banking industry

Loan Practices of China’s Banks Raising Concern

July 1, 2013 by NewsMaker Leave a Comment

One message read: “China Merchants Bank will issue a high interest financing product starting from June 28th to 30th. The product will be 90 days with a 5.5% interest rate. Please call us now.”

A day later came another. “Warm reminder: The interest rate of yesterday’s product has been raised to 6%. (Product duration is 90 days). There is limited access to this product. First come first served.”

The offers are not coming from fly-by-night operators but some of China’s biggest banks. They are raising huge pools of cash to finance a relatively new and highly profitable sideline business: lending outside the scrutiny of bank regulators.

The complex way they go about making off-the-balance-sheet loans is at the heart of China’s $6 trillion shadow banking industry, which the government is now trying to tame. Efforts to rein in the dodgy lending practices put stock markets worldwide in a tizzy in late June.

China’s regulators — and a fair number of economists, policy makers and investors — worry that legitimate banks are using lightly regulated wealth management products to repackage old loans and prop up risky companies and projects that might not otherwise be able to borrow money.

Analysts warn that shadow banking is helping drive the rapid growth of credit in a weakening economy, which could lead to — in the worst situation — a series of bank failures. “This is the biggest uncertainty I’ve seen in my 18 years following the China market,” Dong Tao, an economist at Credit Suisse, said of shadow banking. “You don’t know how banks are deploying capital. And you don’t know the credit risks.”

What banks are doing, analysts say, is pressing customers to shift money from the old, regulated part of their operations — savings deposits — into the new, less regulated part consisting of high-yielding wealth management products that can circumvent government interest rate controls and be used to finance high-interest loans to desperate customers.

China’s leaders are so worried about credit risk that last month the country’s central bank tightened credit in the interbank market, where banks typically go to borrow money from other banks.

The move sent short-term interest rates soaring, and for a day at least, created a debilitating credit squeeze.

The stock markets in China calmed down last week. But financial institutions are hinting that cash is still hard to come by. Some banks temporarily suspended lending in order to preserve cash, according to Caixin, the Chinese business magazine.

Other banks are raising cash by offering a new slate of wealth management products. Nearly every major Chinese bank sold a short-term wealth management product that had to be completed by the end of June, according to a telephone survey. China Merchants Bank did not respond to requests for an interview.

Many of the investments pay 6 percent annual interest, which is far above the highest savings deposit rate set by bank regulators: 3.3 percent.

Consumers withdraw money from their regular savings account and put it into a wealth management product that promises a much higher rate. “Usually banks will have higher-yielding products at the end of each quarter,” said Wang Yanan, a 24-year-old accountant who works in Shanghai. “If I happen to have money at those moments, I’ll buy some.”

Though the products are popular, their disclosure is often poor. Bank employees insist the principal is guaranteed, but contracts for wealth management products are usually vague, simply noting there could be risk. Most offer little detail about where the money will be invested.

Article source: http://www.nytimes.com/2013/07/02/business/global/loan-practices-of-chinas-banks-raising-concern.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: banking industry, economists, tizzy

Inside Asia: On China’s Border, Underground Banking Flourishes

May 20, 2013 by NewsMaker Leave a Comment

ZHUHAI, China — In an underground mall just a stone’s throw from the Chinese border with Macau, a row of 30 small shops with identical golden plaques does a brisk, though shadowy, trade with mainland Chinese visitors, many of them bound for the gambling hub.

“Good rates. Better than the banks,” shout salesmen jostling to usher clients into the shops, where thick wads of bank notes — usually 100 renminbi, or about $16 — change hands and shuffle noisily through electronic cash-counting machines. Licensed as liquor and dry-goods stores, with shelves stacked with rice wine and cigarettes, many serve as underground bankers with remittance agents in back rooms.

“It’s very simple,” said one agent, Choi, who like others interviewed for this article would give only his surname because of the illicit nature of his business. “You give me renminbi here. Then we deliver Hong Kong dollars to you in Macau. We can move tens of millions each day.”

As the Chinese economy and financial markets mature and gain in sophistication, so, too, does a vast underground banking industry offering swift, cheap and low-risk cross-border fund transfers that moves hundreds of millions of dollars’ worth of money each day. Much of that activity is conducted openly on the streets of Guangdong Province, where businesses and individuals depend on underground networks to get around strict currency controls, both for legitimate commercial purposes and to safeguard assets beyond the reach of the authorities.

