Perspective on Risk - June 17, 2025 (Bank Supervision & Regulation)

Brookings Symposium; Financial Stability Monitoring; FOIA Request; Bowman's Inaugural Speech; More Regulatory & Supervisory Stuff

Sometimes things come together; in this case it is a discussion of bank supervision at Brookings that touched on institutional incentives, and the Federal Reserve (finally) responding to my FOIA request.

For those who have recently subscribed to this Substack, it is not a crypto blog, but rather my own idiosyncratic musings that are more generally financial stability, bank supervision and economic focused, with frequent diversions as my interests wander.

Brookings Symposium

Brookings held a symposium The history of bank supervision in America and the road ahead that coincides with the release of a new book by Peter Conti-Brown and Sean Vanatta titled “Private Finance, Public Power: A History of Bank Supervision in America.” I haven’t read the book yet, perhaps it will be a good summer beach read! But I did listen to the entire symposium.

This is a talk about the history of bank supervision — a topic that my own mother steers away from whenever I bring it up. Sean Vanatta

Setting The Stage

Sean had a nice way of characterizing the role of supervision:

… bank supervision [is the] institutionalized risk management by the public sector of the private financial system…

Their third key theme was “Institutional Design and Institutional Change” so inevitably there was some discussion of the role and remit of each of the regulators, and the possibility of regulatory consolidation. A major observation was that, in the US, supervision wasn’t designed, but evolved to fit a purpose. And maybe this evolution was for the better.

In the introductory session, the authors brought forth that each of the supervisory agencies have different mandates, cultures and priorities. And that “these competing elements themselves can create important dynamics — dynamics that yield information, risk management and other benefits that aren't available in other ways”

Each of the supervisory agencies operates through a different risk management framework so the Comproller operates through a kind of chartering and information regime, the Fed operates through as a central bank and a macroprudential supervisor now it wasn't always the case, the FDIC through deposit insurance for a while the RFC as a beneficial owner of the banks that it supervised.

So having that diversity of supervisory perspective of of risk management strategies creates resilience in the system. I think we would argue, and as Peter said, it means that these different institutions will have different priorities at different times so they're not all moving in one direction and that can be beneficial because the financial system is so dynamic you want supervision to be dynamic as well (55:40)

If you have one supervisory institution you can imagine if not regulatory capture then some version of group think or a kind of singular perspective which makes it harder to catch uh the dynamic risks that the financial system creates.

Peter Conti-Brown provides a nice overview of the whole symposium in his Substack The calling -- and secrecy -- of bank supervision

Sheila Bair’s Perspective

Sheila Bair was interviewed by Aaron Klein in a keynote fireside chat. Her perspective should be well known to readers of the Perspective.

I think there still is a lot of tribalism among the the agencies.

… the Fed and the FDIC have longstanding issues … it's not personalities so much it's just their functions. … a bank fails insurance funds going to take the hit, the Fed cares about financial stability and maybe they don't like bank failures, so … there's kind of this back and forth that's always existed — there's always been tension and still is between OCC and the state bank supervisors …

… when you have this identification with particular agencies who all have their own turf interest you're going to get that kind of mindset, it's not helpful it's and my experience is they're all really good examiners

I’ve always respected Ms. Bair’s commitment to her agencies mandate. But the friction in getting the FDIC to take the necessary steps during the GFC still sticks in my craw. The FDIC mandate had a tendency to inhibit doing the correct thing from a broader financial stability perspective.

Regulatory Coordination, Cooperation, or Conflict.

My favorite panel, of course, was on “Regulatory coordination, cooperation, or conflict.” The panel had Michael Tsu, Sarah Bloom Raskin, and Don Kohn. Rob Blackwell, formerly of American Banker, moderated. Here are some excerpts:

On Regulatory Consolidation

Question: Should we be making a run at consolidating these agencies should we be trying to find a way to make the supervisory system more efficient?

