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Boston Fed says Main Street program now ‘fully operational’ and ready to purchase loans

NEW YORK (Reuters) – The Federal Reserve Bank of Boston said on Monday the Main Street Lending Program is now fully operational and ready to purchase eligible loans.

The Main Street lending facility, which opened for lender registration in mid-June, is meant to extend easy credit to small and mid-sized businesses that cannot get it elsewhere.

The Fed encouraged registered lenders to start submitting qualifying loans. The U.S. central bank also announced it intends to publish a state-by-state listing of registered lenders that are accepting new business customers under the program and that choose to be listed.

Lenders had still not made any loans under the program as of July 1, according to data released by the Fed last week.

Large financial institutions that work closely with the Fed, known as primary dealers, slashed in half their expectations for how much take-up they expect from the Main Street lending program, according to a survey released last week by the New York Fed.

It is not entirely clear why the loans have not drawn more interest. When the Fed first proposed it, staff worked urgently on standing it up as thousands of letters poured in with suggestions for how to make it more useful and questions about where to find participating lenders.

source: reuters.com

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U.S. job growth accelerates; layoffs remain elevated

Lucia Mutikani
5 MIN READ

WASHINGTON (Reuters) – The U.S. economy created a record 4.8 million jobs in June as more restaurants and bars resumed operations, but layoffs remained elevated and raging COVID-19 cases across the country threaten the fledgling recovery.

The reopening of businesses after being shuttered in mid-March has unleashed a wave of coronavirus infections in large parts of the country, including the populous California, Florida and Texas. Several states are scaling back or pausing reopenings, and sending some workers back home.

Still, the rebound in hiring added to a stream of data, including consumer spending, in suggesting that the recession which started in February was likely over.

Federal Reserve Chair Jerome Powell this week acknowledged the rebound in activity, saying the economy had “entered an important new phase and (had) done so sooner than expected.” But Powell cautioned the outlook “is extraordinarily uncertain” and would depend on “our success in containing the virus.”

The jump in nonfarm payrolls in June was the largest since the government started keeping records in 1939. Payrolls rebounded 2.699 million in May after a historic 20.787 million plunge in April. Economists polled by Reuters had forecast payrolls increasing by 3 million jobs in June.

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President Donald Trump at a press briefing after the data said the jobs report “proves that our economy is roaring back.”

But despite the better-than-expected increase, employment remains 14.7 million jobs below its pre-pandemic level.

The measurement of the unemployment rate continued to be biased down by people incorrectly misclassifying themselves as being “employed but absent from work” last month.

The jobless rate fell to 11.1% last month from 13.3% in May. The Labor Department’s Bureau of Labor Statistics, which compiles the employment report, said the unemployment rate would have been 12.1% without the misclassification problem.

Hiring last month was boosted by the typically low-paying leisure and hospitality industry, which added 2.1 million jobs, accounting for about two-fifths of the gains in payrolls. The return of these workers pushed down average wages 1.2% in June.

Some companies are cutting wages and reducing hours.

Stocks on Wall Street rallied on the employment data. The dollar was steady against a basket of currencies. U.S. Treasury prices fell.

BROAD JOB GAINS
There were strong job gains in the retail, education and health, manufacturing, construction and professional and business services sectors. Government employment rose modestly as local governments hired teachers and support staff. State governments, confronting reduced revenues and stressed budgets caused by the pandemic, laid off more workers in June.

Employment is increasing largely as companies rehire workers laid off when non-essential businesses like restaurants, bars, gyms and dental offices among others were closed to slow the spread of COVID-19.

Economists have attributed the burst in job gains to the government’s Paycheck Protection Program, giving businesses loans that can be partially forgiven if used for wages. Those funds are drying up and many companies, including some not initially impacted by lockdown measures, are struggling with weak demand forcing them to lay off workers.

Economists and industry watchers say this together with the exhaustion of the PPP loans has triggered a new wave of layoffs, that is keeping weekly new applications for unemployment benefits extraordinarily high.