Beijing is finding it increasingly difficult to stem the tide of speculative and illegal cash. In the decade since China began cracking down on money laundering, the government has amended its criminal laws and strengthened commercial banking rules, but looser restrictions on capital transfers have made it easier for hot money to be channeled across the border.

“China’s financial markets are not that mature,” said Yu Yongding, an economist at the Chinese Academy of Social Sciences and former adviser to the central bank. “There are lots of capital controls that certainly have contributed to these kind of activities, while corruption and money laundering also play an important role.”

In Guangdong, Pearl River Delta cities like Zhuhai, Shenzhen, Guangzhou and Dongguan are major underground conduits for Chinese hot money. The province, where imports and exports amounted to $984 billion last year — a quarter of Chinese foreign trade — has served as a portal for capital flows since China’s economic opening three decades ago. Collectively, the cities are a hotbed of underground banking that also extends to Macau and Hong Kong. Macau, a gambling center, and Hong Kong, a global financial hub, are special administrative territories of China, with financial systems separate from the mainland’s.

In Zhuhai alone, more than 1 billion renminbi is transferred daily through underground networks, according to six agents who spoke to Reuters — part of a tight-knit group of some 100 agents operating in the border area. “Our business has gone up some 30 percent in the past three years,” said one agent, who gave his name as Li.

Besides retail-level agents clustered around the borders at Zhuhai, which is adjacent to Macau, and Shenzhen, which is adjacent to Hong Kong, there is another echelon of shadow bankers existing across Guangdong Province, out of public view, often working from secret offices, with deals conducted between trusted, well-connected parties, often with just a phone call.

“I went to see a friend in this business once,” said a Hong Kong businessman, Chan, who has run a factory in Guangdong for more than 20 years. “It was just a tiny room filled with bank notes. Can you imagine how much money there was? They’re everywhere. In every village, town and city.”

Global Financial Integrity, a Washington group that works to stop the cross-border flow of illegal money, estimated that $2.83 trillion flowed illicitly out of mainland China from 2005 to 2011, with Hong Kong the largest recipient.

Article source: http://www.nytimes.com/2013/05/21/business/global/on-chinas-border-underground-banking-flourishes.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: banking industry, electronic cash, hong kong dollars

DealBook: British Banks Told to Raise $38 Billion in Capital

March 28, 2013 by NewsMaker Leave a Comment

Franck Robichon/European Pressphoto AgencyMervyn King, the departing governor of the Bank of England.

LONDON — British banks must raise a combined £25 billion, or $38 billion, in new capital by the end of the year to protect against future financial shocks, according to a report on Wednesday from the country’s authorities.

The Bank of England, which takes over the direct supervision of British firms like HSBC and Barclays next week, said the new reserves were needed to protect against losses connected to risky loan portfolios, future regulatory fines and the readjustment of banks’ bloated balance sheets.

Mervyn A. King, the departing governor of the Bank of England, said on Wednesday that the need to raise new capital “is not an immediate threat to the banking system and the problem is perfectly manageable.”

DealBook: Bankia Stock Value Is Nearly Wiped Out Under Recapitalization Plan

March 27, 2013 by NewsMaker Leave a Comment

Juan Medina/ReutersBankia’s chairman, Jose Ignacio Goirigolzarri.

MADRID — Shares in Bankia, the giant Spanish mortgage lender whose collapse last year led to a banking crisis in Spain, slumped Monday in the first day of trading after regulators wiped out most of the stock’s value.

The shares closed at 14.7 euro cents, down 41 percent from the close on Friday.

Regulators said Friday that Bankia shares would be revalued at 1 cent each, as the custodial managers who now oversee the bank try to create a clean slate. The new valuation was a condition of Bankia’s getting a capital injection of 10.7 billion euros ($13.9 billion) from European rescue funds.

The action is the latest blow to the tens of thousands of the bank’s consumer clients who bought into the initial public offering two years ago, when Bankia was valued at 3.75 euros a share.

Standard Poor’s lowered Bankia’s rating by one notch, to BB-, which is three rungs below investment grade. The ratings agency said the bank was likely to remain dependent on funding from the European Central Bank for the time being. It also said the cut was justified because the positive impact of Bankia’s plans to increase its capital by converting 6.5 billion euros of hybrid debt into equity ‘‘will not be as great as we previously expected.’’

In February, Bankia reported a loss of 19.2 billion euros for last year, a record for the Spanish banking industry. But it forecast a swift return to profit after the bailout and the cleaning up of its balance sheet.

