banking system

Economix Blog: Unbanked America

October 28, 2011 by NewsMaker Leave a Comment

CATHERINE RAMPELL

Dollars to doughnuts.

Lately you’ve probably heard a lot about bankers. What what about the bankees?

According to the Federal Deposit Insurance Corporation, across the country 7.7 percent of households don’t have a checking or savings account (that is, they are “unbanked”). Another 17.9 percent have checking or savings accounts, but they still rely on alternative financial services like check cashing, payday loans and pawnshops, which typically have very unfavorable terms for borrowers.

The Pew Charitable Trusts has put together state-by-state information on what share of people use the traditional banking system, shown in the interactive map below.

Click on any state to see what share of its households don’t access the traditional banking system. You’ll also see how much it costs to maintain a checking account and make an overdraft transfer in that state.

As you might expect, higher fees discourage families from using banks. As the Pew study cites, the 2009 F.D.I.C. National Survey of Unbanked and Underbanked Households found that 31 percent of households that dropped a bank account said they did so because of service charges, minimum balance requirements or overdraft fees.

Mississippians are most cut off from the traditional banking system: 16.4 percent of households in the state do not have a checking or savings account. On the other hand, almost every household in Utah uses the traditional banking system; just 1.7 percent of households there are unbanked.

Article source: http://feeds.nytimes.com/click.phdo?i=03904dcfa702edba68f44e608ca93e5d

Filed Under: Economy News Tagged With: banking system, national survey, unfavorable terms

Afghanistan Deal With I.M.F. Will Renew Credit Program

October 7, 2011 by NewsMaker Leave a Comment

The fund announced that it had reached an agreement with the Afghan government to renew its program for three years, giving the country’s financial standing a much-needed boost and ending a long period of uncertainty for international donors and the Afghan government about whether an array of small development projects and salary support programs would be able to proceed.

The fund suspended its program more than 13 months ago in large part because of both fraud at Kabul Bank, the nation’s largest private bank, which had caused losses that initially exceeded $900 million, and an overall lack of oversight of the banking system.

“The authorities have made important progress on managing the Kabul Bank crisis that came to the fore in the fall of 2010,” Axel Schimmelpfennig, who leads the fund’s Afghan mission, said in the statement.

“Kabul Bank has been put into receivership, and efforts are under way to recover the embezzled assets from the former shareholders of the bank, which will limit the fiscal costs of the crisis,” Mr. Schimmelpfennig said. He added that overall banking supervision was improving.

“The central bank is also stepping up supervision and ensuring that the banking law and regulations are fully enforced, including on conflict of interest,” he said.

Under the deal, which will extend a modest amount of credit to Afghanistan, the country’s financial system will still have to satisfy the monetary fund that it is working hard to recover the losses from the Kabul Bank debacle. The bank’s receivers and the Finance Ministry are hoping that perhaps as much as 45 percent of the losses can be recouped from the sale of recovered assets, said a person close to the arrangement, who was not authorized to speak to reporters and spoke on the condition of anonymity.

The renewal of the program while the Afghan system is still troubled represents something of a compromise between those who wanted the country to prosecute the wrongdoers in the Kabul Bank fraud and others, especially those who back development, who feared that withholding the monetary fund’s imprimatur would deprive the country of access to money for projects that provide jobs and growth.

“There’s a mix of emotions about this,” said a Western diplomat who is knowledgeable about the monetary fund’s program and was not authorized to speak to reporters. The diplomat added, “There has been definite progress, although there is some ways to go on prosecutions.”

The long hiatus in the program has already cost Afghanistan $70 million that is usually distributed through the Afghanistan Reconstruction Trust Fund, which gets its money from donors and then sends it to the Afghan Finance Ministry, which in turn sends it to other ministries that deliver services and build projects.

The program’s renewal will make Afghanistan eligible again for the trust’s money, and will also increase the confidence of donors who view the monetary fund’s agreement as an important signal of the country’s financial soundness. The program involves little in direct payments, but the I.M.F.’s scrutiny of the monetary and banking systems here acts as a bill of health for other donors, including the United States, Britain and the European Union, assuring them that the country is safe to invest in.

Although the bank’s former chairman, Sherkhan Farnood, and its former chief executive, Khalilullah Frozi, have not been tried, they were detained and placed under investigation by the attorney general’s office. They have since been released with the understanding that they will help the receiver recover the assets, although it is unclear whether they are willing or able to provide much help.

