Coronavirus reactions continue; Supremes don’t tip hand on CFPB case

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Fed fallout

Banks “took a direct hit” from Tuesday’s emergency 50 basis point rate cut by the Federal Reserve. “The KBW Nasdaq Bank Index of the 24 biggest U.S. banks fell 4.6% on Tuesday and has lost 8.4% over the past week, more than double the S&P 500’s 4% drop over the week.”

“Lower interest rates tend to cut into what banks can earn on their bread-and-butter business of lending money. Three rate cuts in 2019 crimped banks’ lending margins, but bankers were sanguine heading into 2020. No increases or big cuts were expected. The spread of the coronavirus epidemic has upended those assumptions.”

“The situation is a good news-bad news deal for banks, depending on which side of the balance sheet is at play,” American Banker explains. “Banks with low deposit growth could struggle as margins get compressed, while those with strong mortgage banking businesses could thrive as consumers look to refinance and take out new loans.”

“The shock that coronavirus has wrought on markets across the world coincides with a dangerous financial backdrop marked by spiraling global debt,” the Financial Times warns. “With debt levels already at a record high, the coronavirus raises the risk of a credit crunch in a world of low interest rates.”

Financial Times

We'll have to wait

The Supreme Court “appeared divided about whether to give the president the unfettered power to fire the head” of the Consumer Financial Protection Bureau “in a case with potentially broad implications for the financial sector. The court heard arguments Tuesday about the structure of the [agency], the outcome of which will determine the extent to which U.S. presidents can influence the agency’s enforcement efforts,” the paper said.

“The U.S. high court, which has a 5-4 conservative majority, gave no clear signal of how it may rule. Several of the conservative justices appeared supportive of removing restrictions on firing the CFPB’s head. But chief justice John Roberts, who could be the swing vote in this case, did not give a strong indication on how he viewed the matter.”

Several justices, including Roberts, “suggested that it could be problematic to establish a new standard for presidential firings since that standard could also be challenged in court,” American Banker’s Kate Berry reported.

Not so bad

The European Court of Justice “ruled that Spanish judges will be responsible for deciding the legality of contentious mortgage contracts on a case-by-case basis, in a decision that falls short of the hit to the banking system some lenders had feared. Analysts had previously warned that a damaging verdict by the ECJ could cost the sector tens of billions of euros if the banks had to repay consumers’ excess interest as well as an additional penalty,” the paper said.

“This was probably the biggest risk facing the Spanish banking sector,” said Stefan Nedialkov, a bank analyst at Citigroup. “The potential negative impact could have wiped out two to three years’ domestic profits — excluding international earnings — if the court had found against the banks.”

Washington Post

Nice try

The Bank Policy Institute, a lobbying group for big banks, “is recommending that the Federal Reserve lower capital requirements and ease the periodic ‘stress tests’ banks take to prove they can survive another economic crisis … as part of the government’s efforts to contain the economic fallout from the coronavirus.” But those suggestions were “lambasted as opportunistic and unnecessary,” the paper reports.

The Fed could “make changes to its bank regulations or enact promptly already planned regulatory changes that would not reduce safety, soundness or financial stability,” the group said. But Jeremy Kress, an assistant law professor at the University of Michigan School of Business, called those recommendations “transparently opportunistic.”

“The whole idea of capital requirements and stress-testing banks is to make sure they have enough cushion to absorb losses” during an economic crisis, he said.


Testing its contingency plan

JPMorgan Chase “is asking thousands of U.S. employees to spend a day working from home in the coming weeks to test its contingency plans should the coronavirus spread,” Reuters reports.

“This week the bank may also begin sending teams of traders to work from secondary office locations in Brooklyn, New York, and nearby in New Jersey, to test its systems and ensure that any kinks are worked out should the bank need to roll out emergency plans more broadly.”

The bank “is testing these contingency plans now because, if the coronavirus spreads further in the United States, it would need to separate employees of the bank’s many business lines to ensure that most business could continue as usual.”


“My priority right now is ensuring that our federal, state and local health agencies have the resources they need to keep Americans safe. It’s not the time to reduce financial system protections to bolster the bottom lines for Wall Street.” — Sen. Sherrod Brown, D-Ohio, the ranking minority member of the Senate Banking Committee, responding to a request by big banks to ease regulatory requirements in light of the coronavirus

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Coronavirus Bank stocks Monetary policy CFPB SCOTUS Mortgages Minimum capital requirements JPMorgan Chase