Fed again takes action; bank stock buybacks on hold

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Fed actions

The Federal Reserve “cut its benchmark interest rate to near zero Sunday and said it would buy $700 billion in Treasury and mortgage-backed securities in an urgent response to the new coronavirus pandemic,” the Wall Street Journal reports. “The Fed’s rate-setting committee, which delivered an unprecedented second emergency rate cut in as many weeks, said it would hold rates at the new, low level ‘until it is confident that the economy has weathered recent events and is on track’ to achieve its goals of stable prices and strong employment.”

“We have responded very strongly not just with interest rates but also with liquidity measures today,” Fed Chairman Jerome Powell said at a press conference Sunday night. Wall Street Journal, Financial Times, New York Times, Washington Post

Fed Chairman Jerome Powell
Federal Reserve Board Chairman Jerome Powell

“The Fed also announced a handful of additional actions Sunday, including lowering the primary credit rate by 150 basis points to encourage banks to lend via the discount window and urged financial institutions to use their capital and liquidity buffers to lend to people and businesses affected by the coronavirus,” American Banker reports.

One of the reasons for the Fed’s “rare and dramatic Sunday evening move” may have been “companies around the world are drawing down their credit lines at the same time, forcing banks to cough up large sums of money on short notice and further straining a financial industry already hammered by sinking interest rates,” the Journal says.

“Banks routinely sell their corporate customers revolving credit lines that serve as backup in case businesses run into cash crunches. The problem now is that the world-wide patchwork of lockdowns and travel restrictions aimed at containing the coronavirus pandemic is causing a wide variety of businesses to scramble for cash all at once to make payroll and cover operating costs as sales plunge.”

Separately, Treasury Secretary Steven Mnuchin said “he would ask Congress to reinstate powers that were used during the 2008 financial crisis to support the economy as the coronavirus threatens to grind business activity in the United States to a halt,” the New York Times says “The comments suggest that the White House is bracing for a widespread downturn that could harm sectors well beyond the travel and cruise ship industries, and that the federal government could need to return to the type of crisis-era measures that were ultimately scaled back by lawmakers in the 2010 Dodd-Frank Act.”

No more buybacks

The largest banks in the U.S. that are members of the Financial Services Forum agreed to suspend stock buybacks until at least July and instead “pledged to put their capital to use helping consumers and businesses struggling with the rapid economic slowdown caused by the novel coronavirus outbreak.” Wall Street Journal, Financial Times

Separately, the commodity prepayments business, “an important corner of trade finance, is becoming riskier for banks and traders dealing with fallout from the coronavirus-inspired market rout and the recent crash in oil prices,” the Journal reports. Global banks most active in the business are Rabobank, Deutsche Bank, ABN Amro and Société Générale.

“Banks extend credit to companies and privately held trading houses, which in turn lend billions of dollars to oil producers by paying upfront for future deliveries of oil and other commodities. Banks get paid back when traders take delivery of oil. But the coronavirus pandemic has weakened global oil demand. The drop in oil prices means the volumes of oil being delivered no longer meet the size of payments promised to the banks, heightening the risk of renegotiation of deals. In this environment, the deals ultimately become less lucrative for banks — and to a lesser extent traders.”

Regional banks with big energy-lending portfolios” are “especially vulnerable” to the crash in oil prices,” the Journal reports. “U.S. and Canadian banks have more than $100 billion in loans outstanding to energy companies. Larger banks also are on the hook for billions of dollars in loans to the energy industry, but they are relatively less exposed because their balance sheets are much bigger and their lending businesses more diversified.”

“So when exactly does a coronavirus-triggered corporate market meltdown officially turn into a full-blown financial crisis?” the Financial Times asks. “That’s a question many market participants, and banks in particular, must be asking themselves.”

“The fact is that the banking system has already been pulled into the corporate credit crisis that many people predicted would be the cause of the next big market downturn. It’s all too easy to see how the problems of individual companies — technology firms, retailers, airlines and insurance companies — could be passed to individual banks and then to countrywide banking systems. Ultimately, they could spread throughout the global financial system, leaving central bankers once again the lender of last resort, standing between us and another global financial crisis.”

“The deep level of fear that has set in on Wall Street — as weeks of market gyrations have wiped trillions of dollars of wealth — has also permeated people’s personal lives,” the New York Times reports, noting that “customers at a Bank of America branch in Midtown Manhattan, the financial heart of New York, were lining up to take cash out of their accounts — sometimes tens of thousands of dollars at a time. So many people sought huge sums that the bank branch, at 52nd Street and Park Avenue, temporarily ran out of $100 bills to fulfill large withdrawals. The shortage hit after a rash of requests for as much as $50,000.”

“We don’t keep large amounts of cash in big bills in the branches because it’s dangerous for our employees and there is low demand,” said Bill Halldin, a BofA spokesman, who “said the bank had enough cash available at its branches to meet its clients’ needs.”

Citigroup and JPMorgan Chase said Friday “that they have employees who have tested positive for the coronavirus,” Reuters reports. “Citi said that one employee was confirmed to have the virus, and JPMorgan confirmed that two of its employees do. The announcements followed similar news from banks such as Wells Fargo, Morgan Stanley and others, as the flu-like virus continues to spread in the United States and worldwide.”

Quotable

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. The Federal Reserve is prepared to use its full range of tools.” — Statement from the Fed, announcing its decision to cut the federal funds rate and buy $700 billion in Treasury and mortgage securities

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