N.Y., California want more regulation; bank stocks hammered again

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“The current situation may not be a financial crisis, but banks are now at the center of whatever it is,” the Wall Street Journal reports. “While it was the novel coronavirus, not banks, that was the spark of the market’s plunge and the looming economic downturn, focus has turned to the question of whether the banking system will be able to handle the immediate potential disruption, or possibly make it worse,” the paper says.

“Banks’ investors are now in uncharted territory … threatened as they are by lower rates and credit exposure to any economic downturn. Fiscal measures like tax relief and direct assistance to consumers and companies may help ease the strain, putting banks’ customers on better footing. But it is getting harder and harder to imagine exactly what the world will look like a year from now.”

On Monday both U.S. and European bank shares got hammered as the overall market had its worst day since 1987. In the U.S., the Federal Reserve’s emergency action to cut U.S. interest rates to zero “wiped more than 15% from many” banks' shares, the Financial Times reports. “The sell-off was exacerbated by concerns that many of the banks’ corporate customers face a weeks- or months-long cash crunch as coronavirus mitigation measures shut down parts of the economy. Eight of the largest U.S. banks have also said they will not buy back stock for the time being, robbing share prices of a significant prop.”

The eight largest U.S. banks said they borrowed from the Federal Reserve’s discount window, its emergency-lending fund, on Monday, “not out of panic but to remove the public stigma of doing so in case the economic fallout of the coronavirus gets worse,” the Journal reports. “People briefed on the move said the borrowings were relatively small and weren’t used to address any critical funding shortfalls.”

In Europe, “the main European banks stock index fell 8.4%, bringing its decline this year to 42%, as the region braced for a prolonged economic slowdown,” according to the Journal. “Investors are trying to calculate banks’ exposure to hard-hit airline, retail and oil giants — as well as hundreds of thousands of small businesses across the region — while also worrying about the longer-term impact for lenders’ profitability and capital positions.”

As if the banks didn’t have enough problems to deal with, “new accounting rules could cripple parts of the banking sector by forcing earlier recognition of loan losses, as the coronavirus pandemic threatens to push the world into recession,” the FT warns. In Europe, “the adoption of accounting standard IFRS 9 “requires banks to take earlier provisions for loans going bad, especially when they cross key thresholds. This forces banks to take provisions for the entire lifetime of a loan.” In the U.S., the recently enacted expected credit losses, or CECL, standard, “requires them to book lifetime loan losses as soon as there is reason to believe a loan will not be repaid in full.

“The old method for both jurisdictions was to book provisions only when customers actually missed payments.”

Stocks weren’t the only bank securities that got hit on Monday. “Higher-risk European bank debt tumbled in price, as investors scrambled to offload bonds that are first to be hit if financial institutions run into serious trouble,” the FT reports.

Several big consumer lenders, including American Express, Capital One, JPMorgan Chase and Goldman Sachs told the New York Times they would allow consumers to skip payments, interest free, on some of their debt during the crisis. But borrowers would have to ask.

However, some banks that issue frequent flyer rewards credit cards aren’t being so lenient when customers cancel trips because of the virus, the Journal found. “Many are finding they’re still on the hook for at least some of the costs.”

On a positive note ...

In a ray of good news amongst the bad, “record low mortgage rates are delivering more refinancing demand than some lenders can handle,” the Journal says. “Some lenders are having trouble keeping up with the red-hot demand.”

“Falling rates are generally considered good news for the mortgage market. But the current jump in refinancing demand presents a dilemma for some lenders, which must balance their desire for volume with their capacity to process applications," the paper notes. "Still, many lenders are doing everything they can to increase their ability to take advantage of the current refinancing boom, however long it may last. That includes outsourcing work to other countries and boosting pay for some employees.”

JPMorgan Chase “has asked all managers globally to allow employees who can effectively work from home to begin doing so to help with social distancing as the coronavirus pandemic spreads,” Reuters reports.

Wall Street Journal

Taking charge

The governors of New York and California “are proposing significant expansions of state regulatory power over consumer financial services, saying federal oversight has become lax under the Trump administration. The expanded state agencies, the Democratic governors say, would help compensate for what they see as a lack of enforcement by the federal Consumer Financial Protection Bureau,” the paper says.

“The proposals, if approved during budget negotiations in two of the largest states, could lead to similar changes elsewhere and train more scrutiny on Wall Street and financial institutions across the country, legal experts say.”

New York Gov. Andrew Cuomo
New York Gov. Andrew Cuomo

No golden parachute

Wells Fargo’s board clawed back $15 million of former CEO Timothy Sloan’s salary after he left last year, according to a regulatory filing released late Monday, which also said he left without severance. “In making its decision, the board took into account the timing of his resignation, the company’s performance and the status of its outstanding regulatory matters,” the paper reports.

Financial Times

Temporary work

Revolut, the U.K.-based fintech, has named Bill Rattray, the former CFO of Standard Life and a longtime ally of chairman Martin Gilbert, to serve as interim CFO “after incumbent David MacLean stepped down after only six months in the role. MacLean’s departure comes at a key time for the five-year-old company, which is attempting to transform from a provider of prepaid cards for overseas travel into an international bank and provider of financial services from travel insurance to commodities trading.”

In jeopardy

Finablr, the parent company of Travelex, the U.K.-based currency exchange operator, said “it is in danger of going out of business as the global payments and foreign exchange group battles problems including questions over its financing arrangements and the effect of the coronavirus outbreak on its operations.”

Quotable

“This is a very challenging environment for banks, as low rates depress net interest margins and a likely recession raises credit costs.” — KBW analyst Frederick Cannon in a note to clients

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