BankThink

The conventional wisdom is that Dodd-Frank compliance expenses are a significant drag on bank budgets. Sounds obvious, right?

Receiving Wide Coverage ...Downgrades: As had been widely expected for some time, Moody’s lowered its ratings on more than a dozen global financial companies, including five of the six largest institutions in the U.S. Although they remain investment-grade credits, the three diversified megabanks (Bank of America, Citi and JPMorgan) and two pure-play investment banks (Goldman, Morgan Stanley) will have to post more collateral and stand to lose trading revenue because of counterparties’ credit requirements. The downgrades will have spillover effects on money market funds (which generally can only buy top-rated commercial paper, and thus can no longer lend to the now-“Prime-2” Citi and B of A) and municipalities (which have relied on banks’ guarantees to lower their own borrowing costs). Moody’s rationale for the cuts is that the business of being a large, trading-oriented bank has permanently changed for the worse, including “the removal of the ‘too big to fail’ maxim,” according to the FT. Even if you doubt that this maxim has truly been removed, you gotta love the British paper’s “sell on the rumor, buy on the news” headline (“Moody’s downgrades end uncertainty”) as well as this on-the-record quote from a stout-hearted analyst at one of the downgraded banks: “We think some of the changes by rating agencies are not motivated from credit considerations, but rather are meant to protect them legally in the future.” Wall Street Journal, Financial Times, New York Times.

We at the FDIC continue to believe the small-dollar loan model is replicable and that these loans can be cost-effective and responsive to the needs of both consumers and bankers.

The question has been hanging: Which bank will be the first to put the Consumer Financial Protection Bureau to a legal test? Finally, we have an answer.

Banks are entitled to a profit. Customers are entitled to value for their money. Financial products can be designed, marketed and priced to satisfy both parties' needs.

The risky practices at and implicit taxpayer guarantee for systemically dangerous megabanks are driving consumers to community-based banks.

Receiving Wide Coverage ...Let’s Twist Again: The Federal Reserve said it would extend through yearend Operation Twist, the strategy of selling the short-term debt in its portfolio and using the proceeds to buy longer-dated paper in order to drive down long-term interest rates. Chairman Ben Bernanke said the central bank stands ready to take further action if the job market doesn’t keep improving, but there’s an ongoing debate about how much else the Fed can do to juice the economy. Wall Street Journal, Financial Times, New York Times.

Kevin Mellyn's "Broken Markets" warns that state suppression of market forces could have lasting consequences. Bankers and policymakers should take heed.

Receiving Wide Coverage ...Mexican Standoff: "Meeting in the desert scrub of Mexico's Baja region in an effort to lift the sputtering world economy, the leaders of the so-called Group of 20 eschewed specific commitments, instead limiting themselves to more generalized promises to invest in public works, overhaul labor markets and use innovation, education and infrastructure investment to fuel economic growth." That's how the New York Times described the hugely anticlimactic result of a gathering of heads of state in Mexico. The Wall Street Journal was equally downbeat, reporting that "world leaders papered over their differences after clashing over the euro-zone debt turmoil, deferring concrete decisions to other meetings amid worries about another global crisis." As in the past, left-leaning pols like Barack Obama and most of Europe lined up on one side to agitate for deficit spending; on the other side was eternal party-pooper Angela Merkel, insisting that the rest of Europe follow Germany's lead and live within its means. What passed for bold talk at the gathering was a joint statement that if things get far worse, "those countries with sufficient fiscal space stand ready to coordinate and implement discretionary fiscal actions to support domestic demand." Feel better? The good news, at least by European standards, is that its leaders are expected to take another whack at putting together a detailed recovery plan in Brussels next week. For the moment, the forces of European austerity appear to be on the march. "Elections cannot call into question the commitments Greece made," Merkel told reporters. "We cannot compromise on the reform steps we agreed on." On this side of the pond, that's bad news for President Obama. "With his own re-election chances directly tied to the European economic crisis as it drags down growth in the United States, Mr. Obama desperately wants Ms. Merkel to loosen the reins on spending and the austerity programs that have been imposed on Greece and the other struggling euro zone economies," according to the Times. Back in the old world, the clock is ticking loudly. Spain is already on the edge of losing access to debt markets. On Tuesday it paid 5.074%, or around two percentage points more in interest rates than a month ago, to lure investors to its 12-month Treasury-bills, the Journal reports. In the secondary market, the yield on 10-year Spanish bonds breached 7% — the level regarded as having triggered the bailouts of Greece, Ireland and Portugal over the past two years, notes the FT. Spanish Prime Minister Mariano Rajoy, meanwhile, has relaunched a previously failed campaign to allow the euro zone's rescue fund to directly channel the aid money into the country's lenders, rather than through the government. Another idea knocking around is for the euro zone's rescue fund to buy government debt, rather than orchestrate a traditional bailout, as a way to ease the pressure on sovereign borrowers. Italian Prime Minister Mario Monti—who's close behind Spain's Rajoy in the cause-for-worry department—went into full spin mode to emphasize that "This should be sharply distinguished from the idea of a bailout." Call it what you will. Europe remains on the edge of crisis and world leaders are as divided and clueless as ever about how to solve it. New York Times, Wall Street Journal, Financial Times

During the hearing, frequent reference was made to "risk," a word which was, and should still be, anathema in banking, for bankers do not take risks; they only underwrite risks.