In a separate report on Thursday the Labor Department said initial claims for state unemployment benefits fell 55,000 to a seasonally adjusted 1.427 million for the week ended June 27. Though claims have declined from a record 6.867 million in late March, progress has stalled.

The claims report also showed the number of people receiving benefits after an initial week of aid rose 59,000 to 19.290 million in the week ending June 20. These so-called continued claims, which are reported with a one-week lag, have dropped from a record 24.912 million in early May.

There were 31.5 million people collecting unemployment checks in mid-June.

With the measurement of the unemployment rate continuing to be distorted since March economists recommend focusing on continuing claims and data on the total number of unemployment checks recipients to get a better view of the labor market.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

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Lebanese finance official in IMF talks resigns post

BEIRUT (Reuters) – A senior member of Lebanon’s negotiating team with the International Monetary Fund (IMF) has quit his post as finance ministry director general, telling al-Jadeed TV he had resigned over the way leaders are handling a financial crisis.

Alain Bifani is the second member of Lebanon’s team at the IMF talks to resign this month. The finance ministry confirmed his resignation in a statement.

Bifani told al-Jadeed the path being taken by Lebanese leaders was reckless and would hurt the people. Reuters could not immediately reach him for comment.

Lebanon is grappling with a financial crisis seen as the biggest threat to its stability since the 1975-90 civil war.

Talks with the IMF which began in May have been bogged down by a row between the government and the central bank over the scale of losses in the financial system and how they should be shared.

Bifani told al-Jadeed that “our approach and our numbers are correct”, in an apparent reference to a government financial recovery plan submitted to the IMF.

The IMF has said the government’s figures appear to be roughly the correct order of magnitude but that Beirut needed to reach a common understanding to move forward.

Earlier this month, financial adviser Henri Chaoul quit Lebanon’s IMF team, saying politicians, monetary authorities, and the financial sector were ‘opting to dismiss the magnitude’ of losses and embark on a ‘populist agenda’.

The numbers have met opposition from the central bank, the banking sector and a parliamentary fact-finding committee that has challenged the losses and assumptions.

Reporting by Samia Nakhoul and Ellen Francis; Writing by Tom Perry, Editing by William Maclean

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European stock index futures bounce on Fed’s bond buying plan

June 16 (Reuters) – European stock index futures joined a global rally on Tuesday, ahead of the U.S. Federal Reserve’s plan to kick off its corporate bond buying programme in an attempt to contain the economic damage from the COVID-19 pandemic.

The Fed is set to start purchasing corporate bonds on Tuesday through the secondary market corporate credit facility (SMCCF), one of several emergency facilities recently launched by the U.S. central bank to shore up liquidity.

Euro Stoxx 50 futures surged 2.5%, recovering from a slump in the past week that was fuelled by concerns of another wave of global coronavirus infections. German DAX futures were up 2.7%, while FTSE 100 futures gained 2.2%.

S&P 500 futures also added 1.1%, looking set to extend gains for the benchmark S&P 500 index for a third straight day. (Reporting by Sagarika Jaisinghani in Bengaluru; Editing by Anil D’Silva)

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Inflation dog may finally bark, investors bet

LONDON (Reuters) – Gold, forests, property stocks, inflation-linked bonds – these are just some of the assets investors are pouring money into on the view that the recent explosion of government spending and central bank stimulus may finally rouse inflation from its decade-long slumber.

With the world economy forecast to shrink 6% this year, it may seem like a strange time to fret about inflation.

And sure enough, market-based gauges suggest an uptrend in prices may not trouble investors for years. U.S. and euro zone inflation gauges indicate that annual price growth will be running at barely over 1% even a decade from now.

So if inflation really is, as the IMF put it in 2013, “the dog that didn’t bark”, failing to respond to all the central bank money-printing unleashed in the wake of the 2008-9 crisis, why should investors prepare for it now, especially as demographics and technology are also conspiring to tamp down inflation across the developed world?

