The European Union’s toughest-ever stress test was meant to leave banks with nowhere to hide, but the results show how the bloc’s capital rules got in the way, Bloomberg reported today. A total of 24 lenders failed the European Banking Authority’s (EBA) stress test with a capital shortfall of 24.6 billion euros ($31.2 billion). The EBA used EU rules as applicable over the three-year horizon of the test. These give national supervisors scope to allow banks to count instruments whose eligibility as core capital will be gradually eliminated over the next four years. Had the fully phased-in EU rules been applied, the number of failures would have increased to 34, according to a calculation by Bloomberg News based on EBA results published in London. That may be the more reliable gauge, since capital is a measure of a bank’s capacity to absorb losses, and the jury’s still out as to how well instruments such as goodwill and some deferred tax assets, admitted in the definition of "capital" used in the stress test, could do that job.
As RadioShack and American Apparel struggle in the throes of financial recalibration, an under-the-radar hedge fund has emerged as perhaps their last hope for salvation, the New York Times reported today. Standard General has landed squarely at the center of two of this year’s most visible corporate turnaround efforts in retailing. The hedge fund struck an unlikely alliance this summer with Dov Charney, the public face and founder of American Apparel, and now holds substantial leverage in determining the retailer’s future. And this month, Standard General inserted itself more deeply into the affairs of a far more troubled retailer, RadioShack, signing a deal that could give it and its partners up to 80 percent of the company’s shares next year. Just a few months ago, few even on Wall Street, let alone the shoppers at those retail brands, had even heard of Standard General. The firm, which manages a little more than $1 billion in assets, was previously known only to media specialists as a behind-the-scenes player in a series of TV broadcasting deals.
The average rate on a fixed-rate 30-year mortgage fell to 4.03 percent in the week ended Oct. 17, the lowest level since June 2013, according to mortgage-information website HSH.com, the Wall Street Journal reported today. Rates have hovered around that level in the days since, HSH.com says. That compares with 4.29 percent in mid-September and marks a sharp decline from the average rate in the week ended Jan. 3, when it was 4.63 percent. Declines of that magnitude can translate into tens of thousands of dollars in savings through lower monthly payments over the course of a 30-year mortgage—and potentially even greater savings on jumbo mortgages. As interest rates have fallen, demand for home loans has surged. Mortgage applications jumped nearly 12 percent in the week ended Oct. 17 compared with a week prior, according to the Mortgage Bankers Association, a lenders trade group.
The Federal Reserve said that it would examine how exposed the largest U.S. banks are to “risky corporate borrowers” in its next round of stress tests, reflecting regulators’ growing concern about lending to companies with high debt levels, the Wall Street Journal reported today. The Fed released details yesterday of the hypothetical market and economic conditions the banks must be able to withstand as part of the annual tests, which examine a bank’s ability to keep lending during a downturn. As in previous years, the 2015 tests will include a sharp increase in unemployment—to 10 percent in 2016—and a significant retraction in economic growth. But the next round of the Fed’s “severely adverse” scenarios includes a worse deterioration in the financial condition of large corporations, reflected by rising corporate-bond yields, especially for companies with high debt levels. Banks must show that they can withstand losses from loans extended to those companies. The Fed’s inclusion of stresses on banks’ portfolios of leveraged loans echoes regulators’ broader concerns about excessive risk-taking in that sector of the credit markets. In addition to the deterioration in corporate credit, the 2015 “severely adverse” stress-test scenario assumes a jump in oil prices to about $110 a barrel.
Investigations of the subprime auto finance business are spreading as General Motors Co. said its lending arm received additional subpoenas seeking details of its underwriting practices, Bloomberg News reported today. GM Financial, which specializes in loans to people with spotty credit, said in a regulatory filing yesterday that attorneys general of states it didn’t identify and other government offices are demanding documents related to its business of making car loans and pooling them into bonds that are sold to investors. The Detroit-based lender, along with Santander Consumer USA Holdings Inc., disclosed a similar probe by the U.S. Department of Justice in August. Both GM Financial and Santander issued new deals in September, one month after the Justice Department’s inquiry became public. Wall Street sold $17.7 billion of the bonds through Sept. 26, a pace that would make 2014 the busiest year since 2006 when a record $27 billion was issued, according to Barclays Plc. Subprime auto debt is still performing relatively well for investors, and new loans are still trailing behind the market’s peak in 2006, according to Loomis Sayles & Co. analysts led by Gary Mitchell. Lenders made $20.6 billion of the loans as of this year’s second quarter, up from $10.9 billion during the same period in 2010 and below the $27.5 billion of loans made in 2006, the analysts said in a report yesterday.
