Fed moves to ease cash shortage; Citi looks to make connections

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Cash infusion

As it began its two-day monetary policy meeting the Federal Reserve, “for the first time in more than a decade, injected cash into money markets to pull down interest rates and said it would do so again Wednesday after technical factors led to a sudden shortfall of cash,” the Wall Street Journal reported. The New York Fed Tuesday morning injected $53 billion into the banking system through repurchase agreements, or repos. Later in the day it said it would inject up to $75 billion more Wednesday morning.

“The move came after the overnight rate on Treasury repurchase agreements, which are short-term loans used by financial institutions like hedge funds and banks, surged at the start of the week amid a shortage of dollars," according to the New York Times. "A few factors seemed to give rise to that shortfall: companies withdrew cash from money markets to pay their taxes shortly after the United States Treasury issued a raft of new bonds. That glut of new debt sapped up cash.”

“Tuesday’s intervention is symbolically important, because it suggests the Fed’s approach to setting interest rates may require fine-tuning,” the paper said. Financial Times, New York Times

Wall Street Journal

Swaps break

As expected, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency approved a proposal to reduce the amount of cash large banks would need to put up to cover trades in the swaps market, a move “that could free up nearly $40 billion for big global banks, the latest regulatory victory for Wall Street.”

“Financial regulators in 2015 required banks to put down a set amount of collateral, or initial margin, in swaps transactions between affiliates of the same firm. The FDIC, led by Chairman Jelena McWilliams, voted 3-to-1 on Tuesday to advance a proposal eliminating the requirement. The trades would still be subject to other restrictions, including collateral requirements tied to daily price changes to account for market risk.”

McWilliams said initial margin collateral is “locked up, frozen, and available only in the event that the affiliate fails — a scenario that has become much less likely” in intervening years.

The FDIC also finalized a simplified capital measure for community banks.

Balancing act

HSBC has survived “revolutions, economic crises, (and) new technologies,” as it says on its website. “Yet the game is changing. Hong Kong’s ongoing protests put HSBC in an uncomfortable position. Tensions between the U.S. and China are another high-level problem. HSBC has built strong relationships in China over the years, but there are signs of strain as it juggles its dual dependence on U.S. capital markets on the one hand and Chinese business on the other. HSBC’s success is an increasingly delicate balancing act too.”

Big savings

“The European Central Bank is about to start lending to some banks at less than it pays them for putting money on deposit. The ECB said last week that it would both pay a higher rate of interest on deposits and charge a lower fee for lending, both under strict conditions. Given that the region’s banks hold €1.8 trillion ($1.98 trillion) of excess reserves and the figure will keep rising now that the ECB has resumed buying bonds, this is a big deal for banks.” One analyst says the move “will save the banks €3.1 billion a year” at least.

Utilizing utilities

Equifax “will soon give consumers the option to let lenders review their electric, phone and cable payment information, the latest move aimed at providing lenders more data to determine whether to approve loan applicants.” The credit bureau “is partnering with Urjanet Inc., a data aggregator that receives payment information from roughly 6,500 utility, phone and other companies. Lenders have been asking Equifax and other credit-reporting and -scoring firms to help them find new borrowers, often by factoring in new data.”

CFPB fight continues

“The Trump administration told the Supreme Court Tuesday that the Consumer Financial Protection Bureau is unconstitutional because Congress limited the president’s power to remove the agency’s director before his or her five-year term expires. Tuesday’s brief, filed by Solicitor General Noel Francisco, continues the Trump administration’s effort to reduce the bureau’s power and roll back other provisions of the Dodd-Frank Act that the banking industry complains are too burdensome.”

CFPB director Kathy Kraninger said she “backs a legal effort urging the Supreme Court to hear challenges to her own power.”

Financial Times

Managers under scrutiny

The U.K.’s Financial Conduct Authority “is investigating senior managers at Metro Bank over their roles in the misreporting scandal that forced it into an emergency share issue this year and prompted its share price to tumble more than 80%.” Metro, the British bank founded by Vernon Hill, who also founded Commerce Bancorp in the U.S., is also being investigated by the Bank of England’s Prudential Regulation Authority.

Backfiring

Interest rates on U.K. credit card balance have risen to an average 24.7% this month, a full percentage point higher than a year earlier and the highest level in 13 years, according to recent figures. “Lenders have been pulling their best low interest rate deals over the past year following new rules brought in by the Financial Conduct Authority designed to clamp down on spiraling debts.”

Banks selling research

Big Wall Street banks “are going head-to-head with the likes of Bain and McKinsey, hoping to sell research services to companies to offset big falls in demand from their traditional clients in asset management.” Investment banks like Goldman Sachs and Morgan Stanley “have come under ferocious fee pressure in recent years and are trying to cut down on costs. At the same time, new regulations stemming from the EU — and which have washed over the U.S. — have required banks to charge investors for the research they provide, rather than bundling the cost into commissions for trading. As a result, fund managers have slashed budgets for spending on research, spurring banks to look for new opportunities in the corporate world.”

Elsewhere

Matchmaker, matchmaker

Citigroup is trying to form coalitions of “major consumer-product companies [and their] rivals trying to disrupt their businesses.” The idea behind the bank’s Consumer Disruptive Growth Conference is to “hatch partnerships between old companies that are replete with cash and searching for growth, and fledgling companies that are gobbling up market share and need working capital. Such tie-ups help Citigroup bankers improve relationships with large-cap clients while also building connections with privately held companies that may one day go public.”

Quotable

“The market will be waiting to see if the Fed makes this a more permanent part of the playbook.” — Goldman Sachs treasurer Beth Hammack, commenting on the Fed’s injecting $53 billion into the repo market to ease a system-wide cash shortage

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Regulatory relief Credit scores CFPB HSBC Citigroup
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