Fed eyeing banks’ technology vendors; Wells questioned on fees

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Call for action

Australian Prime Minister Scott Morrison weighed in on the scandal at the country’s second largest bank, Westpac, which is being sued by the country’s financial regulator for 23 million breaches of anti-money laundering laws, “including a failure to monitor and report payments between known child exploiters.”

“These are some very disturbing, very disturbing transactions involving despicable behavior,” Morrison told Australian Broadcasting Corp. on Thursday. “They should be taking this very seriously, reflecting on it very deeply and taking the appropriate decisions for the protection of people’s interests in Australia.” He said Westpac’s board “needs to determine themselves” whether CEO Brian Hartzer should resign.

The bank’s board of directors “unreservedly apologized” for failing to detect and block the payments. “The notion that any child has been hurt as a result of any failings by Westpac is deeply distressing and we are truly sorry,” said Chairman Lindsay Maxsted. “As a board, and as individuals, we are devastated by the issues raised by Austrac.”

However, Westpac “resisted mounting political and shareholder pressure to immediately oust its chief executive, Brian Hartzer, or any other directors from their positions following an emergency board meeting.”

Fueling the fintech boom

“Information about you, your money and how you spend it” and financial deregulation are the “lifeblood” fueling the “burgeoning financial technology sector, which attracted $24.6 billion in venture capital and a record number of fund-raising mega-rounds in the first three quarters of 2019,” the Wall Street Journal reports.

Until recently, customer financial information “was jealously protected by banks and a few tightly regulated companies. But online shopping, smartphones and a younger generation at ease with digital technology have made us more willing to share personal information — and regulators to sanction change.”

Separately, American financial technology startup Plaid, whose software helps link fintech apps with consumers’ bank accounts, said it has expanded its services in Ireland, France and Spain. It launched in the U.K. earlier this year. “We’ve been fortunate enough to be on the wave of fintech, starting in the U.S.,” Zach Perret, co-founder and CEO, told CNBC. “It’s had a lot of early success in the U.K., despite only being there six months.

Wall Street Journal

Climate change and digital currency

Ten Democrat senators — four of whom are running for president — are supporting a bill that would require the Federal Reserve to factor climate-change risks into how it oversees large banks. A companion bill has been introduced in the House.

“The bill, if passed, directs the Fed to more formally incorporate climate-change-related risks into its regulatory regime for the financial sector. It would order the Fed to specifically ‘stress test’ firms with more than $250 billion in total assets to ensure they can withstand the trouble that climate change can bring to the economy and the financial system. The bill also would direct the Fed to create an advisory panel of climate scientists and economists to create scenarios for the stress testing. Affected firms would also be required to come up with plans for various climate-related contingencies, including fire and rising seawater.”

Separately, Richard Ashton, the Fed’s deputy general counsel for litigation, enforcement and system matters, said the Fed is “looking at ways to step up supervision of technology firms that serve the banking industry, amid ongoing concerns about the threat of cybersecurity breaches.”

“Financial regulators are allowed under the Bank Service Company Act to examine third-party vendors that provide core banking services, according to Mr. Ashton. As more banks outsource data management and other services to technology firms, regulators may be justified in strengthening their oversight.”

On a different note, Fed Chair Jerome Powell said the Fed is “not currently developing a central bank digital currency.” In reply to a request from Rep. French Hill, R-Arkansas, Powell wrote, “In the U.S. context, issuing a central bank digital currency for general use would raise important legal, monetary policy, payments policy, financial stability, supervision and operational questions that need to be considered carefully.” Powell noted, “characteristics that make the development of central bank digital currency more immediately compelling for some countries differ from those of the U.S.” For example, “The U.S. payments landscape is highly innovative and competitive, with many such options available for consumers.”

Unwelcome growth

Unsecured personal loans are “growing like a weed,” up more than 10% from a year ago, and on a “rapid pace of growth that has not been seen on a sustained basis since shortly before the Great Recession.”

“Definitely yellow flares should be starting to go off,” said Mark Zandi, chief economist at Moody’s Analytics. “There’s an old adage in banking: If it’s growing like a weed, it probably is a weed.”

Financial Times

Negative on German banking

Moody’s cut its outlook for the German banking system to negative from neutral while the Bundesbank “warned that the country’s financial stability is increasingly under threat … thanks to a combination of negative interest rates and a slowing domestic economy. The pessimistic forecasts come as Deutsche Bank and Commerzbank, having failed to merge earlier this year, have stepped up cost-cutting efforts in an attempt to improve profits.” Earnings in Germany’s banking sector plunged 31% last year, according to Bundesbank data.

“Banks’ weak profitability will decline further as net interest income falls,” a Moody’s analyst said.

Washington Post

Demanding answers

Rep. Katie Porter, D-Calif., a “vocal” member of the House Financial Services Committee, “is calling on Wells Fargo to disclose the size of a potential problem with two of its popular checking accounts that may have left some customers confused about how to avoid fees.” In a letter to Wells CEO Charles W. Scharf, Porter said the bank may have collected “hundreds of millions of dollars” in fees from customers confused by the rules. In a letter to two of the bank’s regulators, the Office of the Comptroller of the Currency and the Federal Trade Commission, Porter said Wells provided “incomplete information over a span of multiple years” despite knowing that some customers were “confused” by the rules, which led some of them to “unexpectedly trigger more fees by overdrawing their accounts.”

Patrick T. Fallon/Bloomberg

“Wells Fargo disclosed the potential problem last month in a Securities and Exchange Commission filing but has not said how many customers may have been affected or how much it might end up refunding customers.”

Separately, American Banker reports Avid Modjtabai will retire in March. Modjtabai "runs Wells Fargo's payments and technology innovation unit."

Quotable

“While our federal regulators are legally obligated to manage and reduce risks in the financial system, they have been ignoring the growing financial risks of climate change.” — Sen. Brian Schatz, D-Hawaii, announcing his support for a bill that would require the Fed to consider climate change risks in how it oversees large banks