Receiving Wide Coverage ...
Banks' Capital Restraints: Get smaller, or else. That's the message from the Fed to big banks after the finalization of rules on Monday. The Fed approved a graduated surcharge for globally risky banks and it established capital requirements for GE Capital. Fed Chair Janet Yellen said the capital surcharge rule is designed to reduce the potential for large institutions to fail, or force them to reduce their risk profile. In effect, it requires the eight largest U.S. banks to maintain an additional layer of capital to protect against losses; JPMorgan Chase will see the biggest change, as its minimum capital requirement will be raised by 4.5%. The Fed "clearly intends the very largest U.S. banks to buckle under this new capital regime, restructuring quickly and dramatically," Karen Petrou of Federal Financial Analytics told the Journal. "Everything's doableit just costs money," Glenn Schorr of Evercore ISI told the Journal. That's money that could be going to prop up the economic recovery, said Tim Pawlenty of the Financial Services Roundtable. "Regulators should reasonably address risk, but this rule will keep billions of dollars out of the economy," Pawlenty said. The Fed's action will give GE more time to complete the shrinking of its business by exiting much of its banking exposure. The move will delay until 2018 the deadline for GE Capital to prepare for annual stress tests; GE will have to comply with basic capital and liquidity rules starting Jan. 1, 2016, but GE said it already complies with those minimum requirements. "It would not be sensible for us to disregard GE's announced plan to reduce [GE Capital's] size by about 70%, particularly in light of the fact that it is demonstrably executing that plan," Fed Governor Daniel Tarullo said in a statement. The news wasn't all good for banks not named JPMorgan, according to the "Heard on the Street" column. Fed officials indicated that yearly stress tests will become more strict, as the Fed will change the way it calculates its capital surcharge. Wall Street Journal, New York Times, Financial Times
Fed Vacancy Nomination: The White House will nominate University of Michigan economics professor Kathryn Dominguez to the open seat on the Federal Reserve Board. Her academic specialties include international financial markets and foreign exchange-rate behavior. In an academic paper she co-authored in 2011, she found "countries that accumulated large amounts of foreign currency reserves before the financial crisis enjoyed faster economic growth than those that did not," the Journal said. The Senate may try to hold hearings on both Dominguez and ex-Bank of Hawaii CEO Allan Landon, who's nominated for the other Fed vacancy, at the same time. If both are confirmed, the Fed board would be at full-strength for the first time since August 2013. Wall Street Journal, Financial Times
First Data's IPO Plans: KKR, the private equity firm that's First Data's majority owner is readying the payments processor for an initial public offering. Proceeds from the IPO, which could be one of the biggest this year, are likely to be used to pay down some of First Data's pile of $21.1 billion in debt. KKR acquired its First Data stake in 2007 for $29 billion, one of the biggest private-equity buyouts in history. Recently, First Data has lost money, although the size of its losses has shrunk in the past couple of years. First Data has tried to expand beyond its core business of processing credit-card transactions for large banks by acquiring gift-card providers like Transaction Wireless and investing in e-commerce firms like Booker Software. Wall Street Journal, New York Times, Financial Times
Wall Street Journal
New rules were finalized by the Obama administration to crack down on predatory lending to members of the military. The primary aim of the rules is closing loopholes to make it more difficult for predatory lenders to charge high interest rates; to do so, Dodd-Frank's Military Lending Act will be amended to redefine the types of loans that fall under the existing law, which caps the interest rate at 36%. Obama is expected to announce the expansion of the rules at a Veterans of Foreign Wars convention in Pittsburgh.
It's time for private and public capital to be used to pre-fund liquidity buffers to address illiquid debt markets, Lawrence Goodman of the Center for Financial Stability and Stephen Dizard wrote in an op-ed. The Fed and other regulators should also lift the federal funds rate to neutral levels and ease restrictions on market finance.
New York Times
Executives at bank consulting firm Promontory Financial Group are set to be deposed by the New York Department of Financial Services as part of its probe into Promontory's work with Standard Chartered. Promontory is suspected of helping Standard Chartered obscure its misconduct with the processing of billions of dollars for Iran. "We have sought for nearly two years to provide [the Department] with a complete understanding of the facts in this matter and, to that end, recently encouraged it to meet with our professionals," Promontory said in a statement.
Above the Law: It's hard out here for a banking lawyer. H. Rodgin Cohen, an attorney at Sullivan & Cromwell, told a recent panel it's not easy to represent banks these days. The prolonged period of low interest rates has cut into banks' profits, Cohen told the audience (none of whom, presumably, read American Banker and would be thoroughly familiar with that theme.) Another big concern is that many federal regulators aren't too fond of the concept of attorney-client privilege, or perhaps they're just not aware that it exists, Cohen said. Thus, attorneys should warn their bank clients that anything they put in writing could end up in the hands of regulators who demand to see it, even though, as a legal work product, it probably deserves attorney-client privilege protection. In other comments: Cohen said he's miffed when he hears people blame the repeal of the Glass-Steagall Act for the financial crisis; and Cohen proposed the creation of a Cabinet-level Department of Cybersecurity, as the authority is now spread out over multiple regulators, agencies and branches of the military, and because cybersecurity poses an "existential threat" to the banking industry.