James Adams is a Senior Analyst at Sageworks, a leading provider of credit risk management, loan loss reserve and stress testing software to financial institutions.
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The next step in the right direction for CIT may do with a written agreement it has with the New York Federal Reserve about its risk control measurements, loans and leases, capital, liquidity, dividend distribution and much more.
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As the GSEs ramped up their risk-taking, the Federal Reserve seemed, until it was too late, oddly unworried.
Banks generally will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve.
But in the white paper detailing the new legislation, which the Administration released on June 17th, all the new authority to regulate firms that posed systemic risk was vested in the Federal Reserve.
"Now in its third year, the Federal Reserve's review of capital plans provides a regular, structured, and comparative way to promote and assess the capacity of large bank holding companies to understand and manage their capital positions, with particular emphasis on risk-measurement practices, " Federal Reserve governor Daniel Tarullo said.
So why is the Federal Reserve forcing seniors to take on more risk?
How many hedge funds refuse to reserve sufficiently for potential litigation and repurchase risk for breaches of warranties and representations in their loan portfolios?
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Armour take on no credit risk, but rising interest rates from the Federal Reserve or a flatter yield curve will pressure earnings and dividends.
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Equally at risk is La Gomera which was named a Biosphere Reserve under the UNESCO Man and the Biosphere Programme in July this year.
Some, including Christopher Whalen, a managing director at Institutional Risk Analytics and a former staffer at the Federal Reserve Bank of New York, say Citi's problems are so enormous they will require massive government intervention.
In particular, by keeping interest rates too low for too long, the Federal Reserve under Ben Bernanke has underpriced credit and increased risk taking, fueling asset bubbles in the bond and commodity markets.
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Yesterday the U.S. U.S. Office of the Comptroller of the Currency and the Federal Reserve will require JPMorgan to improve its controls and risk management and the FSA in London may also be looking at some enforcement action, according to Bloomberg.
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Now consider this: the Federal Reserve's quantitative easing III tactic explicitly targets the "risk free interest rate" - aiming to set it at a historic low, and thus influencing all related interest rates downwards.
Mr Thomas said water in any mine would be a risk but when the mine operator applies for a licence to work a particular reserve of coal, there is a national database with records showing where that seam had been worked before.
Mr. BEN BERNANKE (Chairman, Federal Reserve): In light of recent changes in the outlook and the risk to growth, additional policy easing may well be necessary.
And the US Federal Reserve and bank regulators said that the downgrade won't affect the risk-weighting attached to US sovereign debt for banks - which means that US banks should not be deterred from lending to their government to any great extent.
"There was disinflationary risk that got taken off the table, " Charles Evans, president of the Federal Reserve Bank of Chicago, said in an interview earlier this month.
Moreover, they should compete to borrow any funds that are offered in private markets at rates below the interest rate on reserve balances because, by so doing, they can earn a spread without risk.
Among other things, it sets up a Financial Stability Oversight Council to oversee systemic risk in the economy, creates an independent consumer financial protection bureau housed within the Federal Reserve and establishes exchanges for the trading of over-the-counter derivatives.
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As a result, it applies a very different set of criteria in its analysis of investment risk than it would for a private company, or even a government whose currency has no reserve status.
The Federal Reserve has cranked up the bubble-machine again, pumping up opportunities as well as risk.
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Unlike our other lending programs, this facility combines Federal Reserve liquidity with capital provided by the Treasury, which allows it to accept some credit risk.
Former Federal Reserve Chairman Paul Volcker, on Capitol Hill Tuesday to promote his plan to exorcise excessive risk-taking from the banking system, says one of the biggest persistent problems is the inherent conflicts banks have between managing their own interests and managing those of their clients.
Shorter-reserve trusts are fine as long as their other attributes, including valuation, make up for the risk.
Risk-off investing strategies have definitely taken hold, but the possibility of easing, either from the Federal Reserve, the ECB, or both, has now risen exponentially.
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The stampede was partly an attempt to reduce the amount of capital banks needed to reserve against possible losses on such bonds, as well as an effort to avoid the wrath of risk-averse investors, executives say.
Seven years ago, after the near collapse of Long-Term Capital Management , 12 Wall Street firms got together with Gerald Corrigan, a former Federal Reserve Bank president and now a managing director at Goldman, to look at ways to mitigate counterparty risk in the markets.
The disconnect between recent economic and market trends is largely due to surprisingly aggressive monetary measures announced by the European Central Bank (ECB) and the Federal Reserve Bank here in the U.S., all providing a higher tide for Wall Street risk takers and not so much for Main Street risk aversion.
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The president dubbed his proposals on limiting bank risk the Volcker rule - after Paul Volcker, one of his economic advisors and a former chairman of the Federal Reserve central bank.
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