Article source: http://dealbook.nytimes.com/2013/03/25/bankia-stock-value-is-nearly-wiped-out-under-recapitalization-plan/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: banking industry, collapse, juan medina

DealBook: British Proposal to Rein In Banks Is Faulted

March 11, 2013 by NewsMaker Leave a Comment

Pool photo by Stefan RousseauPrime Minister David Cameron.

8:07 a.m. | Updated

Proposed legislation to protect Britain’s financial services sector from future crises does not go far enough and may fail to stop banks from engaging in risky trading, British lawmakers warned in a report on Monday.

The warning comes as Parliament debates the new laws, which outline how firms could be split up if they do not separate their investment banking units from their retail banking operations.

The creation of a so-called ring fence between the banks’ businesses is an attempt to shield consumers from an implosion of trading activity and other risky behavior that led to several big banks being bailed out by British taxpayers during the financial crisis.

In the wake of the multibillion-pound handouts to British banks and a series of scandals like the manipulation of benchmark interest rates that have rocked London’s position as a global financial center, Prime Minster David Cameron created a parliamentary commission last year to review standards in the British banking industry.

In the report published on Monday, British politicians said the government had failed to adopt several proposals from the commission intended to protect local firms.

The recommendations include a regular independent review to check that banks are maintaining a separation between their risky trading activity and retail deposits.

The commission also suggested that firms’ overall leverage ratio, which measures the amount of risk banks undertake, should be higher than current international standards, and that local regulators should have greater powers to separate firms if they fail to maintain a division between the different business units.

“The government rejected a number of important recommendations,” Andrew Tyrie, a Conservative Party politician who is chairman of the parliamentary commission on banking standards, said in a statement. “There remains much more work to be done to improve the bill.”

Vincent Kessler/ReutersGeorge Osborne, Britain’s chancellor of the Exchequer.

The report is the second time that the commission has officially weighed in on the British government’s attempts to improve how banks are regulated.

Last year, local politicians also demanded that British authorities should have the explicit power to split up banks completely.

In response to the proposal, George Osborne, the chancellor of the Exchequer, agreed last month to allow British regulators to forcibly separate firms that did not maintain a clear division between their retail and investment banking units.

As part of its lengthy investigation into British banking standards, local lawmakers have called many senior executives, including the chief executives of Britain’s major financial institutions, to give evidence.

In often tense testimony, bankers have been questioned about wrongdoing connected with the investigation into the manipulation of global benchmark rates like the London interbank offered rate, or Libor.

The Royal Bank of Scotland and Barclays already have agreed to large fines with American and British regulators over their roles in the scandal. Other British firms and international banks like Citigroup remain under investigation.

As part of efforts to revamp the country’s banking industry, British politicians are pushing through legislation that is aimed at protecting local consumers from potential future financial crises.

The new laws, according to the British parliamentary commission report published on Monday, “represent not the beginning of the end for the necessary reform process, but the end of the beginning.”

Article source: http://dealbook.nytimes.com/2013/03/10/british-proposal-to-rein-in-banks-is-faulted/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: banking industry, british banks, retail banking

Fed Officials Debate Bank’s Losses Once Economy Mends

February 23, 2013 by NewsMaker Leave a Comment

When the economy grows stronger, the Fed plans to sell some of its vast holdings of Treasury and mortgage-backed securities. The Fed also plans to pay banks to leave some money on deposit with it to limit the pace of new lending.

And that could prove an awkward combination. The Fed faces the possibility of large losses as it sells off securities, which could force the central bank to suspend annual payments to the Treasury Department for the first time since the 1930s, even as it would be increasing the amounts paid to the banking industry for its cash holdings at the Fed to control inflation.

“That sounds like a recipe for political problems,” said James Bullard, president of the Federal Reserve Bank of St. Louis. He described the predicament as one reason the Fed might consider limiting its plans for additional asset purchases.

But Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said that concerns about potential losses needed to be weighed against the benefits of asset purchases. The Fed holds almost $3 trillion in Treasuries and mortgage bonds, and it is adding about $85 billion a month in an effort to cut unemployment.

Mr. Rosengren, a leading advocate of the purchases, said Boston Fed research showed asset purchases this year could help create about 400,000 new jobs.

“That’s what the Federal Reserve should really be caring about, what’s happening with the dual mandate with and without” the asset purchases, Mr. Rosengren said. “When I think about the costs, I have to weigh that against the benefits,” he said at the US Monetary Policy Forum in New York on Friday.

