Beyond the News this week covers bank regulations, the status of the SEC’s Money Market Reform proposal and a quick comment on crypto.
And if you haven’t seen our research report on the growth of public funds assets, check out the Spotlight: Public Sector Assets Continue to Grow Even as the Economy Slows.
Happy weekend!
Marty Margolis
June 23, 2023
The Senate Banking Committee approved a bi-partisan bill June 22 to claw back bank executive compensation. This has gotten a lot of headlines and, naturally the banking industry is concerned. The bill is an effort to increase accountability for bank failures, and it includes some provisions that would affect the bank regulatory activities of the Federal Reserve.
The bill is a long way from law. The Republican House has expressed skepticism with this approach and even if it does become law, it is likely to have only limited impact on the banking industry and the economics of banking services experienced by public fund investors.
What could have a far bigger impact are changes in bank regulations. The headlines around Federal Reserve Chair Jerome Powell’s testimony this week before the House and Senate oversight committees focused largely on monetary policy—Will there be more hikes to the Fed’s policy rate? Will inflation continue to move toward the Fed’s target? Will there be a recession in the near term?—but Powell made some comments, and endured sharp questioning about the Fed’s regulatory initiatives in the wake of the recent bank failures.
A year ago, bankers were lobbying for changes that would loosen the capital and liquidity requirements that the Dodd Frank Act and related regulations impose. Not anymore. Now the Fed is considering tightening capital and liquidity rules, the smaller banks are asking to be exempted, and depositors and borrowers are trying to assess how changes will affect the availability and relative rates on loans and deposits. (Alas the dream of “borrow low, invest/deposit high” is not likely.)
Powell noted that new capital and liquidity requirements on smaller banks are unlikely. But the regional and mega banks will likely face new requirements that will lead to changes in their business economics. The rule-making by the Fed, the Comptroller of the Currency, and the FDIC will not capture the headlines that Chair Powell does but the policy changes they implement could affect the economics of banking—and the economics experienced by bank customers—far into the future.
June 23, 2023
The Securities and Exchange Commission is busy. Too busy say some critics who worry about over-regulation. Be that as it may, the expanding agenda has pushed back the target date to October 1, 2023 for the Commission to consider the final Money Market Fund Reforms. This is according to the Commission’s recently-published Spring Regulatory Agenda. The reforms were originally proposed in February 2022 in response to the Covid 19-related market disruptions.
The new rule would not apply to Local Government Investment Pools, but LGIP boards could consider changes to operating procedures based on the SEC’s actions. And changes in the way institutional money market funds are required to operate would alter the competitive position of LGIPs in the liquidity segment of the investment market.
It’s likely that the delay in considering the final rule—the SEC earlier signaled adoption in April, 2023— relates to the proposal to implement swing pricing for some types of money market funds to deal with potential net asset value distortions related to large scale purchases and redemptions. Swing pricing could significantly change the concept of stable net asset value for those classes of funds where it would apply
Keep an eye out for a future PFII Spotlight report that recaps key elements of the proposed rule and comments received by the Commission.
June 20, 2023
The National Association of State Treasurers Treasury Management Training Symposium in Portland, OR last week included a session on “The Evolution of Cryptocurrency: Tax Implications for States” in their Innovations track. What does crypto have to do with investing public funds? Hopefully nothing today. Last year the Government Finance Officers Association issued an advisory that governments should abstain from using and investing in cryptocurrency. And the disruptions in the crypto world since, which have led to $2-$3 trillion of losses globally since the market peak in 2021 should add a further reason for avoidance.
But, But. . . This session was a good opportunity to keep current because it is unlikely that crypto will go away. Public funds investment officials will face continued questions from constituents and proponents of crypto investing to consider this option. It’s likely that 15-20% of U.S. taxpayers hold some crypto assets and advocates remain vocal. If you want to read a primer on crypto, see Matt Levine’s The Crypto Story in Bloomberg last fall.
The saga of crypto also provides a lens on the current Washington battles around regulating the financial services industry. There is a fundamental question about whether crypto should be regulated, or not, and if so, by whom. This all provides telltales on the tension about government regulation of financial services and products in the modern economy. Public funds investors are both users and producers (think LGIP) of products that are or could be subject to Federal regulation, so the implications could well affect them.
