Category: Market Action

The BoC released a fascinating Staff Working Paper by Rodney J. Garratt, Zhentong Lu and Phoebe Tian titled How Banks Create Gridlock to Save Liquidity in Canada’s Large Value Payment System:

Using detailed data from Canada’s new high-value payment system (HVPS), we show how participants of the system save liquidity by exploiting the new gridlock resolution arrangement. These observed behaviors are consistent with the equilibrium of a “gridlock game” that captures the key incentives that participants face in the system. The findings have important implications for the design of HVPSs and shed light on financial institutions’ liquidity preference.
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In this paper, we examine the launch of a new HVPS [High Value Payment System] in Canada called Lynx that substantially alters financial institutions’ incentives to provide liquidity.2 Whereas the previous system adopted liquidity pooling and risk sharing mechanisms to reduce banks’ liquidity needs, the new system requires banks to provide liquidity up front for all payments, with an exception for banks that have insufficient liquidity available in the designated payment stream to make the payment. In this case, payments are queued and settled on a net basis, a process called gridlock resolution. Participants would like to save liquidity by queuing payments (which will be resolved by the gridlock resolution mechanism). However, now they cannot queue payments directly and can only do this indirectly by keeping their liquidity low, so this is a ”friction” for them to access the queuing/gridlock resolution process.

The ”voluntary” queuing would give them direct control. The new system has two payment streams. Both are what payments professionals call real-time gross settlement streams (RTGS), because payments are made on a gross basis and are final and irrevocable once processed. However, one stream includes a gridlock resolution mechanism (we denote this stream by RTGSG thereafter) that has added functionality, and thereby dominates the pure RTGS stream. FIs quickly figured out a clever way to use both streams to their advantage.

In the Lynx system, gridlock resolution is activated only if there is insufficient liquidity in the payment stream to settle payments on a gross basis. Participants cannot voluntarily put payments into the gridlock queue. Hence, the only way for FIs to obtain the liquidity savings associated with netting in the gridlock resolution mechanism queue is to starve that stream of liquidity. By submitting more payments than liquidity to the RTGS stream with a gridlock resolution mechanism, FIs are able to trigger gridlock resolution and settle payments on a net basis.
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Recognizing an opportunity to save liquidity, on September 16, all the major participants jointly reduced their liquidity allocations to the RTGSG. As expected, this joint action created more gridlocks and queued payments, and activation of the gridlock resolution algorithm led to settling queued payments on a net basis, thus achieving the desired liquidity savings. Engaging the gridlock mechanism lead to delay in settlement of some payments. However, our calculations show that this shift in behavior brought down the system-wide liquidity level by about 76% and caused only about 30 minutes’ delay to the system.

The New York Fed updated the Global Supply Chain Pressure Index:

• Global supply chain pressures decreased again in April, falling to 1.32 standard deviations below the index’s historical average. The March value was revised downward from 1.06 to 1.15 standard deviations below the index’s historical average.
• There were significant downward contributions from Euro Area delivery times, Euro Area stocks of purchases, and Korean delivery times. While the overall index declined, there was a notable upward contribution from Taiwan stocks of purchases.
• Looking at the underlying data, the GSCPI’s recent downward trend has been consistently driven by improvements in Euro Area delivery times.

The TD takeover of First Horizon has been terminated:

Toronto-Dominion Bank and First Horizon Corp. have terminated TD’s proposed US$13.4-billion takeover of the Memphis, Tenn.-based bank, killing the Canadian lender’s expansion in the southeast United States.
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First Horizon’s share price fell sharply when markets opened, and was down 36 per cent to US$9.60 in early trading. TD’s share price rose 1.7 per cent to $82.89 on the Toronto Stock Exchange.

In recent months, TD investors had expressed concerns about the valuation and timing of the First Horizon deal because the banking sector is struggling and share prices have dropped. There were also questions about TD’s ability to turn around a business that was generating subpar growth and that had faced integration issues of its own [from] a prior merger, according to National Bank Financial analyst Gabriel Dechaine.

