Overheated Auto Lending Sector Worries Dimon; Tougher Stress Tests Coming

Receiving Wide Coverage ...

Auto Loans in the Spotlight: All of those TV and radio advertisements from car dealerships could be coming back to bite the banks making loans for new cars. Speaking about the overheated market for auto lending, Jamie Dimon, CEO of JPMorgan Chase, said "someone is going to get hurt." Not JPMorgan, of course. "It won't be us," Dimon said. Probably community banks.

All joking aside, Dimon and other bank executives expressed concern on Thursday during an industry conference about what they see as excessive risk-taking in the subprime auto market. There are certainly plenty of warning signs. Underwriting standards for auto loans appear to have eased significantly, according to Fitch Ratings. Delinquency rates on auto loans have reached their highest levels since 1996. The volume of car loans held by subprime consumers rose 11% in the first quarter, compared to a year earlier, according to Experian. And, auto sales slumped in May.

Ally Financial's CEO, Jeff Brown, was more upbeat, saying "there are no skeletons in the closet" in terms of the Detroit bank's auto-loan portfolio. He noted Ally has recently produced better risk-adjusted returns. Wall Street Journal, Financial Times, American Banker

State of Banking: The WSJ series on the state of the banking continued Friday with a raft of op-ed columns by industry players. Sen. Sherrod Brown, D-Ohio, writes that banks must not forget the needs of small towns and Main Street. Former FDIC Chairman Sheila Bair reminded readers banks are a necessity, despite how easy it is to bash them for their various misdeeds.

Chris Larsen, CEO of payments startup Ripple, compares banks' role in society to that of parents, who are often criticized by online innovators, but are forced to make extremely difficult decisions that the young whippersnappers aren't faced with.

U.S. Bancorp CEO Richard Davis said banks are trying to rebuild their level of trust with consumers, after the financial crisis sullied their reputations.

Roger Freeman, founder of drone developer FreeBird Flight, said banks played little role in his company's success, as "they don't seem to have a lot to offer companies in the early stages." Funding Circle co-founder Sam Hodges sides with Freeman, saying banks are no longer needed and they will slowly vanish, replaced by smarter startups like his own.

Finally, "Heard on the Street" columnist David Reilly said it's unrealistic to expect that big banks will be broken up. Yes, the stock market currently indicates the megabanks are probably worth more dead than alive, and politicians get plenty of mileage out of bashing big banks, but there are plenty of reasons to keep them intact. One is they employ a very large number of workers. Another reason is the bust-up of one large bank is likely to destabilize the rest of the system.

Bankers will get their chance to respond to the WSJ series this weekend.

Wall Street Journal

The largest banks will probably be required to apply capital surcharges to pass yearly stress tests, in order to protect the financial system, Fed Governors Jerome Powell and Daniel Tarullo said Thursday. JPMorgan Chase CEO Jamie Dimon responded that the expected new requirement was "not good" for his bank. "Hopefully we'll be able to adjust," Dimon said. "We put a lot of power, money, people on to get these things right as we modify our business practices to meet the new rules."

The "Heard on the Street" column interprets Powell's and Tarullo's comments to mean that banks can get as big as they want, but they will have to pay for it. Read American Banker's coverage here.

The Consumer Financial Protection Bureau's proposed rules for payday lenders could be a boon for the online lending sector, as some of those firms said they could step in to fill the void left by lenders who leave the space due to the new rules. Executives at two online small-dollar lenders, Elevate and LendUp, reacted positively to the CFPB's proposal, saying it could remove bad actors and allow innovators to provide small-dollar credit.

Meanwhile, financial institutions that see it as their mission to provide financial help to those with modest means—i.e., credit unions—believe the CFPB's rules may hurt their ability to carry out their mission. "We fear that we may be reaching the point at which the credit union can no longer provide short-term, small-dollar credit and still be seen as a responsible steward of our members' capital," said Keith Sultemeier, chief executive of Kinecta Federal Credit Union.

One of the largest payday lenders, Advance America, blasted the CFPB proposal. "For the already highly regulated businesses that offer these consumers' preferred credit option, particularly smaller lenders, they are a death sentence," said Advance America executive Jamie Fulmer.

Financial Times

Swift could be delivering a swift kick in the pants to members who don't maintain strong defenses against cyber thieves, CEO Gottfried Leibbrandt said in an interview. In light of recent losses at the Bangladeshi central bank and others, Swift may begin enforcing tougher standards on its members, Leibbrandt said.

"We could say that if the immediate security around Swift is not in order we could cut you off, you shouldn't be on the network," he said. "Maybe some banks say if you comply only with the lowest standards we can't do business with you or we can do business with you but we have to put in additional controls."

In addition to strengthening their technical cyber defenses, Swift is going to ask its members to communicate more quickly when they see indications of potential trouble.

If the United Kingdom leaves the European Union, it could force JPMorgan Chase to reorganize its British operations and potentially cut jobs there. Chase CEO Jamie Dimon's comments on Brexit were made Friday in a speech in Bournemouth, where the bank employs a large number of lower-paid workers.

New York Times

An unsigned editorial blasted the Consumer Financial Protection Bureau for its "lame" attempt to regulate payday lending. The Times' primary complaint is the CFPB dropped a proposal to limit monthly payments to no more than 5% of the borrower's expected gross income for the same period. The measure could be added back to the final version.

The editorial also worries that the language instructing lenders to determine if borrowers can repay their loans is too vague, which could lead banks to sidestep the requirement. The Times also notes the Pew Charitable Trusts has serious concerns with the CFPB's proposal, namely that it still allows lenders to make high-interest loans weighed down with additional fees.

The Treasury Department deployed the same type of sanctions against North Korea as it used against Iran to force it to abandon its nuclear program. Treasury designated North Korea a "primary" money launderer on Wednesday, which could lead to cutting off the country from the U.S. financial system. It could also affect any bank or company that does banking transactions with North Korea. Chinese banks are expected to be the most-affected group by Treasury's move. Treasury had been plotting such a move against North Korea even before evidence linking the nation to the recent attacks against Bangladeshi and Philippine banks using the Swift network.

Washington Post

A group that includes the Financial Services Roundtable sued to block a rule that restricts the advice wealth management advisers can give to clients. The Labor Department rule creates a new standard for giving advice on managing wealth and savings, requiring advisers to put their clients' interests ahead of their own. Supporters say the rule provides protections to individual investors who are trying to save enough for retirement, by reducing conflicts of interest.

Investment management firms say the new rule will make it more expensive for them to conduct business, possibly forcing them to stop giving advice altogether to clients with fewer assets to invest.