SEC chief warns on leveraged loans; Wells’ woes continue

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Fewer wills
Bank regulators led by the Federal Reserve proposed a rule that would require the largest U.S. banks to create “living wills” every four years instead of every year as they do now, “the latest move by regulators under President Trump to loosen controls put in place after the financial crisis.” The banks would also be required to file every two years “pared-down versions of the plans, addressing capital and liquidity, core parts of their wind-down strategy and any major shifts in their operations.” Fed Chairman Jerome Powell said the action “formalized practices that have developed in recent years and didn’t represent changes to ‘substantive review standards’” for the banks.

At the same time, the Fed proposed tightening liquidity rules for large foreign banks operating in the U.S. While “for domestic banks the changes largely came as a relief from the post-crisis Dodd-Frank legislation, the outcome is more complex for foreign banks, some of which are set to gain while others are likely to lose out,” the Financial Times reports. “Under the new rules, banks would have to hold different amounts of liquid assets depending on how big their U.S. subsidiaries are and the riskiness of their activities.” Wall Street Journal, Financial Times, New York Times, Washington Post, American Banker

Wall Street Journal

Risk warning
Securities and Exchange Commission Chairman Jay Clayton added to the growing chorus of concern about leveraged loans banks are making to higher risk companies, which could pose additional risk to financial markets. Speaking to reporters after a financial conference on Monday, “Clayton said he didn’t view the growth in loans to highly indebted companies as a ‘systemic’ risk, but did raise concerns about how the loans, which take longer to settle than many other financial assets, could hurt liquidity in the investment-fund space. In other words, in the event of an economic downturn, lenders might not be able to access cash from heavily indebted companies to fulfill their other obligations.”

Zach Gibson/Bloomberg

Hard times
Behind the scenes, Wells Fargo’s business performance is suffering just as badly as its public reputation, the paper reports. “What was once an aggressive, fast-growing lender whose profits towered above those of rivals has become a firm with declining revenues that is leaning heavily on cost cuts.”

Heading to the Hill
The heads of the largest American banks “plan to paint a rosy overall picture of an industry House Democrats have targeted for closer scrutiny” when they testify before the House Financial Services Committee this week.

"The chief executives of seven of the nation's largest U.S. banks are likely to be pressed on everything from guns to climate change to the risks of leveraged lending," American Banker's Neil Haggerty reports, "but the overall impact of the hearing on industry policy may be limited to the headlines the grilling will generate."

Financial Times

Eve of destruction?
Edward Bramson, the activist investor who is pushing for a board seat at Barclays, said the bank faces a “real threat” that it will have to raise new capital unless it shrinks its investment bank. “Continuation on the existing course represents a real threat that more new capital will need to be raised to underpin the activities of the corporate and investment bank,” which is “almost certain to cause an immediate destruction of shareholder value,” he said in a letter to shareholders.

While some critics — both inside and outside Barclays — may question Bramson’s motives in trying to alter the bank’s strategy and win a board seat, he may yet succeed, writes columnist Matthew Vincent. “It does not require 36 years in banking to recognize a 29% negative total shareholder return since April 2015,” he writes, referring to the bank’s recent financial performance. “Nor is it necessarily a problem if a board member is short-termist and disruptive if that disruption promises a faster improvement in a bank’s return on tangible equity, and its sector-lagging price to tangible equity ratio.”

Ready to settle
Standard Chartered is expected to pay about $1 billion to settle U.S. and U.K. charges that it violated sanctions against doing business with Iran. An announcement is expected Tuesday.

Quotable

“We saw clearly in the crisis that the failure of one or more large banking organizations may lead to severe stress in the financial system as fire sales and run dynamics spread contagion.” — Gov. Lael Brainard, the only Fed official to vote against Monday’s proposal that would require large banks to produce living wills every four years instead of every year.