Kohn: there's been so many failures at this over time … I think it's probably futile. …

Kohn: I think there's strengths to having different perspectives and different histories and different objectives among the agencies diversity of views is usually produces better decisions. I think the weakness is there's a bias to inaction so when you have to get everyone consensus among all these different agencies, there's some agency that's always holding back that doesn't agree and that agency then in effect has a veto power. And I saw this leading up to the global financial crisis. …

Kohn: … consolidation seems like an impossible dream and maybe not worth doing because you want to keep some of these perspectives but it's there's got to be a way of moving faster coordinating better overcoming some of the objections so that if a if a if a risk is identified it doesn't take three years to identify how to build the resilience against that risk …

Tsu: there's three functions that we have to decide architecturally do we put them together or do we separate them — lender of last resort, supervision, and resolution and there are some jurisdictions where they put them all together into one entity, sometimes in the central bank, sometimes not in the central bank. And here through history we've decided that these have kind of evolved separately

Raskin: .. if you think about why supervision is actually why it rests at the different agencies, there are opportunities there that could actually enhance supervision if you figured out ways to combine them.

So if you take for example the Fed … think about … what is the contribution that monetary policy? Could … a could a stress test for example include this is ahead of SVB, a kind of test on interest rate risk.

I wonder whether the agencies could … use some of their existing … strong suits …

Tsu: … independence should be broken down into independence for what purpose and I think it's one thing you can do is crisis is different than day-to-day supervision, which is different than regulation. So in a crisis you absolutely need to have massive amounts of coordination there has to be a quarterback, you need everyone on the same page, and in every crisis I've been in that happens almost automatically. There's very little friction to that because the stakes are so high and everyone kind of takes off whatever you know jersey they wear and they're like we just have to solve this problem …

In day-to-day I I think the the argument for that kind of centralization in a political body loses its power because day-to-day it's lots and lots of decisions every day …

The Fed’s Unwritten Mandate

Kohn: … as a member of the Federal Reserve Board, I felt like I had a responsibility for financial stability and that supervision [and] regulation had to help bolster that … that objective it's not totally explicit in the Federal Reserve Act, I get that but it certainly has been a responsibility for the Fed from 1913 on …

FSOC … could be better particularly if it were less consensus driven and the secretary was then held accountable … Suppose it were a press conference where the secretary had to answer questions related to financial stability and financial risk after [the meeting.]

There's not a general acceptance by all the agencies that macro financial stability is part of their remit. And you saw when early FSOC made recommendations on money market funds some SEC commissioner said “wait a second, financial stability isn't our thing — our our thing is market functioning etc.”

I think it would be it would be terrific to have all the agencies … on FSOC have its own … financial stability mandate and have at least a group in the agency that would look at all the rule making and say is this consistent with the financial stability mandate …

Supervisory Cultures

I’ve discussed many times in the past the differences between the three major Fed supervision factions: the Board staff, the NY Fed, and the other 11 Reserve Banks, and I’ve discussed the consolidation of supervisory authority for the GSIBs at the Board. I’ve written how, in a crisis, the Fed’s response is to throw Ph.D.s at the problem because the Fed is long this staff.

Question: what are the cultures [at the supervisory agencies], how are the cultures different between Fed and Treasury, or Fed and OCC, or Fed and FDIC, and and how does that make supervision more challenging?

Tsu: I would just start at the Fed [where] there's different cultures. We often talk about the Fed as like one big Fed, well you've got the Board and you've got Reserve Banks and the the cultures across Reserve Banks to the Fed. Certainly pre2008 were quite different.

After 2008 you've got the reorg where you've got the Lissic program overseeing the GSIBs — that was an attempt to basically say this this diversity of cultures led to a blind spot, it led to a Lake Wobegon effect where everyone was above average … so there was an attempt there to centralize that to create a more singular culture around the supervision regulation of that cohort of of GSIBs …

… a lot of it is informed by the kind of the core experiences of each each agency, so at the Fed it's it's a heavily PhD economic driven, monetary policy culture, and lender of last resort discount window that that is very very very strong … anytime there's an emergency that's those are the actions those are the hard decisions that the Fed has to make with regards to the banking system.

The OCC it's chartering and supervision — that's in the DNA of the OCC.

The FDIC is going to be resolution.

