YouSaid · the spoken record

Kathryn Judge

lines on the record: 90
first: 2023-07-03
most recent: 2023-07-03
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“market has very little activity after the great financial crisis, but so many euro dollar contracts and interest rate contracts are based on that, it would be like if the stock of Apple, AAPL, only trades a few times, but there's just the options and puts and calls and derivatives on Apple is incredibly liquid market. It's something is definitely wrong there. And as of tomorrow, that system is no longer going to be there. Well, Professor Kate Judge, thank you so much for joining us. People can find you on Twitter, of course, at profkate judge. Thanks so much for sharing your insights and thanks everyone for watching.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“To the way the market was operating. And yet we saw library continue to be used. Everybody was just so accustomed to it. And there were some network benefits from using it that everyone just kept using it despite the infirmities that were embedded into it. More striking, kind of some of the background language over what would happen if there ceased to be libor wasn't as robust as it should have been, which is part of why the transition has been so difficult. But I say levie. I mean, this is. This is something that is overdue. So, so I'm happy to see it go.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Reference rate, and then a huge volume of derivatives referencing that rate. So that makes it inherently vulnerable to manipulation in a way that no reference rate should be. It does create some challenges for banks that were used to having a little bit of credit give when they were using a variable interest rate. But I think, and there are specific challenges with SOFR. It's not a perfect preference rate by any means, but I think you need to have a much more active market if you want to create a reference rate that anybody can rely on. So I'd say on the whole, the transition has been overdue. And what's really remarkable more about it is just that it lived on so long. I mean, 2008 really took away activity in these markets. 2012 made it absolutely clear that there were costs.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“So I think they liked having that as part of their structure. That being said, 2008 and the reforms that were adopted in the wake of 2008 dramatically changed the interbank lending market in ways that made LIBOR untenable. So I think people are oftentimes focused on the scandals that arose. But what really enabled those scandals is you had what had been a very active and thick market become very thin. And so you had an incredible, you know, it's like what is often reversed to refer to as the reverse pyramid or the inverted pyramid where you have a very small volume of activity in the underlying”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yes, and I will say none. This has been overdue. So I'm glad to see finally the demise of LIBOR. I mean, it's a much longer backstory. As I'm sure you know, LIBOR really rose at a time when there was a very healthy interbank market in the UK, in the United States, and a lot of places, banks with excess liquidity would loan it to other banks was relatively safe. There was a little bit of a spread in there where there was because they were unsecured loans, there was also a little bit of credit risk. So what banks really liked about LIBRE over time as a reference rate is there was a little bit of softness so that his credit conditions changed and they were facing challenges on the liability side, you know, there was some increase that they were getting on any variable rate loans that were tied to LIBRIVAR on the”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Got it. Well, thank you. So, Professor, my final question for you is about the final end of LIBOR. I think you co-chaired a working group on financial innovation and the working group on the LIBOR transition, moving away from the London Interbank offering rates and towards Sofar, a secure owner right. And I think that as of tomorrow, US dollar LIBOR is officially over. So as of June 30th, 2023 will transition to risk-free reference rates such as SOFER. Tell us just how significant is that for the financial system? What benefits do you think there will be? And how will that be different than from the old LiveOre world, which is going to be over in about 24 hours?”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“You know, that's what's really sad. I think it's a great time to be a lawyer in a lot of these different spaces. My preferred way would be for lawyers to have a little less work.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“So, I do think that there's right now is being considered by some kind of regulation by enforcement is largely enforcing of the law. And again, we'll see how all of it plays out. And I don't have opinions on any of the particular recent maneuvers, but generally speaking, to the extent there's enforcement action, it's going to be overseen by courts and the courts are going to come in and say, well, did you actually break the law as it existed? And the fact that an earlier SEC might not have been as active doesn't necessarily change the law.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“I'm in the overdue camp. I mean, part of what's really interesting for crypto is there were a whole variety of regulations, and I would put securities regulations among them, where if you look at the design of many of the instruments should have been applied early on. I actually think one of the more important than securities regulations even are anti-money laundering laws, right? And we saw Treasury and FinCEN coming out very early on in 2013 saying, you know what? Like you actually have to have a risk-based compliant system if you're active in the space, but then we saw very little enforcement. And we saw a proliferation of crypto in ways that really could facilitate. And at times we're designed to facilitate anonymity and undermine the functioning of that entire system.