Experimenting with digital currencies; Questioning SOFR

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A weak bench?

The recent “tumult in the market for short-term cash loans” raises “concerns about the Federal Reserve’s proposed replacement for the troubled London interbank offered rate,” the Wall Street Journal reports. The secured overnight financing rate, or SOFR, rose almost three percentage points to a record 5.25% last week, “pulled higher by a jump in borrowing rates for overnight repurchase agreements, or repos.” SOFR is based on repo rates.

“The move was closely watched because a group of bankers, investors and regulators overseen by the New York Fed has designated SOFR as the preferred replacement” for Libor.

Nevertheless, New York Fed President John Williams warned financial firms against “sticking their metaphorical heads in the sand, hoping the issue will go away,” as the 2022 deadline for replacing Libor approaches. Williams, speaking at a conference in New York, “said he was concerned that some institutions were not moving fast enough to reduce their reliance on Libor.” Wall Street Journal, Financial Times

Separately, the New York Fed added another $49.7 billion to the financial system on Monday, the fifth session in a row it has done so.

The recent shortfall of funds in the short-term money market “may have vindicated” President Trump’s “perception that the central bank went too far” in “shrinking [its] vast holdings of government-backed securities on its balance sheet though for a much more nuanced reason. The tightening, which took place between late 2017 and last month, did not hit economic growth in a discernible way, as Mr. Trump often suggests. But it did leave an obscure but crucial corner of financial markets vulnerable to short-term disruptions.”

Spy games

Credit Suisse’s board “has launched an investigation into its surveillance” of one of its former senior executives after he defected to rival UBS. Credit Suisse told its employees in a memo Monday it launched the probe “following Swiss and German media reports that the bank put former wealth-management head Iqbal Khan under surveillance, leading to a confrontation with three unidentified men last week outside a restaurant in Zurich.” Khan “abruptly” announced his intention to leave Credit Suisse in July then was named head of wealth management at UBS, where he starts next week.

“A spokesman for the Zurich public prosecutor’s office said Monday that prosecutors opened a criminal investigation into possible assault and threat based on a complaint made by Mr. Khan. Credit Suisse had Mr. Khan under surveillance based on suspicions he was trying to poach someone from the bank for UBS, according to a person familiar with the decision.”

“Three men followed Mr. Khan and his wife through the streets of the city last Wednesday, culminating in a chase and a confrontation outside a restaurant behind the Swiss National Bank,” according to media reports.

Wall Street Journal

Virtual reality

“Central bankers and governments are increasingly warming to the idea of ‘digitizing’ their own national currencies. That is, they would issue money that would exist only virtually, without a paper or coin equivalent, and be universally accepted as a form of payment.” That prospect “might be a disappointment to many libertarians and tech-savvy investors who are pinning their hopes (and in some cases their money) on private cryptocurrencies such as bitcoin.”

“How it might work remains unclear, but countries are experimenting with it, and the implications could be profound for everything from commerce to interest rates to privacy.”

Tax rebate

Social Finance said it will reimburse customers who got hit with unexpected capital-gains taxes after it transferred their money from Vanguard Group’s funds into its own exchange-traded funds without telling them. “The move stood to generate capital gains for some clients, saddling them with tax bills.”

Financial Times

Bad sign

Metro Bank, the U.K. challenger bank “engulfed by a misreporting scandal” earlier this year, was forced to cancel a £200 million bond sale on Monday despite offering a 7.5% yield, “much higher than other U.K. banks have recently paid even on their additional Tier 1 (AT1) bonds, the riskiest class of bank debt that is first to take losses in the event of a lender collapsing.” The bank was looking to sell between £200 million and £250 million but received only £175 million of orders by Monday afternoon.

“Not being able to get a senior unsecured issue away at 7.5% when [rates] are so low is pretty staggering,” one analyst said. “To not get it away just reflects the lack of confidence in the ability of the business to turn a profit and maintain a sufficient capital base into the long term.”

The bank’s stock price dropped as much as 17% Tuesday morning following the failed bond sale, the paper says.

AI targeting

Retail banks are using artificial intelligence “to target individuals with products and third-party rewards based on their specific needs and tastes, as part of a broader effort to strengthen customer relationships. Some banks are starting to analyze customers’ ad hoc spending to offer discounts with retailers, restaurants and other partners that are tailored specifically to them. As well as the cross-selling opportunities that analyzing user data presents, banks also hope that personalized rewards via external partners will appeal to existing customers and help to attract new ones.”

Meeting needs

A “newer breed” of financial upstarts “has a broader swath of the U.S. banking market in its crosshairs, offering products that cover virtually all of the day-to-day activities that lie at the core of traditional banks’ lucrative relationships with their customers.” The newcomers include everyone from Apple to T-Mobile to foreign-based fintechs like N26 and Monzo.

Quotable

“Some say only two things in life are guaranteed: death and taxes. But I think there are three: death, taxes, and the end of Libor.” — New York Fed President John Williams, discussing the need to prepare for the replacement Libor as an interest rate benchmark, despite potential problems with its proposed replacement, the secured overnight financing rate, or SOFR

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