Fed: Pandemic work's not finished yet; regulators' new net stable funding ratio

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Unfinished business

Randal Quarles, the Federal Reserve’s vice chairman for supervision, said “the market turmoil triggered by the coronavirus pandemic early this year uncovered weaknesses in the U.S. financial system that regulators are seeking to fix, ” the Wall Street Journal reported.

“While swift and decisive policy action succeeded in calming markets, this does not mean that our work is complete,” Mr. Quarles said in a speech to the Securities Industry and Financial Markets Association. “The Covid event revealed a banking system that withstood this shock quite well with limited official sector support, and a nonbank system that was significantly more fragile.”

Andrew Harrer/Bloomberg

“Mr. Quarles said that the Financial Stability Board, a global group of regulators that he leads, will publish a report in November that will both diagnose what went wrong and highlight areas for potential reform,” the New York Times said.

Costly settlement

Goldman Sachs will pay about $2.8 billion and admit wrongdoing to end the Justice Department’s bribery investigation into the firm’s role in the 1MDB scandal. “The settlement caps one of the biggest stains in Goldman’s 151-year history,” the Journal reported. “All in, the 1MDB scandal will cost the firm more than $5 billion to resolve, about two-thirds of a year’s profits. Under the deal ironed out in recent days with the Justice Department, Goldman will pay a roughly $2.2 billion penalty and give up about $600 million it earned in fees from its work for 1MDB. In July, the bank agreed to pay the Malaysian government at least $2.5 billion to resolve a parallel investigation there.”

“A Goldman subsidiary tied to the misconduct in Asia is expected to plead guilty but the parent company won’t face prosecution, avoiding a felony mark that could have crippled its ability to do business. The arrangement, known as a deferred prosecution agreement, would allow officials to pursue charges later if Goldman errs again.”

“The bank will also avoid the appointment of an outside monitor to review its compliance procedures,” the New York Times said. “The settlement is scheduled to be formally announced on Thursday morning, according to two people briefed on the plans.”

“The agreement is a black eye for Goldman, which has never before had to plead guilty in a federal investigation. And a statement of facts to be released with the settlement will put the bank in a poor light, according to two people familiar with the document.”

Wall Street Journal

Rule change

The Federal Deposit Insurance Corp.’s board voted 3-1 Tuesday “to adopt new rules obliging large banks to hold enough funding to meet their needs for up to a year. The final rule to set a so-called net stable funding ratio, or NSFR,” was also expected to be approved by the Office of the Comptroller of the Currency and the Federal Reserve Board.

“The requirement, which takes effect in July 2021, is part of a coordinated effort by international bank regulators to address a source of instability that contributed to the 2007-09 financial crisis. The rule requires 20 banks with $100 billion in consolidated assets to match the funds they will need for their cash outflows over the course of one year with ‘available stable funding’—such as consumer deposits, regulatory capital or long-term subordinated debt.”

“In a notable shift, the final liquidity rule removed Treasurys and reverse Treasury repurchases from the liquidity requirement,” American Banker’s Hannah Lang reported.

Just in case

“Lenders are worried the days of a business-friendly Consumer Financial Protection Bureau are numbered. Mortgage lenders and financial-technology firms negotiating with the agency over potential settlements are pushing to resolve their cases quickly, thinking that penalties and enforcement will be much harsher if Joe Biden becomes president in January.”

“A Biden administration is expected to embrace a more aggressive role for the CFPB, which in many ways has grown less forceful during President Trump’s time in office. For the financial sector, a reinvigorated CFPB could be one of the most immediate impacts of a Biden presidency.”

Downgraded

Moody’s Investors Service downgraded the long-term debt ratings of three large U.K. banks — HSBC, Lloyds Banking Group and Banco Santander — “following a cut to the nation’s sovereign debt rating last week, which may reduce the government’s ability to support lenders in case of need.”

Financial Times

Communication breakdown

Morgan Stanley’s two most senior commodities traders were fired “for using WhatsApp and other unauthorized messaging platforms, reflecting Wall Street’s continued clampdown on communications channels that it cannot monitor. Their departures follow JPMorgan Chase’s suspension of one of its top credit traders in January over his use of WhatsApp.”

Although Morgan Stanley “found no evidence of wrongdoing” by the two traders, “using the channels is a breach of policy in itself, since the bank restricts communications to channels it can monitor, in line with regulatory guidance on supervising communications.”

New York Times

Not far enough

The Treasury Department has so far allocated only $195 billion of the $454 billion it was authorized to use to back Federal Reserve lending programs, which “have made just $20 billion in loans, far less than the suggested trillions.”

“The programs have partly fallen victim to their own success. They have also been undercut by [Treasury Secretary Steven] Mnuchin’s fear of taking credit losses, limiting the risk the government was willing to take and excluding some would-be borrowers. And they have been restrained by reticence at the central bank, which has extended its authorities into new markets, including some — like midsize business lending — that its powers are poorly designed to serve. The Fed has pushed the boundaries on its traditional role as a lender of last resort, but not far enough to hand out the sort of loans some in Congress had envisioned.”