By law, the Fed sends most of its profits to the Treasury, and in recent years those profits have soared as the Fed has collected interest on its investments. Last year, the central bank contributed $89 billion to the public coffers — essentially refunding a significant portion of the federal government’s annual borrowing costs.

The purpose of the investment portfolio is to hold down borrowing costs for businesses and consumers. As the economy revives, the Fed has said it will begin selling some of those holdings. But it faces potential losses on those sales because interest rates would be rising. Security prices, which move inversely to rates, would be falling, and the government would be issuing new debt at the higher rates, making the low-yield bonds that the Fed holds less valuable.

Estimating the potential losses requires a wide range of assumptions on Fed policy, economic growth and interest rates. A Fed analysis published last month, which assumed that interest rates rose to 3.8 percent later this decade, estimated that the central bank might record losses of $40 billion and suspend contributions to the Treasury for four years beginning in 2017. If rates rose by another percentage point, however, the analysis estimated that losses would triple. An independent analysis published on Friday foresaw losses of around $20 billion and a suspension of payments for only three years.

The Fed can afford to lose money because it can simply print more. It would record a liability, and pay down the debt as profits rebounded.

But there are signs that the Fed’s political opponents would seize on any losses as evidence of economic malpractice. And such that criticism could come at a vulnerable moment: central banks are never popular when they are raising interest rates.

Representative Jim Jordan, an Ohio Republican, cited the potential losses in an open letter this week to the Fed chief, Ben S. Bernanke, requesting more information on what he called “the potentially devastating consequences from any unwind.”

Jerome H. Powell, a Fed governor, insisted Friday that the central bank would not allow its course to be influenced by such political pressure.

“We’re independent for a reason,” he said. “Congress has given us a job to do.”

Some supporters of current Fed policy also argue that an economic revival would inoculate the central bank against criticism, in part because the government’s coffers would be filling even without the Fed’s contributions.

But Frederic S. Mishkin, a Columbia economist and one of the authors of the independent analysis of the Fed’s potential losses, said that was wishful thinking.

“Politicians have very short memories,” said Professor Mishkin, a former Fed governor. “They’re going to focus very much on the fact that the Fed is no longer pulling its weight in terms of producing remittances for the federal government.”

Article source: http://www.nytimes.com/2013/02/23/business/fed-officials-debate-banks-losses-once-economy-mends.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: banking industry, federal reserve bank, treasury department

Mortgage Crisis Presents a New Reckoning to Banks

December 10, 2012 by NewsMaker Leave a Comment

Regulators, prosecutors, investors and insurers have filed dozens of new claims against Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and others, related to more than $1 trillion worth of securities backed by residential mortgages.

Estimates of potential costs from these cases vary widely, but some in the banking industry fear they could reach $300 billion if the institutions lose all of the litigation. Depending on the final price tag, the costs could lower profits and slow the economic recovery by weakening the banks’ ability to lend just as the housing market is showing signs of life.

The banks are battling on three fronts: with prosecutors who accuse them of fraud, with regulators who claim that they duped investors into buying bad mortgage securities, and with investors seeking to force them to buy back the soured loans.

“We are at an all-time high for this mortgage litigation,” said Christopher J. Willis, a lawyer with Ballard Spahr, which handles securities and consumer litigation.

Efforts by the banks to limit their losses could depend on the outcome of one of the highest-stakes lawsuits to date — the $200 billion case that the Federal Housing Finance Agency, which oversees the housing twins Fannie Mae and Freddie Mac, filed against 17 banks last year, claiming that they duped the mortgage finance giants into buying shaky securities.

Last month, lawyers for some of the nation’s largest banks descended on a federal appeals court in Manhattan to make their case that the agency had waited too long to sue. A favorable ruling could overturn a decision by Judge Denise L. Cote, who is presiding over the litigation and has so far rejected virtually every defense raised by the banks, and would be cheered in bank boardrooms. It could also allow the banks to avoid federal housing regulators’ claims.

At the same time, though, some major banks are hoping to reach a broad settlement with housing agency officials, according to several people with knowledge of the talks. Although the negotiations are at a very tentative stage, the banks are broaching a potential cease-fire.

As the housing market and the nation’s economy slowly recover from the 2008 financial crisis, Wall Street is vulnerable on several fronts, including tighter regulations assembled in the aftermath of the crisis and continuing investigations into possible rigging of a major international interest rate. But the mortgage lawsuits could be the most devastating and expensive threat, bank analysts say.

