes years to train good biomedical researchers; suddenly firing thousands of them endangers this pipeline and, with it, treatments and cures.
Biomedical research and financial-system governance have little in common, but leaving financial policy in tatters will also have unintended consequences with far-reaching collateral damage.
Case in point: the CFPB is among the agencies in most need of a radical makeover, but a disemboweled CFPB cannot issue the forward-looking consumer-protection standards essential not only to individual customers, but also to preventing a competitive race to the bottom with macroeconomic and systemic consequences.
If you doubt […]