So these are three different kind of starting points … that really heavily informed … the scar tissue that people build up over time, that really feeds into like how you approach things, how you look at things. And I don't think that's a bad thing. I think that it's good for those to … coexist … They are different though. you just have to learn it and that's what makes … supervision.

Raskin: Mike just made one of the best arguments I've heard actually against regulatory consolidation.

Don Kohn, of course, is a legend in the supervisory and financial crisis management community. Michael Tsu has come a long way since I knew him as an SEC examiner during Lehman. His comments are very thoughtful, particularly on the FSOC process. Maybe he should staff Bessent in that role.

If I were to criticize the symposium at all, it would be that there were too many academic speaking, and virtually no one with actual field examiner experience.¹ I’m going to skip the discussion of the panel on the topic of the Unitary Executive. This was a bit about independence, but it was too academic for discussing here. This panel has a good discussion of why supervisory mandates tend to expand over time. The topic of Supervisory Discretion was better, but again would have benefitted from an experienced examiner on the panel. The panel did point towards an interesting NY Fed working paper: Supervising Failing Banks

Financial Stability Monitoring

As you read above, the Fed has always felt a responsibility for maintaining financial stability. In my time, no place felt this responsibility more than the NY Fed. In fact, I recently found an old 2006 presentation I made to some of our senior examiners trying to help change the mindset from microprudential institution-specific one-by-one examination towards an approach with a greater focus on broader financial stability.

Subsequent to the GFC, in part due to politics and scapegoating, and the need to “do something” because of course the existing mechanisms had failed, there was a proliferation of financial stability efforts.

Two things stand out in particular, the formation of the Financial Stability Oversight Council (FSOC), and the Board forming a Division of Financial Stability led by Nellie Liang.

Initially, the FSOC was quite active, identifying GSIBs and in particular non-bank systemically important institutions. This had some success in getting certain firms to change structurally so that they were no longer considered systemically significant.

Raskin: People want to kind of bury FSOC, like FSOC isn't a good thing, and I want to say one thing just in defense of it, which is… it was put in place not really just to be a mechanism by which the heads [of the agencies] would talk to each other but remember enhanced credential supervision? Do we remember the need that if you're above a certain threshold you would automatically be deemed a systemically significant institution and you'd have to be sent over to the Fed for enhanced credential supervision?

The Board’s Division of Financial Stability is led by Andreas Lehnert, who is an excellent choice. The Board’s website shows that there are 41 staff, principally economists, in the current Division of Financial Stability.

Still, one has the feeling that the oxygen is being sucked out of these efforts as time passes. Trump’s Big Bad Bill essentially defunds FSOC. Political discussions are more about granting capital relief than the question of whether some institutions are too-big or too-important to fail, and what to do about this. In fact, J.P. Morgan was allowed to purchase First Republic following the SVB events, and Wells Fargo has now been allowed to expand again. There is no real talk anymore about whether Blackrock or Blackstone or any of the myriad of other firms warrant supervisory oversight.

Tsu: … it's very easy to say hen it's failed but it's very hard to say when it has been successful, and so we'll take for instance like there's been a lot of discussion about the rapid growth of private credit so every single financial stability group that's been out there has written lots of uh reports and monitoring and surveillance. So far that hasn't manifested as a financial stability risk. Is that a victory because all of this apparatus has now trained a lot of firepower on this? … It really depends on what your counterfactual is.

Now I’m not sure we fully lose this if FSOC goes away. It will be rebuilt in some form; perhaps monitoring again at the NY Fed, perhaps a less formal structure like the President’s Working Group that preceded FSOC. But the point is that it will have to be rebuilt (like much else Trump is tearing down). It would probably be better to keep it around in the first place.

The GFC occurred not because banks were failing. It was subprime and SIVs and ABCP conduits, and Reserve Primary Fund and then Broker/Dealers, and then AIG and finally the banks. Having someone with the authority to look into things sooner is probably good.

FOIA Request

As discussed earlier, one of the problems during the GFC was the strict adherence to conflicting mandates. The subsequent reforms included granting the Treasury the ability to grant a “systemic risk exemption” allowing the supervisors to sidestep the new process legislation established.