“All of Wall Street has essentially refused to deal with the real costs of the litigation that they are up against,” said Christopher Whalen, a senior managing director at Tangent Capital Partners. “The real price tag is terrifying.”

Anticipating painful costs from mortgage litigation, the five major sellers of mortgage-backed securities set aside $22.5 billion as of June 30 just to cushion themselves against demands that they repurchase soured loans from trusts, according to an analysis by Natoma Partners.

But in the most extreme situation, the litigation could empty even more well-stocked reserves and weigh down profits as the banks are forced to pay penance for the subprime housing crisis, according to several senior officials in the industry.

There is no industrywide tally of how much banks have paid since the financial crisis to put the mortgage litigation behind them, but analysts say that future settlements will dwarf the payouts so far. That is because banks, for the most part, have settled only a small fraction of the lawsuits against them.

JPMorgan Chase and Credit Suisse, for example, agreed last month to settle mortgage securities cases with the Securities and Exchange Commission for $417 million, but still face billions of dollars in outstanding claims.

Bank of America is in the most precarious position, analysts say, in part because of its acquisition of the troubled subprime lender Countrywide Financial.

Last year, Bank of America paid $2.5 billion to repurchase troubled mortgages from Fannie Mae and Freddie Mac, and $1.6 billion to Assured Guaranty, which insured the shaky mortgage bonds.

But in October, federal prosecutors in New York accused the bank of perpetrating a fraud through Countrywide by churning out loans at such a fast pace that controls were largely ignored. A settlement in that case could reach well beyond $1 billion because the Justice Department sued the bank under a law that could allow roughly triple the damages incurred by taxpayers.

Bank of America’s attempts to resolve some mortgage litigation with an umbrella settlement have stalled. In June 2011, the bank agreed to pay $8.5 billion to appease investors, including the Federal Reserve Bank of New York and Pimco, that lost billions of dollars when the mortgage securities assembled by the bank went bad. But the settlement is in limbo after being challenged by investors. Kathy D. Patrick, the lawyer representing investors, has said she will set her sights on Morgan Stanley and Wells Fargo next.

Article source: http://www.nytimes.com/2012/12/10/business/banks-face-a-huge-reckoning-in-the-mortgage-mess.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: banking industry, economic recovery, signs of life

Economix Blog: Simon Johnson: Why Are the Big Banks Suddenly Afraid?

August 30, 2012 by NewsMaker Leave a Comment

Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

Top executives from global megabanks are usually very careful about how they defend both the continued existence, at current scale, of their organizations and the implicit subsidies they receive. They are willing to appear on television shows – and did so earlier this summer, pushing back against Sanford I. Weill, the former chief executive of Citigroup, after he said big banks should be broken up.

Today’s Economist

Perspectives from expert contributors.

Typically, however, since the financial crisis of 2008 the heavyweights of the banking industry have stayed relatively silent on the key issue of whether there should be a hard cap on bank size.

This pattern has shifted in recent weeks, with moves on at least three fronts.

William B. Harrison Jr., the former chairman of JPMorgan Chase, was the first to stick out his neck, with an Op-Ed published in The New York Times. The Financial Services Roundtable has circulated two related e-mails “Myth: Some U.S. banks are too big” and “Myth: Breaking up banks is the only way to deal with ‘Too Big To Fail’” (these links are to versions on the Web site of Partnership for a Secure Financial Future, a group that also includes the Consumer Bankers Association, the Mortgage Bankers Association and the Financial Services Institute).

Now Wayne Abernathy, executive vice president of the American Bankers Association, is weighing in – with a commentary on the American Banker Web site.

These views notwithstanding, mainstream Republican opinion is starting to shift against the megabanks, as former Treasury secretary Nicholas Brady makes clear in a strong opinion piece published in The Financial Times.

Mr. Brady was Treasury secretary under Presidents Ronald Reagan and George H.W. Bush, and to the best of my knowledge, no one has ever accused him of being any kind of leftist.

Yet Mr. Brady’s thinking in his Financial Times commentary is strikingly similar to the reasoning that motivated the Brown-Kaufman amendment (supported by 30 Democrats and three Republicans) in 2010, which would have put a hard cap on the size and leverage of our largest banks, i.e., how much an individual institution could borrow relative to the size of the economy. (See this analysis by Jeff Connaughton, who was chief of staff to Senator Ted Kaufman; Senator Sherrod Brown, Democrat of Ohio, is still pushing hard on this same approach.)

