Posts Tagged ‘Regulators’

The Fed Sends 19 Biggest Banks Back to the Treadmill

Wednesday, March 30th, 2011

The Federal Reserve‘s second round of stress tests requires the 19 largest U.S. banks to examine their capital levels against a worst-possible-case scenario of another recession with the unemployment rate hovering above 8.9 percent. The banks were instructed to test how their loans, securities, earnings, and capital performed when compared with at least three possible economic outcomes as part of a broad capital-planning exercise.  The banks, including some seeking to increase dividends cut during the financial crisis, submitted their plans in January.  The Fed will complete its review in March.

“They’re essentially saying, ‘Before you start returning capital to shareholders, let’s make sure banks’ capital bases are strong enough to withstand a double-dip scenario,’” said Jonathan Hatcher, a credit strategist at New York-based Jefferies Group Inc.  Regulators don’t want to see banks “come crawling back for help later,” he said.

The review “allows our supervisors to compare the progress made by each firm in developing a rigorous internal analysis of its capital needs, with its own idiosyncratic characteristics and risks, as well as to see how the firms would fare under a standardized adverse scenario developed by our economists,” Fed Governor Daniel Tarullo said. Although Fed policymakers aren’t predicting another slump any time soon, they want banks to be prepared for one.  In January, the Federal Open Market Committee forecast a growth rate of 3.4 percent or more annually over the next three years, with the jobless rate falling to between 6.8 percent and 7.2 percent by the 4th quarter of 2013.  Unemployment averaged 9.6 percent in the 4th quarter of 2010.

The new round of stress tests are being overseen by a financial-risk unit known as the Large Institution Supervision Coordinating Committee (LISCC).  The unit relies on the Fed’s economists, quantitative researchers, regulatory experts and forecasters and examines risks across the financial system.  Last year, the LISCC helped Ben Bernanke respond to an emerging liquidity crisis faced by European banks.  “The current review of firms’ capital plans is another step forward in our approach to supervision of the largest banking organizations,” Tarullo said. “It has also served as an occasion for discussion in the LISCC of the overall state of the industry and key issues faced by banking organizations.”

At the same time, Bernanke expressed his support for the Dodd-Frank Act, which will add new layers of regulation to the financial services industry, as well as the Consumer Protection Act. “Dodd-Frank is a major step forward for financial regulation in the United States,” Bernanke said, noting that the Fed is moving swiftly to implement its provisions.  Additionally, the Fed wants banks to think about how the Dodd-Frank Act might affect earnings, and how they will meet stricter international capital guidelines.  Banks will have to determine how many faulty mortgages investors may ask them to take back into their portfolios.  Standard & Poor’s estimates that mortgage buybacks could carry a $60 billion bill to be paid by the banking industry.

In the meantime, the big banks are feeling adequately cash rich to pay dividends to their stockholders.  Bank of America’s CEO Brian T. Moynihan said that he expects to “modestly increase” dividends in the 2nd half of 2011.  “We’d love to raise the dividend,” James Rohr, CEO of PNC, said.  “We’re hopeful of hearing back in March from the regulators.”  JPMorgan CFO Douglas Braunstein told investors that the bank asked regulators for permission to increase the dividend to 30 percent of normalized earnings over time.  Braunstein said that JPMorgan’s own stress scenario was more severe than the Fed’s, and assumed that the GDP fell more than four percent through the 3rd quarter of this year with unemployment peaking at 11.7 percent.

Clive Crook, a senior editor of The Atlantic, a columnist for National Journal, and a commentator for the Financial Times, believes that United States fiscal policy itself merits examination.  Writing in The Atlantic, Crook says that “Fiscal policy needs a hypothetical stress test, just like bank capital.  Let’s be optimistic and suppose that the deficit projections do hold, and that a debt ratio of 80 percent can be comfortably supported at full employment.  What happens when we enter the next recession with debt at that level?  Assume another really serious downturn, and another 30-odd percentage points of debt.  Worried yet?  That’s why the problem won’t wait another ten years, and why sort-of-stabilizing at 80 percent won’t do.”