In the SVB case, I have argued that the regulators may have gone too far, that they did not let the existing mechanisms like the Discount Window perform its special role. And by doing so, they have essentially guaranteed uninsured deposits and greatly expanded moral hazard risk.

As long time readers know, back in August 2023 I filed FOIA requests with the FDIC and the Fed. Here is a link to the public documents on the FDIC FOIA Reading Room. Here is the memo from FDIC staff to their Board. Here is their justification.

Now the Federal Reserve has responded as well. Very limited information as all of the juicy stuff was characterized as pre-decisional and therefore withheld. Here is the Federal Reserve’s justification for the systemic risk exemption.

Neither address the two core questions:

• Why weren’t the existing institutional arrangements, and in particular the discount window, adequate to handle the liquidity issues?

• Why was it necessary to protect uninsured depositors?

Taking a Fresh Look at Supervision and Regulation

Fed. Gov. Bowman gave an inaugural speech as the new VC for Supervision Taking a Fresh Look at Supervision and Regulation. In it, there are five points I feel are important:

Explicit criticism of current ratings:

Federal Reserve supervisory statistics show that that two-thirds of the largest financial institutions in the U.S. were rated unsatisfactory in the first half of 2024. At the same time, the majority of these same institutions met all supervisory expectations for capital and liquidity.

This odd mismatch between financial condition and supervisory ratings requires careful review and appropriate revisions to our current approach.

The Fed currently uses the LFI rating system which has components for 1) Capital Planning and Positioning, 2) Liquidity Risk Management and Positioning, and 3) Governance & Controls (including resolution planning).

She doesn’t specify the population encompassing “the largest financial institutions in the U.S.” For argument’s sake, it would either be the eight (8) domestic firms in the LISCC portfolio, or perhaps the full LFI portfolio of 40ish firms above $100+ billion in assets.

It’s hard to get to her ratios using the eight, so let’s assume its the 40ish. With 40 firms,

• 2/3rds being unsatisfactory implies 27 firms,

• of which there are 14 that “met all supervisory expectations for capital and liquidity.” This means that for 13 firms Governance & Controls is driving the rating.

What could be driving these Deficient ratings?

I would generally think the weaknesses fall into one or more of the following areas: BSA/AML controls, a pattern of a failure to address appropriately identified MRIAs² (particularly in the post-SVB environment), MIS/Cyber-security weaknesses, deficiencies in Internal Audit, and perhaps in Model Risk Management³. It is possible, but unlikely unless severely deficient, that weaknesses in capital and liquidity processes would be double-counted in the Governance & Control rating unless their was a degree of negligence by the Board and Senior Management.

I would not expect that Deficient ratings would be driven by Climate Change, Stress Test processes (all of which should have been remediated by now), Living Wills or consumer compliance issues.

As discussed in the Brookings symposium above, the mandate for bank supervision has historically extended beyond capital and liquidity, incorporating other aspects like BSA.

Community bank separation

Clearly playing to the audience, but correct in approach. The optimal number of non-systemic bank failures is above zero.

One approach that would preserve tailoring is to create an independent community bank supervisory and regulatory framework to clearly separate these banks from larger bank supervision and regulation. This would serve to insulate these smaller banks from standards designed for larger and more complex firms.

Of course, this could also be laying the groundwork for the Fed abandoning supervision of smaller banks. This would face massive resistance from many Reserve Banks, but consolidating this function across regulators does make a lot of sense.

Horizontal review criticism

As one of the parents of the first horizontal review, and as a huge proponent, this may be an example of “too much of a good thing.”

Another tool that we will be reviewing with a critical lens is the use of horizontal reviews. In theory, horizontal reviews—where examiners conduct a narrow but deep review on a particular topic across multiple banks—can help improve an examiner's perspective. Horizontal reviews, when used effectively, can help supervisors better understand the range of industry practices.

But these reviews have quickly evolved into oversimplification of complex issues and often include "grading on a curve," where firms are rank-ordered, with an expectation that implementing a simpler approach fails to meet expectations, under the assumption that the more complex approach is appropriate for all firms. However, this side-by-side comparison fails to address the only question that matters: whether a firm's approach meets appropriate legal and supervisory standards for the individual firm's characteristics.