Charlotte Gerken, Executive Director of Insurance Supervision of the Bank of England, gave a speech titled Moderation in all things:

From historic lows of 0.1% in December 2021, the UK Bank rate rose to 4.25% in March 2023. While it could hardly be described as plain sailing for pension schemes or their sponsors, the rise in interest rates has generally reduced the value of their liabilities and boosted funding ratios (see chart 1). This has greatly improved the affordability of buy-outs for many pension schemes.

At the same time, trustees of pension schemes are reported to be increasingly viewing buy-outs as a long-term target[4]. Increased affordability and a decreased appetite to retain this risk have led to a growing appetite for schemes to transact in one go, rather than perform staged buy-ins spread over several years[5]. So called ‘jumbo’ schemes may also present exciting opportunities for the insurers. This all points to a material increase in pension schemes’ demand for BPA in 2023. But I’d note that this is an acceleration of the existing demand for BPA in a large but finite market in run-off (see chart 2 and 3).
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Secondly, the disruption in the UK gilt market last autumn resulted in some pension schemes being overweight in illiquid assets[7] as gilt values fell significantly, and schemes sought to reduce their leverage under liability driven investment strategies[8]. We see insurers increasingly developing solutions to accept illiquid assets as part of the BPA premium, as pension schemes may be reluctant to dispose of these assets in the open market, potentially at a large discount. This requires significant due diligence, and we are seeing insurers seeking more advice from third party specialists such as property valuation experts both for illiquid asset valuation and to calibrate adequate market value haircuts. Alternatively, we have seen deferrals of premiums incorporated in deals giving pension schemes time to dispose of such assets in an orderly fashion[9]. These premium arrangements can be complex and potentially capital intensive due to the increased uncertainty they can create.
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Related to that point, the third area I would like to touch on is a key aspect of the changing pensions and insurance landscape. One industry estimate, suggests that the UK life insurance industry could onboard more than £500bn of pension liabilities – and associated assets – over the coming decade[13] [14]. This is a big structural change in the control of long-term investments in the UK, and the decisions that insurers make now will have long term consequences for the performance and development of the broader economy.

The Fed released its FOMC Statement on schedule:

Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.

The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.

For media inquiries, please email media@frb.gov or call 202-452-2955.

The NYT points out:

But in their statement announcing the decision, policymakers also indicated that they will watch to see whether future rate moves are necessary. That marks a shift in stance: For months, they had assumed that additional changes would be needed.

The change opens the door to a possible pause in Fed interest rate increases, but it also leaves central bankers with options. Officials could raise rates by more if the economy and inflation prove hot.
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Investor bets on where interest rates go from here are firmly tilted toward a pause and then lower interest rates later in the year. One calculation put the likelihood the Fed holds off changing interest rates when it next meets in June at 80 percent.
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Stocks rose after the Fed raised rates and omitted previous language in its statement that signaled more rate increases to come, ushering in the pause investors had hoped for. The S&P 500 rose 0.4 percent.
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The yield on two-year government bonds, which are sensitive to changes in interest rates, latched on to the potential pause, falling to 3.93 percent.
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Cutting interest rates this year is “not in our forecast” says Powell, in response to a question about investors already pricing in swift cuts to interest rates as soon as September.
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The S&P 500 skidded at the end of Powell’s press conference, down 0.5 percent, having initially reacted to the Fed’s policy announcement positively. Investors appeared to react to Powell repeating that the central bank does not expect to cut interest rates this year, with interest rates remaining higher for longer weighing on the market.

PerpetualDiscounts now yield 6.24%, equivalent to 8.11% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.87% on 2023-4-28 and since then the closing price has changed from 15.38 to 15.47, an increase of 59bp in price, with a Duration of 12.42 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decrease in yield of about 5bp since 4/28 to 4.82%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to about 330bp from the 315bp reported April 26.

Still no time!

First Republic finally succumbed:

Regulators seized control of First Republic Bank and sold it to JPMorgan Chase on Monday, a dramatic move aimed at curbing a two-month banking crisis that has rattled the financial system.

First Republic, whose assets were battered by the rise in interest rates, had struggled to stay alive after two other lenders collapsed last month, spooking depositors and investors.