Mr. Brady also stresses that we should make our regulations simpler, not more complex. Senator Kaufman made the same point repeatedly – and capping leverage per bank (Mr. Brady’s preferred approach) would be one way to do this.

Mr. Brady is not alone on the Republican side of the political spectrum. A growing number of serious-minded politicians are starting to support the point made by Jon Huntsman, the former governor of Utah and a Republican presidential candidate in the recent primaries: global megabanks have become government-sponsored enterprises; their scale does not result from any kind of market process, but is rather the result of a vast state subsidy scheme.

As Paul Singer, a hedge fund manager and influential Republican donor, says of the big banks, “Private reward and public risk is not what conservatives should want.”

A second problem for the bankers is that their arguments defending big banks are very weak.

As I made clear in a point-by-point rebuttal of Mr. Harrison’s Op-Ed commentary, his defense of the big banks is not based on any evidence. He primarily makes assertions about economies of scale in banking, but no one can find such efficiency enhancements for banks with more than $100 billion in total assets – and our largest banks have balance sheets, properly measured, that approach $4 trillion.

Similarly, the Financial Services Roundtable e-mail on “Some U.S. banks are too big” is based on a non sequitur. It points out that United States trade has grown significantly since 1992, and it infers that, as a result, the size of our largest banks should also grow.

But the dynamism of the American economy and its international trade after World War II was not accompanied by striking increases in the size of individual banks, and our largest banks did not then increase relative to the size of the economy, in sharp contrast to what happened since the early 1990s.

In 1995, the largest six banks in the United States had combined assets of around 15 percent of gross domestic product; they are now over 60 percent of G.D.P., bigger than they were before the crisis of 2008.

The Financial Services Roundtable is right to point out that banks in some other Group of 7 countries are larger relative to those economies. But which of these countries would you really like to emulate today: France, Italy or Britain?

The Financial Services Roundtable also asserts, in its other e-mail, that the Dodd-Frank financial reform legislation and the Basel III new capital requirements have made the banking system safer. That may be true, although the evidence it presents is just about cyclical adjustment; after any big financial crisis, banks are careful about funding themselves with more equity (a synonym for capital in this context) and holding more liquid assets.

The structure of incentives in the industry hardly seems to have changed, as witnessed, for example, by the excessive risk-taking and consequent large trading losses at JPMorgan Chase recently.

We need a system with multiple fail-safes, and making the largest banks smaller and less leveraged would achieve precisely that goal.

Mr. Abernathy’s article takes a much more extreme position. He contends that banks are already unduly constrained – by Dodd-Frank and Basel III – and this is holding back economic growth.

Mr. Abernathy goes so far as to say that if the banks were to raise $60 billion in additional equity capital, this “holds back $600 billion of economic activity.” In other words, strengthening the equity funding of banking would cause an economic contraction on the order of 4 percent of G.D.P.

Such assertions are far-fetched, not based on any facts and have been completely discredited (see the work of Anat Admati and her colleagues on exactly this point). Mr. Abernathy was assistant secretary for financial institutions under George W. Bush. If he has any evidence to support his positions – a study, a working paper, a book? – he should put it on the table now.

To make such assertions without substantiation is irresponsible. (A document from a lobbying organization would not count for much, in my view, but let’s see if he has even that.)

The big banks and their friends should be afraid. Serious people on the right and on the left are reassessing if we really need our largest banks to be so large and so highly leveraged (i.e., with so much debt relative to their equity). The arguments in favor of keeping the global megabanks and allowing them to grow are very weak or nonexistent. The arguments in favor of further strengthening the equity funding for banks grow stronger – see the recent letter by Senators Sherrod Brown and David Vitter, which I wrote about recently.

The views of sensible people like Secretary Brady, Senator Kaufman, Governor Huntsman and Senator Brown are spreading across the political spectrum.

Article source: http://economix.blogs.nytimes.com/2012/08/30/why-are-the-big-banks-suddenly-afraid/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: banking industry, kurtz, sloan school of management

DealBook: U.S. Builds Criminal Cases in Libor Rate-Fixing Scandal

July 15, 2012 by NewsMaker Leave a Comment

Carl Court/Agence France-Presse — Getty ImagesBarclays is at the center of an interest rate-fixing scandal.

As regulators ramp up their global investigation into the manipulation of interest rates, the Justice Department has identified potential criminal wrongdoing by big banks and individuals at the center of the scandal.