The fraud and lax management occurred almost from the start as Mr. Farnood offered shares in the bank to politically well-connected figures, including Mahmoud Karzai, a brother of President Hamid Karzai, and Abdul Haseen Fahim, the brother of First Vice President Muhammad Qasim Fahim. Other politically connected figures as well as relatives of Mr. Fahim’s brother bought shares and were able to obtain loans worth millions of dollars with little in the way of repayment agreements.

Now the receiver is going after the borrowers’ investments in Afghanistan and in Dubai, where a number of borrowers bought property. Some borrowers have signed repayment agreements, but others have refused. In the meantime the bank has been divided into “a good” new bank, with the deposits, performing loans and other assets of the original Kabul Bank, and a “bad bank,” which has hundreds of millions of dollars in bad loans.

The new bank has been financed by Afghanistan’s Central Bank. The Afghan Finance Ministry has issued a promissory note guaranteeing that it will pay back the Central Bank the full amount of the loan to the new Kabul bank, about $800 million, with a combination of recovered assets and tax revenues, according to people close to the bank. The monetary fund had been concerned that the Central Bank’s reserves would be depleted, but the repayment arrangement appears to have satisfied it.

The monetary fund’s agreement with Afghanistan has been approved at the staff level, but must pass muster with the fund’s executive board. That is expected to happen when the board meets in November.

Article source: http://feeds.nytimes.com/click.phdo?i=91a130b1b5f8ecced916d19ac5d51cfc

Filed Under: Business News Tagged With: bank crisis, banking system, salary support

E.C.B. Looks Poised for Action at Thursday Meeting

October 4, 2011 by NewsMaker Leave a Comment

Mr. Trichet will hold the last press conference of his eight-year term Thursday in Berlin, amid speculation that the bank could cut its benchmark interest rate just three months after raising it.

Some analysts doubt that the E.C.B. will reverse course so quickly, but they are nearly unanimous in thinking that it will need to do something at its monetary policy meeting Thursday in response to deteriorating conditions in the euro zone economy and the banking system.

Recent events have highlighted the bank’s role as the only institution in the euro area with the flexibility and resources to respond quickly to a crisis that seems to grow more acute by the day.

Euro zone governments are struggling to approve a bailout fund in a politically charged process that has focused an improbable amount of international attention on parliamentary debates in Finland and Slovakia. Yet the fund, at a proposed €440 billion, or $585 billion, already appears inadequate for the growing scale of the crisis.

At the same time, fears about European banks seem to be coming true. It has been reported that Dexia, a French and Belgian institution, may break up because of its exposure to Greek debt.

“We are coping with the worst crisis since World War II,” Mr. Trichet said Tuesday during an appearance — his last as E.C.B. president — before the Economic and Monetary Affairs Committee of the European Parliament.

Analysts at Royal Bank of Scotland see a better-than-even chance that the E.C.B. will cut its benchmark rate to 1.25 percent from 1.5 percent Thursday, but they acknowledge that it is not an easy call.

The E.C.B.’s governing council, which includes the central bank chiefs of the 17 members of the euro zone, is divided and has been sending conflicting signals. Earlier this year, Mr. Trichet clearly flagged rate moves in advance.

“When I listen to what the governing council members have said in the last few days, there is no consensus,” said Michael Schubert, an economist in Frankfurt for Commerzbank.

One argument in favor of cutting rates Thursday is that Mr. Trichet will want to do a favor for his successor, Mario Draghi, governor of the Bank of Italy. Mr. Draghi, who will take office Nov. 1, will be under pressure to establish his credentials as an inflation fighter, and he risks undermining his credibility if he oversees a rate cut immediately upon assuming the presidency.

But inflation hard-liners like Jens Weidmann, president of the Bundesbank, are likely to argue vehemently against a rate cut even though evidence is building that Europe is going into a recession. Inflation in the euro area probably rose to an annual rate of 3 percent in September, according to official estimates, well above the E.C.B.’s target of about 2 percent.

The E.C.B. might seek a compromise and take less controversial steps to show it is not watching idly as the banking crisis becomes more acute. It could revive its purchase of secured debt issues by banks, for example, or extend low-interest lending to strapped institutions.

None of those moves will solve the debt crisis, though, nor would a large rate cut, for that matter. But the E.C.B. is very unlikely to take more radical steps, like printing money to buy huge quantities of government bonds, relieving the banks of damaged assets.

Mr. Trichet signaled Tuesday that political leaders should not expect the E.C.B. to rescue them. “We cannot substitute for governments,” he told the parliamentary panel, before going on to mention how much he is looking forward to retirement on the coast of Brittany.

