News : The bigs are alright

Friday, June 24, 2022

The bigs are alright

Jun 24, 2022

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In the list of economic issues to be worried about, the Federal Reserve's annual stress test suggests the health of the nation's biggest lenders shouldn't be one of them. According to the exercise, 33 big banks have enough capital to absorb more than $600 billion in losses and keep lending — that is, they'd be able to weather a pretty bad crisis.

The news is welcome, particularly given growing fears that a recession might be coming sometime in the next year or so. Of course, economists aren't forecasting the kind of hypothetical downturn that was used for the stress test, which included massive losses in commercial real estate and unemployment reaching 10 percent.

Bank trade groups trumpeted the results, with the Financial Services Forum, which represents megabanks, pointing to those firms' financial support for households and businesses during the pandemic. "Forum members continue this support as the nation faces a period of economic uncertainty," President Kevin Fromer said in a statement.

But Senate Banking Chair Sherrod Brown (Ohio) says not so fast. "It is past time for the Fed to implement rigorous stress tests and strong capital requirements," he said in a statement. "Wall Street bank CEOs have raised the alarm bells that an economic hurricane is coming, but the reality is that the largest banks aren't doing what they need to do to protect the economy from the next crisis. Instead of building up capital to withstand losses or investing in the real economy and workers, they're planning to spend $80 billion in stock buybacks and dividends."

Democrats like Brown and other advocates of strong financial regulation have argued that the stress test was significantly weakened during the tenure of former Fed Vice Chair of Supervision Randy Quarles. Better Markets' Phillip Basil points out that if the Fed had required banks to make the same testing assumptions that they did pre-Trump, aggregate capital levels would've dropped by an additional 1.9 percentage points (for a total of 4.6 percentage points, rather than the actual result of 2.7).

It's unlikely that bank capital levels will be a front-burner issue anytime soon (though of course, you never know what might cause a financial crisis. MM hears that one time a pandemic nearly led to one, believe it or not.)

But Michael Barr, President Joe Biden's nominee to become Quarles' replacement, is expected to be confirmed sometime this summer, and the stress test is one of the areas where he'd have a fair amount of discretion to make them tougher. So, stay tuned for that.

(We'll find out how much banks plan to pay out in dividends after 4 p.m. on Monday, by the way.)

If you're looking for a detailed rundown of risks facing the banking system, the Office of the Comptroller of the Currency has you covered with its semiannual report on risks facing the banking system.

TGIF! — Kate Davidson is back on Monday. Send tips to kdavidson@politico.com or @KateDavidson, or aweaver@politico.com or@aubreeeweaver. And reach me at vguida@politico.com.

JOIN MM'S OWN Kate Davidson on Tuesday, June 28, on POLITICO Live for a Women Rule conversation on what's ahead for the U.S. economy and how it will affect women's livelihoods and economic well-being. Confirmed speakers include Dana Peterson, chief economist, The Conference Board, and Tené Dolphin, executive director, National Women's Business Council. Register here to watch live, and email her any questions you want her to ask the panel.

A message from Grayscale:

As other countries approve spot Bitcoin ETFs, the U.S. is falling behind. SEC approval is critical for both investors and the future of the digital asset ecosystem. That's why Grayscale Investments is currently seeking regulatory approval from the SEC to convert the company's flagship fund — Grayscale Bitcoin Trust (GBTC) — into an ETF. CEO Michael Sonnenshein connected with POLITICO Focus to discuss the pending SEC approval and the future of the cryptocurrency landscape. Read on for more.

Driving the day

U.S., EUROPEAN ECONOMIES SLOW SHARPLY, RECESSION RISK GROWS — From WSJ's Paul Hannon and David Harrison: "The U.S. and European economies slowed sharply in June as surging prices of energy and food weakened demand for other goods and services, business surveys showed, increasing the risk of recessions around the world.

"The new figures on manufacturing and services activity underline how dark the outlook has become in both Europe and the U.S. Russia's war in Ukraine has hit global growth as high inflation spread across the globe. Economies also face continuing supply-chain disruptions and the prospect of rising interest rates that curb business investment. Europe faces additional pressure from a possible energy shortage this winter."

LABOR MARKET TIGHT, BUSINESS ACTIVITY SLOWING — Reuters' Lucia Mutikani: "The number of Americans filing new claims for unemployment benefits edged down last week as labor market conditions remained tight, though a slowdown is emerging amid high inflation and rising interest rates.

"Despite the second straight weekly decline reported by the Labor Department on Thursday, claims are hovering near a five-month high. There have been job cuts in sectors like technology and housing amid fears of a recession as the Federal Reserve aggressively tightens monetary policy to quell price pressures."

FED OFFICIAL CALLS FOR SIGNIFICANT RATE RISES — WSJ's Nick Timiraos: "A Federal Reserve official said the central bank would need to raise interest rates aggressively this year in order to combat inflation. Fed governor Michelle Bowman said she strongly supported the Fed's 0.75-percentage-point rate increase last week and that she would favor raising the central bank's benchmark rate by another 0.75 point, or 75 basis points, at the central bank's next meeting, July 26-27.

"'Based on current inflation readings, I expect that an additional rate increase of 75 basis points will be appropriate at our next meeting as well as increases of at least 50 basis points in the next few subsequent meetings, as long as the incoming data support them,' Ms. Bowman said in remarks prepared for delivery Thursday at a banking conference in Harwich, Mass."

U.S. BANKS TAKE A HIT FROM DISCOUNTED CORPORATE BOND SALES — FT's Joe Rennison: "Wall Street banks are taking steep losses on corporate bond deals signed before the latest downturn in financial markets, as investors demand bigger discounts and higher yields to lend to companies.

