Fed eases bank leverage ratio; Kabbage cuts back

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Ratio relief

The Federal Reserve unanimously voted Wednesday to ease banks’ supplementary leverage ratio for one year. The Fed hopes to “boost the flow of credit to cash-strapped consumers and businesses during the coronavirus slowdown.”

“Banks are sitting on giant stockpiles of cash, U.S. government debt and other safe assets,” the Wall Street Journal says. “By tweaking how the ratio is calculated, the Fed is effectively trying to engineer a swap. Remove Treasurys and central bank deposits from the calculation, the thinking goes, and banks should be able to replace them in the asset pool with loans to consumers and businesses.”

“The decision means that as the Fed pushes more cash reserves into the banking system, the banks will be able to take those reserves on to their balance sheets without having to increase capital at the same time,” the Financial Times says.

Financial Times

Cabbage crunch

Kabbage, the online small business lender, in an effort to conserve cash, “has stopped making loans, made big reductions to customer credit lines and temporarily dismissed staff after many of its borrowers have been shuttered by the coronavirus outbreak,” the paper reports.
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“We securitize our receivables and we are on the hook for loan performance, which is suffering because of delinquencies, because our customers have no revenue, because they are closed,” co-founder and president Kathryn Petralia told the paper.

Unhappy stockholders

U.K. bank stocks plunged Wednesday, the first day of trading after the country’s five largest banks agreed to “halt dividends and buybacks in response to the Bank of England’s warnings against paying out billions of pounds to shareholders during the coronavirus pandemic. HSBC and Standard Chartered, which are both headquartered in London but do the vast majority of their business in Asia,” both fell more than 7%, “wiping billions from their valuations and causing a backlash among Hong Kong retail investors.”

HQ Qs

The Bank of England’s “pressure on HSBC to cancel its dividend for the first time in 74 years has reignited a debate at the top of the bank over whether it should redomicile to Hong Kong,” the paper says. The BoE’s “intervention prompted anger among some board members and executives, with calls to reopen the question of whether the group’s legal base should move from London.”

The dividend ban “is particularly damaging for HSBC, which generates more than four-fifths of its profits from Asia, despite being headquartered in London. A third of its shares are owned by retail investors in Hong Kong, who count on the dividend as part of their income.”

Bonuses too

“Banks have a societal role as agents of the government, transmitting state aid to the small enterprises and individuals as unemployment rises and recession looms. They must not forfeit the high ground by raining rewards down on staff after other stakeholders have suffered so much,” the paper says in an opinion piece, arguing banks should also suspend employee bonuses. “Remuneration is a lagoon-sized cost for banks. Variable pay accounted for nearly half of Barclays’ total remuneration costs of £1.3 billion in 2019. About half of the bill was in cash. It would be an error for banks to jeopardize the strength by repeating the mistakes of the noughties.”

Under pressure

New Zealand has joined the euro zone and the U.K. in ordering banks to stop paying dividends, “a move that could put pressure on Australia’s big banks,” which own most of New Zealand’s banks. “New Zealand’s move could make it harder for Australia’s so-called Big Four — Commonwealth Bank of Australia, ANZ, Westpac and National Australia Bank — to maintain their high dividend payouts and aggravate their already strained relationship with the Reserve Bank of New Zealand.”

Quotable

“From a U.K. policy perspective it is understandable, but this is damaging in Asia and around the world. U.K. institutional investors and Hong Kong retail investors own bank shares for the dividend. This isn’t billionaires and hedge funds; a lot of these people are ordinary folk.” — Ronit Ghose, a banking analyst at Citigroup, commenting on U.K. banks’ decision to suspend dividend payments