Banks deal with coronavirus; Fed finalizes bank capital rules
Breaking News This Morning …
HSBC office evacuated
“HSBC has evacuated dozens of staff from its office in London’s Canary Wharf after a staff member reported a confirmed case of coronavirus, ” the Financial Times reports. “The employee, who works in the investment bank’s research department, has self-isolated and the rest of the team are now working from home, according to a person familiar with the events.”
“If confirmed, it would be the first case of COVID-19 in one of London's major financial institutions," the Sun reports. "HSBC employs around 10,000 people at its Canary Wharf headquarters and 40,000 people across the U.K.”
Receiving Wide Coverage ...
The Federal Reserve overhauled capital rules for the largest U.S. banks, “completing one of the biggest changes to the postcrisis rulebook for Wall Street during the Trump administration,” the Wall Street Journal reports. The Fed said “the changes would simplify rules for big banks such as JPMorgan Chase and Wells Fargo without posing risks to the stability of the financial system.”
“Parts of the overhaul are likely to be welcomed by big banks, including changes that streamline aspects of stress tests, which require 34 large banks to show how they would weather simulated market and economic shocks. Wednesday’s plan reduces the total number of big-bank capital requirements to eight from 13, the Fed said. For large Wall Street firms, those changes could be offset by a new ‘stress capital buffer.’”
“The final rules are largely unchanged from the original proposals,” the Financial Times notes, "and do not include a countercyclical buffer, which some expected after the Fed’s supervision head Randal Quarles praised the concept in public speeches.”
“Today’s rule gives a green light for large banks to reduce their capital buffers materially, at a time when payouts have already exceeded earnings for several years on average,” said Lael Brainard, “the last remaining Fed governor chosen by President Barack Obama” and the lone dissenter to the Fed’s decision. “She has regularly warned against chipping away at rules meant to prevent the kind of risk-taking that exacerbated the financial crisis,” according to the New York Times.
"Notably, the final rule removed a bank's leverage ratio — a non-risk-weighted measure of capital adequacy — as a component of the stress capital buffer," American Banker reports. "The so-called stress leverage buffer requirement in the proposal had drawn industry criticism."
Banks in the U.S. and U.K. are “sending hundreds of staff to test their disaster recovery sites, installing big screens in traders’ homes and pushing regulators for a reprieve on trading rules so they can keep their businesses running through a coronavirus outbreak,” the FT reports. “The efforts by big global banks including Goldman Sachs, JPMorgan Chase, Morgan Stanley and Barclays are an escalation of business continuity planning that has already prompted them to segregate staff in Asian cities at the epicenter of the coronavirus outbreak.”
While many employees “can work from home with relative ease, regulatory and technology demands make the situation more complicated for salespeople and traders,” the paper notes. “To prevent those staff from being forced into quarantine en masse over a single coronavirus incident, banks are looking at spreading them out between head office and disaster recovery sites that have the same technical capacity as their main sites.”
“For many companies it will be a first-time experiment with home working on a wide scale, but as many Asian offices begin to normalize working practices after their own attempts to stop the spread of the virus, the signs are that the European industry will adapt,” Reuters says.
The coronavirus epidemic could also make it harder for U.S. lenders to comply with the current expected credit losses (CECL) accounting rules, which require them to forecast expected future losses on loans as soon as they are made. Lenders “are expected to use economic indicators for forecasting. But the novel coronavirus, which has shaken global financial markets, is making it difficult for companies to make predictions about credit risk,” the Journal says.
“I don’t think the Centers for Disease Control and Prevention or anyone else has the ability yet to forecast the future evolution of the virus with much confidence,” said Stephen Ryan, an accounting professor at New York University.
Take it easy
Eric Blankenstein, the former Consumer Financial Protection Bureau official who left the agency last year, “promised soft handling” of cases against Wells Fargo brought to the agency, according to a report released Wednesday by the House Financial Services Committee. “According to the report, [Wells Fargo CEO Charles] Scharf’s immediate predecessor, C. Allen Parker, explicitly told a member of the bank’s board in May that Mr. Blankenstein had promised him that the Trump administration would continue to smooth the way for the bank — even after Mr. Blankenstein resigned that week over racist statements he had made as a law student,” the New York Times reports.
“The House report also said that Wells Fargo had dragged its feet on fixing internal controls and that in the spring of 2017, its senior leaders displayed a cavalier attitude toward the tasks that lay ahead of them.”
Wells Fargo "was reviewing the report and had no immediate comment," the paper says, and "Blankenstein did not respond to calls seeking comment."
Separately, Wells plans to increase its minimum wage to between $15 and $20 per hour for most of its U.S. markets, “joining other Wall Street banks that have raised hourly pay in recent years,” Reuters reports. “The pay hikes, which will take effect by the end of 2020, will increase the wages for more than 20,000 U.S.-based employees and will be based on employee location.” For example, employees in New York and San Francisco will be paid $20 an hour, while those in places like Charlotte or Des Moines will receive $16 an hour.
“The announcement from Wells Fargo comes a week before Chief Executive Officer Charles Scharf is scheduled to testify before the U.S. Congress over measures the bank has taken related to its sales scandal.”
Wall Street Journal
The Treasury Department’s Financial Crimes Enforcement Network fined U.S. Bank’s former chief operational risk officer $450,000 for “failing to prevent corporate violations of anti-money laundering laws.” Two years ago the bank was fined $613 million and entered into a two-year deferred prosecution agreement for weak anti-money laundering controls.
According to FinCEN, Michael LaFontaine, who served as the bank’s chief operational risk officer from October 2012 until June 2014, had been “advised internally that the bank’s transaction-monitoring software was inadequate, and that the bank’s anti-money laundering staff was stretched too thin.” FinCEN Director Kenneth Blanco said “LaFontaine’s failure to take action prevented U.S. Bank from filing reports about suspicious and potentially criminal activity.”
Michael Sherwood, Goldman Sachs’ former European co-head, “has joined the board of Revolut, a week after it completed one of the continent’s largest fintech fundraisings. The five-year-old company also appointed veteran retail banker and risk specialist Ian Wilson to its board, as it ramps up efforts to transform from a provider of prepaid cards for overseas travel into an international bank.”
Separately, Chinese mobile payments company Ant Financial has taken a small stake in Swedish fintech Klarna, “pushing further into western markets despite a recent escalation in tensions between Beijing and Stockholm.” Ant, the sister company of ecommerce giant Alibaba, has bought a less than 1% stake in Klarna, Europe’s largest privately owned fintech.
“Ant Financial made its biggest push into western markets last year with the $700 million acquisition of U.K. payments group World First," the paper say. "That followed an attempt to buy a U.S. cross-border payment group, MoneyGram International, which was blocked on security grounds. World First closed its U.S. arm to avoid any similar problems.”
Dark Towers, a book about Deutsche Bank, “is a devastating tale of a big bank gone bad,” the paper opines. “After flourishing as the house bank of a rising West Germany, Deutsche floundered in recent decades as it tried to become a global investment bank in the American style. Deutsche’s transformation had bet heavily on the conventional wisdom of the time: big international banks, it was said, would enjoy economies of scale and provide one-stop shopping for multi-national corporations.” But, the book says, “disorder and dysfunction plagued the Frankfurt-based financial supermarket.”
“We’re practicing. You don’t want to wake up and find that the U.S. has half a million cases and someone tells you to send everybody home.” — A senior executive at a large U.S. bank, discussing the bank’s plan to start having employees work from home in case the virus spreads