Welcome

Upon Further Analysis — Archives

  • The Chevron Deference and Banking Regulation

    The United States Supreme Court is considering overturning Chevron USA vs. Natural Resource Defense Council, a long-standing precedent that generally defers to an administrative agency’s interpretation of the law. What impact would overturning the Chevron Deference have on banking regulation and supervision? The Chevron Deference The 1984 Chevron case centered on the EPA’s definition of…

  • Expected Shortfall vs. VaR as Risk Measures

    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…

  • Operational Risk, Fungible Capital Requirements, and the Basel Endgame

    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. 

  • FHLBank Reform and Concentration 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.

  • Measuring Systemic Risk in Banking

    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,…

  • THE BIG PICTURE

    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…

  • REGULATORY CAPTURE

    Few things examiners find more dispiriting than to have banks go over their heads to senior agency management.  Not only does it undercut the examiner’s authority, but it places the agency itself at a distinct disadvantage.  An agency leader is likely to know a lot fewer details of the issue at hand than the examiners…

  • FIRST REPUBLIC AND HALO EFFECTS

    The FDIC’s Chief Risk Officer has released a postmortem report of the First Republic bank failure.  A close reading of the report indicates that supervisors largely overlooked weaknesses in interest rate risk and liquidity risk management at First Republic.  The FDIC’s supervision of First Republic appears to be a classic case of the halo effect,…

  • Locked in Unrealized Losses

    Current capital rules for U.S. Banks require only the largest and most complex banks to include accumulated other comprehensive income (AOCI) in regulatory capital.  Proposed new rules would extend this requirement to all banks over $100 billion in assets.  Much of the discussion on the proposed rules has focused on unrealized losses on available-for-sale (AFS)…

  • How to Write a Supervisory Letter

    The spate of bank failures this past spring has triggered more interest in how the bank supervisory process works.  The Supervisory Letter (SL) is usually the most critical document coming out of the supervision of large banks.  I’ve written quite a few SLs in my time and can share how the letter writing process works…