I will be looking closely at whether the continued use of horizontal exams going forward is appropriate, and if so, to ensure that these exams are sufficiently transparent, they reflect proper respect for the APA, and do not circumvent our responsibility to provide each regulated institution with a fair, firm-specific evaluation.

When it was initially devised, it applied only to those firms that would now be designated as GSIBs and their foreign branch equivalents. I assume it has been extended, and with the extension there is a diminution of the skill and tailoring of the results and message. The initial implementation of horizontal reviews certainly did not force a “one size fits all” approach. It was clearly tailored, and firm’s with a higher risk level or more substantial business were expected to have leading practice, while others with less significant risks in the area could get by with merely “adequate” controls. That said, there was no more effective way of getting management’s attention than pointing out where they trailed peers - much more effective that giving a supervisory rating.

Supplemental Leverage Ratio

We’ve all known this is coming, the only question is why it is taking so long.

The original calibration of the eSLR was based on forecasts of the level of reserves and other so-called "safe assets" in the system that are now far out of line with current levels. I expect that in the near future, the agencies will publish a proposal to help address this concern and ensure that the eSLR resumes functioning as a backstop capital requirement.

Due to multiple rounds of quantitative easing (QE1, QE2, QE3, and QE4), bank reserves exploded from normal pre-crisis levels to unprecedented heights. The massive QE programs meant that bank reserves became "abundant" rather than "ample" - far exceeding what anyone anticipated when the eSLR was designed.

The binding nature of this constraint has forced a reduction in Treasury intermediation (and holdings). This, of course, is undesirable when we need to soak up all of the Treasury debt issuances.

The role of guidance in supervision

When I was an examiner, guidance was just that: guidance. It seems to have subsequently taken the effect of regulation, so there is less discretion for the examiner to factor in the unique ways a firm may choose to manage a risk. Heritage J.P. Morgan was a firm that always governed itself differently from other organizations, but was nonetheless effective.

Guidance can be an effective tool to promote transparency in supervisory expectations, to provide clarity to regulated institutions on the permissibility of new activities and their associated risks, and to provide firms some perspective on how they may comply with statutory and regulatory requirements.

Where guidance does not further these objectives, it is worth revisiting. … Fundamentally, guidance should clarify expectations, and provide answers to industry questions. … Changing expectations around the use of guidance, as a tool to promote clarity in supervisory expectations, can encourage innovation in the banking system.

Overall, the speech is a good start.

More Regulatory & Supervisory Stuff

Reducing Examiner Discretion on CAMELS Management Rating

Rep. Fitzgerald, Scott [R-WI-5] has introduced H.R. 3379 as the “Halting Uncertain Methods and Practices in Supervision Act of 2025” or the “HUMPS Act of 2025”

To amend the Federal Financial Institutions Examination Council Act of 1978 to require the Federal financial institutions regulatory agencies to update the CAMELS Rating System, and for other purposes.

1. establish clear and objective criteria for assessing each CAMELS component;

2. revise the weighting of each CAMELS component to derive a composite rating that more accurately reflects the financial condition and risk profile of the financial institutions being rated;

3. either—

   1. eliminate the management component of the CAMELS rating system; or

   2. revise the management component of the CAMELS rating system to limit the assessment under such component to objective measures of the governance and controls used to manage an institution’s risk profile; and

4. ensure that composite ratings are determined based on a transparent methodology that is limited to the objective criteria established for each CAMELS component.

Discount Window

Fed exploring Home Loan bank collateral interoperability (American Banker)

This would be a welcome development

Fed Vice Chair Philip Jefferson, speaking Monday morning at the Federal Reserve Bank of Atlanta's annual Financial Markets Conference, said closer collaboration between the two emergency lending programs was one of several developments likely to emerge from the central bank's ongoing effort to modernize its discount window.

"The Federal Home Loan banks and the Fed … have been looking at issues of interoperability with regard to the pledging of collateral," Jefferson said. "That work is in its early stages and I look forward to advancements in that area."

Liquidity Facilities

Tip of the hat to Ian Taylor on LinkedIn for pointing to a speech by Fed. Gov. Jefferson titled Liquidity Facilities: Purposes and Functions.