First Republic was taken over by the Federal Deposit Insurance Corporation and immediately sold to JPMorgan. The deal was announced hours before U.S. markets are set to open, and after a scramble by officials over the weekend.
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JPMorgan will “assume all of the deposits and substantially all of the assets of First Republic Bank,” the F.D.I.C. said in a statement. The regulator estimated that its insurance fund would have to pay out about $13 billion to cover First Republic’s losses. JPMorgan also said that the F.D.I.C. would provide it with $50 billion in financing.
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By last week, after an alarming earnings report in which the bank disclosed that customers had withdrawn more than half of its deposits, it became clear that there was no option outside a government takeover.
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Like the other two failed banks — Silicon Valley Bank and Signature — First Republic collapsed under the weight of loans and investments that lost billions of dollars in value as the Federal Reserve rapidly raised interest rates to fight inflation.
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Other regional lenders, like Utah’s Zions Bank and PacWest of Los Angeles, have firmed their footing faster than First Republic, and bank analysts do not see another collapse as imminent. The stocks of every other bank in the S&P 500 stock index rose on Friday even as First Republic’s shares ended the day down more than 40 percent in anticipation of the government takeover.

Sic transit gloria mundi!

I still have no time to catch up on all the links I have saved …

So here’s the 2023-4-28 report, very late, but it’s here! I have all kinds of links to discuss, but they’ll just have to wait!

Sorry this is so late! A month-end jam-up, coupled with a very enjoyable and excellent dinner with an old friend, conspired to cause delays. I won’t be posting the results for the 28th tonight, but I’ll catch up on the weekend, I promise! (… and there’s another month-end to do for the fund, too!)

TXPR closed at 548.04, down 0.51% on the day. Volume today was 918,780, third-lowest of the past 21 trading days.

CPD closed at 10.82, down 1.19% on the day. Volume was 73,500, above the median of the past 21 trading days.

ZPR closed at 8.97, down 0.99% on the day. Volume was 197,250, above the median of the past 21 trading days.

Five-year Canada yields up a bit to 3.01% today.

Bonds were basically quiet:

The Bank of Canada did not hike interest rates earlier this month because it wanted to see more evidence of the effects of previous monetary tightening on growth and inflation, a summary of deliberations from the policy meeting showed.

Canadian inflation excluding food and energy costs is expected to remain above 3% until the fourth quarter of this year, the median forecast of seven economists surveyed by Reuters showed, which could dash hopes of an early BoC shift to cutting interest rates.

Canadian government bond yields were higher across the curve, recouping some of the previous day’s decline. The 10-year rose 3.9 basis points to 2.849%. (Reporting by Fergal Smith)

Prof Claudia Buch, Vice-President of the Deutsche Bundesbank, gave a speech:

Spring has come, but whether the crypto-asset winter is over remains to be seen. Those who see crypto-assets mainly as a conduit for illegal and gambling activities would certainly hope that turbulent spells in markets for crypto-assets have provided a salutary lesson. Those who see productive potential in these new technologies would hope that these episodes help separate the wheat from the chaff.

Which of those views prevails is an open issue. Whether crypto-assets that promise to improve the provision of financial services ultimately deliver on those promises crucially depends on the regulatory response. Which services are useful, how market structures evolve, whether new entrants are able to challenge the incumbents, what risks are associated with this – all this is shaped by regulations that apply to crypto markets.

Today, I would like to focus on the financial stability implications of crypto-assets. So far, the crypto market has been small. Market capitalisation of crypto-assets stands around 0.2% of global financial assets.

However, if there is one thing we’ve learnt from the past, it is that even seemingly small pockets of distress can breed financial crises. Crypto-assets promise innovative ways of providing financial services, just as the securitisation of financial assets did in the 1990s. Securitisation was an innovation considered to improve the allocation of risks in the financial system. It, too, started small in the 1980s, only to grow to an annual issuance volume of approximately half of outstanding mortgage and consumer loans in 2007. Similarly, the US mortgage market was considered to be of relatively minor importance – only to send shockwaves through the global financial system in 2007-08.

