An influential counternarrative has emerged regarding 2023’s bank failures. Official post-mortems attributed the failures in part to a light touch approach to bank supervision. The counternarrative suggests that the problem may be too much supervision. Specifically, that supervisors failed to effectively prioritize and placed too much emphasis on non-core, non-financial weaknesses. Its advocates suggest that…

We are likely to hear a lot more about “tailoring” when it comes to bank regulation in the U.S. It’s hard to argue with the concept that regulation and regulatory burden should be proportionate to a bank’s size, complexity, and risk. Applying that concept in a thoughtful, prudent way is quite another matter. Background The…

A black swan refers to a highly improbable but impactful event. The metaphor can apply to a wide range of events, even baseball records. Black swans most frequently apply to financial risk management, including regulatory capital and stress testing. The Global Financial Crisis (GFC) exposed some of the gaps in probability-based capital frameworks. Stress testing…

A black swan refers to highly improbable but impactful events. While the term is most frequently used in a financial context, it can apply to other fields as well. Baseball is a good example, especially given its long history and emphasis on individual statistics. What were baseball’s greatest black swans? I’ll look at some notable…

Recent news reports indicate the incoming administration is considering consolidating federal banking regulators as part of a broader effort to improve government efficiency. I went through two such consolidations during my 36-year career in bank supervision. Efficiency gains are likely to be meager, at best.  At the same time, having multiple banking regulators can undermine…

A previous post discussed some of the challenges associated with modeling non-maturity deposits (NMD), especially with respect to economic value of equity (EVE). Deposit modeling for earnings-at-risk (EAR) is more tractable but presents challenges of its own. What is EAR? EAR looks at changes to net interest income from changes in market interest rates. Unlike…

On October 18, 2024, regulators closed First National Bank of Lindsay (FNBL), OK. In a departure from other recent bank closures, the FDIC elected not to fully reimburse uninsured depositors. What does this decision say about moral hazard, market discipline, and which depositors the government chooses to protect? Moral Hazard and Deposit Insurance Regulators took…

Assumptions around nonmaturity deposits (NMDs) are key drivers of a bank’s interest rate risk profile. I’ve looked at a host of models over the course of my career. These include market models, credit models, prepayment models, and stress testing models. But NMD modeling presents the most challenges. What makes NMD risk modeling so difficult? Modeling…

Last year’s failure of Silicon Valley Bank prompted efforts to improve liquidity risk management within the banking system. Much of the attention has focused on improving access to the Federal Reserve’s discount window (DW), including attempts to reduce discount window hesitancy due to its perceived “stigma.” While the DW stigma is treated as an article…

Dick Selma played for five teams over a largely undistinguished ten-year Major League career. The 1970 Philadelphia Phillies finished fifth in their division, only a half game out of last place. That was also the third in a string of seven straight losing seasons for the Phils. Somehow though, this journeyman pitcher on a mediocre…