Upon Further Analysis — Archives
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Understanding Mortgage Servicing Assets
Federal banking regulators have proposed changes to the capital treatment of mortgage servicing assets (MSA) One rationale for this change is to increase mortgage origination and servicing activity by banks, who have lost market share to nonbank entities. What are mortgage servicing assets and what are their risks? And are these proposed changes likely to…
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Fast-tracking New Bank Charters: A Cautionary Tale
Banking agencies have been fast tracking applications for new banking charters, with a particular emphasis on crypto and crypto-adjacent firms. This approach calls to mind an episode from early in my career. In that case, a banking agency ignored some clear red flags, providing yet another hit to its already tarnished image. Moreover, the situation…
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Regulation and Supervision – What’s the Difference?
Banking regulation in the US has two separate but closely related elements: regulation and supervision. These terms are often used interchangeably, even by professionals in the field. Not all activities by regulatory agencies fall squarely in one category or another. But there are important distinctions between the two. Understanding the distinctive roles associated with each…
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Sanewashing Regulatory Reform
Advocates for recent changes to bank regulation and supervision have characterized these efforts as merely an attempt to restore balance and to prioritize substance over form. More neutral observers also accept much of this premise. But is this really the case? Or are terms like reform, modernization, and material financial risks masking how extreme some…
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Understanding CAMELS Ratings
Regulators give banks report cards in the form of CAMELS ratings. These ratings can affect examination frequency, assessments, the ability to pursue acquisitions, and the likelihood of enforcement action. The ratings are also not publicly disclosed, except on an aggregated basis or in some limited instances. A recent proposal to define “unsafe or unsound” practices…
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Checking the Box?
Some key regulators and bank lobbyists characterize much of bank supervision as checking the box. “Checking the box” suggests a mindless emphasis on the superficial. Maybe the phrase test-markets well. But is box checking really that prevalent? My own experience suggests that it isn’t and that there are some fundamental contradictions associated with this narrative.…
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The End of Preventive Supervision?
The FDIC and the OCC recently issued a Joint Notice of Proposed Rulemaking (NPR) that would establish a definition of “unsafe or unsound practices” and change the standards for issuing matters requiring attention (MRAs) and matters requiring board attention (MRBAs). While advocates for these changes describe them as promoting a greater focus on core financial…
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How to Look at Financial Risk Models
Models play an essential role in financial decision making. Financial institutions and their regulators use models to forecast, identify exposures, and quantify risks. Whether you’re a Treasurer, a risk manager, or a regulator, it’s important to understand how models work and some of their pitfalls. The idea isn’t to turn people into modeling experts, but…
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Are We Ready for Robo-Examiner?
Some observers have touted the promise of artificial intelligence (AI) in improving the quality of bank supervision. Recent staffing cutbacks at bank regulatory agencies have given this issue more immediacy. Can robo-examiners come to the rescue? More generally, what are some of the more promising applications of AI in bank supervision? And what are the…
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AI-Generated Supervisory Letter
As a test, I used ChatGPT to generate a supervisory letter given a set of facts. I didn’t use the bank’s name, but the findings corresponded to those of an August 21, 2021, examination of Silicon Valley Bank. The query also used Uniform Bank Performance Report (UBPR) data as of June 2021. Here is the…