The Fed's move to tweak bank stress tests; Wirecard CEO quits as money hunt continues

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Sensitivity analysis

The Federal Reserve will analyze “large banks' ability to withstand various coronavirus-related recession scenarios as it forms policies on capital requirements, dividends and stock buybacks,” Randal Quarles, the Fed’s vice chair for supervision, said Friday.

In a speech to Women in Housing and Finance, Quarles said “the central bank’s annual stress tests will include a ‘sensitivity analysis’ of banks’ resilience in three hypothetical scenarios,” the Wall Street Journal reported. “The new analysis is being conducted alongside the Fed’s annual stress tests, which were introduced during the global financial crisis of 2007-09 to assess whether the largest banks have enough capital to weather a downturn. If a bank’s capital is found to be inadequate, the Fed can block it from buying bank shares or paying dividends.”

The banks “will have to prove their financial strength in both a double-dip recession and a prolonged one to get regulators’ stamp of approval on their dividend plans,” the Financial Times said. “The Fed will announce on Thursday whether it will follow European regulators in banning big banks from paying dividends.”

“The assessments will adjust the unemployment rate, gross domestic product and Treasury rates based on three scenarios: a V-shaped economic recovery, a U-shaped recovery and a W-shaped recovery. The last implies a second round of social distancing and business closures,” American Banker’s Hannah Lang writes.

Wirecard unravels

Markus Braun, “long the face of the company and its largest shareholder,” resigned as Wirecard’s CEO on Friday “after two banks in the Philippines meant to be holding over $2 billion on behalf of the fintech giant said they don’t have the cash and never did,” the Journal reported.

“An instantly recognizable fixture at tech conferences, recently adopting Steve Jobs-style black turtlenecks, Mr. Braun became known for grand predictions about the future of payments, big data and artificial intelligence,” the Journal said. “His resignation Friday raises serious questions about his legacy.”

https://www.wsj.com/articles/markus-braun-storyteller-behind-wirecards-rise-and-fall-11592592549

“With Wirecard’s debt trading at 25 cents on the euro and its shares falling more than 70% in two days, investors were attempting to assess the solvency of a group that processes tens of billions of euros in credit and debit transactions each year,” the FT said.

https://www.ft.com/content/120a27bf-ae35-4aae-b220-54a2eff3a9e5

“Wirecard’s explanation for a €1.9 billion hole in its balance sheet was further undercut on Sunday when the head of the Philippine central bank said the money never entered the country,” the FT said. Two Philippine banks said Friday “that Wirecard was not a client, that there was no evidence such accounts ever existed and that documents provided to EY supposedly detailing the balances were forgeries.”

https://www.ft.com/content/574ca70f-1d1e-4ade-b02b-9b846ea88d14

On Monday the company announced that the missing $2 billion “probably doesn’t exist,” the result “of a multiyear accounting fraud.” Wall Street Journal, Financial Times

“The case raises a disturbing question for Frankfurt’s financial community. Why did so many institutions fail to take into account what the Financial Times had reported might be going on there? BaFin, Germany’s financial markets watchdog, failed particularly miserably as an institution.”

DWS, “one of Germany’s leading fund managers,” went “on a Wirecard buying spree immediately after the Financial Times had published extensive evidence suggesting that a large portion of Wirecard’s revenue and profits did not exist,” betting “more than €500 million of their investors’ money that the FT reporting was wrong.”

“DWS vowed to pursue both the company and its departed chief executive Markus Braun through the courts, seeking damages. Across all its funds, exposure to Wirecard was cut substantially in May, following the publication of the special audit by KPMG, which failed to verify that substantial amounts of the company’s reported profits were genuine. This week, as shares in Wirecard lost four-fifths of their value, DWS reduced its ongoing exposure to zero.”

But “investors betting against shares in Wirecard hit a prodigious payday. For some passionate critics of the company, the reward wasn’t just in money, but in vindication. Before Wirecard revealed more than $2 billion of cash was missing from its business on Thursday, investors who bet on stocks to decline had made it one of their most popular targets. That set up what may have been one of the biggest paydays for short sellers on a single stock in years.”

“[But] the path to riches was hardly linear. While critics were proven right in the end, gobs of money were lost over the years as the company’s share price marched higher, wiping out short bets.”

Wall Street Journal

Behind the scenes battle

“The growing and largely hidden interchange economy” is creating increasing tensions between retailers and banks. “The fees help drive the payments system. Merchants hate them; banks love them. In the middle are consumers. The fees push up prices for everyone. They also fund a growing array of cardholder rewards—which flow largely to affluent customers.”

Financial Times

No barriers

“Banking regulators will do untold damage to global financial stability if they erect barriers to protect local markets once huge loan losses from the coronavirus crisis begin to hit lenders, the Institute of International Finance has warned.”

Change of plans

Peer-to-peer lenders “grew rapidly after the last financial crisis, promising to provide a better deal to both borrowers and income-starved savers than they would receive from the big banks. But faced with rising default rates, falling demand for new loans, and nervous retail investors, lenders are increasingly being forced to abandon their original ambition of democratizing finance and turn instead to backing from big financial institutions.”

Quotable

“We will use the results of our sensitivity analysis to inform our overall stance on capital distributions and in ongoing bank supervision. [The analysis] will help us judge whether banks would have enough capital if economic and financial conditions were to worsen.” — Fed vice chair for supervision Randal Quarles, announcing that the Fed is tweaking its stress tests in the wake of the coronavirus pandemic to decide large banks’ capital requirements and ability to pay dividends.