Jury out on SOFR; Bowman advocates for community banks

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Wall Street Journal

Looking out for the little guy
In her first speech as a Federal Reserve Board governor, Michelle Bowman said bank regulators need to “develop and refine” the supervision of community banks “to fit the smaller size and less-complex risk profiles of these banks.” It is “crucial” to “balance effective regulation and supervision to ensure the safety and soundness of community banks while also ensuring that undue burden does not constrain the capacity of these institutions to support the communities they serve,” she said at an American Bankers Association conference. Bowman was named by President Trump to fill the Fed board seat reserved for someone who has worked at or regulated community banks.

Growing pains
The secured overnight financing rate, a benchmark designed by the Federal Reserve Bank of New York as a possible replacement for the scandal-ridden London interbank offered rate, has been going through some gyrations recently. “If SOFR proves unusually volatile or hard to predict, it would diminish the benchmark’s appeal to companies that are considering tying their borrowing costs to it, adding uncertainty to the market’s search for a suitable Libor alternative.”

The last resort
Central banks may need to become the “market-makers of last resort” during the next crisis, a role traditionally played by private commercial banks. “The sharp rise in volatility in the final of quarter of last year led to lower capital ratios at several European banks,” which “exacerbated market wobbles by making banks even more wary of taking risk just as investors want help to unload assets or hedge their exposures.” But for central banks to “support the whole financial system directly in this way will likely look a lot more complicated and risky than doing it through banks, and some politicians may fight to stop it happening. That will be painful for everyone.”

Star search
The European Central Bank’s search for a successor to President Mario Draghi, whose term ends in October, is being complicated by the area’s “faltering economy and fractious politics.” His are big shoes to fill, the paper says. Draghi has been “the dominant force in the European economy and financial markets during his seven-plus years as ECB head, holding the currency zone together by breaking taboos, including with the launch of a massive bond-buying program.”

“At least five unofficial candidates appear to be in the running to replace him: two Frenchmen, two Finns and a German. The candidates have very different economic philosophies, and there is no clear front-runner.” But “others could emerge.”

Financial Times

Ahead of the curve
Morgan Stanley’s deal to buy Solium Capital, just days after BB&T said it would acquire SunTrust, “suggests a revival of deal making in the banking sector after years of caution.” The Solium acquisition “gives Morgan Stanley access to technology that Solium has developed. Technology has become a familiar theme in the limited volume of M&A deals involving banks in the past few years, in which big firms prioritized acquisition of fintechs that can help banks stay ahead of the curve.”

The Behind the Money podcast explores details of the BB&T-SunTrust merger.

Quotable

“I witnessed firsthand how community banks were significantly affected by the global financial crisis, a crisis they did not cause.” — Federal Reserve Gov. Michelle Bowman.

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