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“But instead of having just one node, the Money Market Mutual Fund standing in between the two, you now have two, the federal home loan bank, which is engaging a lot more liquidity transformation than it ever used to, along with the fund family. And just nobody thought about this at the time. And I'd say it's something we at the very least ought to consider whether or not this is really what we wanted.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“And they did years of analysis, came up with hundreds of pages of analysis. And they said, there's so many different types of investors holding institutional money market mutual funds in the prime space. We think they're going to go into a dozen different types of assets. As a practical matter, almost all of them went to one. They went to a government money market mutual funds, oftentimes in the very same fund family. Well, how did government money market mutual funds manage to grow so rapidly? The federal home loan banks came in. So they increased their advances, the loans they were making to banks, and they increased the amount of short-term liabilities that they were issuing. Now those government money market mutual funds could come in. And so now what we have is you still have the bank that's getting the funding on one end and a money market mutual fund investor on the other end.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“They use kind of all of their expertise to entrench structures that are actually relatively outdated and where we kind of would be better off with something else to tie this all back around to a very different example. I certainly don't explore the book to the Federal Home Loan Banks. This was a little bit of attention. Again, I think generally shorter chains tend to result in more accountability and more transparency and a little more resilience. We go back to the SEC. You know, after 2008 and a lot of pressure from FSOC, they finally said, okay, we're going to do something about money market mutual funds. And our focus is going to be on institutional prime money market mutual funds because that's where the problem arose. These are the money market mutual funds that were largely holding commercial paper issued by banks.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“I think about the largest banks is really being the largest middlemen because it's a lot of what they're doing. It's certainly not the only thing they're doing. I mean, I should be clear, most middlemen are not just intermediating. They're also providing other services along with that intermediation. But a lot of what you're paying them to do is kind of use their reputation and use their connection to facilitate flows of capital from people who have it to people who need it. And that's a very valuable service, but it's also a service from which they manage to profit significantly. And some of those profits are generated and sometimes”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Intermediation create short term efficiencies. So it's the path of least resistance, but very often there's long-term cost, whether it's increased fragility, loss of information that customers might end up wanting or investors might end up wanting, whether it's about carbon footprint or the way workers are treated. And then there's just kind of less resilience built into that system. And so it tries to map out a lot of the trade-offs and how we might put more of a thumb on the scale for some of the shorter and more resilient chains.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Grown more complex supply chains. So you have kind of production disaggregated with each little piece being done wherever it's being done most cheaply. Again, we have cheaper clothes. We have cheaper food, but we also have sources of fragility. So actually when I sold the idea for the book in January 2020, I was like, you know, supply chains are much more fragile than anybody realizes. I actually struggled during the early period of the pandemic. People forget this, but early on, actually, supply chains looked like they were holding up well. So I was like having to go back and like revisit my core thesis. But of course, the other shoe dropped. And of course, now for geopolitical reasons, we're realizing that this complexity and the informational loss that comes along with it also creates different sources of vulnerability. So a lot of the book is an exploration of saying we really need to understand intermediation structures much more than we do and that there's real payoffs from doing so in terms of usually more”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“We were feeding off of each other in somewhat similar ways, and they potentially gave rise to similar sources of fragility. So we've seen Amazon and Walmart are one and two on the Fortune 500, and they have been for a while. You look at a lot of industries, the intermediaries involved, Cargill. We don't think about that much. It's oftentimes one of the largest private companies in the country produce more billionaires than any other company actually out there. And it doesn't grow food, but what it really does is facilitate the flows. And so what we saw, these intermediaries who are growing in power, because they're playing really important roles helping to overcome information challenges, logistical challenges, developing expertise, creating very valuable infrastructure. But that allows them to grow in size and power over time, and then also results in standardization that tends to lead to long-term.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“In 2006. So there were a lot of benefits that seemed to flow from this. But of course, there was fragility, there was loss of information and some drawbacks. The book was motivated by the fact that I realized the same two phenomenon were arising in intermediation.