The department’s criminal division is building cases against several financial institutions and their employees, including traders at Barclays, the British bank, according to government officials close to the case who spoke on the condition of anonymity because the investigation is continuing. The authorities expect to file charges against at least one bank later this year, one of the officials said.

The prospect of criminal cases is expected to rattle the banking world and provide a new impetus for financial institutions to settle with the authorities. The Justice Department investigation comes on top of private investor lawsuits and a sweeping regulatory inquiry led by the Commodity Futures Trading Commission. Collectively, the civil and criminal actions could cost the banking industry tens of billions of dollars.

Authorities around the globe are examining whether financial firms manipulated interest rates before and after the financial crisis to improve their profits and deflect scrutiny about their health. Investigators in Washington and London sent a warning shot to the industry last month, striking a $450 million settlement with Barclays in a rate-rigging case. The deal does not shield Barclays employees from criminal prosecution.

The multiyear investigation has ensnared more than 10 big banks in the United States and abroad. With the prospects of criminal action, several firms, including at least two European institutions, are scrambling to arrange deals, according to lawyers close to the case. In part, they are trying to avoid the public outcry that stemmed from the Barclays case, which prompted the resignation of top executives.

The criminal and civil investigations have focused on how banks set the London interbank offered rate, known as Libor. The benchmark, a measure of how much banks charge one another for loans, is used to determine the borrowing costs for trillions of dollars of financial products, including mortgages, credit cards and student loans. Cities, states and municipal agencies also are examining whether they suffered losses from the rate manipulation, and some have filed suits.

With civil actions, regulators can impose fines and force banks to overhaul their internal controls. But the Justice Department would wield an even more potent threat by bringing criminal fraud cases against traders and other employees. If found guilty, they could face jail time.

The criminal investigations come at a time when the public is still simmering over the dearth of prosecutions of prominent executives involved in the mortgage crisis. The continued trouble in the financial sector, including the multibillion-dollar trading losses at JPMorgan Chase, have only further fueled the anger of consumers and investors.

But the Libor case presents a potential opportunity for prosecutors. Given the scope of the problems and the number of institutions involved, the rate-rigging investigation could provide a signature moment to hold big banks accountable for their activities during the financial crisis.

“It’s hard to imagine a bigger case than Libor,” said one of the government officials involved in the case.

The Justice Department has jurisdiction over the London bank rate because the benchmark affects markets in the United States. It could not be learned which institutions the criminal division is chasing next.

According to people briefed on the matter, the Swiss bank UBS is among the next targets for regulatory action. The Commodity Futures Trading Commission is pursuing a potential civil case against the bank. Regulators at the agency have not yet decided to file an action against the bank, nor have settlement talks begun. UBS has already reached an immunity deal with one division of the Justice Department, which could protect the bank from criminal prosecution if certain conditions are met. The bank declined to comment.

The investigation into the global banks is unusually complex and it could continue for years, and ultimately end in settlements rather than indictments, said the officials close to the case. For now, regulators are building investigations piecemeal because the facts of the cases vary widely. That could make it difficult to compile a global settlement, although some banks would prefer an industrywide deal to avoid the harsh glare of the spotlight, said a lawyer involved in the case.

American authorities face another complication as they build cases. Investigators still lack access to certain documents from big banks.

Before gathering some e-mail and bank records from overseas firms, the Justice Department and American regulators need approval from British authorities, according to the people close to the case. But officials in London have been slow to act, the people said. At times, British authorities have hesitated to investigate.

By contrast, the Justice Department and the Commodity Futures Trading Commission have spent two years building cases together. Lanny Breuer, head of the Justice department’s criminal division, has close ties with David Meister, the former federal prosecutor who runs the commission’s enforcement team.

In the Barclays case, the British bank was accused of reporting false rates to squeeze out extra trading profits and fend off concerns about its health. During the crisis, banks feared that reporting high rates would suggest a weak financial position.

Lawmakers in London and Washington are examining whether regulators looked the other way as banks artificially depressed the rates. On Friday, it was disclosed that a Barclays employee notified the Federal Reserve Bank of New York in April 2008 that the firm was underestimating its borrowing costs. Despite the warning signs, the illegal actions continued for another year.

But in April 2008, a senior enforcement official at the Commodity Futures Trading Commission, Vincent McGonagle, opened an investigation. He directed the case along with another longtime official, Gretchen Lowe.

At first the case stalled as the agency waited months to receive millions of pages of documents when Barclays pushed back against the American regulators, according to the officials close to the case. By the fall of 2009, the trading commission received a trove of information, providing a broad view into the wrongdoing.

