Investors Worry About Bank 'Bail-In' Plans; Higher Capital Requirements?

Receiving Wide Coverage ...

Farm Aid? The difficulties pot businesses face in obtaining a bank account have been well-documented. Now, at least two startups are trying to help banks confront their regulatory fears and open accounts for marijuana growers and dispensaries, according to articles in the magazine Inc. and the New York Times.

Hypur said it's helped five banks in Colorado serve cannabis companies in the state, according to Inc.; Hypur won't identify the banks. Hypur provides software that conducts a type of audit of a marijuana business' licenses and financial documents and ensures compliance with state law. Hypur has also helped banks provide services and products to cryptocurrency businesses.

Tokken (pronounced "token") is looking to develop an electronic payment system that doesn't rely on the credit card networks. Instead, Tokken will use the automated clearing house to transfer money. Tokken is led by Lamine Zarrad, a former bank examiner at the Office of the Comptroller of the Currency.

Hypur and Tokken aren't the only companies named in the two articles working to help bridge the gap between bankers' fears and pot businesses' challenges. Privateer Holdings in Seattle recently hired a former Fed bank examiner to find a solution to the problem.

Wall Street Journal

If Neel Kashkari's comments on Tuesday that Dodd-Frank is too weak weren't shocking enough, consider this nugget buried at the bottom of the Journal's story on Kashkari's speech at the Brookings Institution in Washington. Minimum capital requirements of as high as 25% of total assets is a conversation worth having, Kashkari said.

No wonder Democratic presidential candidate Bernie Sanders issued a statement, saying he was "delighted" with Kashkari's comments. Some analysts pointed out the potential consequences of the remarks made by the new president of the Federal Reserve Bank of Minneapolis. Jaret Seiberg of Guggenheim Securities said that breaking up the biggest banks would help regional banks. The Journal noted that U.S. Bancorp, one of the largest regional banks, is headquartered in Minneapolis.

A representative for the largest banks took umbrage with Kashkari's remarks. John Dearing, the acting chief executive of the Financial Services Forum, observed that the "largest financial institutions are smaller and less complex with twice the capital and triple the liquidity" since Kashkari left his position with the Treasury Department to run for governor of California.

A separate Journal article on Wednesday shows at least some investors in bank bonds might disagree with Kashkari's observations. One reason for bank stocks' poor performance may be concern that banks are no longer set to be bailed out.

Bond investors once had the assurance that if a bank was close to failure, a government bailout would absorb some of the bondholders' losses. Now if a bank's capital cushion drops too low, the bank can stop paying interest on its bonds, write them off or convert them to equity.

In other words, to prevent taxpayers from being on the hook for a bank's failure, bank investors instead would bail out the banks; or, in other words, they would be "bailed in." Those fears seemed to underscore the situation with Deutsche Bank last week, when it took the step of issuing a statement that it would continue to pay interest on its bonds.

"The current turmoil that we saw in bank prices and equity is related to a new awareness for investors that they are exposed to more risk than before," said Sam Theodor, an analyst at Scope Ratings.

Investors who are looking for the steady cash flow of a rental income are beating out first-time homebuyers with all-cash offers for home purchases. The startup company Home Union helps investors buy homes sight-unseen, with the goal of having the investors rent out the properties.

Regulators have recently expressed concern about growing risk in commercial real estate lending. In another potential strain on the sector, bonds that are backed by CRE loans have weakened since the beginning of this year, on concerns of a potential recession. An analyst with Nomura Securities predicted the cost of financing will increase for borrowers this year.