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Top six banks control most of the assets in the US banking system. And that really changed the nature of banking. They had a lot of access to resources, access to data that allowed them to standardize underwriting that facilitated the growth of securitization. It certainly had been around for over a century, but it grew exponentially as there were more tools available to really standardize or seem to standardize loan products. And that allowed kind of these new complex and very long chains through which cash was suddenly flowing from money market mutual funds into asset-backed commercial paper all the way through into mortgage-backed securities and then home loans. And so we ended up with longer and more complex chains. It created meaningful short-term efficiencies. I mean, homeownership was at a peak.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, the core idea that drove the book was I'm a banking scholar that's where he spent all of my time. And anybody who knows banking knows that there have been two really big trends. One, a dramatic decrease in the number of banks and a increase in the proportion of assets held by the large banks. So we went from having unit banks with lots of small banks that really engaged in relationship lending to having the”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“We need to have much stricter set of oversight in place. For a small community bank, where if we actually look at the deposits at community banks, in the period leading up to March, deposits were going out of GSIBs at the fastest rate because they wanted a higher rate of return, regionals at a slightly lower rate, steady at community banks. March hitts, suddenly the outflows from regionals dwarf everything else. There's still some aggregate outflows, net outflows from the large banks in the sense that you have money flowing in, but also still money going out because of the interest rate environment. Community banks still stable. So I think there's something to be said for a lot of these small community banks, and maybe it's just kind of a community financial institutions where they still really are engaged in an accrual business and allowing them to have accounting treatment that reflects.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“The business of banking and marketing to market all of the assets that a bank holds on the asset side of its balance sheet, in part, and this is where we started the conversation, because oftentimes in the interest rate environments where there are losses on the asset side of their balance sheet, those are going to be somewhat offset as a practical matter in terms of their ongoing income by virtue that there's kind of implicit gains on the liability side and that historically at least, they didn't need to pass all of the changed interest rate environment on to depositors. And it could well be that that's changing. And I think it's one of the things we really need to pay a lot of attention to and pay very close attention to. And I think for the larger banks, I mean, again, the regionals for me at this point, now that we know they're so difficult to resolve,”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“I think it certainly is going to be looked at questions over how much should be marked to market and whether it should be marked to market for accounting purposes or for regulatory purposes or both are always kind of issues that get debated whenever we have banking challenges because you oftentimes do have losses that are embedded on the asset side that had they been recognized earlier might have resulted in earlier interventions. So I think there's a lot to be said for that. I think for regulatory purposes, for any of the larger regional banks, it's clear that they should be subject to treatment that looks more like the G-SIBs, where they actually do have to take those losses into account in doing their capital calculations. That being said, there is a little bit of attention, and maybe it's attention that shapes the world, that reflects the world that we're in and how much it has changed between the nature of banking.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Amount of risk there. So, number one, do you think that held a maturity accounting needs to be looked at? And number two, do you think it's likely that it will be looked at in this upcoming round of regulation?”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Back to the interview. And do you think that held to maturity accounting might be wise to take a look at that, given that Silicon Valley, they were quoting their mortgage-backed securities and treasuries at par at 100 cents on the dollar because when they bought them there, interest rates were at zero. But when now they're suddenly they're worth 80 cents on the dollar if they were to trade them in the market, they're valuing them on their balance sheet at 100 cents on the dollar. And correct me if I'm wrong, that accounting somewhat not fictitious, but incorrect accounting. I mean, everyone knows it's incorrect, was used for their capital ratio so that if you took into account those losses, they had a very low capital base ratio, I think negative, but I don't want to say because I'm not sure. But if you quoted those assets apar as Silicon Valley Bank did, it passed its stress test with flying colors. Not a stress test, but it was incompliance with its common equity tier one thing when obviously there was huge”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Of trying to understand where and how my banks be assuming risks in ways that are not well captured in the current regulatory scheme. So one, we should always update regulatory Banks are able to and are engaging in forward-looking assessments over what are the risks that they are exposed to and what are they doing to manage those risks.