"When banks agree bond sales on behalf of companies, they typically set a maximum interest rate that investors can expect to receive in exchange for buying the debt — factoring in some flexibility in case markets move."

STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president's ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.

Crypto

OCC: CRYPTO TURMOIL REINFORCES CAUTIOUS APPROACH — CoinDesk's Jesse Hamilton: "Michael Hsu, acting chief of the Office of the Comptroller of the Currency (OCC), said the recent fireworks in the crypto industry have further cemented his resistance to allowing lenders unfettered exposure to the digital assets markets.

"Hsu is one of the top U.S. banking regulators, and his reluctance to open up the wider financial system to crypto has been a significant hurdle in the industry's push toward regulation. That view isn't about to change, thanks to what he's been seeing."

DISTRESSED CRYPTO BROKER SETS LIMITS ON WITHDRAWALS — Bloomberg's Muyao Shen: "Crypto brokerage firm Voyager Digital Ltd. is limiting customer withdrawals from its platform to $10,000 and to 20 transactions during a 24-hour period.

"The New York-based firm, which secured $485 million in loans in the past week from Alameda Research to shore up protection for customer assets, announced the limits on its website. The firm secured the funding after disclosing its exposure to the troubled crypto hedge fund Three Arrows Capital Ltd."

A message from Grayscale:

Fly Around

RECESSION WORRIES BOOST TREASURIES — Bloomberg's Isabelle Lee and Enrique Roces Gonzalez: "US Treasuries rallied after another batch of economic data fell short of expectations, ratcheting up recession worries. American equities advanced as the decline in yields made stocks relatively more attractive.

"The S&P 500 ended almost 1% higher after waffling throughout the day, and is now up more than 3% in the past three days. The tech-heavy Nasdaq 100, whose members have been more sensitive to the rise in bond yields, jumped 1.5%. The 10-year yield fell back below 3.10% just nine days after spiking to within a whisker of 3.50%. Commodities from oil to copper remained under pressure as signs of waning demand mounted."

DRAFT GOP BILL WOULD TIGHTEN RULES AROUND CONSUMER FINANCIAL DATA — CNBC's Lauren Feiner: "A new draft bill from House Financial Services Ranking Member Patrick McHenry, R-N.C., lays the groundwork for how the GOP will tackle financial data privacy if the party wins back the majority in the chamber this November.

"The discussion draft, shared exclusively with CNBC, would modernize a financial data protection law known as the Gramm-Leach-Bliley Act to cover data aggregators in addition to financial institutions and require more transparency with customers. Such changes could end up applying to fintech companies like Plaid or Intuit's Mint."

JOIN TUESDAY FOR WOMEN RULE TALK ON THE ECONOMY: The U.S. economy is showing signs of slowing down after a period of robust growth last year. How would an economic slowdown affect women's economic security across socioeconomic, racial, and geographic lines? Join POLITICO's Women Rule for a conversation on what's ahead for the U.S. economy and how it will impact women's livelihoods and economic well-being. REGISTER HERE.

CANNABIS BANKING DIES, AGAIN — From Pro's Natalie Fertig: "Language to allow financial institutions to offer services like bank accounts and loans to the cannabis industry will not be part of a final, bicameral trade package — despite passing the House as part of the bill earlier in the year. The SAFE Banking Act was added to the China COMPETES Act in the House in March, but was not part of the Senate's smaller bill. The House and Senate chose to hold a formal conference committee to reconcile the two versions of bill, but negotiations have been bogged down. The removal of SAFE from the bill does not come as a big surprise, and Rep. Ed Perlmutter (D-Colo.) — the bill's chief sponsor in the House — has said there are other bills he could attach it to before this Congress is over."

HOUSE PANEL APPROVES EXPANDING AML REPORTING — ICIJ's Will Fitzgibbon in WaPo: "A bipartisan group of lawmakers cleared a major hurdle this week to advance what they call the most significant revision to America's anti-money laundering laws in 20 years.

"The bill, called the Enablers Act , amends the 52-year-old Bank Secrecy Act to require for the first time that trust companies, lawyers, art dealers and others investigate clients seeking to move money and assets into the American financial system. Those covered by the law, who include financial advisers and art and antiquities traders, would also be required to report suspicious activity to the Treasury Department. Real estate transactions would not be covered by the law, however."

KEN GRIFFIN DITCHES CHICAGO FOR MIAMI — FT's Ortenca Aliaj and Steff Chávez: "Billionaire hedge fund manager Ken Griffin is moving his firm Citadel to Miami from Chicago, following his earlier threats to leave the city over rising crime rates.

"In an email to employees on Thursday seen by the Financial Times, Griffin described Miami as a "growing metropolis that embodies the American dream" and said he had recently moved there with his family. Citadel Securities, Griffin's market-making firm, will also relocate in what is expected to be a multiyear process."

A message from Grayscale:

The U.S. digital asset marketplace has been rapidly evolving for years, with more consumers than ever before collecting, trading and using cryptocurrency. But as other countries approve spot Bitcoin ETFs, some are concerned that the U.S. hasn't kept pace. That's why Grayscale Investments, the world's largest digital currency asset manager, is seeking SEC approval to convert its flagship fund, Grayscale Bitcoin Trust (GBTC), into an ETF. Grayscale Investments CEO Michael Sonnenshein joined POLITICO Focus for a conversation on how spot Bitcoin ETFs could promote financial accessibility and safety and why GBTC is the best-suited option for the transition. Read on for more.