Republicans May Underfund Dodd-Frank Implementation

Thursday, January 20th, 2011

Republicans May Underfund Dodd-Frank ImplementationPresident Barack Obama’s crackdown on Wall Street excesses could be hampered if the incoming Republican-controlled Congress refuses to fund two crucial regulatory agencies.  The Dodd-Frank financial reform law – passed with heavy Democratic support – promised a generous budget to regulate the $600 trillion over-the-counter derivatives market.  Now, the law’s implementation may be derailed by the incoming 112th Congress.  Randy Neugebauer (R-TX), who will chair the House Financial Services oversight subcommittee, wants to review the regulators’ expansion plans.  “Once you turn the money loose, it’s a little harder to stop that train,” he said.

The two regulatory agencies in question are the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).  The SEC, for example, had expected to receive an 18 percent increase to its 2011 budget, which would have allowed it to hire 800 new regulators to enforce Dodd-Frank.  Roadblocks are on the horizon, however, in the form of Representative Spencer Bachus (R-AL), who will chair the House Financial Services Committee, and Frank Lucas (R-OK), who will chair the agricultural committee that oversees the CFTC.  The two Congressmen wrote to regulators, saying “An overarching concern…is the need to get it done right, not necessarily get it done quickly.”  The Republicans’ attitude to enforcing Dodd-Frank could be a boon to Wall Street firms, whose lobbyists are advocating a go-slow approach.

Mary Schapiro, SEC Chairman, said “We will have to take some more steps to cut back.  At this stage, it will impact our work.”  The chronically underfunded and understaffed CFTC, which had expected a 50 percent budget increase, had planned to hire 240 new regulators this year to enforce its new oversight of the swaps market.  According to CFTC Chairman Gary Gensler, “I do think without sufficient funding next summer (2011) you’d see a significant number of registrants – swap dealers, swap execution facilities and so forth – whose legitimate applications would have to be slowed down.  Michael Greenberger, a University of Maryland law professor and previously the CTFC’s director of trading and markets, says.

Basel III Could Slightly Impact Economic Growth

Wednesday, January 5th, 2011

Basel III Could Slightly Impact Economic GrowthThe Basel Committee on Banking Supervision overhaul of bank capital rules may cut global economic growth by 0.22 percent, which is seen as a reasonable amount.  This will occur over an eight-year transitional period during which the rules are put into place, according to the Basel committee and Financial Stability Board (FSB).  According to the FSB and the Basel committee, “The transition to stronger capital standards is likely to have a modest impact on aggregate output.”

Regulators are reassuring lenders and companies that the Basel III overhaul may force banks to cut back on lending, thus hurting the economic recovery.  According to the Institute of International Finance, an earlier version of the plan would have cut economic output by 3.1 percent in the eurozone, the United States and Japan from 2011 through 2015.  Etay Katz, a partner at the London-based law firm of Allen & Overy LLP, thinks the report “leaves quite a lot more to be desired.  I think bankers, when they see this, will be skeptical of the rigor with which this analysis has been conducted.”  Katz thinks the impact of Basel liquidity rules was not taken into account.

According to the new numbers, yearly growth could be as much as 0.03 percentage points below the baseline scenario – and that assumes that banks won’t have to comply with the revised regulations – over eight years.  Regulators are overhauling bank capital and liquidity prerequisites because the Basel II rules did not protect lenders during the financial crisis.  The Basel III rules have been approved by the G20 nations.

Banks Charging Off Bad Commercial Loans at Fast Pace

Tuesday, July 28th, 2009

buy-sell-panicA new Wall Street Journal analysis shows that U.S. banks are charging off bad commercial mortgages at the fastest pace in almost two decades.  At the current clip, losses on loans that financed apartments, retail centers, offices, and other commercial real estate could total nearly $30 billion by the end of the year.

Thousands of U.S. banks loaded up on commercial-property debt; as a result, losses on such loans will be on the radar as banks post quarterly results in coming weeks.  Regulators, meanwhile, continue to push some bankers to take losses on commercial real-estate exposure now as a way to lessen the blow of a catastrophic hit later.  Some analysts remain concerned that some banks are not sufficiently recognizing losses on their commercial real-estate loans, thereby exposing themselves to larger losses later.

According to Deutsche Bank AG, since the beginning of 2008, the amount of charged-off commercial mortgages as a percentage of such debt outstanding has ranged from a high of 3.2 percent to as low as 0.3 percent.  Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank, comments, “Net charge-offs to date have been highly inadequate. This is clearly a problem that is being pushed out into the future.”

Banks are balancing the ability to take charge offs (or loan loss reserves) with the capacity on their balance sheet to absorb such loses without jeopardizing their capital condition with the regulators.