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so two quick comments on that. One, when we look at the risk weightings, they generally speaking have been far more focused on credit risk than interest rate risk. And they also are in part the byproduct of a set of politics that inform not just what happened in the United States, but what happens in Basel, right? So when you think about banks, sovereign risk and interest rate risk are actually two of the greatest risks that they're always exposed to. And they're not well reflected in the risk weightings at all. But that's part of the fact that we expect or I expect bank regulations to always be incomplete. And I think we need to expect bank regulations to be incomplete. And that's part of the reason we need banks to be doing a good job with risk management. And we need supervision to come in and complement the regulatory scheme in terms of”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Does it make sense for those to be fixed amounts? Because if interest rates are going to remain at zero forever, it makes sense that a U.S. two year treasury note has a risk rating of zero. But if interest rates are going to go from 0% to 5% in one year, it seems like a risk rating of 0% is grossly inappropriate.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“So correct me if I'm wrong, but for banks who have to hold equity capital against all of their assets, let's say it's 10%. The dominant form of equity tier ratio that people care a lot about is common core equity tier one or common equity tier one. And that is a risk-based weighting. So if you have a dollar worth of US treasuries, very different risk weighting than if you have a dollar worth of subprime mortgage. And so credit risk really those risk weightings went up a lot after the great financial crisis. That's my understanding. But for those, quote, risk-free, credit risk-free instruments such as treasuries, no credit risk, and then agency mortgage-backed security is very little credit risk from a GCC or a federal home loan bank advance or something. Exactly. No, something like that is ranging from zero percent to 20%.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Oversight council under the leadership of the Treasury Department issued two pieces of guidance that would effectively revive designation authority, which is the ability of FSOC to designate non-bank systemically significant and subject them to enhance regulation accordingly and fed oversight. And they also provided a really nice analytical framework for trying to understand how we identify systemic risk outside of the banking system. And I think that is absolutely key. So we certainly have to be focused on banks, what we can do to make the banking system healthier. We also have to be very tuned to the fact that the more we do to create a healthy banking system, the more we're likely to squeeze that system in ways that facilitate the flow of activity outside of that system. And we really do need to have a much better set of tools than we currently.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“And the role of banks relative to non banks in providing credit, facilitating payments, and providing other services. And so I think part of what's really interesting right now is not just the, okay, we have the regional bank crisis somewhat contained. We're likely to see significant losses there. We might see a hollowing out of regional banks as a type of banking entity. I don't think they're going to disappear, but there's certainly the possibility that it becomes a less viable business model once they are regulated in a way that's commensurate with the risks that they pose. But I think there's also big questions over, you know, how much of the stays in the banking space and how much of this actually moves outside of banks. I think one of the really bright spots right now that hasn't gotten enough attention is the Treasury Department issued to pieces of guidance. Actually, I shouldn't say the Treasury Department, the Financial Stability.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Regulation, more of the enhanced prudential standards being applied to regional banks in the $100 billion to $250 billion range. And again, that is in part because the current statutory scheme gives the Fed discretion over what enhanced some of some discretion with respect to what enhanced prudential standards to apply to banks in that size range. And again, once we know that the failure of those banks could have systemic repercussions and could impose significant losses on the deposit insurance fund, then we need to have a more appropriate suite of regulations that make those failures less likely. So I think all of that is really appropriate. And then I think there's just a bunch of bigger picture questions. You know, what do we do with deposit insurance? But I think sometimes framing it around what do we do with deposit insurance is missing some of the bigger picture issues, which is the structure of the banking system.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“I think a lot of the bigger picture question going forward is what do we care about with respect to the structure of the banking system and why, right? So you're right. Like higher capital requirements are coming down for the largest banks. That was already underway as a result of Basel III and the holistic capital review that Michael Barr, who's currently the vice chair for supervision at the Fed, had undertaken shortly after he came into that role. Large banks were already going to face more robust requirements. And that is certainly going to precede a pace. I think we're likely to see more robust.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so the DIF is the federal deposit insurance corporation's fund that uses making whole of depositors after a bank fails. So I think it's proposed, it hasn't happened yet, that big banks may face higher capital requirements. This may not be on those smaller regional banks, although a lot of people who work at regional banks say that, oh, it's going to come down to us. It's going to sort of, this regulation is going to trickle down to us, even though officially it says that it's only for the Big Banks. And of course, the big banks just officially passed the Fed's stress test that came out yesterday on June 28th. We're recording on June 29th.