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Shelton's dim Fed chances; investors skeptical of Citi turnaround

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Not enough votes

Judy Shelton, President Trump’s nominee to join the Federal Reserve’s board of governors, currently doesn’t have enough votes for confirmation, Sen. John Thune of South Dakota, the Senate’s second ranking Republican, said Tuesday.

“We’re still working it. She’s a priority for the White House. It’s the Federal Reserve. It’s important, so obviously we want to get it done. But we’re not going to bring it up until we have the votes to confirm her. We’re still having some discussions and, you know, when it’s ripe, we’ll move,” he said.

“Republicans have a 53-47 vote advantage in the Senate, and with all Democrats likely to oppose her candidacy, Ms. Shelton can afford to lose no more than three GOP votes. Two Republicans, Sen. Susan Collins of Maine and Sen. Mitt Romney of Utah, said in July they wouldn’t support her confirmation.” Wall Street Journal, Financial Times, Washington Post

The Fed’s two-day monetary policy meeting ends Wednesday afternoon. Here’s what to expect from the announcement. Wall Street Journal, Financial Times

Closer scrutiny

Ernst & Young, “under fire for missing a suspected fraud that blew up German fintech company Wirecard, said auditors should play a bigger role in detecting such wrongdoing, challenging the accounting industry’s longstanding assertion that its job isn’t to seek out malpractice.”

“Whilst the primary responsibility for the prevention and detection of fraud is with the management and supervisory boards, audits should play more of a role in the future to detect material frauds,” Carmine Di Sibio, EY Global’s chairman and CEO, said in a letter to clients.

The letter “cites a number of steps the firm is taking to toughen its scrutiny of companies’ books, including looking at social media and ‘ongoing checks on management probity.’”

“Many people believe that the fraud at Wirecard should have been detected earlier and we fully understand that,” Di Sibio said in the letter. “Even though we were successful in uncovering the fraud, we regret that it was not uncovered sooner.”

“He said EY would increase its use of technology to improve its audits in the wake of the scandal, including ‘using electronic confirmations for audit evidence’ such as ‘matching the company’s records of banking transactions with those provided to EY by the bank.’”

Wall Street Journal

Rebound in jeopardy?

Citigroup will need more than a new CEO to convince investors that it’s a valid turnaround play, the Journal says. “The bank’s need to spend to upgrade risk systems and downbeat economic comments make it hard to bet on a turnaround for the beaten-up stock,” which dropped another 7% on Tuesday after falling more than 5% on Monday.

“Trading at one of the steepest discounts to book value among its peers, Citigroup has huge potential for a sharp turnaround. Yet the timing of any rebound is increasingly hard to figure. For one, the pandemic’s ongoing effect on banks’ overall expense plans is still murky. Also notably, Citigroup was more downbeat about recent economic trends than some peers. A big question is what that means for credit, particularly cards. Beaten up bank stocks like Citigroup remain tempting turnaround bets. But with the rest of the market hitting new highs, the cost of waiting for banking’s turn is steep.”

Hoping for the best

California’s Bank of Hope, which built itself into a $17.2 billion asset institution by catering mostly to Korean Americans and other recent immigrants, “faces a Covid reckoning.” The bank “is one of many small and midsize U.S. banks buried under a pile of potentially troubled commercial real-estate loans.”

Indeed, “Bank of Hope’s loan portfolio may be one of the most vulnerable. It had $3.1 billion in loans with Covid-19-related payment deferrals or other modifications as of June 30, according to its second-quarter earnings call. That accounts for around 18% of the bank’s total assets, ranking among the highest percentage for these kinds of loans in the country. Loans with these modifications were equivalent to around 170% of the bank’s Tier-1 capital, a level higher than most peers. Problems among small and midsize banks like Bank of Hope could accelerate a downturn in the property market by removing an important source of financing.”

Swimming in mortgages

The Fed is poised to “overtake banks as the largest mortgage bond investor” as issuance of mortgage-backed securities by the government agencies soars. But “banks have also increased their mortgage bond holdings. Big banks in particular have been flooded with deposits and needed a place to park them, like the mortgage and municipal-bond markets.”

Financial Times

Surrender to reality

Handelsbanken, “one of the leading advocates in Europe for the importance of maintaining bank branches, has conceded defeat to the rise of online banking and is to close almost half its branches in Sweden by the end of next year. Known for its church spire principle — under which a branch manager should be able to see all their customers from the top of a tower — Handelsbanken has long resisted the move by the other three large banks in Sweden to cut sharply the number of branches. But on Wednesday Handelsbanken announced it would close 180 of its 380 branches in Sweden, cut 1,000 jobs and invest SKr1bn ($115 million to boost its digital customer offering.”

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