Durbin asks Fed to probe card fees; European banks brace for more bad debt provisions

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We didn’t do it

HSBC defended its “cooperation with U.S. prosecutors in a case against China’s Huawei Technologies Co. after Chinese state media said the bank had set Huawei up.” The British bank, which gets most of its revenue and profits from China and Hong Kong, “said the U.S. Justice Department made formal requests for information about Huawei, a former HSBC client, and that it didn’t ‘set a trap’ for Huawei to break U.S. sanctions, as Chinese newspaper People’s Daily wrote in an article Friday. The statement comes amid intensifying U.S.-China tensions over trade, Hong Kong and Huawei that have put HSBC in the crosshairs as an Asia-focused trade bank with a large U.S. operation.”

“In the statement, first released on Chinese social media and geared toward a local audience, HSBC said it wasn’t involved in the DOJ’s decision to investigate Huawei or to arrest Huawei finance chief Meng Wanzhou and doesn’t have any hostility to the company. It said it relies on communities understanding that international banks must follow international rules.” Wall Street Journal, Financial Times

Wall Street Journal

Step one

Wells Fargo “did some needed work in the second quarter,” but its “turnaround still has a way to go. Wells faces other challenges going forward. The asset cap imposed on the company by the Fed continues to have a broad impact on its business. In home lending, where the bank is a giant, it is still producing more, but it also faced the headwind of faster prepayments that reduce the value of its mortgage-servicing rights.”

“There is one big thing in Wells’s favor: a cost base that has room for cuts. Chief Executive Charles Scharf says the bank needs a $10 billion-plus reduction to its expense base. The bank hasn’t yet given any detailed timeline for achieving the cuts, though perhaps some of the pandemic’s long-term effects can be a tailwind, such as reducing the necessary physical footprint. Still, there are also costs associated with supporting employees and clients through this uncertain crisis.”

“Wells’s unique mix of challenges is forcing it to cut costs first, but it might not be the last” bank to do so. “The bank’s approach to belt-tightening could offer some clues about what is to come for the rest of the industry. Other big banks cut billions of dollars in costs and laid off thousands of employees in the wake of the last financial crisis, putting them in a better position to withstand this one. Some have pledged not to lay off employees in 2020. Whether they are forced to make cuts later on will depend on the length and severity of the recession.”

Keeping tabs

Democratic Sen. Richard Durbin of Illinois, “the namesake of the Durbin amendment” to the 2010 Dodd-Frank Act that caps swipe fees on debit cards, “is asking the Federal Reserve to probe allegedly anticompetitive practices that are forcing merchants to pay excessive debit-card fees levied during the coronavirus crisis by large networks like Visa and Mastercard.”

“In a letter to Fed Chairman Jerome Powell, Mr. Durbin said practices by the large card networks and debit-card issuers are diminishing competition in the online payments marketplace and costing merchants potentially billions of dollars. The letter, which Mr. Durbin’s office sent late Friday, asks the Fed to determine whether the major card networks and debit-card issuers have a shared incentive to limit the transactions processed by lesser-known debit-card networks.”

Out of favor

Rates on jumbo mortgages remain substantially higher than on conventional 30-year fixed-rate loans. “The average rate on a 30-year jumbo mortgage was 3.77% in mid-July, more than 0.4 percentage point above the average rate on smaller, conforming loans. The same force pushing most mortgage rates to record lows—investors piling into safe-haven assets like government bonds—has pushed jumbo loans out of favor.”

“Banks generally keep jumbo loans on their own books, betting that the borrowers are less likely to default. But the Federal Reserve has taken extraordinary steps to intervene in the mortgage market during the coronavirus pandemic, including agreeing in March to buy an essentially unlimited amount of mortgage-backed securities. What is more, jumbo loans aren’t entitled to forbearance under the Cares Act.”

Crypto green light

“National banks and federal savings associations can provide cryptocurrency custody services for customers, including holding unique encoded keys associated with digital currencies,” the Office of the Comptroller of the Currency said Friday. “The OCC also restated its position that banks may provide permitted banking services to cryptocurrency businesses as long as the banks effectively manage risks and comply with regulations such as anti-money-laundering requirements.”

“From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today,” Brian Brooks, acting Comptroller of the Currency, said in a statement. “This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency.”

Financial Times

Brace yourselves

“The largest U.K., Swiss and eurozone lenders are expected to provision at least €23 billion for the second quarter as they report earnings in coming days,” Citigroup estimates. “That is on top of the €25 billion of charges the same group took against potential defaults in the first three months of the year.”

“When added to the $61 billion already reserved by the five largest U.S. banks over the first six months, the combined figure from the biggest western lenders could reach $117 billion. That would be the highest net addition to reserves since the first half of 2009, in the aftermath of the collapse of Lehman Brothers, according to Citi.”

Quotable

“U.S. retailers and restaurants cannot afford to pay unnecessarily high fees for debit card transactions at a time when they have been hit hard by the pandemic and its economic effects.” — Democratic Sen. Richard Durbin of Illinois, in a letter to Fed Chair Jerome Powell, asking the Fed to investigate alleged anticompetitive practices in debit transactions.

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