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As of yesterday, five Fed contestants have moved from the swimsuits and evening gowns into the monetary and regulatory policy talent contest.  Although President Trump’s beauty pageants typically included a panel of high-glitz arbiters, this time it’s just him making the decision.  More fun for him, of course, but one has to wonder what happens to a central bank when the battle to chair what is supposed to be a collegial, expert, and independent agency takes on all the attributes of a Las Vegas event, smoke and mirrors included.

Read more: Karen Petrou on Waiting for Miss Universe at the Federal Reserve 

In this alert, we assess a new series of papers from Federal Reserve staff warning about the increasingly systemic rollover risk at Home Loan Banks competing among themselves for the big-bank advance business that keeps the System’s lights on.  Although FHFA Director Watt warned the Banks in 2016 and again this year about rollover risk, Fed data show how inexorably the System is becoming a critical maturity-transformation engine and taking on all the risks this inevitably entails without the liquidity cushions or capital needed to absorb it.  The Fed study concurs with a Milken paper we previously analyzed, although it goes farther to point to the types of systemic risks the Fed worries about in concert with FSOC.  If policy-makers agree with these findings, the FHLBs are in for a shock.

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Shortly before a group of moderate Democrats petitioned Senate Banking Chairman Crapo (R-ID) to advanced legislation to revise the Dodd-Frank threshold for systemic BHC regulation, a bipartisan pair of senators introduced legislation to revise the $50 billion threshold to designate systemic BHCs based on the way U.S. GSIBs are selected.  This would eliminate the simple $50 billion threshold to rely instead not only on more general size thresholds, but also on the often-qualitative FRB and global systemic criteria.  The new approach would almost surely relieve larger BHCs that are not now designated as GSIBs from all of the additional prudential and resolution requirements of the Dodd-Frank Act.  Because this approach could leave BHCs of considerable size – e.g., above $250 billion – out of the Dodd-Frank standards, some have countered with relief only for BHCs above $50 billion but below a size threshold such as the $225 billion standard recently suggested as a compromise by NEC Director Cohn.

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The OCC has begun the Community Reinvestment Act review recommended by Treasury in its report earlier this year on banking-regulation change.  Focusing only on CRA ratings, not the broader CRA questions that Treasury addresses, the OCC instructs its senior officers to alter the way evidence of possible discrimination or illegal lending is considered to focus CRA ratings on community reinvestment absence any actual patterns or practices that undermine CRA responsibilities.  As a result, instances of lending enforcement undertaken by the CFPB may not be reflected in OCC CRA ratings, nor will the agency necessarily lower CRA ratings based on its own enforcement actions related to cross-selling, auto loans, or similar matters.

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