Here’s an opinion on economic forecasting from former chief economist of ATB Financial Todd Hirsch:

No one knows this better than economists. I’ve spent most of the past three decades working on teams within various think tanks, companies and banks, trying to forecast the economy. And I’ve concluded that it’s a waste of time. Why?

First, we’re getting worse at it. The problem isn’t faulty mathematical models or econometric techniques. Rather, the problem is the growing number of things that hit us from out of the blue – the so-called “black swan” events that are, by definition, unforeseeable.

No one in 2019 predicted a pandemic. No one in 2021 predicted a massive ground war in Europe. No one in 2022 predicted a series of bank failures. (Yes, of course, some experts had warned of all of these things, but they were nowhere on economists’ radar.) The frequency of these sorts of events is growing at an alarming rate.
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The idea that anyone can predict GDP growth to a tenth of a percentage point is hubris. A better strategy would be to prepare for any possibility. That, to a certain degree, is what economic forecasters do when we apply a “high, low and base-case” probability to a range of scenarios.

But by assigning one scenario the “base-case,” we’re still trying to convince ourselves that we can get the forecast correct. And that leads us right back to the start, where we lull ourselves into a false confidence.

Prepare for any outcome. Plan around multiple scenarios. Be ready to react swiftly as economic situations change. Don’t become complacent, thinking you know what’s going to happen.

I like this guy!

The New York Fed has updated its Corporate Bond Market Distress Index:

Corporate bond market functioning moved closer to historical norms over the month of April, with the end-of-month market-level CMDI above its historical median.

Market functioning in both the high-yield and investment-grade sectors remained roughly flat over the course of the month.

Looks like another scandal is brewing with construction loans:

The lawsuit claims StateView – founded in 2010 by brothers Dino and Carlo Taurasi with friend and chief financial officer Daniel Ciccone – repeatedly deposited cheques written on the RBC accounts into the TD accounts, and the Canadian Clearing and Settlement Systems (which handles transactions between financial institutions) conditionally credited the value of the cheques to the TD account “pending final settlement.”

TD alleges that before the transfer cleared, however, StateView moved the conditionally credited money out – either to a different account at another bank, or wire transferred it to a third party – and then stopped payment on the original RBC cheques. To avoid detection of this scheme, called cheque-kiting, TD further alleges StateView processed a large volume of “sham transactions” between other TD accounts.
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In the wake of TD’s filings, StateView is facing demands for repayment from at least two other lenders that could see an unfinished townhouse project (Nao Towns Phase II in Markham, Ont., with 96 units) pushed into insolvency.
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StateView also has several Ontario projects under construction, sold out or “fully reserved” that may now be subject to reorganization of StateView’s debts. Those include: High Crown Estates in King City (48 units), MiNu Towns in Markham (147 units), On the Mark in Markham (164 units), Elia Collection in Newmarket (72 units), Queen’s Court in Brampton (82 towns and detached homes), Elm & Co. in Stouffville (202 units) and BEA Towns in Barrie (218 units).

PerpetualDiscounts now yield 6.23%, equivalent to 8.10% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.97% on 2023-4-21 and since then the closing price has changed from 15.25 to 15.31, an increase of 39bp in price, with a Duration of 12.34 (BMO doesn’t specify whether this is Macaulay or Modified Duration; I will assume Modified) which implies a decrease in yield of about 3bp since 4/21 to 4.94%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to about 315bp from the 300bp reported April 19.

John C. Williams, President and Chief Executive Officer of the New York Fed, gave a speech:

So far, tighter monetary policy from the Federal Reserve and central banks around the world is helping to bring a better balance between supply and demand. Inflation has declined in a number of sectors, particularly for many categories of commodities and goods.

In addition, the supply-chain bottlenecks that had constrained the supply of goods have largely dissipated. For example, the New York Fed’s Global Supply Chain Pressure Index has declined to a level that indicates supply pressures are now actually somewhat lower than normal. 3 I hear the same from business leaders from around the Federal Reserve’s Second District, who confirm that supply chains have improved considerably.

