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Yellen vs. Congress, Round 1: Caution was the word during the first of two days of Federal Reserve Board Chair Janet Yellen's semiannual testimony before Congress. While she wouldn't signal the central bank's plan as far as interest rates are concerned, she did confirm that falling stock prices and the volatility seen in other financial markets concern the Fed. But Yellen did not give way to doomsday predictions either. While she expressed her worries regarding the myriad factors that threaten to suppress growth, she also reiterated the strength in the labor market. As such, she wouldn't predict precisely where the economy was headed. But then again, maybe Yellen didn't need to give a prediction to make it clear how dire the economic situation has become. In many ways, that was evident from her tone alone, which contrasted very clearly with the rosier outlook given in December the when the Fed hiked rates. During her day on Capitol Hill, Yellen was peppered with the expected litany of concerns from lawmakers who believe the central bank erred in raising rates. And if those criticisms weren't enough, seated behind her were protestors with T-shirts bearing anti-Fed slogans, the Financial Times reported. But the Fed may be little to blame for the economy's current problems, according to an op-ed in the Wall Street Journal by Encima Global president David Malpass. He argues the conditions precipitating the current market turmoil were firmly in place before the Fed chose to raise rates. What he believes is necessary if the Fed wants to change the tide is for the central bank to reduce the 0.5% interest rate it pays for its $2.4 trillion worth of bank loans and shift away from holding so much bank debt. Of course, others have less positive comments about the central bank: Over at Quartz, the argument is made the Fed has mistakenly ignored the threat of deflation when chalking up the current pressures on inflation.
Could the U.S. Go Negative?: One issue that was largely left unresolved during Janet Yellen's first-day testimony before Congress was the question of whether the U.S. would implement negative rates. Even as Yellen was speaking, yet another foreign central bank was deciding to become a Negative Nancy: Sweden's Riksbank cut its repo rate by 15 basis points to negative 0.5% and said it the rate could be lowered if necessary. Sweden chose to pull interest rates down into negative territory because of its lack of confidence in meeting the 2% inflation target – despite the fact the country's economy is booming. Of course, Sweden is far from the only country doing this. Last month, the Bank of Japan similarly waded into negative waters, with mixed but generally positive results, and many other countries in Europe have done the same. In fact, the wave of central banks taking this approach has gotten so large that some are beginning to think its monetary policy's next big innovation. But going negative isn't necessarily so easy for Yellen. For starters, as MarketWatch points out, she isn't even sure if she has the legal authority to do so. While the Fed has considered negative rates in the past – particularly at the height of the recession – it has never gone that far. Yellen said it would require greater examination from a legal perspective before the Fed could even begin to consider implementing it.
Wall Street Journal
Across the pond, European banks have felt the sting of repeated stock sell-offs, but they may actually be healthier than investors think. The Euro Stoxx bank index has fallen 27% since the start of the year and 42% from its peak last April. And contingent convertible bonds have caused quite a bit of volatility in bank credit markets. But while the banks have not performed well, it's not clear why. The paper notes the beginning of the downturn, which happened sometime between Christmas and New Year, occurred for no apparent reason, with attempts at explanations seeming to miss the mark. As the paper notes, concerns about yet another bank crisis are overblown – European banks hold far more capital than in the past and have more stability in terms of funding. Plus, the regulatory climate they face is much clearer today as well, which shows they're going to be okay, whether investors think so or not.
AIG chief Peter Hancock has combatted the activist investor mobs, and now he waits ahead of his company's fourth quarter earnings. The insurer has faced loud calls to break up, namely from activist investor Carl Icahn. The fervor AIG faced came as a surprise to many – while the U.S. government had to bail out the company in 2008, it was repaid by late 2012. And since then, AIG has gotten smaller, losing multiple businesses including its aircraft leasing, consumer finance and overseas life-insurance operations. But being "too-big-to-fail" still seems to be too much for some. And Hancock has had to take that in stride. As he waits to see whether investors like his plan to scale down, he cracks jokes about losing his job. But as those close to him will say, don't confuse that humor for fear.
BNP Paribas has once again turned cold on the U.S. energy sector. The French bank has decided to halt reserve-based lending, which provides liquidity to oil and gas companies. The company isn't exiting the space entirely – it will still service existing clients, but it has decided to not take on any new ones. In doing this, it becomes the latest bank to concede that oil prices may remain deflated for longer than once anticipated. But for BNP, the move is notable because it's not the first time this has happened. In 2012, BNP sold its RBL unit to Wells Fargo as part of an effort to strengthen its balance sheet during the Eurozone debt crisis. But then in 2014, it decided to re-enter the space, as it sought to widen its product mix. So in choosing to ramp down business rather than exit the field entirely, it seems BNP may have learned its lesson.
A former British regulator has drawn ire for his highly negative comments on peer-to-peer lending. Lord Adair Turner, who once led the UK's financial watchdog as chairman, said Wednesday that "big losses" could result from P-to-P platforms over the next decade. The P-to-P industry quickly fired back, saying he was likely unaware of the strong credit teams these companies have assembled. They added his assumptions – those who rely on P-to-P are likely unbanked customers or small businesses with poor credit – are incorrect, and P-to-P lenders' customers could easily go to banks but choose not to. Plus some say his job as a board member for Oak North represents a clear conflict of interest, since the bank focuses on lending to small businesses backed by entrepreneurs. But Lord Turner remained steadfast to his assertion, going so far as to say the policy he suggested is something the P-to-P industry "should love."
New York Times
MetLife's fate now rests in a federal judge's hands. The insurer finally had its day in court, having sued the federal government in January 2015 after the Financial Stability Oversight Council labeled it a "systemically important financial institution." The designation relegates MetLife to stricter Federal Reserve oversight. MetLife argued regulators keep changing the rules, making matters far more difficult for firms under scrutiny. And luckily for MetLife, it seems the federal judge in this case, Rosemary Collyer, may be on the insurer's side. The judge questioned how the regulators come to their decisions to create the designation, including whether they follow the rules that are ostensibly in place. She expressed concern over how the Council gathers its evidence and then judges the companies, noting there may be "nobody neutral" in the decision-making. Still, there's a strong chance that Collyer could nonetheless come down on the government's side – the paper notes she reiterated that Dodd-Frank leaves some discretion to the regulators in how to apply its principles.
Charlotte Observer: The Securities and Exchange Commission has given the green light to a proposal from a Bank of America shareholder that would require bank executives to defer a portion of their salaries to a fund for future legal fines. The proposal can now be included in the bank's proxy statement, meaning shareholders can vote on it during the bank's upcoming annual meeting. The proposal follows a similar one rejected by Citigroup shareholders. These proposals stem from the frustration many bank shareholders have as a result of the hefty fines and settlements companies have paid to resolve crisis-era issues. While the proposal may fail, in the long run it has some big time support: New York Fed president William Dudley has gone on record that such requirements would force executives to prevent bad activities from occurring at their banks.