The second round of stress tests; State Street settles with SEC

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Cleared for takeoff
All 18 big banks passed the second round of the Federal Reserve’s stress tests (though two of them needed a do-over), indicating that they are “healthy enough to start whittling down their capital stockpiles, clearing them to make payouts to investors that exceed their expected profits.” It was only the second time that no bank failed. “A few banks in regulatory hot water were cleared, opening the door for a wave of dividends and stock buybacks that could boost bank stocks left behind in the market rally.”

“Within minutes of the Fed releasing the test results, the country’s four largest banks — Bank of America, Citigroup, JPMorgan Chase and Wells Fargo — announced that they could repurchase a total of about $105 billion of their own shares. The four banks also said they would increase their dividends.”

Despite the positive results, “investors should go easy on the champagne this year,” and “shouldn’t overestimate the importance of capital returns,” the Wall Street Journal cautioned. “Among the six biggest banks, none even came close to matching the S&P 500’s total return including dividends of 9.4% over the past year, despite big increases last year in buybacks and dividends from the group as a whole. On average, they have returned a negative 2.9% since announcing their capital plans in June of last year.”

There was one down note, however. The Fed ordered Credit Suisse to fix “weaknesses” in its capital plans before its U.S. unit would be allowed to increase dividend payments to its Swiss parent. “While it was the best capitalized bank in the stress test, officials said they were not happy with the way it forecast what its trading losses might be in a severe downturn.” Deutsche Bank, meanwhile, passed without further questions.

Fined and settled
State Street agreed to pay $88 million to settle Securities and Exchange Commission claims that it overcharged its investment firm clients by $170 million for custodial services from 1998 to 2015. “Some $110 million of those charges stemmed from a secret markup State Street had added to the costs of sending secured financial messages” over the SWIFT network. Wall Street Journal, Financial Times

A former UBS compliance officer and her day-trader friend were sentenced to three years in a U.K. prison for insider trading. “It is clear that you took every opportunity to enjoy entry into the rather louche lifestyle that was being led by [trader Walid] Choucair,” the judge scolded Fabiana Abdel-Malek, the former UBS employee. “You were a gamekeeper, using the knowledge you had gained from your employment to become an efficient and accomplished poacher.”

Separately, “regulators on both sides of the Atlantic are focused on what they see as a network of traders who may have exchanged inside tips on big merger deals over a number of years.” Specifically, the Securities and Exchange Commission and the U.K.’s Financial Conduct Authority are investigating David Johnson, a former Citigroup banker, who may have “collected details about impending deals from a former colleague and passed them to traders.”

Wall Street Journal

Going down
In anticipation of coming rates cuts by the Fed, Goldman Sachs and Ally Financial have begun lowering rates on their online savings accounts. “Interest rates are on the downswing and projected to fall further,” Ally told customers.

Inside Libra
Facebook’s Libra “appears to operate more like existing web-payment systems, such as PayPal, than bitcoin.” The Journal explains the differences.

Financial Times

JPMorgan Chase’s agreement to buy a stake in 10x Future Technologies, the banking technology start-up founded by former Barclays CEO Antony Jenkins, who was “ousted from Barclays in 2015 for caring more about retail customers than investment bankers, is a vindication of his view that lenders cannot afford to let better data aggregators disintermediate their relationships and push them down the value chain into more regulated and less profitable activities.”

Washington Post

Bank of America said it will stop lending to detention centers and private prisons, “making it one of the last big Wall Street bankers to cut ties with the industry. Dropping private prison companies is a way for banks, already targets of Democratic presidential candidates, to get out of the crossfire on another emotional issue, industry analysts have said. JPMorgan Chase and Wells Fargo made similar moves earlier this year, and U.S. Bank told The Post in March that it, too, was pulling back.”

“The stress tests have confirmed that the largest banks are both well-capitalized and place a high priority on strong capital planning practices. The results show that these firms and our financial system are resilient in normal times and under stress.” — Fed vice chairman for supervision Randal Quarles on the results of the second round of bank stress tests.

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