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Banks tighten consumer underwriting; de novo Chicago bank to focus on women

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Financial Times

Past sins resurface

Morgan Stanley’s status as a primary dealer in French government bonds has been suspended for at least three months “following the alleged manipulation of markets that earned the bank a €20 million fine last year.” Agence France Trésor, the agency that manages French public debt, said it took the action “citing trades by the bank five years ago that ‘had the effect of seriously undermining the liquidity of the French sovereign bond market.’ Morgan Stanley also failed to disclose in 2017 that France’s markets regulator was investigating the matter.”

“The loss of primary dealer status means Morgan Stanley will no longer buy bonds directly from the AFT in auctions of new debt, a role that gives trading desks a more comprehensive view of activity in government bond markets. Fourteen banks remain on the French treasury’s list of primary dealers.”

Off the charts

Wells Fargo is “targeting dramatic cuts to its spending on consultants after an internal backlash against the bank’s outlay on firms including McKinsey, PwC and Oliver Wyman, which has reached $1 billion to $1.5 billion a year. The savings form a crucial part of new efficiency plans to be unveiled by chief executive Charles Scharf and will also include thousands of job cuts among Wells’ 266,000-strong global workforce. Wells became over-reliant on consultants as it struggled to deal with the fallout of a 2016 mis-selling scandal that cost the bank more than $3 billion in penalties and forced radical improvements to its compliance procedures.”

“Spending on consultants is off the charts,” said one person. “You lose track of all of them really. It is comical.”

Q2 takeaway

The FT looks at four trends from the most recent bank earnings season, both in the U.S. and Europe. “There are fears that the revenue boost from trading will prove temporary,” it says.

Preparing for more

Metro Bank in the U.K. reported a £241 million for the first half, “becoming the latest lender setting aside hefty sums to deal with expected loan losses as it predicted an even more severe economic downturn than its peers. The bank, which is dealing with the first recession since it was established a decade ago, reported £112 million of expected credit losses, up from just £4.4 million in the same period last year.”

"The majority of the total — £97 million— was due to changes in economic forecasts rather than actual customer defaults. Government rescue schemes and programs such as loan repayment holidays have so far kept customer default rates low, but banks are predicting sharp increases later in the year as more businesses collapse and the unemployment rate rises.”

New York Times

Not so easy

Interest rates may have dropped to record low levels, “but with tens of millions of people out of work and coronavirus infections surging in many parts of the country, qualifying for a loan — from mortgages to auto loans — has become more trying, even for well-positioned borrowers. Lenders that have set aside billions of dollars for future defaults have tightened their standards, often requiring higher credit scores, heftier down payments and more documentation.”

“It’s not unusual for lenders to tighten the credit reins during a downturn, but the current situation has made it especially challenging for them to get an accurate read on consumers’ financial health. Borrowers have been able to pause mortgages, halt student loan payments and delay paying their tax bills, while millions of households have received an extra $600 weekly in unemployment benefits. Those forms of government support could be masking an underlying condition.”

Elsewhere

More ammo

Germany’s financial watchdog BaFin said “it was conducting an audit of the accounts for collapsed payments firm Wirecard covering a period running from 2017 to 2019. The outcome of the review may provide ammunition for prosecutors who suspect Wirecard executives of masterminding a criminal racket to fake the company’s accounts and bilk creditors of billions of euros,” Reuters reported.

“BaFin said it was conducting the audit after the nation’s accounting watchdog, the Financial Reporting Enforcement Panel (FREP), informed BaFin that Wirecard refused to accept an error it had found or cooperate with the watchdog. That information from FREP gives BaFin, which is under scrutiny for not identifying issues with Wirecard sooner, the authority to conduct the audit, which covers the years 2017 and 2018 and the first half of 2019.”

Women’s bank

Three local women — a banker, a restaurateur and a lawyer — are “looking to start a commercial bank in Chicago, with a focus on lending to women-owned businesses,” the Chicago Tribune reports. “First Women’s Bank, which received conditional approval from the Federal Deposit Insurance Corp., would be the first financial institution startup in the Chicago area in more than a decade. Organizers are raising the necessary funds and aim to launch early next year.”

Amy Fahey, “who spent about 29 years with JPMorgan Chase, holding different senior positions, will be chair of the board of directors.” Lisa Kornick, the restaurant owner, will be chief experience officer, and Melissa Widen, a former attorney, will be vice president and chief administrative officer. Marianne Markowitz, acting administrator of the U.S. Small Business Administration under President Barack Obama, will be president and CEO.

Quotable

“During my time as a restaurant owner, I needed to select a new bank because our existing bank could no longer meet our needs. I was shocked to find there were no banks focused on women. As an entrepreneur, I immediately saw an opportunity.” —Chicago businesswoman Lisa Kornick, one of the co-founders of First Women’s Bank, which plans to open in early 2021.

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