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Regional bank balance sheet than there is for something like JPMorgan. And so that does mean, again, we'll see what happens with office. We'll see what happens with other domains in commercial real estate, but there's potentially losses that are going to come there. And so the question is like, what do we do going forward? And I mean, I think in the short run, one of the things we have to do is just increase the tools that we know work generally for banks. I mean, I think one of the biggest lessons from March is the need to invoke the systemic risk exception for both SUB and signature, the very significant losses to the deposit insurance fund that came along with a failure of First Republic suggest we don't have a good exit plan for these banks. And once there's no attractive exit plan that doesn't result in significant losses to the diff, then you need to have, I think, more robust regulation to make”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“How can we make those serve as alarm bells earlier on? Going back to the current situation, it's part of what we see regional banks doing. And so really, I think we need to figure out what to do about regional banks. And they also have, again, asset side challenges. There's a lot more commercial real estate on the asset side of the”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Largest banks that ended up kind of either failed or near failure. They were paying 100 basis points more on 12 month CDs, 130 basis points more on longer-term CDs. If we go back to the S&L crisis, again, we saw S&Ls offering much higher rates of interest on insured products in ways that allowed them to continue to hold on to insured deposits, even when they were insolvent. So in place like Texas that had a high concentration of insolvent SNLs, it not only meant that the S&Ls were paying a lot more for their deposits, but even healthy banks in Texas had to pay 50 basis points more just to hold on to deposits because, again, competition was more geographically constrained at that time. And they were facing competition. So really what banks do is they're like, okay, like, let's use all of our government lovers that we can before going to the discount window. And so part of the question is.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so broker deposits, broadly speaking, are when you're paying some type of intermediary to be able to attract new deposits to your institution. Again, I mean, if we think about what banks do when they get into trouble, the idea is that they go to the Fed and they go to the discount window. In practice, they don't want to go to the Fed and they don't want to go to the discount window. So like, okay, well, what else can we do for liquidity? The biggest thing they do by far, we've been talking about federal home loan bank system. The other thing they do is they try to figure out, well, we still have government insurance. How can we exploit that to attract people into our bank? So there's been some really nice work by, for example, Varelacharya and Nada Mora looking at kind of what was happening with bank deposits during 2007 and 2008. And part of what we saw is that troubled banks offered higher rates of interest on both demand deposits and CDs. So if you look at like the four.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“And once you have higher sources of funding on the liability side, you're really squeezing net address margin. So we have real challenges, I think, there for the regional banks.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so this is kind of shifting away from the federal homeland banks completely. I mean, there are a number, I think, modest proposals that are immediately on the table and some bigger picture thinking that has been going on. I mean, I think the immediate challenge is, again, really center around the regional banks. And I think that pains again to continue to grow. I think depositors are awake to the risk of these institutions. And just as importantly, depositors are more awake than they ever have been to how much they're foregoing in terms of interest by staying in the banking system. And once that's the case, banks have to pay a much higher rate of interest to those depositors to hold on to them, or they have to go to broker deposits, which we're seeing the regional banks do rely more heavily on broker deposits. They have to go to the federal home bank. All of those are much higher sources of funding.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Had a pattern of doing this. But for SVV particularly, it'd be interesting to actually go back and look at the increased borrowing from the federal homeland bank system over the course of 2021. Because part of what you would actually want to see and part of what hopefully you would see is that at some point in that curve, so some point much earlier in 2021, when interest rates weren't actually as high as they are today, when the losses on the treasuries that they were holding and the mortgage-backed securities that they're holding were not as great that they would have been forced to try to figure out, well, how do we actually keep funding our operations? And I think forcing hard questions earlier, even if unpleasant, tends to result in there being a more attractive array of possible avenues forward.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, no, it's a great question. I mean, so I think as a practical matter, SVV would have had to go to the Fed earlier than it did. And I think that would have been, or potentially would have had to think about the capital raise that got it into so much trouble earlier than it did. And I think undertaking any of those actions earlier than they did and potentially in a more orderly fashion would have had some meaningful advantages in terms of getting the right people in the room and having them own up to the severity of the challenges at an earlier stage in the game. And again, part of what's interesting for the federal bank of San Francisco is, or sorry, I mean, first of all, federal bank of San Francisco will just say it's a continual troubled player, right? It also, if you go back to 2007 and 2008, of all of the regional banks, it had the most loans outstanding to banks that ended up subsequently being troubled institutions. So they've consistently”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“So just doing some back of the envelope math. So I'm looking at the San Francisco Fed report, excuse me, not Fed, San Francisco FHLB report from March 31st, so the end of quarter, they had slightly over $100 billion in advances. Let's call it $100 billion. And then from your article, I found out that SVVB borrowed $15 billion from the Federal Home Loan Bank of San Francisco before its messy demise. About 15% of FLCB banks outstanding advances were to one specific bank, Silicon Valley Bank. So you want to cap that to 2%. So they only, Silicon Valley Bank only would have gone to $2 billion instead of $15 billion. In what way, how do you think that story would have played out instead of the way it did?”