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The U.S. banking system is safer and more stable than it was before 2008, but the turmoil surrounding Silicon Valley Bank and a handful of other financial institutions suggests it could still be a little more secure and stable. I showed you that (please).
Of course, occasional bank failures may be inevitable. They just need to be managed. And it’s heartening to see how the broader financial system and the U.S. economy avoided the entire turmoil. Recall that many at the time thought this was a repeat of the S&L crisis and that a recession was inevitable as banks cut back on business.
Still, it would be foolish not to learn. something The fiasco (you know, the failure to sell all interest rate hedges in the middle of a major rate hike cycle, the loading of uninsured deposits from a fickle and highly concentrated customer base, the lack of a chief risk officer) FUBAR for a second opinion when everything goes well.
With that in mind, here’s a new report from the Center for Financial Stability on this topic. The report was authored by a handful of industry luminaries, including Sheila Baer, Joyce Chan, Charles Goodhart, Lawrence Goodman, Barbara Novick, and Richard Sander. It claims:
Unfortunately, little work has been done to meaningfully address these weaknesses. Capital and liquidity stress tests continue to treat government securities as risk-free and highly liquid. Uninsured deposits remain at risk of a run. As it becomes clearer that the Fed will need to maintain its “high interest rate stance for an extended period of time,” pressure on banks’ funding costs and net interest margins will increase, increasing the risk of further bank failures. Regulators are proposing major changes to capital requirements, known as the “Basel III endgame,” but these primarily address issues stemming from the Great Financial Crisis (GFC) and are It’s not a banking turmoil. Whatever the merits of these proposals, what is more urgently needed is to address the very real risk of future bank failures and their impact on the stability of the system.
In most cases, it sets back on the ground covered by many, many other post-mortems into the 2023 Bank Fraud Act, both in terms of the weaknesses it uncovered and the need to address them. Let me do it. It works safely in most cases.
For example, this group could be used to support efforts such as increasing U.S. bank deposit guarantees, increasing capital requirements, ending the risk-free treatment of U.S. government debt, reforming the FHLB system, or the chaotic mess of U.S. financial regulators. We avoided recommending that mixed organizations be abolished and replaced. Use a single powerful watchdog.
The attached report also states: many While there is some blame for tight monetary policy and the Fed’s failure to take financial stability concerns more seriously, this argument feels a little weak. The U.S. central bank is clearly concerned about financial stability, but combating inflation is a priority and it has made policy decisions in case some U.S. banks are found to be incompetently managed. It’s obvious that I can’t remove it.
But it did make one interesting suggestion. The report’s unique highlights include:
. . . The group believed that creating an independent regulatory and oversight board at the Fed could be beneficial and less controversial. It places the Fed’s monetary policy responsibilities under the newly constituted seven-member Monetary Policy Committee (MPC), and puts regulation and supervision under another seven-member Financial Policy Committee (FPC). ) may be achieved by placing it under This will leave regulation and oversight to the Fed, but it will strengthen and increase its importance in decision-making. . The recent bank failures were an unfortunate but predictable sign of a rapid inflation surge for financial institutions with interest-sensitive assets and viable liabilities. A closer link between the Fed’s monetary policy and bank regulatory and supervisory responsibilities might have worked better in focusing supervision on these risks. Separating the two completely could have made things even worse. To maximize the potential benefits of the new FPC, the group believed that the membership of the FPC and the Monetary Policy Committee should overlap. One way he could accomplish this is by adding the MPC and FPC chairs to both committees, and perhaps one additional member.
This may sound familiar to some Alphaville readers, but that’s because that’s the model currently in use in the UK.
As part of a sweeping regulatory overhaul following the global financial crisis, the UK abolished the Financial Services Authority and created the Financial Conduct Authority, a more typical consumer protection agency. Regulation of individual financial companies was left to a new body within the Bank of England, the Prudential Regulation Authority, and a new Monetary Policy Committee was established to monitor system-wide risks.
The FPC consists of the central bank governor, four deputy governors and the central bank’s director-general for financial stability, the FCA’s CEO, five external members with expertise in this area, and one non-voting Treasury official. It is made up of 13 members including. Meetings are held quarterly and reports are submitted. make people frown Make recommendations that people tend to follow.
It is similar to the US Treasury’s Financial Stability Oversight Council or the Financial Research Service, but with real functions (for example, it can also give binding instructions to the PRA and FCA).
At times, the FPC, chaired by Andrew Bailey, has been buying long-term government bonds to calm the turmoil of last year, even as the MPC, chaired by Andrew Bailey, has been selling long-term government bonds to curb inflation. It can also lead to some scary and funny situations, such as voting for. Here is his full BoE report on how FPC and MPC interact. If you’re interested in that kind of thing, take a look here.
But overall, it’s a setup that seems intuitively smart, and so far there doesn’t seem to be any major downsides, apart from the overall mess with LDI?
Although the British system is not explicitly mentioned anywhere, CFS certainly seems obsessed with it, and one of the more bizarre aspects of the US Federal Reserve Special emphasis is placed on how it can help. Below are the highlights of the report.
The creation of the FPC could also address the group’s shared concerns about bank executives serving on the Federal Reserve’s regional banks’ boards. The boards of the Fed’s 12 reserve banks each consist of nine people, three of whom come from the banking industry. There has been considerable public criticism over the fact that SVB CEO Greg Becker served on the board of directors of a San Francisco regional bank. Although local bank boards have no role in setting regulatory or supervisory policies, the views of bank executives who serve on local bank boards undermine public trust, and the existence of boards inevitably undermines bank supervision. This invites speculation as to whether or not this is the case. We note that the San Francisco Regional Bank has suffered significant reputational damage from the failure of SVB, even though SVB’s supervision was functionally supervised by the Federal Reserve Board in Washington. The best solution is to ban bank executives from serving on the Fed’s local bank boards. However, if this continues, we recommend that all functional and administrative regulation and supervision be completely removed from local banks and placed under the FPC.
Placing regulation and supervision under the FPC could ensure that Washington’s bank examiners are supervised by a committee comprised of experts in the fields of regulation and financial stability. This would also help prevent local political influence on the oversight process. At the same time, as mentioned above, examiners need to be supported and respected in their supervisory role. They will have the best understanding of the bank’s weaknesses and risk management gaps ‘on the ground’. They must be empowered to act quickly to resolve critical issues that may threaten the bank’s survival. The FPC’s primary responsibility is to ensure that examiners are well-trained, adequately resourced, and have the ability to act quickly and unencumbered by the layers of Washington bureaucracy.
The report also believes that splitting the FPC and MPC would ameliorate another major criticism of the Fed.
Creating the FPC would also help address groupthink at the Fed. Despite this metric’s potential to be an important predictor of financial instability, there is a persistent reluctance at the Fed to think in monetary terms. Similarly, meaningful dissent on financial and regulatory issues is rare. Ideally, the FPC would include conflict-free individuals with working knowledge and experience of financial markets. New he FPCs must actively work to enhance their stress testing capabilities with focused, meaningful, and realistic scenarios. By providing a less academic and more realistic reflection of the real-world risks that banks face, financial institutions and regulators can be better informed about the full picture of potential risks.
Still, it’s horribly amusing to see someone advocate that the US emulate the UK’s approach to financial regulation. Perhaps not mentioning that the FPC-MPC model was made in the UK was a strategic choice to make it more flavorful?