The provision of liquidity by central banks is a foundational element of financial intermediation. Central banks should be able to provide liquidity effectively for the financial system to function smoothly

Jefferson discusses how central banks provide liquidity to support financial system stability, focusing on both intraday and overnight credit. He examines similar facilities in the UK, Japan, and euro area, noting that different central banks achieve similar objectives through varying designs that balance 1) Interest rates vs. collateral requirements. 2) Accessibility vs. moral hazard concerns. and 3) Penalty rates vs. broad collateral acceptance.

Beware Unintended Consequences

These two Financial Times articles examine different aspects of potential unintended consequences from Trump administration financial policies, both highlighting how regulatory changes could create systemic risks rather than address them.

• Could Trump’s ‘big beautiful bill’ kill the OFR and accidentally sabotage SOFR? (Alphaville) describes how the Big Beautiful Bill could effectively kill the Office of Financial Research (OFR) through budget restrictions rather than direct legislation. Section 50005 would cap the Financial Research Fund at only the Financial Stability Oversight Council's tiny budget (around $16 million), starving the OFR of the $83 million it needs for data collection and analysis.

• A mooted fix for the Treasury market may actually increase systemic risk (FT) argues that granting SLR relief may do more hard than good. While nominally intended to strengthen the role of banks and dealers in the Treasury market, it would likely amplify dealers’ Treasury financing activities, and expand the already elevated size of hedge fund bets on what is called the Treasury cash-futures basis trade, making the whole system more fragile.

Financial Sector-wide Stress Tests

EU plans sweeping stress test of non-banks (FT)

Readers know I have been in favor of drastically changing the US stress test requirements, and adopting an approach more akin to the Bank of England, which occasionally will run stress tests across the entire financial sector, and not just banks. Well, the EU has gone in the British direction; maybe the US will eventually follow.

EU regulators are planning their first stress test to look for vulnerabilities in the financial system outside of banks, reflecting fears about the rapid growth of less regulated groups such as hedge funds and private equity. …

Officials at the EU’s main financial watchdogs are still discussing the details of such a system-wide stress test of non-bank institutions, but they are optimistic that it could be launched next year, according to two people involved in the talks.

The Sovereign Ratings Cap

We haven’t much discussed the Moody’s downgrade of the US, but one important angle is that a country’s rating generally acts as a “cap” on the rating of its financial institutions. Damodaran weighs in on the downgrade in A Moody's Ratings Downgrade for the US: What now? (Musings on Markets)

The Bank Policy Institute (BPI) Doesn’t Like Regulations

To be expected, but not totally wrong.

Redundant, Costly and Inaccurate: The U.S. Bank Liquidity Regime Needs a Rethink (BPI)

In summary, the current U.S. liquidity regulation framework for large banks is characterized by significant complexity, redundancy, and inaccuracies, which undermine both its effectiveness and efficiency. The framework’s five main components — LCR, NSFR, internal liquidity stress tests, ongoing supervision, and resolution liquidity requirements — often overlap in purpose and methodology, resulting in duplicative and sometimes conflicting obligations.

To enhance both financial stability and economic growth, the framework should be streamlined and modernized. Redundancies — such as resolution requirements and the misaligned NSFR — should be eliminated or consolidated, and regulatory requirements should be recalibrated to better reflect actual liquidity risk and the operational realities of modern banking.

The Most Damaging “Guidance” in Banking (Bank Policy Institute)

… the federal banking agencies’ Model Risk Management Guidance. It is a set of check-the-box instructions on how banks should validate and document the models they use across all aspects of their operations. It has disrupted bank operations; created a massive compliance bureaucracy; hampered banks’ efforts to make effective use of AI; and impeded banks from innovating in everything from lending to anti-money laundering monitoring to cybersecurity. Its application has also varied greatly from examiner to examiner. Moreover, that manual is now 14 years old, and has never been updated to reflect the revolution in computer analysis that has occurred since its adoption.

Also, it is being enforced illegally. Rescission therefore appears to be required under Executive Order 14219.

Other than that, how did you like the play Mrs. Lincoln?

