Category: Financial Institutions

  • Are Bank Regulators Creating More Systemic Risk?

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    Adam Levitin

    Systemic risk seems to be the byword for financial institutions regulators now, but a trio of developments indicates that it is only deepening:

    1. Professor Anna Gelpern at Rutgers-Newark notes a scary change in Federal Reserve policy: the Fed just adopted an interim final rule (was there a notice and comment period?) that allows “all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market.”

    To put it in less abstruse language, the Fed is allowing insured banks to take equities (supposedly investment grade, as if that had meaning now) as collateral. So insured banks now take on their affiliates junk equity holdings as collateral and if things go badly…the FDIC insurance fund (and ultimately the taxpayers) are on the hook. I’m guessing that this means all of the bum MBS floating around insured banks’ affiliates are going to go into the collateral pile. Not every bailout has to make the front page of the Times, but that’s what this temporary Fed rule is…a contingent bailout.

    2. As Professor Patricia McCoy of University of Connecticut School of Law observes that BoA is asking for its capital requirements to be temporarily lowered. In other words, BoA wants to become even more leveraged. This, at a time when banks are scrambling to delever.

    3. Professor McCoy also notes that BoA is aksing to be and to be excused from the Riegle-Neal 10% concentration limit, which prohibits banks from obtaining more than 10% of all insured deposits via merger. BoA is already right around 10%, so to the extent it picks up anything from Merrill or a Merrill subsidiary (or any other bank), it might have problems (not that the 10% cap deterred BoA when acquiring Fleet a few years ago).

    Whether the OCC and Fed will acquiese to BoA’s requests remains to be seen. But these two developments put together indicate that the lessons of Fannie and Freddie have not been internalized: (1) larger institutions generate more systemic risk, especially when they are (2) highly leveraged and (3) holding junk collateral. Let’s hope that in the scramble to stave off one crisis we aren’t setting the stage for another much worse one.

  • Why the OCC Can’t Be Relied on for Consumer Protection

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    Adam Levitin

    The OCC is up to its old tricks. It doesn’t matter how bad things are out there for consumers–one can always count on the OCC to stand up against any attempt to regulate the consumer lending practices of national banks.

    The OCC’s latest shande is its opposition to the Federal Reserve’s proposed expansion of Regulation AA, which defines and bans certain unfair and deceptive acts and practices (UDAP). The OCC’s response, is perhaps the best illustration of its complete regulatory capture–the OCC is objecting to the proposed Regs because it is concerned that they will hurt bank safety-and-soundness, and constrict lending (which it claims is bad for consumers).

    Somehow the OCC’s parallel agencies–the OTS and NCUA, which regulate federal thrifts and credit unions, haven’t been overwhelmed by the same concerns, as they have proposed parallel UDAP regulations to the Fed’s. It seems that the OCC doesn’t understand that UDAP regulations are about consumer protection, not safety-and-soundness. But, then it is hard to think of a federal agency that is more in the thrall of the entities it “regulates.”

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