The stress test scenarios don’t just ignore IRR, they reward it. As of December 31, 2023, Charles Schwab had unrealized losses on its investment portfolio of $21 billion, more than 50% of Tier 1 capital. BAC has unrealized losses of more than $100 billion, or more than 45% of Tier 1. The supposedly stressed rate…

An oft-repeated truism is that government grants special treatment to homeowners and favors the housing industry. Discussions of the “housing lobby” inevitably preface with the word “powerful.” But is this truism, well, true? Upon closer inspection, the record is more mixed than many assume. Several government programs and incentives promote home ownership. The government explicitly…

Proposed new capital standards for large banks (Basel Endgame) include some fundamental changes in measuring market risk. The new standards would replace the current value-at-risk (VaR) approach with the expected shortfall approach. The market risk proposal is exceptionally complex, and I don’t intend to get into the gory details. Instead, I’ll focus on broad conceptual…

The Basel Endgame proposal would ditch the AA’s models-based approach to credit and operational risk and replace it with an amped-up version of the SA. By moving credit risk weightings under the AA closer to what already exists under the SA, the proposal would result in a real capital charge for operational risk. 

National banks must generally limit their extensions of credit to a single borrower to 15% of capital. This limit increases to 25% for loans secured by “readily marketable collateral.” …In contrast, the Pittsburgh FHLB’s advances to PNC represent 637% of FHLB’s capital. The San Francisco FHLB’s extensions to JPMC were 397% of capital.

The FDIC must resolve bank failures at the least cost to the insurance fund. However, a systemic risk exception allows resolutions that are more costly, at least in the short run. The SVB resolution provides a case in point. The FDIC estimates a resolution cost of $17.8 billion (on total assets of $209 billion). However,…

Gil Hodges was elected to the Baseball Hall of Fame in 2022.  More than 20,000 have played major league baseball, but only 271 reached the Hall of Fame as a player.  While making the Hall is certainly a big deal, his road to Cooperstown was a long one, especially considering the strong early support for…

Senator William Proxmire bestowed a monthly Golden Fleece Award that highlighted what he saw as wasteful government projects. Proxmire was a talented self-promoter, and the press ate it up. Unfortunately, his characterization of the supposed waste was sometimes misleading. The amounts involved were often trivial relative to overall government spending and illustrates a tendency in…