Banks cautioned on bonuses, pay; Powell praised for decisiveness

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Dividend decision due

U.K. banks are expecting the Prudential Regulation Authority, the country’s top financial supervisor, to order them to stop paying dividends in order to bolster their capital levels during the coronavirus outbreak. The PRA, the supervisory arm of the Bank of England, “is running out of time to make a decision on whether to block the payments, with Barclays due to pay a full-year dividend on Friday,” the Financial Times says.

“Until last week, the PRA had been relatively unfazed by dividend payments going ahead as planned. But the supervisor changed its stance on Friday, when the European Central Bank ordered eurozone banks to freeze dividend payments and share buybacks. The ECB’s decision has put ‘extraordinary pressure’ on the PRA.”

The paper opines bank regulators in both the U.S. and the U.K. should follow the ECB’s example and order a halt to dividend payments. “Even if regulators do not act, chief executives and boards unilaterally should make capital preservation a priority,” the paper adds.

“Economies have gone on to a war footing: manufacturers are retooling factories to supply the needs of governments, workers are being mobilized and reallocated to areas of shortages. The financial sector must, likewise, adjust to the new reality. Banks will bear a large part of the burden that will come from the economic disruption of the coronavirus pandemic," the paper says. "To weather the storm, they must build their balance sheets into fortresses and use every means to shore up capital. It will also ensure that banks cannot take advantage of relaxed capital requirements to return funds to shareholders.”

The ECB is also warning banks to “exercise extreme moderation” in paying bonuses this year “and threatened to intervene if they failed to show restraint with payouts.”

“If we have to play this role, so be it,” Andrea Enria, the chairman of the ECB’s supervisory board, told the paper.

At least one big international bank is thinking about restraining bonuses. “It is a bit early to talk about 2020 bonuses but we are certainly thinking in the direction that we want to show solidarity,” Credit Suisse CEO Thomas Gottstein told a Swiss broadcaster, according to Reuters.

“Banker-bashing after the 2008 crisis provided grist for political movements like Occupy Wall Street and even extra taxes like the U.K. bank levy,” the Wall Street Journal notes. “Lenders need to do a much better job of managing potential public-relations risks this time round. Trimming pay before they are formally told to is a good place to start.”

Wall Street Journal

In praise of Powell

Federal Reserve Chair Jerome Powell “has mobilized the central bank to move faster and farther than ever before” in order to combat the coronavirus pandemic’s threat to the economy. “In the short weeks since financial markets seized up, Mr. Powell has placed the Fed on wartime footing. He took up the central bank’s playbook from the 2008 financial crisis and then some — cutting rates to near zero, purchasing huge quantities of government debt and, breaking a taboo, lending to American businesses,” the paper says.

Federal Reserve Chair Jerome Powell
Federal Reserve Chair Jerome Powell

“It’s another transformation of the Fed’s traditional role in American finance, as banks’ lender of last resort, in a time of crisis. Congress has encouraged the Fed, working with the Treasury Department, to invent new ways to stem the damage, pushing the Fed into fiscal policy choices it has long preferred that elected officials decide.”

And the chair is winning praise for his efforts, the paper says: "current and former colleagues say Mr. Powell is proving more decisive than more academic-minded colleagues in a job that is becoming more political."

Keeping the title

Bank of New York Mellon named Todd Gibbons permanent CEO. Gibbons, who has been with the bank since 1986, was named interim CEO last October after Charles Scharf resigned as chairman and CEO to become president and CEO of Wells Fargo. Joseph Echevarria, who was named BNY chairman after Scharf left, will remain as independent chairman.

2050 target

Barclays said Monday “that it would aim to be a net-zero bank by 2050 by aligning the emissions of the activities it finances across all sectors with the Paris Agreement on climate change,” the paper reports. The British bank, “the largest fossil-fuel financier in Europe and the sixth globally, which has come under fire from investors for having a weaker climate policy than some of its European rivals, said it would start with the energy and power sectors and provide targets to measure its progress in 2021.”

“Some of the measures the bank will implement will lead to a reduction in the carbon-dioxide intensity of its power and energy portfolios of 30% and 15% respectively by 2025, Barclays Chairman Nigel Higgins said in a letter to shareholders.”

Financial Times

Risky business

“Big banks that help asset managers package risky loans into investment products [such as collateralized loan obligations] are sitting on billions of dollars of debt linked to companies most exposed to an economic downturn,” the paper says. “Active warehouse lenders include big banks such as Citigroup and Credit Suisse, which provide CLOs with temporary facilities and then later earn fees from selling the asset-backed bonds to investors. But when the market for these bonds seizes up, as it has now, banks can get stuck holding the risk for longer than planned, weighing down their balance sheets.”

Quotable

“We learned our lesson. Moving early and aggressively is really important. We needed to get the markets functioning.” — Patrick Harker, president of the Federal Reserve Bank of Philadelphia, on the speed at which the Fed has moved to try to defend the U.S. economy against the coronavirus

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