Article source: http://www.nytimes.com/2011/10/05/business/global/ecb-looks-poised-for-action-at-thursday-meeting.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bank of scotland, banking system, members of the euro

DealBook: Bank Said No? Hedge Funds Fill a Void in Lending

June 9, 2011 by NewsMaker Leave a Comment

J. Emilio Flores for The New York TimesD. Hunt Ramsbottom, head of Rentech, which turned to hedge funds for loans after a bank rejected it.

Hedge fund managers have been called plenty of names.

Now, they can add another: local banker.

When Rentech, a clean energy business in Los Angeles, was rejected by its long-time banker last year, it asked a hedge fund for money instead. “You have to take what’s available at the time,” said D. Hunt Ramsbottom, chief executive of Rentech, which has since borrowed $100 million in this unconventional way.

With traditional lenders still avoiding risky borrowers in the wake of the financial crisis, hedge funds and other opportunistic investors are stepping into the void. They are going after midsize businesses that cannot easily raise money in the bond markets like their bigger brethren.

The support is critical in a recovery characterized by high unemployment and anemic growth. These middle-market companies, which generate $6 trillion in revenue a year and employ 32 million people in the United States, are borrowing billions of dollars from the hedge funds for product development, strategic acquisitions and even day-to-day operations like payroll and utilities.

But the lending force also poses a significant risk to the companies and the broader economy, given the unregulated nature of this shadow banking system.

These lenders of last resort typically charge interest rates that are several percentage points higher than banks. Loaded up with high-cost loans, borrowers could find themselves falling deeper into debt or worse, into bankruptcy. Over the last year, Rentech has borrowed from a group of funds, led by Highbridge Capital Management and Goldman Sachs, at an interest rate of 12.5 percent.

“On the one hand, the cost of money is more expensive than what some businesses might be used to,” Mr. Ramsbottom said. “On the other, if the money is not available, the cost is infinite.”

The lending activity is also stoking fears that speculative activities — like those that contributed to the crisis — are shifting from banks to loosely regulated firms that play by their own rules. While policy makers are moving to increase capital and other standards for banks to prevent another disaster, hedge funds and the like are not subject to the same oversight.

If firms load up on debt and the market goes into a tailspin again, the shadow banking system could implode and threaten the entire economy.

“These institutions are essentially servicing a part of the market where banks are not lending,” said Debarshi Nandy, a professor at York University’s business school in Toronto. “The million-dollar question is, Are we benefiting?”

Hedge funds offered a crucial lifeline for Rentech. The company is hoping to build a facility about 60 miles east of Los Angeles to transform yard clippings into fuel, enough for 75,000 cars. If it works, the project would represent Rentech’s first commercial success in its nearly 30-year history.

Unprofitable for decades, Rentech is a risky proposition for a traditional lender. While large corporations with healthy balance sheets can easily tap into the bond markets or borrow from banks, their smaller counterparts with shakier credit have fewer options.

Middle-market companies, with revenue of $25 million to $1 billion, do not typically sell bonds. And their main financing sources, specialty lenders like CIT Group and regional banks, have not fully recovered. Last year, debt securities focused on this segment stood at $12 billion, down from $35 billion in 2005, according Standard Poor’s Leveraged Commentary and Data.

Hedge funds and other investors are flush with capital. Last year, Highbridge, which is owned by JPMorgan Chase, started a $1.6 billion fund that lends money to midsize companies. The private equity firm Blackstone Group started a $3 billion fund. Even FrontPoint, the firm hobbled by an insider trading investigation, has raised $1 billion for a lending fund and plans to double the size, according to a person with knowledge of the matter.

The concern is that hedge funds are looking for quick payoffs rather than long-term opportunities — and will bolt if there is trouble. A previous wave of money managers that jumped into lending after the collapse of Lehman Brothers in 2008 saw their loans sour. The firms, mainly smaller, fringe players, have since disappeared.

“The new funds rushing into direct lending now will learn the hard way that it is easy to make what appear to be sound loans as the economy is improving, but it becomes brutal to either collect the loans or foreclose when the downturn comes,” said Max Holmes, the founder of Plainfield Asset Management, whose lending-focused fund, once as large as $5 billion, is winding down.

Unlike their predecessors, players today say they are operating like community bankers, focusing on multiyear deals backed by significant collateral and capital. They are also locking up investors’ money for years rather than quarters. This can alleviate some short-term pressures.

“The people who last are those with a relationship-oriented business, not those who view it as a trade,” said Rob Ladd of D. E. Shaw, which manages $1.7 billion in lending strategies.

Stephen J. Czech of FrontPoint spent weeks researching Emerald Performance Materials. He scoured the chemical manufacturer’s financials, visited several facilities, and met with executives — all of which gave him the confidence to lend the company money.

