Oil price plunge fans bank fears; CFPB sues Fifth Third on phony accounts
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And then, the oil shock
“Shares of global and U.S. banks plummeted Monday after a collapse in oil prices sparked fears that financial institutions, already struggling with falling interest rates, could be in for trouble,” the Wall Street Journal says. “Sharply lower oil prices could make it harder for energy companies to stay current on their loans. A rise in defaults would be painful for banks with sizable portfolios of energy loans. An emergency cut in interest rates last week also is keeping investors away from the financial sector. Lower interest rates crimp what banks can earn on loans.”
“What’s more, a pessimistic outlook for economic growth due to the spread of the coronavirus foreshadows tough times ahead for banks, which tend to rise and fall with the economy,” the paper says.
“The crash in oil prices has added worries that loan defaults, which have been hovering at historically low levels, may be set to rise,” the Financial Times adds. “While the direct exposure of U.S. banks to the oil industry is just 2%, according to Autonomous Research, the indirect exposure to adjacent regions and sectors could be significant.”
“Europe’s limping lenders” are having their own set of problems, the Journal says. “Banks are extending special measures — such as deferring mortgage repayments, extending credit lines and offering bridging loans to those in need — to customers whose businesses are stretched because of the spread of the virus amid unprecedented moves across almost every asset class in recent days. It is the latest challenge for lenders already struggling with negative interest rates and sluggish growth across the region.”
“Investors worry that as economic activity falls, companies will struggle to fulfill their debt obligations, pay workers and keep their businesses alive. A rise in defaults would immediately hit banks, which would have to assume losses at a time when many in the region are reporting low profits because of negative interest rates and anemic growth.”
Back in the U.S., federal regulators “urged banks to work ‘constructively’ with borrowers affected by the coronavirus outbreak, in a joint announcement similar to ones issued after 9/11 and Hurricane Katrina," the FT reported. "The regulators, which included the Federal Reserve and the Office of the Comptroller of the Currency, said that they would in turn work with the banks to make sure any attempts to help borrowers did not trigger any oversight alarms.”
The White House has invited the CEOs of “Global Systemically Important Financial Institutions,” such as JPMorgan Chase and Bank of America, to meet this week to discuss how to deal with the crisis, the Washington Post reports.
Et tu Fifth Third?
The Consumer Financial Protection Bureau filed a lawsuit Monday against Fifth Third Bancorp, claiming the bank’s employees “opened deposit and credit-card accounts without customer approval in a bid to meet ambitious sales goals.” The agency said, “Fifth Third knew for years that employees were opening unauthorized accounts but didn’t do enough to monitor or adjust sales goals and incentive-based compensation programs to discourage the behavior,” the Journal reports.
“Fifth Third’s compensation and employee incentive structure does not reward retail employees for opening unauthorized accounts, nor does it give them sales quotas or product-specific targets,” the bank told the paper. “Our controls are designed to prevent and detect unauthorized account openings.”
“The charges against the bank echoed those that have bedeviled Wells Fargo, which has been engulfed in turmoil since its admission in 2016 that it created what may have been millions of sham accounts to increase its sales,” the New York Times says.
Separately, the CFPB “proposed a whistleblower program that would award tipsters who voluntarily provide original information on possible violations of consumer financial laws,” the Journal reports. Those reporting violations “to the bureau are entitled to between 10% and 30% of monetary penalties if their tips result in an administrative proceeding or court action brought by the bureau and when the monetary penalties are more than $1 million.”
Indian criminal investigators accused the co-founder of the failed Yes Bank of “receiving illicit kickbacks in 2018 to provide funds to a now bankrupt housing finance company, raising new questions about the troubled institution’s lending practices,” the paper says. Rana Kapoor “was arrested on Sunday morning, just days after the Reserve Bank of India seized control of the lender he founded.”
Deutsche Bank cleared funds to enable Jho Low — the Malaysian businessman behind the massive 1MDB scandal that has ensnared Goldman Sachs — to buy a house in Cyprus under that country’s “golden passport” program. “Germany’s biggest lender acted as a so-called correspondent bank and processed a cross-border transfer of almost €6 million” in June 2015, the paper says. “The money transfer happened several months after allegations surfaced that Mr. Low helped misappropriate vast sums from Malaysia’s 1MDB state investment fund.”
“Deutsche’s role in the transaction highlights the hazards of the correspondent-banking model, in which global banks provide international payment services such as clearing U.S. dollar and euro transactions for smaller regional lenders, earning fees in return.”
“Regulators note that financial institutions should work constructively with borrowers and other customers in affected communities. Prudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism.” — A joint statement by U.S. bank regulators, urging banks to work with their customers to help them through the unprecedented economic threat of the coronavirus