Fed officials differ on stress tests?; Deutsche's golden parachutes
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Expecting the unexpected
Federal Reserve Chair Jerome Powell said bank stress tests “must adapt and keep firms on their toes, or the annual exam could fail to prepare the financial system for the next downturn.”
“If the stress tests do not evolve, they risk becoming a compliance exercise, breeding complacency from both supervisors and banks,” he said in a prerecorded video shown Tuesday at a conference on the subject at the Federal Reserve Bank of Boston. “When the next episode of financial instability presents itself, it may do so in a messy and unexpected way. Banks will need to be ready not just for expected risks, but for unexpected ones.”
Randal Quarles, the Fed’s vice chairman for supervision, speaking at the same conference, said the stress tests “need to be more predictable and easier for firms to pass.”
“Like a teacher, we don’t want banks to fail; we want them to learn,” he said, adding that failing banks “is not the purpose of stress testing, and it never has been.”
He also said the Fed could make the tests “less volatile by averaging out results over time.”
“This wouldn’t affect the overall stringency of the tests. But mathematically, it would mean that no single year could have an outsized influence on the amount of capital that a bank is required to maintain,” Quarles said. Wall Street Journal, Financial Times, American Banker
King of the Hill
Powell has the support of Congress as he delivers his semiannual monetary report and answers questions from the House Financial Services Committee Wednesday followed by the Senate Banking Committee on Thursday. “President Trump’s relentless public criticism of the man he picked to run the Federal Reserve isn’t broadly shared by lawmakers who confirmed the central bank leader to his post last year. In interviews, they declined to endorse Mr. Trump’s call for the Fed to cut interest rates and said they would oppose efforts by the president to remove Mr. Powell from office.”
While most of Powell’s testimony will likely focus on interest rates and the economy, “he also may field questions on what the central bank is doing to address climate change risks,” the Wall Street Journal suggests. Fed officials have said “they are researching the issue and aim to use the Fed’s banking regulation role to help ensure financial institutions are prepared to deal with severe weather events. But the Fed’s response has left some Democratic legislators unhappy.”
Meanwhile, White House economic adviser Larry Kudlow said Powell’s job “is safe — for now," the Washington Post reports. “There is no effort to remove him. I will say that unequivocally at the present time. Yes, he’s safe,” Kudlow said. “To be very clear, there are no plans presently to change Mr. Powell’s job or any of that sort of thing."
While Deutsche Bank has begun the dismissal of 18,000 employees, it’s “coming under fire for the lavish golden parachutes it has paid out to top executives” over the past year. “Germany’s biggest bank has spent more than €52 million on severance pay for senior executives who were fired or left voluntarily over the past 14 months, almost matching the lender’s annual pay for the entire management board.”
For the rank and file who were dismissed on Monday, "it was regarded internally as evidence of rare humanity that Deutsche's departing equity traders and sales people were permitted to remain in its London headquarters for three hours before being ejected. Some displayed signs of distress but many of them adjourned to a nearby pub, having anticipated that their days at the bank were numbered."
Separately, Deutsche Bank is testing U.K. fintech OakNorth’s credit analysis and monitoring platform “with a view to formalizing the partnership. The software uses data about a prospective borrower such as the financial performance of its peers and sentiment about its brand from online reviews to help inform lending decisions.”
Southington, Conn., police arrested a man who stole as much as $300,000 from ATMs in the state using a “Jaws of Life” hydraulic tool. Police said the suspect broke open the cash machines using “a battery-powered hydraulic spreader similar to what firefighters use when extricating motorists from crushed vehicles.”
“The stress tests demonstrate that banks have now built enough capital to withstand the severe recession. The capital building phase of the post-crisis era is now complete.” — Federal Reserve vice chairman for supervision Randal Quarles