Mexico courts big banks; New York eyes taxi lenders

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Debt fret
Federal Reserve Chair Jerome Powell Monday “joined a growing list of policy makers and other commentators warning about potential excesses in business debt” and said “financial regulators must take seriously potential dangers that rising levels of business debt pose to the U.S. economy.”

“Fifteen years ago, everyone was talking about whether households were borrowing too much,” Powell said in prepared remarks for a speech at a conference on financial markets in Florida. “Today everyone is talking about whether businesses are borrowing too much. Business debt has clearly reached a level that should give businesses and investors reason to pause and reflect.”

“However, the parallels to the mortgage boom that led to the global financial crisis are not fully convincing,” Powell added. “Most importantly, the financial system today appears strong enough to handle potential business-sector losses, which was manifestly not the case a decade ago with subprime mortgages.”

He said the Fed is monitoring "to ensure that banks are properly managing the business debt risks they have taken on.”

Another federal regulator warned of a different danger to banks, namely inadequate defenses against criminal money laundering. “U.S. banks are having a hard time recruiting and retaining compliance professionals, particularly those who specialize in financial crimes, the Office of the Comptroller of the Currency said in a semiannual report on the risks facing lenders. Recruiting hurdles are particularly high at small lenders and regional banks.”

Deutsche defensive
Deutsche Bank denied claims in a New York Times report that senior executives looked the other way when junior anti-money laundering investigators recommended that multiple transactions involving Donald Trump and his son-in-law, Jared Kushner, be reported to the Treasury Department. “At no time was an investigator prevented from escalating activity identified as potentially suspicious,” the bank said. “Furthermore, the suggestion that anyone was reassigned or fired in an effort to quash concerns relating to any client is categorically false.”

For his part, the president took to Twitter to defend his relationship with the bank. “Deutsche Bank . . . was very good and highly professional to deal with — and if for any reason I didn’t like them, I would have gone elsewhere ... there was always plenty of money around and banks to choose from.”

Two Democrat senators, Sherrod Brown of Ohio and Chris Van Hollen of Maryland, sent a letter to Deutsche CEO Christian Sewing asking him to explain the claims in the Times report. “Given Deutsche Bank’s record of recent serious violations of U.S. securities, banking, sanctions and anti-money laundering laws, if true this would seem to be another especially alarming failure of the bank’s risk management and internal controls,” the senators said.

Deutsche Bank’s stock hit an all-time low on Monday as the bank prepares for its annual meeting on Thursday, where executives “are bracing for a barrage of criticism from shareholders.” The bank’s stock is down 39% over the past year following a string of problems.

The bank needs to address four major challenges as shareholders prepare to vote.

Wall Street Journal

Bienvenido, amigos
Mexico’s new “left-wing nationalist” president Andrés Manuel López Obrador “has emerged as an unlikely ally to big banks looking to expand in Mexico. He meets regularly with bank chiefs. He has argued for less-stringent regulation, suggesting banks can effectively police themselves. A greater reliance on banks, the thinking goes, will lead to a reduction in Mexicans’ dependence on untraceable cash transactions. Expanded access to the financial system, meanwhile, could give poorer Mexicans a boost by bringing more workers into the formal economy.”

Not ready for prime time
Corporate borrowers “are dawdling” in adopting the Federal Reserve’s preferred replacement for Libor. Only $105 billion of variable-rate corporate debt tied to the secured overnight financing rate, or SOFR, has come to market since it was created a year ago, compared to more than $900 billion of debt using Libor. Companies are in “a state of paralysis” when it comes to using SOFR, said Mark Cabana, head of short-term interest-rate strategy research at Bank of America Merrill Lynch.

Financial Times

New player
Goldman Sachs has picked Mazars, the U.K.’s eighth-largest auditor by revenues, to audit its Goldman Sachs International unit, “the first time the U.S. bank has gone beyond a ‘Big Four’ accounting firm to vet its books.” The bank’s surprising selection “comes after concern over the dominance of PwC, EY, KPMG and Deloitte prompted Britain’s competition regulator to call last month for legislation to force the firms to split their operations by separating their audit businesses from their consultancy arms.” Goldman is retaining PwC as its main corporate auditor, however.

New York Times

Driving debt
Both the state and city of New York announced separate inquiries into “more than a decade of lending practices that left thousands of immigrant taxi drivers in crushing debt.” The state will investigate lenders, while the city goes after the brokers who helped arrange the loans. “The biggest threat to the industry leaders appeared to be the inquiry by the attorney general, Letitia James, which will aim to determine if the lenders engaged in any illegal activity.” Lenders include Capital One, Signature Bank and Medallion Financial, a specialty finance company.

"Lenders did not respond to requests for comment," the paper says, noting, in the past they "denied wrongdoing," pinning blame on the borrowers, who "made poor decisions and assumed too much debt."

Elsewhere

Regulating cryptocurrency
The Financial Action Task Force, an intergovernmental body, is preparing to issue international regulatory standards that would require cryptocurrency exchanges to disclose where and to whom they send money. “In addition to verifying and keeping records of their own users’ identities, exchanges and other service providers would have to pass customer information to each other when transferring funds, just as banks are required to do. Many in the blockchain industry have argued that this practice is at best onerous if not completely unworkable with cryptocurrency and apt to drive users away from regulated platforms.”

Quotable

“In public discussion of this issue, views seem to range from ‘This is a rerun of the subprime mortgage crisis’ to ‘Nothing to worry about here. At the moment, the truth is likely somewhere in the middle.” — Federal Reserve Chair Jerome Powell about the potential dangers of growing corporate debt

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