We all know that no one listens to what credit ratings agencies say, and that if you were buying up all of that RMBS eight years ago marveling at what a great deal you were getting on triple-A rated stuff, you had it coming. But wouldn’t it be neat if you could put the tiniest bit of stock into a credit rating? Wouldn’t it be great if the folks at Fitch and Moody’s and S&P actually had to do the things they get paid to do?
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 »
Federal Reserve Hints That Maybe Banks Should Hire Jerry Bruckheimer To Help Write Their Stress Test ScenariosBy Matt Levine
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 »
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
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 »
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 »