A series of incriminating e-mail and instant messages, regulators say, laid bare the multiyear scheme. In one document, a Barclays employee said the bank was “being dishonest by definition.”

The case gained further traction in early 2010, when the agency’s enforcement team engaged the Justice Department. The department’s criminal division, led by Mr. Breuer, agreed that regulators had a strong case. The investigation continued until January 2012, when the trading commission notified Barclays lawyers that they were entering the final stages before deciding about an enforcement action.

As part of the deal, regulators pushed the bank to adopt new controls to prevent a repeat of the problems. Among other measures, the bank must now “implement firewalls” to prevent traders from improperly talking with employees who report rates.

The bank says that it provided extensive cooperation during the three inquiries, and has spent around $155 million on its own three-year investigation. Because it agreed to settle with British authorities, Barclays received a 30 percent fine reduction.

In the United States, Barclays offered to pay a fine of $200 million to the C.F.T.C., slightly below the initially proposed range, according to government officials close to the case. Mr. Meister’s team soon accepted the offer, securing the biggest fine in the commission’s history.

On June 27, British and American authorities announced the deal with Barclays, which agreed to pay more than $450 million total. “For this illegal conduct, Barclays is paying a significant price,” Mr. Breuer said then.

Susanne Craig contributed reporting.

Article source: http://dealbook.nytimes.com/2012/07/14/u-s-is-building-criminal-cases-in-rate-fixing/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: banking industry, global investigation, libor rate

DealBook: Amid Debt Crisis, Banks Confronted by Familiar Problems

June 25, 2012 by NewsMaker Leave a Comment

Arne Dedert/European Pressphoto AgencyThe European Central Bank in Frankfurt, Germany.

Despite efforts to strengthen the international banking industry, many of the world’s largest financial institutions still face the same pressures that confronted the sector after the collapse of Lehman Brothers in 2008, according to the Bank for International Settlements.

In its annual report, published on Sunday, the association of the world’s central banks said major international banks continued to be weighed down by investor skepticism about their future earnings and their ongoing reliance on government-backed financing.

The report said that to win back investor confidence, financial institutions should write down their underperforming assets and increase their cash reserves.

“Banks need to repair their balance sheets,” the B.I.S., based in Basel, Switzerland, said in its report. “This will entail writedowns of bad assets, thus imposing losses on banks’ stakeholders.”

Regulators worldwide have demanded that banks and other financial institutions clean up their balance sheets, but the firm still have a long way to go.

European financial institutions, for example, are currently trying to offload more than 2.5 trillion euros, or $3.1 trillion, of noncore loans, or roughly 6 percent of total European banking assets, according to the accounting firm PricewaterhouseCoopers.

The average ratio of loans to deposits for European institutions — a key measure of a firm’s exposure to bad loans — currently stands at 130 percent, sizably higher than the average of 75 percent for other banks worldwide, according to statistics from the B.I.S.

The association of central banks said that the Continent’s financial institutions remain too reliant on cheap, short-term loans provided by the European Central Bank, as many banks, particularly in Southern Europe, struggle to raise new funds from the capital markets.

“Many banks depend strongly on central bank funding and are not in a position to promote economic growth,” the B.I.S. report said.

The ongoing dependence by global financial institutions on wholesale funding will likely lead to continued high financing costs for banks for the foreseeable future, as investors demand larger amounts of collateral to protect against potential losses.

In Europe, where exposure to government debt has left financial institutions vulnerable, one-fifth of banks’ assets were set aside last year as a guarantee to obtain new financing, the B.I.S. said. Institutions in Southern Europe have been hit the hardest. The amount of assets used for collateral by Greek banks, for example, rose tenfold between 2005 and 2011, and currently stands at around 33 percent of total assets.

As banks reduce their exposure to risky assets in economies that are struggling amid the global economic slowdown, many firms have pulled back on lending to other financial institutions, particularly in overseas markets. The B.I.S. said that borrowing among banks in the euro zone fell drastically between 2008 and 2011, as local firms reduced their international lending by 43 percent over the period.

Government “debt holdings are an important drag on banks’ efforts to regain the trust of their peers and the markets at large,” the B.I.S. report said. “Exposures to sovereigns on the euro area’s periphery are perceived as carrying particularly high credit risk.”

Article source: http://dealbook.nytimes.com/2012/06/24/amid-debt-crisis-banks-confronted-by-familiar-problems/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: banking industry, central banks, report said that