Will climate change spur crisis?; OCC, FDIC go it alone on CRA overhaul

Wall Street Journal

Separate ways

Comptroller of the Currency Joseph Otting said “he plans to push ahead” with a proposal by his office and the Federal Deposit Insurance Corp. to overhaul the Community Reinvestment Act “despite objections from the Federal Reserve. Mr. Otting acknowledged the possibility that the Fed might issue a different proposal for the banks it regulates, an outcome that the industry wants to avoid,” the paper reports.

“The growing rift among federal banking regulators makes it likelier that banks will have to navigate different sets of rules” under the CRA, the paper adds. “The OCC oversees roughly 70% of activity under the rules, and its proposal would apply to some 1,200 banks — including some of the biggest, such as JPMorgan Chase and Wells Fargo. The Fed oversees about 15% of CRA activity.”

Otting “stood firm in defense of his agency's proposal to modernize the CRA, calling out critics of the plan who he said do not have their facts straight,” American Banker reports.

Full speed ahead

Capital One’s fourth quarter financial results indicate all is well with the American consumer borrower. “Against the trend seen from other banks, Capital One grew its net interest income by a relatively sharp 4% in the fourth quarter from the prior year. Net interest margin, a measure of lending’s core profitability, was under pressure by lower interest rates, but it only declined slightly, to 6.95%, or by 0.01 percentage point from a year earlier,” the paper says.

“There is still a lot of noise in consumer credit, including an impending accounting-rule change that will require banks to reserve against all future possible loan losses, not just losses anticipated over the next year. But for now, Capital One is pushing ahead with profitable card and auto lending.”

Opportunity knocks

Money managers including Allianz and American International Group “have found a window of opportunity to enter the business of financing international trade, long the domain of banks. Trade finance has historically been dominated by European banks such as HSBC and BNP Paribas, alongside Citigroup in the U.S. But some powerhouses, including Dutch lender ABN AMRO, have dialed back their operations. Others, under pressure from new capital requirements, are looking to sell their trade-financing deals, creating an opportunity for new types of financiers to enter the market.”

Nonbank financial institutions are also supplanting banks in cross-border credit. According to the Bank for International Settlements, these so-called shadow banks “are leading the growth in cross-border lending, with cross-border banking claims in the third quarter up 17% from a year earlier. That’s the fastest growth in at least six years, when records began.”

“Nothing is inherently wrong about their becoming more important,” the paper says. “But the shift raises questions about how they’ll behave in a sharp slowdown or financial crisis.”

Financial Times

Reduced stress

European banks “will have more leeway to police themselves under a planned overhaul of the biennial bank stress tests carried out by the European Banking Authority. The watchdog argues that the current methodology — introduced in the wake of the financial crisis to show how much capital would be depleted if a lender came under pressure — has outlived its usefulness,” the paper reports.

“The framework we are proposing today aims at making the EU-wide stress test more informative, flexible, and cost-effective,” EBA Chairman José Manuel Campa told the paper. “The EBA, which ensures bank regulations are applied evenly across the EU, said it to wanted to focus instead on how banks use their capital in more ‘relevant’ scenarios. It wants lenders across the bloc to have more control over how they model results, with the ability to cast aside existing constraints if they explain why.”

On the line

Wirecard’s CEO Markus Braun “will receive a contract extension if an accounting probe finds no material misconduct at the company,” the company’s new chairman, Thomas Eichelmann, said. Braun, “who is also the single largest shareholder of the fast-growing German payments service provider,” has a contract that expires at the end of 2020.

“KPMG, which is overseen by Mr. Eichelmann, was commissioned by Wirecard after the Financial Times in October published documents that appeared to indicate a concerted effort to fraudulently inflate sales and profits," the paper reports. "The company has categorically denied impropriety and said the conclusions drawn by the FT about the files were incorrect. Mr Eichelmann suggested that KPMG had not discovered any significant wrongdoing so far.”

Negative is negative

“Eurozone bank executives have launched a fresh lobbying push to convince policymakers of the dangers of long-term negative interest rates, warning they will hurt savers and pensioners while fueling price bubbles in riskier assets.” After two years of trying to convince the European Central Bank and others to reverse their policies, “now European bankers are taking a different approach. In a series of private meetings with the region’s regulators and politicians at the World Economic Forum in Davos, bankers have warned of what they see as the broader perils of long-term negative interest rates.”

Meet the new boss

Westpac, the troubled Australian bank that has been embroiled in a huge money laundering scandal, has named former Barclays Chairman John McFarlane as its chairman. He will succeed Lindsay Maxsted on April 2. One of his first jobs will be to find a replacement for Brian Hartzer, who lost his job as CEO following the scandal.

New York Times

Small payout

Only about 10% of the 147 million consumers eligible for a settlement with Equifax over its 2017 data hack have filed for some type of compensation. The credit bureau agreed to pay up to $700 million to settle claims with consumers whose private financial data was compromised.

“Wednesday was the deadline for initial claims under the settlement, including requests for free credit monitoring services or the so-called alternative compensation — a payment of up to $125 for those who already had some form of monitoring in place.” However, “those seeking the cash option will receive far less than the $125 cap. More than 4.5 million people had filed claims for the cash payment as of Dec. 1. Only $31 million of the settlement was set aside for the cash option; that works out to less than $7 a person.”

The next crisis

Climate change may “cause the next financial crisis,” according to a “book-length” report published this week by the Bank for International Settlements. The report, which warns that “central bankers lack tools to deal with what it says could be one of the biggest economic dislocations of all time … could be the overriding theme for central banks in the decade to come.”

Quotable

“My thought or vision will be that we will do a joint OCC-FDIC rule, and then the Fed will have to make a determination whether they want to ultimately pick what we’ve done or modify it for the 15% of the banks that they regulate.” — Comptroller of the Currency Joseph Otting, saying that the two agencies will move forward with their plan to overhaul the Community Reinvestment Act and not wait for the Fed to join them