Problems for Student-Loan Pools; Energy Lenders Squeezed

Wall Street Journal

Here's another problem with America's skyrocketing student-loan debt. Bonds backed by student loans are become more risky, as investors fear new programs to lower monthly payments means they won't get paid in time, or at all. Withot the revenues generated by securitizing the debt, andbanks have less capital to make new loans.

U.S. Bancorp has withdrawn a sale of a $3 billion student-loan portfolio because bids were too low. U.S. Bancorp's move came after Moody's Investors Service and Fitch Ratings placed $36 billion of student loans on a downgrade watchlist. U.S. Bancorp no longer makes student loans, but still owns student loans it originated.

The root of the issue are income-based repayment plans. The setup is intended to help recent college graduates afford monthly payments, as well as serve as a safety net for borrowers. The surging pile of student-loan debt helped bring about the new type of repayment plan.

Navient, a spin-off from SLM Corp.'s Sallie Mae, is the largest holder of private student loans that are under pressure. Navient said it has ample liquidity to meet its debt obligations. JPMorgan Chase had $4.5 billion of the student loans on its books as of June, and SunTrust Banks had $4.4 billion.

In what was described as the first of its kind, a dozen bank regulators from the three federal bank-regulatory agencies held a meeting in Houston with about 40 energy bankers from JPMorgan Chase, Wells Fargo, Bank of America, Citigroup and Royal Bank of Canada. The discussion, held at Wells Fargo's Houston office, centered around regulators' crackdown on energy loans. The bankers disputed the regulators' assessment of reserve-based loans as high-risk.

“These are good loans, they have a history of performing,” said the Financial Services Roundtable's Francis Creighton. “We think their analysis is incorrect on this.” The dispute is making life difficult for small and mid-sized oil and gas producers. Banks are becoming less willing to make loans to these companies using their energy reserves as collateral. Banks worry regulators will ding them for making the loans, as they attempt to prevent the next financial crisis.

It appears the regulators are winning the argument. Banks are taking steps that would not be described as customer-friendly. Cullen/Frost Bankers in San Antonio, which has about 15% of its loan book tied to the energy industry, recently reduced borrowing capacity for some of its customers, as a result of falling energy prices. That reduced the value of their reserves as collateral. “We just have to live through this,” Frost Bank CEO Dick Evans said.

In another example, Comerica and Capital One Financial both filed a record number of appeals on their spring bank examinations, disputing regulators' assessment of their loans. Most appeals were rejected and some banks had all their appeals rejected, unnamed sources told the Journal. The Office of the Comptroller of the Currency, the Federal Reserve and Federal Deposit Insurance Corp. all declined to discuss their meetings with banks.

The cyberattack on the U.S. Office of Personnel Management was even worse than thought. Hackers stole fingerprints from 5.6 million people, up from the previous estimate of 1.1 million people. The cyberattack is expected to be a top issue when President Obama meets with Chinese president Xi Jinping this week, since the U.S. says China was behind the attack.

Anti-money laundering laws in Russia apparently aren't doing much good. Since 1994, illegal money transfers in and out of Russia totaled $3.26 trillion, according to the nonprofit group Global Financial Integrity. That's larger than earlier estimates. The figures are so high because of a lack of governance and because of Russia's unsettled political and economic situation, according to the Atlantic Council.

Financial Times

BB&T CEO Kelly King said more big deals might be on the Winston-Salem, N.C., company's agenda. King indicated, during a second-quarter earnings conference call, there might be a pause in dealmaking activity, after its acquisition of Susquehanna Bancshares and pending acquisition of National Penn Bancshares. Now, as it plans its next move, BB&T is looking at capital rules and liquidity requirements.

“As we approach $250 billion you wouldn’t likely see us slip over ... to $251 billion,” King told the paper. “We will have a strategy in place to meaningfully go over, to absorb the additional cost of that hurdle point.”

“I’ve made it very clear we are trying to get larger in this particular timeframe,” he said. “Not because we want to be bigger but because we need scale to afford investments in technology and regulatory compliance.”

Marketplace lender Prosper has acquired BillGuard, an Israeli credit-monitoring app. The deal will give Prosper access to more potential customers as it tries to catch up with Lending Club, the FT speculated.

Elsewhere ...

Boston Globe: In addition to closing 17 branches in the Boston area, Citigroup also plans to withdraw its sponsorship of the Citi Performing Arts Center in Boston, which includes the Citi Wang Theatre, the Citi Shubert Theatre and the Colonial Theatre.

Forbes: Two Bain & Co. consultants offer suggestions on how banks can make their customer-support call centers more helpful by reducing the number of incoming calls and thus lowering banks' expense levels. Suggestions include putting an end to requiring written affidavits for most fraud incidents, getting frontline employees involved in making improvements and creating categories for different types of incoming calls that the bank wants to reduce.