ECB opens to large bank mergers; Deutsche Bank has a new scandal

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Receiving wide coverage

Big not so bad

"Europe's main banking regulator is trying to clear the path for mergers between the continent's lenders as the belief grows that scale is the key to reviving the struggling sector," the Journal reports. "The regulator—an arm of the European Central Bank that covers the largest eurozone banks—is making this softer stance toward potential tie-ups known privately. It marks a departure for the regulator from its perceived stance of imposing prohibitively tough conditions on mergers."

"The loosening comes as the eurozone's fragmented banking sector struggles to make money. Low interest rates—which are set up by the ECB's own monetary-policy arm—continue to eat up banks' margins on loans, hurting their profitability and making them largely unattractive for investors. Mergers have been long touted as a possible answer to the region's banking woes."

In Denmark, where people "have lived with subzero rates longer than anyone else," the "worst is yet to come" for the country's banks, according to Kristian Vie Madsen, deputy director general of the Danish Financial Supervisory Authority. Since 2012 Danish banks have managed to fend off the effects of negative rates through "a lot of one-offs" to offset losses, but "there are not that many one-offs that can save the results for the next year," he said. Danish banks start to release earnings in early February.

Wall Street Journal

One step forward

Investors are starting to trade derivatives tied to the Federal Reserve's secured overnight financing rate, or SOFR, its preferred replacement for the London interbank offered rate, "a sign the financial industry is coalescing around a new benchmark for short-term interest rates" and "easing worries that lenders and other financial institutions remain underprepared for the shift" away from Libor. "That is encouraging to some analysts because the transition marks a key shift for financial markets."

"The CME Group this month began offering options on SOFR interest-rate futures and nearly two dozen SOFR options contracts have traded since the January 6 launch." "This is a good step forward towards developing SOFR derivatives markets," said Gil Holmes, co-head of North America rates trading at J.P. Morgan Chase.

Financial Times

Deutsche's newest scandal

Deutsche Bank has a new problem. It "paid $1.1 million to secure the wealth management business of a senior Saudi royal, according to an internal probe that led to two former staff being reported to criminal prosecutors," the FT reports. "Some of the pay and perks violated Deutsche's policies on anti-corruption and gifts and entertainment, the probe found. Six employees left after the investigation; some of them have since taken senior roles at Barclays, UniCredit and Union Bancaire Privée. Twelve staff had their bonuses suspended."

"The scandal in the wealth management division, which involved payments to the wife of the royal's financial adviser, highlights the legal and reputational risks to a unit that is central to the German bank's turnround hopes."

Coming out party

On Wednesday Goldman Sachs CEO David Solomon "will stand before a crush of shareholders, analysts and journalists at the bank's first-ever investor day. It is effectively a coming-out party for a [company] that has spent the past two years planning a radical overhaul of its operations as it moves from its trading and investment banking roots to an institution offering everything from current accounts to money management and credit cards for the masses. It is one of the many breaks with tradition the investment banker has made since taking control at Wall Street's most storied bank."

"Marcus, Goldman's consumer bank, is the epicentre for the company that Mr. Solomon and his team are trying to build — a place where innovation and customer experience matter more than the prestige that the bank once prized."

To the rescue

The president of SBI Holdings, Japan's largest online brokerage, is offering a lifeline to the "country's regional banks — a sector whose chronic troubles are building both domestic and global financial stability risk." Yoshitaka Kitao told the FT that "desperate regional lenders who might once have dismissed an approach from SBI now had 'no choice' but to talk to him as he laid out offers of partnership. Local banks that opt to partner SBI, he said, would benefit from its superior technology while becoming, in effect, conduits through which their customer bases could access SBI's much larger range of financial products and services."

Kitao's comments "come as Japan's financial regulator has begun planning the sector's biggest shake-up since the 1990s with a series of reforms that would allow regional banks to participate more broadly in their surrounding economies."

Elsewhere

It ain't over yet

Last week the Office of the Comptroller of the Currency permanently banned Wells Fargo's former CEO John Stumpf from the banking industry and fined him $17.5 million, while also charging five other former executives for their roles in the bank's massive fake accounts scandal. Wells has also "racked up well over $4 billion in penalties." But the bank's troubles are far from over. Reuters provides a rundown of the "remaining shoes yet to drop," and there are a lot of them.

Quotable

"Somewhere in the back of their minds, the ECB realizes that the negative rates environment is weighting on profitability of the banks, and they need to do something about it." — Jérôme Legras, head of research at Axiom Alternative Investments, about the European Central Bank's recent change in attitude to allowing large European banks to merge.

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Monetary policy Interest rates SOFR Wealth management Consumer banking Deutsche Bank Goldman Sachs Wells Fargo
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