Powell warns on recovery; will coin shortage doom the penny?

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Long road to recovery

The Federal Reserve announced no new monetary policy steps or stimulus programs on Wednesday, but Fed chair Jerome Powell warned that “the U.S. economy faces a long road to recovery that will require greater public vigilance to prevent the spread of the coronavirus pandemic and more spending from Congress and the White House.”

“The path of the economy is going to depend to a very high extent on the course of the virus, on the measures that we take to keep it in check,” he said at his post-meeting news conference. “We can’t say it enough.”

“The pace of the recovery looks like it has slowed since the cases began that spike in June,” Powell added. “It’s too early to tell both how large that is and how sustained it will be. We just don’t know yet.”

“Mr. Powell said policymakers needed more data before drawing firm conclusions about the scope of the pullback, but he noted that debit and credit card spending were slowing and labor market indicators suggested that recent job gains might be weakening.”

No mea culpa

Germany finance minister Olaf Scholz “defended his handling of the Wirecard scandal in closed-door hearings in the Bundestag on Wednesday, insisting the authorities had done all in their power to uncover irregularities at the disgraced payments company.”

Scholz “insisted that sweeping reform of German financial regulation, unveiled by his ministry last week, would fix deficiencies in the system and ensure there would be no repetition of the Wirecard affair, according to participants of the session. However, some opposition MPs said they were unimpressed with his performance, and continued to insist on a full parliamentary inquiry into the scandal.”

Meanwhile, “German authorities have asked Russian officials if Jan Marsalek, the former Wirecard executive who ran operations for the disgraced fintech company, had entered Russia and requested they act on an Interpol notice issued for his arrest. The request, made on July 22, and a ‘red notice’ issued through multilateral police organization Interpol were disclosed in written answers the German government provided to lawmakers on Wednesday. The Russians hadn’t responded to the German request as of Tuesday, according to the written answers.”

Boffo quarter

Credit Suisse said its second quarter net income jumped 24% versus the year ago period on a “surge in fees from its investment banking and capital markets business. The bank set aside 296 million francs in loan-loss provisions, less than the 568 million francs it took in the first quarter in anticipation of loans souring from the coronavirus pandemic.” It also announced a major restructuring.

“The revamp, which is designed to reduce costs and improve efficiencies, rolls back some of the changes brought in by previous chief executive Tidjane Thiam. It comes as his successor, Thomas Gottstein, sets about putting his mark on the business almost six months after taking on the role. The company said it hoped to save SFr400m a year from the reshuffle by 2022.”

Wall Street Journal

Location matters

The relative performance of European banks is likely to depend on “how well a lender’s primary markets are dealing with the twin health and economic shocks of the pandemic.” Deutsche Bank, for example, “set aside a modest €761 million ($892.6 million) for loan losses on account of relatively benign prospects for the German economy. Meanwhile, Barclays made a loan-loss allowance of £1.6 billion ($2.06 billion) for the quarter. It now has a 2.5% total provision against its loan book, more than double the amount that Deutsche Bank has. Barclays holds more unsecured and credit-card debt, but the difference is also due to Germany’s relative success in controlling the health and economic impact of Covid-19.”

But “efficiency still matters too.. Barclays right-sized its bank at the end of 2017 to focus on the U.K. and U.S. and is relatively lean with a cost-to-income ratio of 57%. That allowed the lender to deliver a second-quarter return on tangible equity of 2.9%, compared with a loss of 0.6% for Deutsche Bank. The German lender is one year into its latest three-year overhaul and still has a chunky 85% cost-to-income ratio.”

Big Pay day

PayPal said its total payment volume grew 30% in the second quarter “despite a nearly two-thirds drop in travel and events. That is up from 19% growth in the first quarter. June was the fastest-growing volume month for PayPal since it separated from eBay in 2015.”

Financial Times

Know your customer

U.K. financial firms must “take steps to better understand the needs of vulnerable customers, ensure their staff have the skills to make appropriate judgments, and provide more suitable products, communications and customer service,” according to updated guidance from the Financial Conduct Authority, which found that “nearly half of all U.K. adults may be ‘especially susceptible to harm’ and some have been ‘exploited for gain.’”

“Supporting vulnerable consumers is a key focus for the FCA, and the coronavirus crisis has only highlighted its importance,” Christopher Woolard, the FCA’s interim CEO, said. “While many firms do excellent work to support their vulnerable customers, we will not hesitate to step in where others do not.”

New York Times

Penny wise or foolish?

The nationwide coin shortage “has led to renewed discussions about the fate of the penny, which has seen its purchasing power fall because of inflation while its production costs have risen. Canada got rid of pennies in 2012 for reasons that also apply in the United States: They are not very useful, with too many sitting in jars, and they cost more to make than they are worth. Each penny costs about two cents to produce. Pennies accounted for 59 percent of the 12 billion coins the mint manufactured last year.”

“But the movement to eliminate pennies faces significant opposition. Some people support the penny for sentimental reasons. It was one of the first coins made by the Mint after it was established in 1792. Penny proponents also argue that eliminating pennies would amount to a one-cent sales tax for consumers because prices that end in 99 cents are common.”

Elsewhere

Clean it up

Bank of America “has asked the Trump administration to correct data on the recipients of $520 billion in pandemic aid,” Reuters reported. The bank, which the Small Business Administration said was the largest Paycheck Protection Program lender by volume as of June 30, “has asked the SBA to pull the data, clean it up and re-issue it.”

The request, along with one from 30 lawmakers who have “grave concerns” about errors in the PPP data, “will likely raise pressure on the SBA and the Treasury to explain how they put together lending data on the program.”

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