Fannie, Freddie can keep profits; CBD firm seeks national bank

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American Banker's annual Most Powerful Women in Banking and Finance is out! Check out our exclusive coverage of who made the lists and why.

Receiving Wide Coverage ...

Who's to blame?

The Federal Reserve Bank of New York wants to know “why banks with excess cash failed to lend to the overnight money market” last week. The situation “revealed cracks in the U.S.’s financial plumbing.” John Williams, the president of the New York Fed, and Lorie Logan, its senior vice president in the markets group, told the Financial Times “officials were looking at why cash failed to move from banks’ accounts at the Fed into the repo market, where banks and investors borrow money in exchange for Treasuries to cover short-term funding needs.”

“The thing we need to be focused on today is not so much the level of reserves [held at the Fed],” Williams said. “It’s how does the market function.” While market participants said the Fed's unwinding of quantitative easing took too much cash out of the system, Fed officials are looking into the banks' role in the shortage, the paper says.

The New York Fed said it will “continue to offer to add at least $75 billion daily to the financial system through October 10, prolonging its efforts to relieve pressure in money markets.”

Wall Street Journal

The first step

Fannie Mae and Freddie Mac “are expected to start keeping their earnings as early as this week, pausing a years-long arrangement in which they handed nearly all of their profits to the Treasury Department.” Under an expected agreement between the Trump administration and the Federal Housing Finance Agency “the companies would be allowed to retain about a year’s worth of profits, or about $20 billion, an initial major step in allowing the companies to build up capital so they can operate as private companies again.”

“We’re still in the middle of negotiations with Treasury, but I think we’re close,” said Mark Calabria, the FHFA head. “I hope to have it done by the end of the month.”

Making friends

John Philpott, the CFO of Vertical Wellness, is trying to win over banks as the company, which markets cannabidiol, or CBD, prepares to go public. “Some banks and accounting firms have kept their distance from the sector because of a previous federal ban on growing hemp. Some of the banks Mr. Philpott recently talked to still have to verify whether they can do business with Vertical Wellness, which works with a local bank in Kentucky but wants a national or international bank going forward.”

“When I meet with a bank, I first need to make sure they understand what kind of company we are,” he says. “What they all agree on though is that this is an interesting space that they want to get into.”

Separately, American Banker reports, "Rep. Ed Perlmutter, D-Colo., has expanded the Secure and Fair Enforcement Banking Act, or SAFE Banking Act, to include protections for industrial hemp businesses."

The future is here

Intercontinental Exchange, the owner of the New York Stock Exchange, was “set to launch its long-delayed market for bitcoin futures Sunday, a high-profile bet that consumers, businesses and Wall Street will embrace cryptocurrencies. The new futures are part of a venture called Bakkt (pronounced 'backed'), whose ultimate goal is to make cryptocurrencies sufficiently transparent and regulated for individuals to use in retail purchases. If successful, ICE’s futures could make it easier for merchants to protect themselves from swings in bitcoin prices.”

New competition

“China’s biggest internet and technology companies are crowding into the financial-services business, hoping to monetize troves of data they’ve collected on millions of people in the country.” The companies “have set up finance arms providing personal loans, insurance and investment products. Many of those products are offered and sold via the companies’ smartphone apps that connect directly to individuals’ virtual wallets or bank accounts.”

Financial Times

Another milestone

Goldman Sachs is planning to offer individual savings accounts (ISAs) in the U.K. for the first time. “The bank’s plan to launch the tax-free investment account that has been hugely popular with investors in the U.K. since they were first introduced in the late 1990s, marks the latest expansion of Goldman’s consumer bank Marcus, which was launched in the U.S. in 2016. Goldman’s push into consumer banking is central to efforts to lift revenues and diversify its source of funding.” Marcus launched in the U.K. last year.

Revival plan

Despite “slashing 18,000 jobs and stripping out €6 billion of annual costs,” mainly in its investment bank’s trading unit, Deutsche Bank “is planning to hire hundreds of staff and add almost €100 billion of assets at its wealth management unit in a bid to break into the top tier of those catering to the growing ranks of the world’s ultra-rich. The division, run by Fabrizio Campelli, has been placed at the center of a new strategy unveiled in July by CEO Christian Sewing to revive Germany’s biggest bank. Campelli has been given firepower to invest and hire in order to achieve ambitious targets in an increasingly crowded sector.”

Separately, Deutsche “has agreed to transfer key staff, clients and technology in its prime brokerage and electronic equities businesses to BNP Paribas, as part of the German lender’s wider overhaul of its investment banking unit.”

Keys to success

A turnaround in the marketplace lending industry, which has largely failed to deliver on investor’s expectations since it was created 15 years go, “will require overcoming three tricky hurdles,” the paper reports. “Borrowers are too expensive to acquire; the platforms serve investors that have a significantly higher cost of capital than banks; and the stock market is skeptical about whether the companies can weather an economic downturn.”

Introspection

“It is clearly important that banks understand the implications of their exposure to mortgages in coastal Florida or to governments finally getting serious about slashing emissions,” writes Patrick McCully, the Rainforest Action Network’s climate and energy program director. “But that is not enough. Banks must address their own role in creating the climate crisis.”

Lighting the fire

Facebook’s Libra has created a sense of “political urgency” among central banks to create their own digital currencies.

Elsewhere

Charging depositors

Jyske Bank, Denmark’s second-largest publicly traded bank, is planning to start charging customers with more than $100,000 on deposit at the bank, the latest response to negative interest rates. Previously, Jyske and other banks had charged customers holding more than $1 million.

“CEO Anders Dam said the latest Danish rate cut this month means Jyske is now ‘losing even more money’ when it deposits excess reserves at the central bank at minus 0.75%. Dam also says it’s possible the rule will be extended to an even larger group of depositors. Other banks have hinted they’ll follow and economists say the development marks a major shift in how monetary policy will be felt across the economy.”

Quotable

“That ability of the system to move money around and redistribute — it didn’t work the way we’ve seen in the past.” — New York Fed President John Williams, commenting on last week’s shortage of funds in the money markets which forced the Fed to inject money into the system four days in a row

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