At the same time, data on rents for new leases provide early signs of slowing inflation for shelter. This is important because shelter inflation had been a significant driver of higher inflation over the past year.

However, despite the moderation of inflation, imbalances endure, with overall demand still exceeding supply in the economy. This is seen in the inflation rate for core services excluding housing, which has been running around 4-1/2 percent since last August.
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Because of the lag between policy actions and their effects, it will take some time for the FOMC’s actions to bring inflation down to our 2 percent target. With inflation expectations well anchored, I expect inflation to decline to around 3-1/4 percent this year, before moving to our longer-run goal over the next two years.

Turning to GDP, the data flow for the first quarter indicates that the economy continues to expand at a solid pace. I expect real GDP to grow modestly this year as tighter monetary policy continues to take effect, with growth picking up somewhat next year.

In addition, we are beginning to see some signs of cooling in the labor market. I expect slow growth will likely lead to some softening, with unemployment gradually rising to about 4 to 4-1/2 percent over the next year.

TXPR closed at 551.68, down 0.92% on the day. Volume today was 1.31-million, above the median of the past 21 trading days.

CPD closed at 10.97, down 0.63% on the day. Volume was 43,660, far below the median of the past 21 trading days.

ZPR closed at 9.10, down 0.76% on the day. Volume was 91,610, third-lowest of the past 21 trading days.

Five-year Canada yields down to 3.09% today.

The BoC has released a Staff Working Paper by John Duffy, Janet Hua Jiang and Huan Xie titled Pricing Indefinitely Lived Assets: Experimental Evidence:

We study indefinitely lived assets in experimental markets and find that the traded prices of these assets are, on average, about 40% of the risk-neutral fundamental value. Neither uncertainty about the value of total dividend payments nor horizon uncertainty about the duration of trade can account for this low traded price. An Epstein and Zin (1989) recursive preference specification that models the dynamic realization of dividend payments and incorporates risk preferences can rationalize the low traded price observed in our indefinitely lived asset market.
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In this paper, we study the trade of assets in an experimental market with indefinite horizons, consisting of an unknown number of periods. The first period begins with trade in the asset. Following trade, each unit of the asset pays its holder a fixed dividend. Thereafter, with a constant probability δ, traders’ holdings of the asset carry over to the next period, and in each new period, trade in the asset takes place and asset holders earn dividends per unit held. With probability 1 − δ, the asset ceases to exist; the asset market shuts down and the asset has no continuation value. This indefinite-horizon, or random-termination, design, initially proposed by Roth and Murnighan (1978), is the most commonly used approach in the laboratory to implementing infinite horizons with discounting.

Unlike most finite-horizon asset markets where the FV of the asset decreases over time, the stationarity associated with indefinite horizons implies that the FV of the indefinitely lived asset is constant over time.1 The stationarity associated with indefinite horizons may be a more natural setting for understanding asset pricing decisions.2

In our baseline treatment (treatment A), subjects trade in indefinite-horizon asset markets implemented by random termination (more precisely, a modified version of the block random termination scheme of Fréchette and Yuksel (2017)). In each period the market is open, subjects first trade units of a single asset. Once trading is concluded,
they receive dividend payments for each asset share they hold. Finally, a random number determines whether the asset market will continue to a new period. In each session, subjects participate in three indefinite-horizon markets (with different pre-drawn market lengths) to reveal the effect of experience, as in Smith et al. (1988). We find that traded prices are quite low, averaging around 40% of the standard FV, and they remain low even as traders gain experience. This result is rather surprising given that the vast majority of experimental asset market studies following the Smith et al. (1988) design find asset price bubbles, or prices greatly in excess of the standard FV, in the first market played, with approximate convergence to the standard FV within three market repetitions.
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As a result, we conclude that neither uncertainty about the trading horizon nor uncertainty regarding total dividend payoffs can account for the low traded prices observed in the baseline treatment A relative to the other two treatments. Instead, the experimental results suggest that the dynamic realization of dividend payments plays a critical role in accounting for the low traded price in treatment A relative to the other two treatments. In treatment A, in each trading period, subjects receive dividend payments in the current period and face an uncertain continuation value in the future. In the other two treatments, as all dividend realizations are realized after the trading is completed, subjects are more likely to view the asset as a static lottery and care about the total dividend payments.