Supervision Nerds Should Read UponFurtherAnalysis

I wanted to call out this Substack for a continued stream of bank supervision content that will be accessible to the lay reader.

Supervisory Appeals and Unreliable Narrators (UponFurtherAnalysis)

Much of bank supervision operates outside the public eye. Recent critiques of supposed regulatory overreach note the secretive nature of bank supervision but then make claims of their own that are hard to either verify or falsify. This can lead to an “unreliable narrator” problem. One area where this is readily apparent is in the supervisory appeals process, which some critics claim is “broken.” But do these claims stand up to scrutiny?

The UBPR and Interest Rate Risk (UponFurtherAnalysis)

Banking regulators recently revised their Uniform Bank Performance Report (UBPR) to improve the report’s ability to identify and analyze interest rate risk (IRR). This publicly available report is designed to provide a comprehensive view of a bank’s performance and risk profile. Using some real-life examples, I’ll show where the UBPR has improved, where it falls short, and discuss potential improvements to the source data.

Note: the National Information Center really does need to update their website to make it easier to download specific, relevant information.

What are Unsafe and Unsound Practices Anyway? (UponFurtherAnalysis)

The assessment of safety and soundness is among the most fundamental elements of bank supervision. But what does safety and soundness mean in practice? And what makes certain aspects of a bank’s condition or management unsafe or unsound?

Speedbumps and Bank Supervision (UponFurtherAnalysis)

Explosive growth preceded some of the biggest bank failures. Meaningful asset-based thresholds encourage banks to pause growth as their risk infrastructure catches up.

One Weird Trick — Bank Supervisors Hate It

All financial firms will maximize towards their incentives. In The trouble with Danish, squared (FT), Dan Davies walks through the effects of a loophole caused by EU bank capital regulations being different from the Basel standard. In this case, the “loophole” was designed to account for Bankassurance firm’s “goodwill hit” when buying fund management firms. Fascinating read.

The difference between tangible asset value and the price paid is recorded as “goodwill” on the balance sheet, and it’s pretty settled regulation that goodwill has to be deducted from a bank’s regulatory capital. But it isn’t deducted from accounting equity, and accounting equity is the basis of the Danish Compromise.

This makes it much more capital efficient to carry out any acquisitions in this sector through your insurance subsidiary rather than on the balance sheet of the parent bank

Normal Accidents

Normal Accidents is a foundational book in operational risk. The Streetwise Professor seems to subscribe to the methodology as well. In Normal Accidents. Again. (Streetwise Professor) discusses the collapse of the Spanish power grid.

Many “normal accidents” involve causal chains that came as a complete surprise to those reviewing them ex post. This is definitely not the case with respect to the electricity grid and renewables. There have been many Jeremiahs warning of impending doom from over-reliance on them. Indeed, the Spanish grid operator itself sounded the alarm as recently as February.

Another “normal accident” is the power failure at Heathrow in March. North Hyde Review Interim Report displays many of Perrow’s framework characteristics.

Interactive Complexity

• The failure cascaded across multiple interconnected systems, the sequence of events created a scenario that wasn't fully anticipated, and had an unrecognized cross-system single-point-of-failure dependency.

Tight Coupling

• There was no buffer time or intermediate failsafe that could prevent the cascade. The tight coupling meant that automated recovery wasn't possible, and human operators had to work within the constraints of safety protocols. The incident occurred during peak airport operations, and the time-sensitive nature of aviation operations meant that even relatively brief outages had disproportionate impacts.

The accident was "normal" in that it arose from the inherent characteristics of the system - not from extraordinary circumstances or operator error, but from the way complex, tightly coupled systems inevitably interact. Multiple small failures combined in unexpected ways - the initial transformer failure, the circuit configuration, and the timing created a scenario that exceeded the system's design assumptions.

1. Michael Tsu, the former Acting Comptroller of the Currency was once an SEC examiner, but that is out of the mainstream of bank supervision.

2. MRA = Matters Requiring Immediate Attention

3. I say this last bit on Model Risk Management given the extremely strong pushback recently from BPI. The Most Damaging “Guidance” in Banking (Bank Policy Institute)