Federal Reserve

  • 20 Feb 2014 at 6:18 PM

Jeffrey Gundlach Feels Like He’s Getting Screwed

In a plot line not totally dissimilar to that of his favorite film, Ass Traffic: Volume 8. Read more »

  • 07 Oct 2013 at 5:25 PM

Shutdown Watch, Day Seven: Nothing To See Here

No progress—unless you consider this progress. No CFTC report on the things the CFTC reports on, joining all of the other reports that are not coming out. Still no concern that the lack of progress means there will be a default, even if John Boehner is now saying he wasn’t serious when he said he wouldn’t allow a default. Some people smelling opportunity. And a reminder that the Federal Reserve is not reliant on Congressional appropriations in a way that will be obvious to those whose ATMs dispense something other than $20 bills. Read more »

Today the Fed released a paper making fun of banks for their lame responses to the Fed’s stress tests, both on prudential-regulatory and on literary grounds. For instance, the banks were supposed to come up with their own stress scenario and see how they’d do in that scenario, and a lot of banks apparently phoned in that effort. The Fed was unimpressed:

A BHC [bank holding company] stress scenario that simply features a generic weakening of macroeconomic conditions similar in magnitude to the supervisory severely adverse scenario does not meet [the Fed's] expectations.

BHCs with stronger scenario-design practices clearly and creatively tailored their BHC stress scenarios to their unique business-model features, emphasizing important sources of risk not captured in the supervisory severely adverse scenario. Examples of such risks observed in practice included a significant counterparty default; a natural disaster or other operational-risk event; and a more acute stress on a particular region, industry, and/or asset class as compared to the stress applied to general macroeconomic conditions in the supervisory adverse and severely adverse scenarios.

At the same time, BHC stress scenarios should not feature assumptions that specifically benefit the BHC. For example, some BHCs with weaker scenario-design practices assumed that they would be viewed as strong compared to their competitors in a stress scenario and would therefore experience increased market share.

Oh sure you get points for, I don’t know, having a lot of capital or whatever the ultimate point of all of this is, but what really distinguishes a B+ from an A bank, stress-test-wise, is creative scenario design. Read more »

  • 09 Jul 2013 at 1:49 PM
  • Banks

New Capital Regulations No Big Deal, Say Regulators

US banking regulators have released new proposals to require banks to have higher leverage ratios, counterintuitively meaning lower leverage, and you can go read them here, or read about them here or here. Briefly: in addition to regular Basel III risk-based capital requirements, banks are also subject to a backstop equity-divided-by-assets0 leverage test, and internationally the minimum is 3%, but in the US it’ll be 5% for the biggest bank holding companies and 6% for the biggest insured banks. The OCC estimates that the banks are in total about $84 billion or so short of that requirement, though they have five years to get there, so it’s not, like, go sell $84 billion of stock right now or whatever.1

We have talked about leverage ratios to death and now they are dead. Leverage ratios, yaaaay.

But here is a weird thing from the regulators’ joint notice of proposed rulemaking: their estimate that banks’ cost of equity capital is just 0.56% above their cost of debt: Read more »

The Fed is meeting in 11 days. Therefore, it is time to start speculating about what they will do/that they will do what you want them to do/that any prediction other than “sit tight” has more than a trace likelihood of coming true. And if not in 11 days, then in a month-and-a-half. Or in September. You know, eventually. Ben Bernanke did say “maybe” and “possibly” and “in the next few meetings,” after all. Read more »

  • 07 Jun 2013 at 10:30 AM
  • Banks

Foreign Banks Get Two-Year Reprieve From Failed Populist Effort

Once upon a time, Blanche Lincoln was a United States Senator from Arkansas, which is no longer as friendly to Democrats as it was when she was first elected in 1998. So, facing a tough re-election battle in 2010, she pushed hard for a seemingly ill-advised rule forcing banks to hive off some of their swaps trading, believing that it would put her over the top.

It didn’t, and she got trounced. Now, Blanche Lincoln is no longer a U.S. Senator, but her swaps push-out rule survives as part of the Dodd-Frank law, much to everyone’s unhappiness. So everyone’s getting together to agree to put off actually enforcing it for a while. Read more »

One reason that a lot of people are enamored with the Brown-Vitter approach to bank regulation is that it’s very simple, and everyone deep down sort of thinks that the simple answer has to be better than the complicated one. “You don’t need risk-based capital or stress tests or liquidity coverage ratios or VaR models or multiple tiers of capital or bail-in debt,” Brown and Vitter promise. “You just need to make sure that big banks don’t have assets of more than ~6x their common equity.”

Some people disagree1 and by all means feel free to question those people’s motives. Certainly some people benefit from complexity, bankers above all but also banking regulators, former regulators, and I suppose me too. Simple banking seems really boring, though maybe Brown-Vitter simple banking wouldn’t be.

Anyway that seems like the background to this interesting speech by Fed governor Daniel Tarullo about financial stability, which you could if you like read as sort of the Fed’s initial response to Brown-Vitter. And it’s not not that; the speech engages with Brown-Vitter on the capital stuff, basically defending the status quo of risk-based regulatory capital while conceding a little to Brown-Vitter’s call for higher capital.2

But he seems at least as focused on another source of systemic risk: not banks but wholesale funding markets, not capital but liquidity. You could see why the Fed might be focused there. Read more »