Scharf signals ‘sense of urgency’ at Wells; Europe weighs new AML agency

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Many problems

“Ultralow interest rates and political and economic uncertainty are forcing Europe’s banks to confront an imperative they have been slow to respond to: cut costs fast or risk falling even further behind U.S. rivals,” the Wall Street Journal reports. “As the latest quarterly earnings season draws to a close, evidence is mounting that banks in Europe are trying to react as low rates continue to squeeze profits and competition from U.S. banks bites deeper. The answer for most is downsizing, cost-cutting, refocusing or some combination of those.”

But that may not enough. “So banks are also looking for ways to attract depositors to make investments that generate fees for the banks.” They are also “looking more into cost-efficiency and into finding a new business model that allows for better cross-selling opportunities,” said Marco Troiano, deputy head of the banks team at Scope Ratings. “This difficult environment is an opportunity for the European banking system to restructure. Sooner or later they may be facing competition from a large technology company, such as Amazon or Facebook, and they must be ready to compete with them.”

But European banks have problems beyond that. The European Union is looking at creating “a central authority to crack down on money laundering activity after a series of high-profile scandals have underlined Europe’s weaknesses in preventing dirty cash from flowing through its banks,” the Financial Times reports. “The body’s mission would be to police financial institutions’ compliance with EU rules on customer due diligence and other safeguards. The proposal would mark a significant ramping up of Europe’s response to a wave of money-laundering scandals over the past two years that have revealed ways for criminals to exploit the EU banking system.”

Count Dutch bank ING — which “became caught up in a string of scandals around the continent” — as a supporter of the proposal. “We’re absolutely in favor of tackling this on at least a European level, if not even beyond,” CEO Ralph Hamers told the paper. “ING has been at the center of some of the most high-profile compliance failures in Europe during the past year. It was charged a record-breaking €775 million penalty by Dutch authorities in 2018 for a series of failures that prosecutors said allowed companies to launder hundreds of millions of euros. It is being separately investigated by regulators and judicial authorities in Italy, where it has been banned from accepting new customers in the country since the start of the year, and said it ‘has experienced heightened scrutiny by authorities in various countries.’”

The proposal couldn’t be more timely, as Deutsche Bank officials “approved the sale of a chunk of Silicon Valley real estate to a Russian businessman despite objections from its U.S. reputational risk committee,” the Journal reports. “The lender’s Germany-based global reputational-risk committee approved the $72 million deal in May 2018, overruling concerns raised by executives including the one responsible for Deutsche Bank’s U.S. anti-money-laundering controls.”

“While disagreements within banks are common, the discord within Deutsche Bank was notable because it occurred while congressional lawmakers were scrutinizing the bank’s Russian business relationships. And the bank’s U.S. committee is rarely overruled. In the wake of the sale, some Deutsche Bank managers questioned whether the lender had learned from past lapses in compliance.”

“After the sale went through, Deutsche Bank officials in the United States took the rare step of contacting the federal watchdog that polices financial crimes to report the bank’s own transaction as suspicious,” the New York Times reports. “So-called suspicious activity reports are common … but they generally involve activities conducted by banks’ customers or even their customers’ customers, not the banks themselves.”

Separately, in Greece, the country’s “chief anti-corruption prosecutor has accused Piraeus Bank, the country’s largest lender, of violating capital controls in transactions relating to Libra Group, a U.S. conglomerate that had earlier bailed it out. The case raises questions about the governance and stability of Greek banks, still struggling to recover from an eight-year crisis that saw national output fall by 25%.”

Wall Street Journal

Bank run in China

At least four small banks have been hit with deposit runs in the past few months as “China’s banking sector has been dogged by liquidity concerns, particularly among smaller regional banks that had expanded aggressively in recent years.” The latest bank to experience a run is Yichuan Bank, a small rural bank where customers for the third straight day “rushed to pull money out even as authorities stepped in forcefully to quell concerns around the latest troubled Chinese lender.”

Financial Times

No time to lose

Federal Reserve Board Chair Jerome Powell said this week that the recent dislocations in the short-term money market, caused by banks hoarding cash, won’t lead to looser capital rules on U.S. banks. But a long-term solution is required, the paper says. “Funding-market strains are likely to intensify towards the end of the year, a period when banks tend to pad out their balance sheets. If this is to avoid becoming an unseemly political row, that long-term solution may be needed fast.”

Elsewhere

Diving right in

Wells Fargo’s new CEO Charles Scharf told employees at a town hall meeting this week “he is trying to bring a fresh sense of urgency to solving Wells Fargo’s regulatory woes,” Reuters reports. Scharf, the former CEO at Visa and Bank of New York Mellon said he “is more hands-on in his early days than at his previous CEO roles in order to tackle the bank’s regulatory and operational problems. When he started as CEO jobs in that past, Scharf focused on learning about the companies, but at Wells Fargo, the need to develop controls has brought a sense of urgency.”

Qilai Shen/Bloomberg

Quotable

“We all have to act a little bit more impatient for some of these things, and demand more of each other. I’m going to constantly ask the question, ‘Can we do a better job? Can we do something faster?’” — Wells Fargo CEO Charles Scharf at a town hall meeting with employees this week