I’ve kind of butchered this here, not including a description of how “Treatment B” and “Treatment C” differ from “Treatment A”, so those interested will just have to read the paper. Still, this does offer food for thought in the context of the current low trading prices of the current FixedReset market; and of the absurdly high prices during the issuance boom of the early 2010s.

Who wants to tweak this game to be like the FixedReset market? Say, after each round there are four mutually exclusive possibilities:

• an X% chance the game is over
• a Y% chance the dividend rate goes up by 1 unit per share
• another Y% chance the dividend rate goes down by 1 unit per share
• a (100-X-2Y)% chance there is no change in the framework of the next round

Let the play-trading begin!

TXPR closed at 556.81, up 1.30% on the day. Volume today was 4.74-million, the highest by far of the past 21 trading days, more than 2.5 times that of the second-place day.

CPD closed at 11.04, up 0.64% on the day. Volume was 204,050, the highest by far of the past 21 trading days, about 2.5 times that of the second-place day.

ZPR closed at 9.17, up 1.44% on the day. Volume was 153,210, near the median of the past 21 trading days.

Five-year Canada yields down slightly to 3.12% today.
There was some news today but broader markets were pretty calm:

Equities showed little reaction to economic data in the form of S&P Global’s flash U.S. Composite PMI Output Index, which said U.S. business activity accelerated to an 11-month high in April.
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Economic data in the euro zone also showed the region’s economic recovery unexpectedly gained steam this month, with HCOB’s flash Composite Purchasing Managers’ Index climbing to an 11-month high.
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This week, economic reports have largely pointed to a slowing U.S. economy, although comments from a host of Fed officials have indicated the central bank is still likely to hike by 25 basis points at its May meeting. Markets are currently pricing in an 85.4% chance of a 25 basis point hike at the May policy announcement, according to CME’s FedWatch Tool.
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The yield on 10-year Treasury notes was up 2.3 basis points to 3.568%.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 0.7 basis points at 4.177%.

US Regulators are seeking to broaden the regulatory net:

The multi-regulator Financial Stability Oversight Council released the proposals for public comment just over a month after two regional bank failures sparked the biggest financial system contagion threat since the 2008 financial crisis.

U.S. Treasury Secretary Janet Yellen has raised concerns about non-bank financial institutions, including hedge funds, because of their lack of supervision and the potential for systemic spillovers from firms in distress.

Revisions to guidance on branding such firms as systemically important reverse some aspects of Trump-era changes in 2019 that made such designations more difficult.

Yellen said the new guidance removes some “inappropriate hurdles” to designating non-bank firms, causing the process to take up to six years.

“That is an unrealistic timeline that could prevent the Council from acting to address an emerging risk to financial stability before it’s too late,” she said in remarks to the FSOC meeting she chaired on Friday.

The new guidance drops 2019 requirements that FSOC assess the likelihood of a firm’s financial distress, apply an “activities-based approach” and conduct a cost benefit analysis prior to designation — which National Credit Union Administration Chair Todd described as a “Rube Goldberg-like process.”

These will be replaced with a quantitative and qualitative analysis process under which the council determines whether “material financial distress at the company or the company’s activities could pose a threat to U.S. financial stability,” a Treasury official told reporters, adding that it was not a complete return to 2012 guidance.
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FSOC’s proposed new risk assessment framework aims to enhance the council’s ability to address financial stability risks by reviewing a broad range of asset classes, institutions and activities, according to a Treasury fact sheet.

These include markets for debt, loans, short-term funds equities, digital assets and derivatives; counterparties, payment and clearing systems; and financial entities including banking institutions, broker dealers, asset managers, investment firms, insurers, and mortgage originators and services.

The new framework also specifies vulnerabilities that FSOC and member regulators would consider when evaluating potential stability risks. These include leverage, liquidity risk and maturity mismatches, market interconnections and concentration, operation risks and risk management activities.