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“And then, second is just the fact that troubled banks continually rely on advances as a way of putting off actually dealing with whatever it is that they need to deal with and putting more frictions in the ability of troubled institutions to increase their borrowing, I think could be very helpful both for the troubled institutions themselves, but also in terms of alerting the Fed earlier on to institutions that are in trouble and system-wide demand for liquidity.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“In a really inefficient and distortive way. So then the idea is like what to do with it. And one of the idea 2% cap is even though community banks have actually weathered the recent storm that has ensnarled regional banks incredibly well. And it's important to note that the community banks are coming through much better than the regionals. Long term, they still face a lot of challenges, right? We are in a digitalized environment. They aren't as well suited for that environment. And there are challenges with scale. So part of what's saying if we still care about having a vibrant community bank system, if we still care about smaller regional banks, why don't we allow the benefit?”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Our own loan bank system is slightly more profitable because it's able to make slightly more advances. Those advances are relatively more safe. I mean, I think the likelihood of the federal homeland bank losing money from loaning money to JP Morgan is basically zilch. So you were kind of increasing profitability. But really that profitability isn't that much different than the opportunism that we saw with Ref Corp bonds, where Congress is like, oh, look, this is effectively free money. So like, you know, and there's been debates over whether or not that affordable home program contribution should be 15% or 20% as opposed to 10%. But all of those proposals in my mind are really underutilizing what the system could be. It's really just saying let's take further advantage of the fact that we're doing this thing off balance sheet and in taking further advantage of doing this thing off balance sheet, we're going to kind of yield some profits that might be used for some productive purposes.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and the cap is just one idea. So, one thing also I should note is Sandra Thompson, who's the current head of the FHFA, which is the current body that oversees the federal home loan banks along with Fannie and Freddie, is undertaking a comprehensive review of the federal home loan bank system. We're expecting a report out in September 2023. So we are going to hopefully see some changes. I don't think they're going to be as dramatic as would be helpful, but there's at least some kind of consideration of these issues underway. So one of the challenges, again, is as financial institutions have grown in size, part of what we've seen is the biggest beneficiaries of the federal home loan bank system are the biggest banks. And I don't think there's any reason to necessarily deny them membership, but it's not clear that through their membership, we're getting significant public benefits other than the fact that the federal”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“So, in your piece, you write, it's time to put an end to these abuses, capping the advances that FLG banks can extend to any member institution to 2% of outstanding advances would go a long way towards preventing large troubled banks from using FLB advances to delay a needed reckoning. So what precisely are those abuses and why do you think this cap would be necessary?”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and there are government sponsored enterprise, so it is a different charter. They do have members of the board of directors that are supposed to be public service members, and they do have a number of ways that they do create some public benefits. The biggest one at this point is 10% of their net earnings have to go to affordable home programs. So that does help address home affordability, but that's a relatively small benefit relative to the implied cost to taxpayers if you take into account kind of the cheap funding that they enjoy that the system costs to maintain.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“So they're trying to make money, they're a for profit entity, whereas the Federal Reserve, definitely not a for-profit entity if you look at their sort of cash flow, they're paying 5.25% or 5% to people who are in the reverse repo facility, and they're earning 2% or 3% on the mortgages that they bought mortgage-backed securities that they bought in 2020. So a Federal Reserve is definitely not a for-profit entity, but the FHLB is. And also the Federal Reserve can print money, but the FLJB funds itself, not by printing money, but by issuing notes and bonds that the public buys and they have attractive financing because they have a government guarantee.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT
“What are treated as government securities to fund all of their activities? And then they're able to, as a result, generate very significant profits. And if we look, the retained earnings have really increased substantially over time. And every single one of the federal home banks has been paying out dividends at a very nice rate to member institutions.”
2023-07-03 · Forward Guidance · The Little-Known Entity That’s Lent Over $1 Trillion To U.S. Banks (10x The Fed!) | Professor Kathryn Judge on The Federal Home Loan Bank (FHLB) System · IDENTIFIED FROM THE TRANSCRIPT