Banks seen breezing through stress tests; Deutsche under investigation

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Deutsche in Dutch
U.S. authorities are investigating whether Deutsche Bank failed to comply with anti-money laundering laws, “the latest government examination of potential misconduct at one of the world’s largest and most troubled banks,” the New York Times reports. “The investigation includes a review of Deutsche Bank’s handling of so-called suspicious activity reports that its employees prepared about possibly problematic transactions, including some linked to President Trump’s son-in-law and senior adviser, Jared Kushner. The criminal investigation into Deutsche Bank is one element of several separate but overlapping government examinations into how illicit funds flow through the American financial system. Several other banks are also being investigated.” Financial Times, New York Times

Separately, “executive turnover and banker defections” are making it hard for the bank to “stabilize its Wall Street presence.” The German bank “has proposed promoting Christiana Riley, currently chief financial officer of the investment bank, to replace its current chief executive of the Americas, Tom Patrick.” She would be the “fourth U.S. head in less than four years. But the suggestion prompted U.S. regulators to express concerns about yet another management change in the key New York-based role at such a tumultuous time.”

At the same time, the bank is “expected to talk to top investors within days” about a plan that would “cut up to a quarter of its riskiest assets in the next few years, shedding more light on how the German lender is trying to overhaul its business and revive profitability.”

Wall Street Journal

No stress yet
U.S. banks “are likely to sail through their stress tests this Friday … allowing them to announce big share buybacks and dividends next week when their capital plans are approved by the Fed.” But the tests may be a lot harder going forward. “Fed regulators are planning next year to throw banks a curveball known as the stress capital buffer, under which capital requirements will vary from year to year. These new rules have yet to be finalized and banks have been loudly complaining that the year-to-year variability in their capital requirements would be difficult to manage. If the Fed goes ahead with the plans as they are, though, then these annual tests are only going to get more stressful for top Wall Street banks.”

Looking at Libra
Regulatory and legislative pressures are already growing on Facebook, just two days after it announced its intention to launch a digital currency, “with leaders of the Federal Reserve and an influential Senate committee saying they will scrutinize its rollout.” Fed Chair Jerome Powell noted the Fed has “significant input into the payments system,” and that Facebook’s plan is “something we’re looking at.”

Separately, the Senate Banking Committee said it plans to hold a hearing on the matter on July 16. “A hearing is also likely in the House, where House Financial Services Committee Chairwoman Maxine Waters, D-Calif., has asked Facebook to put Libra on hold until regulators and lawmakers decide how to oversee it.”

“Regulators should see this as a wake-up call to get serious about the privacy and national security concerns, cybersecurity risks, and trading risks that are posed by cryptocurrencies,” Waters said.

Regulatory issues aside, consumer acceptance of Facebook’s “plan to reinvent money” is no sure thing. “The problem it will bump up against in the U.S. and Europe is that consumers already have decent mobile-payment options using established currencies, regulations and financial plumbing. A few specific cases such as cross-border transfers aside, it also isn’t clear what obstacle Facebook’s cryptocurrency would overcome.”

But Facebook isn’t alone facing regulatory scrutiny over its digital currency plans. “Dozens of startups that want to make the leap from unregulated cryptocurrency dealer to licensed brokerage are waiting for regulators to open the door to let them proceed. None of the applications has been approved since regulators stepped up enforcement actions against issuers of cryptocurrencies in early 2018. The roadblocks faced by the startups suggest that other companies pushing into cryptocurrencies, such as Facebook, may also need to grapple with skeptical regulators and potentially extensive delays. In many cases, applications have languished for months beyond the standard six-month period for making a decision, according to lawyers involved in the process.”

Easy does it
The Financial Accounting Standards Board said many companies “won’t need to go through a complex evaluation process or costly administrative adjustments to change how they account for the shift” away from Libor to “a new reference rate, such as the Secured Overnight Financing Rate, which is the benchmark preferred by the Federal Reserve.”

Financial Times

Desks for all
HSBC agreed to lease more than 1,100 desks in London from WeWork, which called the deal “the world’s largest co-working space.” The agreement “makes HSBC — which also occupies WeWork space in Hong Kong and elsewhere — one of the shared office provider’s largest tenants globally.”

The bank's U.S. unit plans to open as many as 50 branches and hire more than 300 bankers in new and existing markets as it looks to boost deposits, ramp up its home lending and sell more consumer loan products, including credit cards, American Banker reports.

Quotable

“We will wind up having quite high expectations from a sort of safety and soundness and regulatory standpoint if they do decide to go forward with something.” — Fed Chair Jerome Powell on Facebook’s plan to launch its Libra digital currency

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