Karen Petrou: Competitiveness in a Cold, Cruel World
When I gave a talk last week about bank-merger policy, I was asked an important question: if I’m right about the franchise-value challenges facing most U.S. banks, then why is banking here doing so much better than in other advanced, market-oriented nations? The answer in part is that, in a pond full of ugly ducklings, a scrawny mallard with just a few more feathers looks a lot better. But, it’s more complicated than that. The reasons why make it clear that, if bank-merger policy remains implacably set against economies of scale and scope, then only a very few, very big birds and more than a few nonbirds will own the waters.
As in any comparative analysis, the first step to judging U.S. banks versus those in other nations is to define which banks are being compared. Most other nations have very few, very big banks often considered national-champion charters dedicated as much to supporting their sovereign governments as to placating shareholders. As our recent merger-policy paper details, national champions are insulated from market discipline because they are almost always expressly too big to fail. Credit Suisse was an exception to this rule, but only because it failed so fast and Switzerland was so unready for resolution that it could do nothing more than fold one national champion into another, UBS.
For all the talk of TBTF banks in the U.S. and the benefits the very biggest enjoy during flight-to-safety situations, none are yet a national champion, and a good thing too. The market discipline applied to the very largest U.S. banks may be imperfect, but it’s a lot more stringent than that applicable in many other advanced nations. It thus forces better return on investment than requisite as banks are de facto utilities.
Further, that the very biggest U.S. banks do […]
FedFin Assessment: TD Orders Set New Enforcement Paradigm
In this report, we build on our initial assessment of the ground-breaking AML enforcement action finalized last Thursday with TD Bank by the OCC, FRB, and FinCEN. While the banking agencies did not use their nuclear option – requiring TD to close its U.S. operations – the scope of the violations persuaded the agencies along with FinCEN and the Department of Justice to impose huge fines and so sharply constrain U.S. activities as likely to cause both the bank and others to question the viability of continuing U.S. operations for at least the near term. New branches, products, and services appear barred without a non-objection for the foreseeable future and considerable management turn-over, especially in the U.S., is also likely. The OCC’s decision to impose the asset-growth cap discussed below implements the Acting Comptroller’s plan to ….
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
Karen Petrou: Why Didn’t Supervisors Stop TD Before Trillions Escaped AML Surveillance?
The enforcement actions last week against TD Bank’s manifold and manifest money-laundering violations bristle with righteous anger. This is understandable – the bank’s AML lapses are jaw-droppingly dangerous. But what’s missing from the recounting of TD’s sins is any accountability for why banking-agency supervisors failed to catch violations dating back to 2012 that transgress every compliance, risk-management, and governance norm. Yes, throw the book at TD, but let’s also call the banking agencies on the carpet for why TD was allowed to grow so big even though it was clearly also so bad.
The enforcement orders from the Fed and OCC are replete with new mandates making it clear that neither agency trusts TD here or back home in Canada to do anything right re AML without two guns at its respective heads. It falls to FinCEN and the Department of Justice to provide the recounting of what was actually going wrong at TD and how supervisors should have caught enough of them to stop at least some of the trillions of dollars of payments that went without AML scrutiny and enabled billions, if not more, of human and drug trafficking, organized crime, and so much else that victimized all too many people and nations.
Time, not to mention stomach, does not permit listing all of TD’s glaring AML violations starting in 2012 that went uncorrected and indeed materially worsened after a 2013 FinCEN warning. But even a few examples tell a dismal tale.
For one, TD’s AML compliance team had dotted reporting lines that at best confused responsibilities and boasted of and were compensated for ensuring total AML compliance without a dent in TD’s risk appetite even as the AML operation shrank to infinitesimal in comparison to TD’s rocket growth. Indeed, TD got AML religion only when the […]
Karen Petrou: Home Loan Banks Meet a Moral Hazard speed Bump
Although FHFA’s “advisory” to the Home Loan Banks about funding troubled banks drew little notice, our analysis shows clearly just how consequential this de facto rule will prove. Last year, the Home Loan Banks smugly funded high-risk banks secure in their super-lien, stiffed the FDIC even on pre-payment penalties, and even told the Federal Reserve to stand back when one possibly-salvageable bank sought discount window access. If FHFA has its way – and that’s never a sure thing – faltering banks now need new funding sources, the FDIC is at considerably less risk of loss, and Home Loan Banks will defer to the Fed when it comes to the discount window, not the other way around.
Home Loan Bank advances now stand at $780.8 billion, down about $100 billion from the huge draws in the midst of the 2023 crisis but more than double what they were just a few years ago. This is an after-effect of the March crisis, when the very largest banks experienced unprecedented deposit inflows as funds fled high-risk banks. Most of these deposits have since stayed put. As a result, banks regional and small, shaky and sound, have turned to the Home Loan Banks, using the securities they cannot liquidate due to unrealized losses as collateral backing the Home Loan Bank advances on which many banks have come to rely as deposits remain scarce and costly.
Whether this does any good for housing is a debate for another time. What is clear is that Home Loan Banks have been happy to become not just housing lenders, but lenders’ lenders, bolstering profits for the lender-owned system and salaries for those who run the Banks on their behalf. I also will not revisit the question of whether Home Loan Banks enjoy a taxpayer subsidy – the Banks […]
FedFin on: FHLB Advance Availability
The FHFA has issued an advisory bulletin (AB) building on its 2023 over-arching plan for FHLB reform and bank-regulatory efforts to clarify and constrain FHLB lending to troubled IDIs which received considerable “lender-of-second-resort” FHLB funding during the 2023 crisis. FHFA says that this bulletin does nothing more than “memorialize” longstanding FHFA standards; in fact, it makes significant changes and is likely to require at least some Home Loan Banks to improve member-related credit-risk management by no longer solely counting on collateral and contacting an IDI’s primary regulator, the FDIC, or a Reserve Bank to confirm that ….
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.
FedFin on: Deposit Record-Keeping
Stunned by the impact of a recent fintech failure (Synapse) and growing risks in this arena, the FDIC is seeking comment on a proposal requiring IDIs doing business with third parties related to transaction-empowered deposit accounts to keep timely and daily reports of each deposit and its beneficial owner. The FDIC believes that this would prevent harm to third-party customers who believe funds given to the third party are FDIC-insured when these funds are in fact aggregated into a single account for which the third party is the beneficial owner and the arrangement is not covered by FDIC pass-through insurance….
The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.