Banks prepare to reopen branches; unused $130 billion in PPP loans goes begging

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Worse than 2008?

Besides the coronavirus pandemic, “there’s another threat to the economy,” an article in The Atlantic warns. “It lurks on the balance sheets of the big banks, and it could be cataclysmic. Imagine if, in addition to all the uncertainty surrounding the pandemic, you woke up one morning to find that the financial sector had collapsed.” The cause of that alarm is CLOs, or collateralized loan obligations, “the subprime mortgages of the corporate world.”

“You may think that such a crisis is unlikely, with memories of the 2008 crash still so fresh. But banks learned few lessons from that calamity, and new laws intended to keep them from taking on too much risk have failed to do so. As a result, we could be on the precipice of another crash, one different from 2008 less in kind than in degree. This one could be worse.”

But the Wall Street Journal downplays the worry, saying that the problem with CLOs isn’t credit risk. It’s “the supply of credit.”

“By a number of measures, CLOs are under stress due to the coronavirus pandemic. However, the most-senior debt sold by CLOs is protected from principal loss in a number of ways, including a threshold for how many loans rated triple-C—a low ratings tier—the CLO can own. The immediate question for most people is what risk there is for big institutions like banks, pension funds and insurers that own the most-senior CLO debt. For now, the defensive terms within CLO structures appear to make the risk of permanent loss to them from the current economic stress remote.”

Financial Times

Sturm und Drang

Deutsche Bank is warning that “its provisions for bad loans will surge to the highest level in more than a decade this quarter as the coronavirus crisis leaves the global economy mired in recession. Germany’s biggest lender had earmarked a provision of just €506 million for bad loans in the first three months of the year, but cautioned on Wednesday that the figure would increase this quarter.”

“Our expectation would be that credit loss provisions will be in a range around €800 million for this quarter,” CFO James von Moltke told analysts at Goldman Sachs’ European Financials Conference. That would be “up fivefold from a year ago.” However, von Moltke added that “we would expect that the second quarter will be the peak of the loan loss provisioning for this year,” followed by an improvement in the second half.

Meanwhile, Commerzbank, Germany’s second-largest bank, is under “attack” by its second-largest shareholder, Cerberus, which has “called for two seats on its supervisory board to ‘prevent Commerzbank’s demise.’”

“In a confidential letter sent to the bank’s chairman Stefan Schmittmann, which was seen by the Financial Times, the private equity firm argued that ‘swift and decisive action now”’ was required to stop a ‘downward spiral’ caused by bloated costs, low profits and managerial inaction. It called for ‘significant change at the supervisory board, the management board and the company’s strategic plan.’” Commerzbank declined to comment.

New York Times

Moving target

More than $130 billion remains available in the Paycheck Protection Program as “small businesses have grown more wary of taking the money. Even more striking was the fact that on many days last month, more money was being returned than borrowed, highlighting its messy execution and confusing rules that deterred some small businesses from using the money.”

Changes “Congress made to the program last week to make it less restrictive … could help the remaining $130 billion move faster. But having the terms of their loans revised on the fly yet again — which has happened repeatedly since the program began in April — is a nightmare for borrowers as they struggle to salvage their companies.”

“Senators from both parties signaled support for additional legislative and administrative changes to the PPP to ensure it provides optimal support to small businesses trying to stay afloat during the coronavirus pandemic,” American Banker’s Neil Haggerty reports. “Some also urged steps to better enable fintech firms and community development financial institutions to distribute PPP funds.”


Getting ready

American banks “have been stocking up on masks and other supplies and setting up acrylic barriers to prevent spreading the novel coronavirus as they ready their branches for the country’s gradual reopening,” Reuters reports.

“Bank of America has installed over 20,0000 acrylic barriers across branches to prepare for more foot traffic as shelter-in-place orders ease, spokesman Matt Card said. The bank requires employees to wear masks, and has stockpiled enough so that each employee receives one a day, he said. Capital One is also installing barriers, enhancing deep cleaning protocols, placing social-distance markers for queuing and providing hand sanitizers and masks, said spokeswoman Devon Gunn. It will also provide masks to customers if they arrive without one, she added.”

Justice fund

Goldman Sachs said it “launched a $10 million fund to support the work of organizations addressing racial injustice, structural inequity and economic disparity. The bank will match employee donations to recipient organizations, it told customers of its online bank Marcus.”

“An email by a Goldman employee about his experiences of racial injustice and criticizing managers at the Wall Street bank for not supporting junior bankers from diverse backgrounds went viral at the firm last week,” Reuters said.

App warning

The FBI warned Wednesday that hackers are “targeting mobile banking apps in an attempt to steal money as more Americans have moved to online banking during the coronavirus pandemic,” according to The Hill. “The FBI specifically pointed to banking trojans as a threat, which involves a malicious virus hiding on a user’s mobile device until a legitimate banking app is downloaded. Fake banking apps were also cited as a threat, with users in danger of being tricked into downloading malicious apps that also steal sensitive banking information.”

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CLOs Coronavirus Paycheck Protection Program Loan-loss provisions Diversity and equality Cyber security