Banks ace first round of stress tests; Cards a danger zone

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End of round one: For the third straight year, the 34 largest U.S. banks all passed the Federal Reserve’s stress tests proving they could remain solvent even during a deep recession. “The results signal that many banks will win the Fed’s approval to boost payouts to investors next week, in the second round of the tests,” the Wall Street Journal commented. The results also strengthen the case for the Trump administration and congressional Republicans who want to ease some of the rules enacted after the financial crisis, the papers say. Wall Street Journal here and here, Financial Times here and here, New York Times, American Banker

Credit cards were identified as the main source of potential losses in the stress tests. Under the assumptions of a severe recession, banks could lose $100 billion on credit cards, tying them with commercial and industrial loans as the areas with the largest hypothetical losses. In 2016, cards ranked third among the areas with the biggest potential losses, at $92 billion.

The Banker and Journal both presented the stress test results for all 34 banks.

More efficient: Federal Reserve Gov. Jerome Powell and Keith Noreika, the acting Comptroller of the Currency, proposed “an easing of trading restrictions, more transparency in stress tests and less burdensome capital requirements” on banks in testimony before the Senate Banking Committee.

“I don’t think what we’re talking about here amounts to broad deregulation,” Powell told the senators. “I think it amounts to making regulation more efficient, protecting the important gains we’ve made. We’re not really talking about some massive program here.” Wall Street Journal, Financial Times, American Banker

White knight: Just as he did a decade ago with Goldman Sachs, Bank of America and General Electric, Warren Buffett became the lender of last resort for Home Capital Group, the troubled Canadian mortgage lender that agreed to accept a C$2.4 billion financing package from a unit of Buffett’s Berkshire Hathaway. Of course, Buffett isn’t doing it in the name of altruism. Financial Times, New York Times, American Banker

Daniel Acker/Bloomberg

New benchmark: Fifteen large banks voted to replace the London Interbank Offered Rate with a measure based on short-term loans backed by U.S. Treasury securities. The new benchmark rate is expected to be phased in beginning next year on a voluntary basis. Wall Street Journal, Financial Times

Financial Times
The case against Barclays: The criminal case brought by the U.K.’s Serious Fraud Office against Barclays and two of its former executives is based on a rule that prohibits companies from deceiving their creditors by secretly buying their own shares. Historically, the paper says, most previous such cases have been handled through civil or regulatory proceedings, but Barclays and its former executives are being held criminally liable.

Before filing the case against Barclays, the SFO was headed for the scrap heap. Prime Minister Theresa May had earlier promised to abolish the agency. Now it appears “to have secured a stay of execution.”

Quotable
“This year’s results show that, even during a severe recession, our large banks would remain well capitalized.” — Fed Gov. Jerome Powell.