Three U.S. agencies signed off on relaxed mortgage-lending rules Wednesday, helping complete a long-stalled provision of the 2010 Dodd-Frank financial law, the Wall Street Journal reported today. The Federal Reserve, Securities and Exchange Commission and Department of Housing and Urban Development approved the new rules for the mortgage-backed securities market a day after three other agencies approved the standards. The regulators’ actions came over the objections of two SEC commissioners, who warned that the rules would do little to prevent a return to the kind of lax mortgage underwriting that fueled the financial crisis. The rules are intended to improve the quality of loans by giving banks a financial incentive to ensure that mortgages can be repaid. The initial rules required that banks hold 5 percent of the risk of mortgages packaged and sold to investors or require a 20 percent borrower down payment. But regulators, concerned that overly stringent rules would harm the housing market’s recovery, backtracked on the 20 percent down payment. Instead, banks will be able to avoid the 5 percent risk-retention requirement if they verify a borrower’s ability to pay back the loan and comply with other requirements, such as a requirement that a borrower’s debt payments not exceed 43 percent of their income.
The state of Washington's tobacco settlement authority says Lehman Brothers Holdings Inc. owes it nearly $40 million for a terminated swap agreement tied to money Lehman invested for it, Dow Jones Daily Bankruptcy Review reported today. In a court filing on Tuesday, lawyers for the tobacco authority say that Lehman's expert witness's contention that Lehman is actually the one owed money is "absurd." In its own Tuesday court filing, Lehman says that the "forward curve" analysis used by its expert is standard in the industry. But lawyers for the Washington authority, which was created in 2002 to make decisions based on the bonds that are backed by the state's tobacco settlement fund, cite a report from its own expert that says Lehman owes $38.6 million.
The Federal Reserve Bank of New York failed to examine JPMorgan Chase & Co.’s investment unit ahead of the bank’s 2012 “London whale” trading debacle, despite a recommendation from other Fed supervisors that it look at the unit involved in the trades, according to a new report, the Wall Street Journal reported today. The Fed’s Office of Inspector General yesterday released a four-page summary of a years-long investigation, saying that Fed supervisors didn’t follow up on signs that the bank’s chief investment office — where the traders engaging in the problematic derivatives transactions were based — needed a closer look. A team of experts from across the Fed system recommended that the New York Fed conduct “a full-scope examination” of the JPMorgan unit in 2009, but the regulator never did, the report said. In 2012, JPMorgan announced losses in the unit related to botched derivatives trades that eventually cost the bank $6 billion. The inspector general found that the New York Fed’s planned exam never went off “due to many supervisory demands and a lack of supervisory resources,” weaknesses in planning procedures, and the loss of “institutional knowledge” following a 2011 reorganization of the team supervising JPMorgan, according to the report.
U.S. regulators yesterday issued a rule requiring banks that sell loans to investors to keep part of the risk on their own books, a measure aimed at preventing the sloppy loans that sparked the 2007-09 credit crisis, Reuters reported yesterday. The rule was mandated by the 2010 Dodd-Frank Wall Street reform law. After years of debate over its parameters, the 553-page measure was adopted by three of the six agencies that need to sign off on it. The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency also adopted the rule. It requires banks to keep at least 5 percent of the risk on their books when they securitize loans. This "skin in the game" is aimed at aligning the bank's interest with the investors that buy the loans. Before the crisis, banks pumped up lending volumes with little concern about risks since they planned to offload the loans. Investors who purchased loans gauged risk relying on credit ratings by agencies that had received fees from the banks.
This summer’s huge cyberattack on JPMorgan Chase and a dozen other financial institutions is accelerating efforts by federal and state authorities to push banks and brokerage firms to close some gaping holes in their defenses, the New York Times reported today. Top officials at the Treasury Department are discussing the need to bolster fortifications around a critical area of cybersecurity: outside vendors, which include law firms, accounting and marketing firms and even janitorial companies. The sweeping effort began before the hacking of JPMorgan, which compromised some of the personal account information of 76 million households and 7 million small businesses. Under discussion is a requirement that the banks put in place more stringent procedures and safeguards to make sure that outside firms have, at the least, basic defenses. http://dealbook.nytimes.com/2014/10/21/after-jpmorgan-cyberattack-a-pus…
Listen to former White House Chief Information Officer Theresa Payton provide her perspectives on issues surrounding cybersecurity at ABI's Winter Leadership Conference. Payton is one of the nation's most respected authorities on Internet security and now directs an international net fraud prevention firm. To register, please click here: http://www.abiworld.org/WLC14
In related news, Staples Inc., the world’s largest office-supply chain, is investigating a potential breach of customer credit card data, becoming the latest retailer to confront a threat from hackers in recent months, Bloomberg News reported today. Staples has contacted law enforcement authorities and is working to resolve the matter, according to Mark Cautela, a spokesman for the Framingham, Mass.-based company. The potential data theft adds to a wave of breaches at companies such as Home Depot Inc., Target Corp., Sears Holdings Corp.’s Kmart chain and Neiman Marcus Group Ltd. that have put pressure on retailers to bolster security. The Staples incident, reported earlier by independent journalist Brian Krebs, may involve the theft of card information from Staples locations in the Northeast. http://www.bloomberg.com/news/print/2014-10-21/staples-says-it-s-probin…
