Is a good year a bad sign for banks?; Checking for post-Libor plans

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Former Federal Reserve Board Chair Ben Bernanke said the central bank has enough tools, including quantitative easing and forward guidance — "tools that he largely pioneered during the financial crisis” — to “fight a potential recession even though its benchmark interest rate remains historically low,” the Wall Street Journal reports. In a paper he presented at a conference in San Diego on Saturday, Bernanke said those methods could “represent the equivalent of up to three percentage points of cuts in Fed interest rates.”

“The old methods won’t do,” Bernanke said. “If monetary policy is to remain relevant, policy makers will have to adopt new tools, tactics and frameworks.”

“Coming from a giant of modern macroeconomics, [Bernanke’s comments] underscore just how worried the field as a whole has become about the long-running decline in borrowing costs,” the New York Times comments,

Wall Street Journal

Difference of opinion

“Times are good for U.S. banks. The industry is highly profitable, lending is up, and the number of problem institutions is the lowest since early 2007,” the paper says. Just four small banks failed last year after none went under the previous year. “Regulators say the current calm is a sign of strength in the economy, which is in its 11th year of expansion. Even banks that do run into trouble can easily raise fresh capital or find a merger partner.”

“Yet some bank analysts and former regulators say the very paucity of failures may be a sign that hidden risks are building. A trend toward easing postcrisis rules for the financial industry has some former regulators worried that risks could be overlooked. Smaller firms are now allowed to file shorter financial reports with regulators, are examined less often and are exempt from some capital rules if they maintain a relatively high ratio of equity to assets.”

Show time

Financial regulators, “which for months have urged banks and other financial services firms to prepare for the likely end of the London interbank offered rate in 2021, have recently begun asking for evidence of their preparations.” For example, the New York State Department of Financial Services “is requiring banks and insurers to submit plans for managing the risks associated with the end of Libor.” The Office of the Comptroller of the Currency “said in December that it plans to increase oversight of the issue and that examiners will evaluate whether banks have made an inventory of all contracts that could be affected. The Federal Reserve’s supervisors have also begun asking banks about their plans.”

Financial Times

Following through

Goldman Sachs and Morgan Stanley “are among international banks facing probes by the Bank of England over the quality of their regulatory reporting in the wake of wider concern over bank governance and reporting issues. The U.K.’s Prudential Regulation Authority has commissioned Section 166 reports, also known as skilled person reviews,” into the two banks. “The move comes after the watchdog pledged to launch such investigations into large financial institutions in an open letter to banks last year.”

Missed opportunity

Last year was not a good one for the “class of post-crisis challenger banks” in the U.K. like "Metro Bank and CYBG, now Virgin Money UK," the paper says. “For a time they seemed poised to capitalize on the taint left by the financial crisis on Britain’s legacy bank brands of Barclays, HSBC, Lloyds and RBS. Instead, 2019 left Metro with its own capital concerns and the combined Virgin Money-CYBG with a market capitalization 40% below the companies’ pre-merger levels 17 months earlier. Other challengers stumbled too.”

But “it was a distinctly pre-crisis area of banking that yielded some of 2019’s best challenger banking victories: buy-to-let mortgages.” Lenders like Paragon and OneSavings had a good year. “But until they have been through another cycle, investors should not underestimate the challenges these challengers face too.”

Harness the future

Some of Wall Street’s biggest banks, including Goldman Sachs, JPMorgan Chase and Citigroup, “have stepped up their research into quantum computing, signaling growing confidence that recent breakthroughs in the field have laid the foundation for the first practical applications of the revolutionary new computing technology," the paper says. "The potential for the technology to revolutionize activities like risk management and trading are so great that banks need to start learning how to harness it now, said William Hartnett, a managing director at Citi.”

Looking to compete

European banks are “considering a new round of deal making to create regional champions to take on the American groups that dominate the industry. For the most part, European banking executives have eschewed talk of large mergers, deterred by fragmented national laws, rules and the memory of the calamitous combination of RBS and ABN Amro at the height of the crisis,” the paper reports.

“But the dam may be about to break. Troubled by the parlous state of the financial system, eurozone politicians and regulators have given the first signal in years they may soon dismantle the remaining barriers to cross-border M&A and achieve a true banking union.”

Achilles heel

“With $2.7 trillion of assets and a presence in 65 countries,” HSBC is one of the world’s biggest banks. But its fortunes are still heavily tied to Hong Kong and mainland China, where it made 80% of its profits in last year’s third quarter, the paper notes. “For much of the bank’s 155-year history, that often-vibrant home market has been a strength, offering high profit margins and high growth. But, with the fate of Hong Kong as a semi-autonomous Chinese territory hanging in the balance, it is starting to look like a vulnerability.”

Washington Post

Fair housing

The Department of Housing and Urban Development plans to “propose a new rule as early as Monday that would reduce the burden on local governments to meet their fair housing obligations, further scaling back civil rights enforcement,” the paper charges. The changes the agency wants would “redefine what it means to promote fair housing, eliminate the assessment used to address barriers to racial integration, and encourage cities to remove regulations that stand in the way of affordable housing.”


“They are all making similar noises: ‘We need you to pay attention. It is important. It isn’t going to go away.’” — Paul Forrester, a partner at the law firm of Mayer Brown LLP, on the growing number of regulators calling on banks to show they are ready for life after Libor

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Monetary policy Law and regulation Financial regulations LIBOR Technology M&A