OCC warns on ‘weaponizing’ lending; a new approach to help Black businesses

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Playing politics?

Treasury Secretary Steven Mnuchin’s decision last week to “pull the plug on a portion” of the Federal Reserve’s “crisis lending facilities with about two months left in office … jeopardized a very effective partnership” with Fed Chair Jerome Powell, the Financial Times says.

“If the economic recovery proceeds without backsliding due to a new surge in infections and lack of fiscal support, the worries about the impact of Mr. Mnuchin’s decision may end up being moot. But if financial markets were to experience new turmoil in the coming months, the Fed might struggle to limit the damage to investors in corporate debt, municipal and state debt, and asset-backed securities, whose markets were propped up by the lapsing facilities. And the fallout could be broader, given the nearly $40 trillion U.S. equity market has been buoyed by the Fed’s intervention as well.”

“Mr. Mnuchin said his decision was driven by a deference to what he believed was Congress’s intent when it allocated the funding, a desire to repurpose the money toward better uses and a belief that markets no longer needed them,” the New York Times said. “But his actions, which will limit the incoming Biden administration’s ability to use those programs at scale, seem driven by politics.”

“By ending the programs — which have been funneling loans to medium-sized businesses and backstopping municipal and corporate bond markets — Mr. Mnuchin is taking away a source of economic support just as the new administration comes into office and as rising virus cases dog the recovery. By asking the Fed to return the money that enables the emergency efforts, he could make it harder for Democrats to restart them at a large scale and on more generous terms.”

“At first glance, it doesn’t seem like a huge blow to the economy. The programs Mnuchin is asking the Fed to end only made about $25 billion in loans. But that’s deceiving,” the Washington Post said.

“Ever since the Fed announced these special lending facilities that would provide additional aid, if needed, to small businesses, corporations and municipalities, the bond markets relaxed. The cost of corporate borrowing fell after the Fed put these supports in place. Mnuchin wants to take that support away just as the economy appears to be heading into a very rough winter — and a transition of power to the Biden administration.”

Don’t play politics

The Office of the Comptroller of the Currency said “big U.S. banks can’t refuse to lend to entire categories of lawful businesses under a rule proposed Friday, following complaints that the oil-and-gas industry was unfairly denied financing by large lenders,” the Wall Street Journal reported.

“We need to stop the weaponization of banking as a political tool,” Brian Brooks, the acting comptroller, said. “It’s creating real economic dislocations.”

“The measure, which Mr. Brooks said largely codifies existing guidance, is certain to draw pushback from the banking industry over concerns it could create an obligation to lend unless a bank can demonstrate there is credit risk.”

“It is one thing for a bank not to lend to oil companies because it lacks the expertise to value or manage the associated collateral rights,” the OCC said. “It is another for a bank to make that decision because it believes the United States should abide by the standards set in an international climate treaty.”

“The banking regulator’s move is the latest in a series of administration attempts to push back against the advancing ESG movement, which argues environmental, social and governance factors should be taken into account in investment decisions,” the FT said. “In the past 12 months, banks including Goldman Sachs, JPMorgan Chase, TD Bank and Deutsche Bank have said they will no longer finance new drilling projects” in Alaska.

“The proposal says banks effectively should be blind to any political or social-justice implications of serving one industry over another, and should instead just focus on the numbers,” American Banker reported.

Wall Street Journal

Preferred financing

Citigroup, JPMorgan Chase and Bank of America “will give Black-owned businesses advantageous terms on a crucial type of financing that companies use to manage their cash flow, a novel effort to narrow the wealth gap between white and non-white communities.” The three banks “say they will lower charges to Black- and other minority-owned companies in supply-chain finance programs. Companies use supply-chain finance to manage short-term spending needs, similar to the way a consumer might use a credit card.’

“As part of their diversity efforts, the banks will pay Black-owned suppliers earlier than other customers or charge them lower fees, the banks say.”

A year to forget

“The year 2020 will go down as one of the most volatile—and likely one of the worst—for bank stocks on record. The KBW Nasdaq Bank Index is down 22% for the year and remains on pace to underperform the S&P 500 by more than any year on records going back to 1993.”

“More broadly, the stock market is soaring even as the economy continues to stumble amid the pandemic. The lesser performance by banks, viewed as closely tied to the fortunes of consumers and businesses, highlights the disparity between a rallying market and a troubled economy.”

All in

Bitcoin’s climb to within 4% of its all-time high “has attracted a wide cast of characters, from the Wall Street billionaires Paul Tudor Jones and Stanley Druckenmiller to momentum investors who aim to ride winning assets higher and losing markets lower. Their participation, in turn, has fueled more buying,” pushing the price to $18,965, just below its record high of $19,783 set in December 2017.

Financial Times

Eye on payments

Deutsche Bank “is on the lookout for takeovers and joint ventures to help towards its goal of becoming a major force in Europe’s rapidly consolidating payments processing industry.” The bank “has hired a number of external payments experts in recent months, including André Bajorat, the founder of fintech Figo, as the corporate bank’s new head of strategy. It has also taken on some former senior managers from collapsed payment processing group Wirecard.”

“Digital payments are one area with the highest strategic priority for us,” said Stefan Hoops, head of Deutsche’s corporate bank.

Washington Post

Finding the loophole

Wellshire Financial Services, which operates a chain of stores that make loans backed by titles on automobiles that can reach as high as 350%, got a $25 million five-year loan at a 3.15% interest rate through the Federal Reserve’s $600 billion Main Street Lending program. The company used “what consumer advocates describe as a loophole to a rule designed to prevent most lenders from getting this federal help.”

Quotable

“These banks that get huge federal government support…cannot collude together to essentially blackball entire sectors of the U.S. economy.” Sen. Dan Sullivan, R-Alaska, who has been lobbying the Trump administration to prevent banks from cutting off financing to the energy industry.