FDIC looks to ditch call reports; Wirecard’s long-time auditor under fire

Register now

Receiving Wide Coverage ...

Wirecard fallout continues

The Wirecard scandal has “put the spotlight” on the company’s auditor Ernst & Young, which “had questions related to unorthodox arrangements under which the company’s cash was held in bank accounts it didn’t control as far back as 2016,” yet “subsequently signed off on three years of Wirecard’s financial results with those arrangements in place,” according to the Wall Street Journal.

“We feel Ernst & Young’s auditing work was a disaster,” said Marc Liebscher, a Berlin lawyer who is representing Wirecard investors who filed a criminal complaint in Munich against the auditor. In its defense, EY claims it was “duped along with everyone else.” “There are clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception,” it said.

EY told its partners Friday to “tell clients that the ‘objective’ of the large international fraud at Wirecard was to ‘deceive investors and EY,’” the Financial Times said.

German regulators, who “have faced accusations that they failed to adequately supervise” Wirecard, plan to “overhaul the way [they] regulate accountancy firms … to contain the fallout from the huge fraud” at the payments company, the Financial Times said. “The government will terminate its contract with the country’s accounting watchdog, the Financial Reporting Enforcement Panel, as early as Monday. The power to launch investigations into companies’ financial reporting would then be handed to BaFin, Germany’s financial regulator.”

Meanwhile, “Philippine regulators say they are investigating the local partner businesses of Wirecard in a probe that may finally map out the full extent of the southeast Asian country’s exposure to one of Europe’s worst accounting scandals,” the FT said. The country was “dragged into the scandal” after Wirecard claimed that an allegedly missing $2 billion of company funds was held by two Philippine banks, both of which claim that they never held it and which now appears never existed. The investigation is being conducted by the country’s National Bureau of Investigation and Anti-Money Laundering Council.

“The speed of the collapse and Wirecard’s debts, at least €3.4 billion, have focused attention on a man who for a long time was barely visible inside his own company,” CEO Markus Braun, who “cloaked himself in a formality that stood out in the casual atmosphere of a technology company,” the FT says. “He secluded himself on a floor where key card access was only available to senior management, their assistants, and the team that dealt with high-risk payments processing for online gambling and pornography.”

“One thing is sure,” the New York Times reports: “Anyone paying attention should not have been surprised” by the scandal. “Since 2008, Wirecard had attracted skeptics who wondered how the company could generate the worldwide revenue it claimed. The questions, raised by analysts and investigated in a series of articles in The Financial Times, were repeatedly waved away by Mr. Braun, whose global ambitions grew with the stock price.”

“Millions of digital banking customers” in the U.K. were “unable to access their money” after Wirecard filed for insolvency last week, the FT said. “Wirecard Card Solutions (WCS), the U.K. subsidiary of Wirecard, has quietly become a crucial part of the British fintech scene, providing the technology to enable consumer-facing start-ups, such as Pockit and Curve, to issue prepaid cards and process payments before they were regulated to do it themselves.”

Wall Street Journal

Fresher data

The Federal Deposit Insurance Corp. “is moving to boost the way it monitors for risks at thousands of U.S. banks, potentially scrapping quarterly reports that have been a fixture of oversight for more than 150 years yet often contain stale data,” the Journal reports. “The FDIC on Monday is expected to kick off a competition among 20 data and technology firms to develop a new reporting prototype that could provide the agency with more timely and targeted data about banks’ credit exposures and deposit information.”

“The competition is part of a broader push to modernize the way government watchdogs surveil risks in the market. Proponents say it could also boost consumer protection, help combat financial crime and ensure the banking system serves an inclusive set of customers.”

Blind spot

“Banks have pulled back sharply on lending to U.S. consumers” because “they can’t tell who is creditworthy anymore. A provision in the government’s coronavirus stimulus package … says lenders that allow borrowers to defer their debt payments can’t report these payments as late to credit-reporting companies.”

“The credit blind spot has further clouded the outlook for lenders. Lenders that are having a tough time spotting risky loan applicants are approving fewer borrowers for credit cards, auto loans and other consumer debt. They are also hunting for new data sets that could indicate who is in financial trouble and how much they need to set aside to cover soured loans.”

Lost luster

“Banks are scrambling” to hold onto customers for their pricy ultra-premium rewards credit cards, which “aren’t as rewarding these days” as “travel bans and social distancing have made those perks less appealing, leading some customers to question if the cards are worth their hefty annual fees.” JPMorgan Chase, for example, “delayed a planned $100 increase on Sapphire Reserve’s $450 annual fee. It is also doling out extra points on grocery purchases through the end of June. Citigroup rolled out extra points on online grocery, drugstore and other purchases made with its premium Prestige card through August.”

But “doling out extra points for groceries and other everyday expenses could become costly for banks.”

Bad omen

Fidelity Investments’ decision last week to “close two institutional prime money-market funds” that included a lot of certificates of deposits issued by foreign banks is “an ominous portent for some non-U.S. banks, which have increasingly come to rely on such funds to raise dollars they can’t easily acquire at home. The closures don’t mean an imminent funding crunch. But they are still bad news for the banks, watching one of their limited avenues for profit in recent years slowly closed off.”

Financial Times

Less risky

Large global banks are “more resilient and less susceptible to risky behavior than before the 2008 financial crisis, but gaps remain in the new regulatory regime, according to the Financial Stability Board. Global systemically important banks, or GSIBs, are now better capitalized and have built up significantly more capacity to absorb losses, with their core capital ratios on average having doubled since 2011, the FSB said in a review of post-crisis rulemaking. The problem of moral hazard — the danger that bankers may take excessive risks if they believe they are not accountable if their bets go wrong — has also declined, the report found.”

Call retreat

“Uncertainty about the scale of potential financial losses caused by coronavirus has accelerated a retreat from the European banking sector by global equity fund managers, who have cut allocations to these lenders to the lowest level for at least a decade. Only 250 managers currently have an exposure to European banks, down from 313 in February 2018, according to Copley Fund Research.”

Among the unloved is HSBC, whose “popularity has weakened dramatically among global equity managers. Just 9% have any exposure to the London-listed bank, down from a peak of 40% in 2013.”

Takeover offer

Cannae Holdings and Senator, two U.S. investment companies that already own a 15% stake in CoreLogic, “have made a $7 billion unsolicited bid” to buy the real estate data analytics company, “the first large hostile takeover attempt during the coronavirus pandemic.” On Friday the two firms “criticized the company’s management for failing to set it on a course for growth and proposed a plan to help bolster its value.”

Quotable

“What we would like to do is frankly make the call reports obsolete, and not because we wouldn’t have the data but because we would have better data and we would have more timely data.” — Jelena McWilliams, chairman of the FDIC, which is looking to improve and speed up the information it gets on the 3,200 banks it regulates.

For reprint and licensing requests for this article, click here.