Banks may get boost from loan program; Trouble for mortgages not backed by U.S.

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Fee bonanza

American banks “stand to collect billions of dollars in fees on the $350 billion in loans that are being offered to U.S. small businesses as part of the federal response to the coronavirus pandemic,” the Financial Times says. “Banks will receive processing fees, paid by the federal government, for making the loans. The fees will vary with loan size: 5% for loans under $350,000, 3% for loans under $2 million and 1% for loans greater than $2 million.” The loans, which will be forgiven if the business doesn’t lay off workers, will not incur a capital charge.

Banks are likely to be swamped with applications for the loans when they begin taking applications on Friday, the Washington Post says. But “many bankers say they lack the detailed guidance needed to administer the loans. Some lenders that are new to working with the SBA could struggle with staffing and software problems once they are approved to join the program.”

"While fintech lenders are seeking to participate in the program as direct lenders, none of those companies are currently authorized to participate in the 7(a) program," American Banker reports..

Dividends, buybacks halted

Following the lead of the European Central Bank, the European Banking Authority, the euro zone’s banking regulator, “demanded that all EU lenders stop their planned dividend payments and share buybacks,” the Financial Times reports. After earlier counselling banks to be “prudent” in paying dividends, on Tuesday the EBA said it “urges all banks to refrain from dividends distribution or share buybacks which result in a capital distribution outside the banking system, in order to maintain its robust capitalization.”

“In addition, the EBA told national regulators to make banks review their remuneration policies — including bonus payments — to ensure they are ‘reflecting the current economic situation’ as well as the banks’ own finances,” the paper says.

Following suit, the U.K.’s six largest banks “bowed to pressure from Britain’s top financial regulator and halted their dividends after they were warned against paying out billions of pounds to shareholders during the coronavirus pandemic,” the paper adds. “In a series of coordinated statements on Tuesday evening, Lloyds, RBS, Barclays, HSBC, Santander and Standard Chartered said they would cancel their dividends for 2019 and refrain from setting cash aside for investor payouts this year. They also pledged not to carry out any share buybacks.”

The Prudential Regulation Authority also said it “expects” the banks and Nationwide, the building society, to refrain from paying any cash bonuses to senior staff and signaled they should stop setting money aside for variable pay during the ‘coming months.’”

“A group of the largest U.S. banks, including Bank of America and Citigroup, said they would suspend share buybacks, but are expected to pay previously announced dividends,” the Wall Street Journal reports. “Switzerland’s Credit Suisse and UBS have indicated they will pay out 2019 dividends as planned.”

Repo facility

The Federal Reserve plans to launch “a temporary lending facility that will allow foreign central banks with accounts at the Fed to convert their holdings of Treasury securities into dollars, its latest bid to alleviate strains in global markets,” the Journal reports. “The program will allow foreign central banks and other international monetary authorities who maintain accounts at the New York Fed to enter a lending arrangement called a repurchase agreement in which borrowers temporarily exchange their Treasury securities for U.S. dollars.” The repo facility is expected to be available starting April 6 for at least six months.

“This facility should help support the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars other than sales of securities in the open market,” the Fed said.

“In recent weeks the greenback’s value has risen sharply as investors have flocked to safe assets, and companies have scrambled to offset the blow to revenues from economic shutdowns,” the FT explains. “This has resulted in a global shortage of dollars that has hit emerging markets particularly hard, adding to concerns about the fallout for the global economy.”

The move “makes the Fed’s unstated role as global lender of last resort increasingly official,” the Journal says.

Wall Street Journal

Mortgage mayhem

The Federal Reserve rescued the government-backed mortgage market, “but the market for loans in which the government doesn’t shoulder the risk is coming undone," the paper says. "Investors are abandoning that market, starving the lenders that extend mortgages to borrowers who don’t qualify for conventional loans. Those lenders are halting operations, bracing for a sharp rise in missed mortgage payments during the coronavirus shutdown.”

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Financial Times

Hedge protection

Big Wall Street banks “have quietly joined” with the Mortgage Bankers Association “in calling for regulatory action to prevent the Federal Reserve’s emergency purchases of mortgage-backed securities from unintentionally upending the hedging strategies of mortgage originators.” On Sunday the MBA asked the Securities and Exchange Commission “to discourage securities firms from making margin calls on mortgage lenders for hedges they bought to protect themselves from a fall in the value of their loans." In its appeal to the SEC, the MBA warned mass enforcement of those margin calls could have a “destabilizing” impact on mortgage originators.

What to watch for

U.S. bank stocks plunged 25% in March, more than twice the drop in the S&P 500. The paper looks at “five big things we know about how banks are being impacted, and five big unknowns.”

Opportunity knocks

The coronavirus gives banks the opportunity to rehabilitate their image that has been tarnished ever since the global financial crisis, the paper says. “Rather than being admonished for their role in causing the 2008 crisis, they are being called on to help distribute unprecedented stimulus programs worth trillions of dollars designed to save the global economy from collapse.”

“The difference with 2008 is that we were seen as the problem then, everybody today knows the problem is the virus,” Société Générale CEO Frédéric Oudéa says. “We are one of the activities that has to function  . . .  we are the doctors of the economy.”

New York Times

Diversity training

JPMorgan Chase acting co-CEOs Gordon Smith and Daniel Pinto “said the bank was making diversity training mandatory for all employees and would pay more attention to employee complaints. They said the bank would expand the recruiting team dedicated to hiring people of color, make a greater effort to hire vendors run by minorities and work harder to provide customers with access to its full range of products.”

Quotable

“It makes sense in a time like this to shut off your dividends and preserve your capital. In six months’ time we’ll have a much better idea of what capital looks like.” — John Cronin, a banking analyst at Goodbody Stockbrokers, about the wave of European banks suspending dividends in the face of the coronavirus crisis