OCC takes a shot at Wells; Warren targets bank mergers

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Wall Street Journal

Climbing uphill

The Office of the Comptroller of the Currency said Wells Fargo “has a massive backlog of employee human-resources complaints and poor controls around pay, a rebuke that adds to the long list of problems facing the lender’s new chief executive. The HR complaints came in a July letter from the OCC and laid out a lengthy to-do list. Among the issues the HR department needs to address, the regulator said, are thousands of employee complaints, an inadequate policy for clawing back compensation from executives and controls around pay that aren’t tight enough to ward off potential misconduct,” the paper reports.

“The bank has been at pains to demonstrate since the October hiring of Charles Scharf as CEO that it is making progress repairing the regulatory messes that emerged after a 2016 fake-account scandal, which upended Wells Fargo’s reputation as a staid mortgage lender and forced out some of its top executives.” A Wells spokeswoman said the bank “is making progress on our regulatory obligations but more work needs to be done.”

Not sold on SOFR

Regional banks — including PNC, Regions Financial and U.S. Bancorp — “are struggling to move away from the troubled London interbank offered rate, saying alternatives to the key benchmark for variable-rate debt could hurt their ability to make new loans.” The banks “say they are concerned the new secured overnight financing rate, or SOFR, could notch outsize drops at times of economic stress. That could force banks to lend at low rates at times when their own borrowing costs are rising,” the paper reports.

“Some regional banks are going to explore alternatives to SOFR, including the prime rate, which is the base rate banks charge creditworthy commercial customers, or the effective federal-funds rate, which reflects the rate large banks charge each other for loans. The reluctance of these banks to use SOFR could also help rival benchmark rates gain traction.”

Squeezed

Royal Bank of Canada, Canada’s largest bank by assets, said it is “focusing on curbing cost growth as lower interest rates and economic uncertainty weigh on the banks’ businesses.” The bank reported net income of 3.21 billion Canadian dollars ($2.41 billion) in the three months ended Oct. 31, down from about C$3.25 billion in the year-earlier quarter.

“Lower U.S. interest rates, weak deal flow in global capital markets and rising provisions for credit losses squeezed profits. The bank is forecasting that interest rates will stay low into next year, constraining the bank’s lending margins.”

The earnings drop was the company’s first quarterly profit decline since the start of 2018, American Banker said.

Financial Times

Stressed out

“Stress tests designed to make banks more stable might have exacerbated a spike in short-term borrowing costs that forced the Federal Reserve to step in to calm markets earlier this year,” Fed vice chair for bank supervision Randal Quarles told a House committee on Wednesday. The “banks’ own internal stress testing may have led them to hoard cash rather than lending it in the overnight repurchase, or repo, market,” Quarles said. “He listed these liquidity stress tests, typically carried out under the supervision of regulators stationed at the banks, as one potential cause of the crunch in September, when overnight interest rates suddenly soared.”

Who will lead?

Craig Donaldson’s planned departure as Metro Bank’s long-serving CEO at yearend “leaves the lender without a permanent chief executive or chairman, as it faces mounting pressure to win back investors’ confidence. Donaldson’s departure follows the announcement in October that chairman and co-founder Vernon Hill would also leave the board by the end of the year. The pair were central to Metro’s strategy since it was founded a decade ago with the ambition of disrupting the U.K.’s dominant high street banks. However, it came under fire after the discovery of a reporting error at the start of this year and its shares, now down almost 90%, have not recovered.”

Errors abound

One in five people in the U.K. who check their credit report find an error. “The research by Which?, the consumer group, uncovered a significant number of errors on people’s reports, many of which went uncorrected. It also revealed widespread confusion about what information is recorded in credit reports and how this is used. The findings come as the Financial Conduct Authority is conducting a review of the credit information market, amid concerns regarding the purpose, quality and accessibility of the information.” The report also found that “four in 10 people have never checked their credit report.”

Beefing up

“New Zealand will require local banks to hold an extra $13.1 billion in capital by 2027 in tough new rules intended to better protect its financial system against future shocks, despite opposition from the nation’s lenders,” the paper reports. “Under new rules unveiled on Thursday, the four biggest banks in New Zealand, all of which are owned by Australian lenders, will have to raise their tier one capital ratios to 16%. Smaller banks will have to hold 14% in tier one capital. The plan comes as the Reserve Bank of New Zealand seeks to bullet proof its financial system from unprecedented crises by making its lenders among the best capitalized in the world.”

Fake news?

“All of this talk about [central banks] launching their own cryptocurrencies is likely to be one big, elaborate bluff,” the paper says. Most of the comments coming from central bankers “seem designed to jolt the private sector banks into improving the inefficient, costly and time-consuming world of cross-border payments. Many of them are secretly hoping the private sector will come up with solutions that make this unnecessary.”

New York Times

Deal breaker

Senator Elizabeth Warren “plans to introduce a bill in coming weeks that would intensify the scrutiny of bank mergers, a signal less of legislative action to come than of her intentions for the finance industry if she is elected president,” the paper says. Warren’s proposal “will almost certainly go nowhere in the Republican-controlled Senate. But its argument that the ‘review process for bank mergers is fundamentally broken’ indicates that Warren still has the financial industry in her sights. The proposal is the latest sign that if Ms. Warren wins the White House, her victory could usher in a new era for the rules that govern banking.”

A companion bill was introduced in the House Wednesday by Rep. Jesús “Chuy” García, D-Ill.

“Warren’s bill would require CFPB approval for mergers when at least one of the parties offers consumer financial products,” American Banker reports. “It would restrict merger approval to banks with the highest rating in two out of three of their last CRA exams. And it would require disclosure of discussions between the institutions and regulators before a merger application is filed.”

Quotable

“I think we need to examine [the factors involved in the repo market issues], particularly among them the internal liquidity stress tests that we run that create a preference — or can create a preference — at some institutions for central bank reserves over other liquid assets including Treasury securities.” — Federal Reserve vice chair for bank supervision Randal Quarles, discussing the September repo market liquidity issues, which forced the Fed to intervene

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Crime and misconduct SOFR Earnings Stress tests Succession planning Credit reporting Cryptocurrencies M&A
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