Emerald used the loan to buy a European rival. “All types of financing were considered,” said Candace Wagner, Emerald’s president, but the company preferred the “flexibility and certainty” of FrontPoint.

Some who borrowed from hedge funds have not been so satisfied. Hedge funds have been lumped with payday lenders that charge usury rates. Plainfield has been accused of predatory lending in civil suits, and local and federal authorities have looked into the firm’s practices. Plainfield said it won or settled all of the suits and investigators closed their inquiries without taking action.

The creditors of Radnor Holdings, a disposable-cup company that defaulted on a roughly $100 million loan, claimed Tennenbaum Capital Partners charged excessively high rates as a takeover tactic, a strategy referred to as “loan to own.” After a protracted legal battle, the fund took control of Radnor in 2006, renaming it WinCup.

Tennenbaum did not return calls for comment.

Another worry is that funds will trade on nonpublic information they receive as lenders. A March study in The Journal of Financial Economics found a spike in investors betting against the shares of companies that took hedge fund loans. Businesses that borrow from banks did not experience the same activity, according to the authors, including Professor Nandy.

For Mr. Huntsbottom of Rentech, the benefits outweighed the risks. While the company could end up losing the profitable fertilizer plant it put up as collateral on the loan, Rentech can continue to pursue the clean energy venture.

“An entrepreneur will pay whatever,” he said, “ to keep his business alive.”

Article source: http://feeds.nytimes.com/click.phdo?i=d2c315adb8b7cd2287c5068539e04c50

Filed Under: Business News Tagged With: banking system, charge interest, hedge funds

Trichet to Leave a Difficult Legacy at E.C.B.

May 31, 2011 by NewsMaker Leave a Comment

Time and again the E.C.B. and its president, Jean-Claude Trichet, have applied pressure when they thought heads of state were not acting responsibly. As a result, when Mr. Trichet’s eight-year term expires at the end of October, he will leave behind an institution that has grown significantly in stature and influence.

He also leaves behind a difficult legacy for his likely successor, Mario Draghi, the governor of the Bank of Italy. Mr. Draghi appears to share Mr. Trichet’s ability to negotiate cordially with European leaders — and browbeat them when necessary. But Mr. Draghi, already an influential member of the E.C.B. governing council, will also inherit an institution that has become deeply entangled with the banking system, financial markets and the political process.

“The E.C.B. so far has done an admirable job, all things considered,” said Dennis Snower, president of the Kiel Institute for the World Economy in Kiel, Germany. “But it has found itself in a very uncomfortable place not of its own choosing. This place may become more uncomfortable as time goes on.”

In May 2010, Mr. Trichet and others pushed leaders to recognize that there was a crisis in the first place, and then to fashion a rescue package for Greece. The E.C.B. did its part by buying Greek government bonds.

This year, the E.C.B. has used its clout in the banking system to insist that Portugal and Ireland accept bailout loans. Mr. Trichet has also pushed, with limited success, to get governments to adopt tougher sanctions against euro countries that run up too much debt, with the goal of averting future crises.

In recent days, as the idea of letting Greece stretch out its debt payments gains traction, the bank has set itself up as the main opposition. It is not yet clear whether the E.C.B. will succeed in blocking a restructuring that many economists see as inevitable.

Mr. Trichet and others argue that a Greek default could disrupt financial markets in ways that would be unpredictable and impossible to control. But in recent weeks the E.C.B. has faced criticism that it has a conflict of interest.

In May 2010, the E.C.B. began buying Greek, Portuguese and Irish debt to try to stabilize markets for those bonds. The E.C.B. moved in concert with the national governments, who at the same time created a €500 billion bailout fund, worth $720 billion at current exchange rates, for the distressed countries.

As a result, though, the E.C.B. now holds €75 billion in bonds from those countries, and would take a big hit to its balance sheet if any of them defaulted.

Last month, Mr. Trichet walked out of a meeting with euro area leaders in Luxembourg. He was upset that the politicians were toying with the idea of a Greek debt restructuring.

Yet the E.C.B.’s foray into politics also created strains inside its own governing council. Axel A. Weber, the president of the German Bundesbank and a member of the council, argued strenuously that the E.C.B. was making a mistake by intervening in government bond markets.

Based on public statements Mr. Weber made later, it appeared that he believed the E.C.B. was moving too far into fiscal policy and letting governments off the hook.

“Primary decision making over wide areas of economic and finance policy remains with member states,” he and two Bundesbank economists wrote in a March commentary published in the Frankfurter Allgemeine newspaper.

