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Fed announces new stress test round; will also consider extending buyback ban

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The Federal Reserve said it “will analyze large banks’ ability to withstand two coronavirus-related recession scenarios as part of a second round of stress tests later this year,” the Wall Street Journal reported. “Unlike an earlier round of stress tests this year, the Fed will release the results of the tests for each bank, rather than providing aggregate results for the group. That means investors and the public will have a better understanding of the health of each of the 33 lenders when it comes to lending through the downturn.”

“The Fed’s stress tests earlier this year showed the strength of large banks under many different scenarios,” said Randal Quarles, the Fed’s vice chair for supervision. “Although the economy has improved materially over the last quarter, uncertainty over the course of the next few quarters remains unusually high, and these two additional tests will provide more information on the resiliency of large banks.”

This is the Fed’s first-ever "midcycle" stress test designed to get a firmer grasp of banks' capital strength since onset of the coronavirus pandemic, American Banker’s Hannah Lang reports. The supplemental tests will use data from this year's economic tremors.

The Fed is also considering “whether to extend restrictions on dividends and share buybacks” by banks into the fourth quarter, the Financial Times said. In June the Fed banned share buybacks and capped third quarter dividends, saying at the time that the banks were “sufficiently capitalized” but that “heightened economic uncertainty” meant they should act “to preserve their capital levels in the third quarter.” On Thursday the Fed said it would “announce by the end of September whether those measures to preserve capital will be extended into the fourth quarter.”

Separately, the Federal Reserve Bank of New York said Michael Strine, its chief operating officer and first vice president, will retire early next year, “capping a period of change in the bank’s leadership.” Strine, who is also an alternate member of the interest-rate-setting Federal Open Market Committee, will step down from that role on Feb. 28.

“Mr. Strine oversaw operational issues at the New York Fed, which is the central bank’s main point of contact with financial markets and a custodian of major gold holdings. Mr. Strine, who has worked in a number of positions at the New York Fed since 2013, is leaving after several other high-profile exits at the bank. In June 2019, Simon Potter, leader of the bank’s markets group, and Richard Dzina, who helmed the financial services group, both left without successors being ready.”

Wall Street Journal

Smooth ride

Auto loans are holding up better than expected during the coronavirus crisis. “In the early stages of the pandemic, auto loans started showing high rates of customers in deferral programs. But deferrals have yet to turn into waves of defaults. Late payments have ticked up a bit during the summer as stimulus faded, but they are still well below even recent historical levels.”

“Credit losses are also being flattened by a surge in used-car demand and pricing—meaning repossessed cars are flipped for good value. In fact, the major negative right now is that demand for autos is such that banks that lend to dealers are seeing a decline in credit utilization because dealers are finding it hard to put cars on the floor.”

Financial Times

Relaxed rules

The European Central Bank “has relaxed regulations on eurozone banks, freeing up as much as €73 billion of capital in an attempt to boost lending and prevent the economic crisis triggered by the coronavirus pandemic from turning into a credit crunch. The move grants lenders extra capital relief, enabling them to increase their lending to governments, businesses and households. It follows a similar, albeit more generous, move by the U.S. Federal Reserve in April.”

Suspended

“A director in Citigroup’s information technology department has been placed on leave after he was identified as the operator of a prominent website dedicated to the QAnon conspiracy theory.” Jason Gelinas, a New Jersey resident, reportedly “earned more than $3,000 a month by operating the site, which attracted 10 million visitors a month.”

“As outlined in our code of conduct, employees are required to disclose and obtain approvals for outside business activities,” Citigroup said in a statement.

Elsewhere

Sentenced

A former JPMorgan Chase foreign exchange trader was sentenced to eight months in prison on Thursday “following his November 2019 conviction for conspiring with traders at other banks to rig currency trades,” Reuters reported. The trader, Akshay Aiyer, “was also sentenced to two years supervised release and fined $150,000. Prosecutors had sought up to 46 months in prison, while the defendant sought probation.”

“Aiyer’s case was part of a broad U.S. probe into currency manipulation by the banking industry.”

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