The ideological split had lasting consequences for the E.C.B. Mr. Weber, who had long been seen as the front-runner to succeed Mr. Trichet, resigned as Bundesbank president at the end of April rather than have to defend polices with which he strongly disagreed.

Even though European politicians seem to resent E.C.B. meddling, they have been glad to allow the central bank to deploy its financial resources at crucial moments, propping up commercial banks with cheap credit and intervening in bond markets.

In many respects, the E.C.B. is far better equipped to deal with the crisis than national governments. It is a pan-European institution able to act quickly — and independently.

Article source: http://feeds.nytimes.com/click.phdo?i=1f4a460d6854697f7a7e27ab1fc4b49d

Filed Under: Business News Tagged With: admirable job, banking system, mario draghi

Seeking Business, States Loosen Insurance Rules

May 9, 2011 by NewsMaker Leave a Comment

Today, all it takes is a trip to Vermont.

Vermont, and a handful of other states including Utah, South Carolina, Delaware and Hawaii, are aggressively remaking themselves as destinations of choice for the kind of complex private insurance transactions once done almost exclusively offshore. Roughly 30 states have passed some type of law to allow companies to set up special insurance subsidiaries called captives, which can conduct Bermuda-style financial wizardry right in a policyholder’s own backyard.

Captives provide insurance to their parent companies, and the term originally referred to subsidiaries set up by any large company to insure the company’s own risks. Oil companies, for example, used them for years to gird for environmental claims related to infrequent but potentially high-cost events. They did so in overseas locations that offered light regulation amid little concern since the parent company was the only one at risk.

Now some states make it just as easy. And they have broadened the definition of captives so that even insurance companies can create them. This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more potential debt than policyholders know, raising the possibility that some companies will find themselves without enough money to pay future claims. Critics say this is much like the shadow banking system that contributed to the financial crisis.

Aetna recently used a subsidiary in Vermont to refinance a block of health insurance policies, reaping $150 million in savings, according to its chief financial officer, Joseph M. Zubretsky. The main reason is that the insurer did not need to maintain conventional reserves at the same level as would have been required by insurance regulators in Aetna’s home state of Connecticut.

In other big transactions, companies including MetLife, the Hartford Financial Services Group, Swiss Reinsurance, Genworth Financial and the American International Group, among others, have refinanced life, disability and long-term-care insurance policies, as well as annuities.

For the states, attracting these insurance deals promotes business travel and creates jobs for lawyers, actuaries and other white-collar workers, who pay taxes. States have also found that they can impose modest taxes on the premiums collected by captives.

For insurers, these subsidiaries offer ways to unlock some of the money tied up in reserves, making millions available for dividends, acquisitions, bonuses and other projects. Three weeks after Aetna’s deal closed, the company announced it was increasing its dividend fifteenfold.

And as changes to the nation’s health systems are phased in, such innovations might even help hold down the cost of insurance for consumers, much as selling pooled mortgages to investors has made buying a home less expensive.

The downside, though, is that the states are offering a refuge from other states’ insurance rules, especially the all-important ones requiring companies to have sufficient reserves. California, for one, has already chosen not to try to lure such businesses. “We are concerned about systems that usher in less robust financial security and oversight,” said Dave Jones, the California insurance commissioner.

While saying that he wanted to remain open to innovation, Mr. Jones added, “We need to ensure that innovative transactions are not a strategy to drain value away from policyholders only to provide short-term enrichment to shareholders and investment bankers.”

The cost of some of the deals has been considerable. In 2008, MetLife used a subsidiary in Vermont to handle a crucial $3.5 billion letter of credit, with help from Deutsche Bank, because the subsidiary was not subject to the same collateral requirements as in New York. The trade immediately bolstered MetLife’s balance sheet, helping the company to endure that year’s market turmoil without government assistance. But MetLife agreed to pay Deutsche Bank $3.5 million a year for 15 years, according to internal documents obtained by The New York Times — locking itself into high costs for years.

MetLife said its transaction was in keeping with industry rules and norms, and Deutsche Bank declined to comment.

Another issue is public oversight. State regulators normally require insurance companies to make available reams of detailed information. A policyholder can find every asset in an insurer’s investment portfolio, for instance, or the company the carrier turns to for reinsurance. But not if the insurer relies on a captive. The new state laws make the audited financial statements of the captives confidential.

Article source: http://feeds.nytimes.com/click.phdo?i=2a4089ee526f4a1c8ff36f66b4975f97

Filed Under: Business News Tagged With: banking system, policyholder, state of connecticut