The answer is that some think the dog really will bark this time, partly because – unlike in the post-2008 years – governments around the world have also been rolling out massive spending packages, in a bid to limit the impact of the coronavirus pandemic.

“We will be pushing, pushing, pushing on the string and dropping our guard, then 3-5 years from now…that’s when the (inflation) dog will start barking,” said PineBridge Investments’ head of multi-asset Mike Kelly, who has been buying gold on that view.

“Gold worries about such things long in advance. It has risen through this coronavirus with that down-the-road-risk top of mind,” he added.

Even typically frugal governments such as Germany have joined central banks with trillions of dollars in stimulus programmes. Investors say even the long taboo topic of debt monetisation, where central banks directly fund government spending, may be on the cards.

“What worries me is that at the moment it seems that there is no limit to fiscal stimulus,” said Klaus Kaldemorgen, a portfolio manager at asset manager DWS, who said he was investing in inflation hedges far more now than he was after 2008.

Inflation hawks also cite a trend of de-globalisation, where shrinking international trade and Western companies bringing production back to their own countries leads to higher prices.

This view that inflation could pick up ahead is reflected in forward swaps and in Citi’s inflation surprise indexes, which show that the extent that U.S. inflation readings

WHAT TO BUY?
Investors have an interest in pricing future inflation correctly to safeguard their returns, hence the need for hedges, assets that increase in value or at least hold it when price growth accelerates.

They appear primarily to favor U.S. inflation-linked bonds and gold. Wealth managers canvassed by Reuters have been channelling up to 10% of clients’ portfolios into the yellow metal via index funds, gold shares and even bullion.

But if gold prices have risen 18% since the end of March XAU=, some other hedges remain cheap.

U.S. 10-year inflation-linked bonds – known as TIPS – show “break-evens”, or the anticipated rate of inflation in a decade, around just 1.2%.

Also known as linkers, the face value and interest payments on these securities rise with inflation.

But despite the stimulus boom, “the inflation levels that are priced in are much lower than what was priced in at the end of last year,” said Teun Draaisma, a portfolio manager at Man Group, who has invested in inflation-linked assets.

So inflation might be some years away, but banks are advising clients to pick up cheap hedges. Morgan Stanley suggests U.S. 30-year linkers, while Natwest advises buying 30-year UK linkers and 10-year euro zone inflation swaps.

“These hedges in many cases look extraordinarily cheap, so why not buy them now? We could wait, then things could start to move away from us,” said Colin Harte, multi-asset portfolio manager at BNP Paribas Asset Management.

Indeed, the S&P 10-year U.S. TIPS Index is already up 12% from March levels .SPBDU1ST.

“It won’t be a couple of years from now until (inflationary factors) start to come through, so that’s why we keep (long-dated U.S. linkers),” said Chris Jeffery at Legal & General’s asset allocation team.

Harte at BNP said his main hedge is gold but he has also invested in a broader commodity basket which includes natural gas, copper and oil.

WOOD AND FORESTS
And it’s not just about gold or linkers: another choice is real estate. Kaldemorgen of DWS is buying German residential property stocks, betting that the supply of new property will rise slower than the money supply.

Global house prices, adjusted for inflation, rose 14% in 2009-2019, according to the IMF.

Legal & General’s Jeffery accelerated investments in agricultural land and forestry earlier this year in expectation they will retain their real value over the five- to 10-year horizon. His holdings are via publicly listed shares of companies heavily exposed to such land.

Timber prices rose over 130% in real terms in Great Britain over the past decade, Forest Research data shows, while the value of U.S. farmland rose 28% in the decade to 2019, according to the Department of Agriculture.

Kelly of PineBridge also favours timberland, purchased through private funds. While predicting that linkers will remain cheap for the next few years, he expects timber to benefit sooner if rock-bottom mortgages entice more first-time home buyers and fuel a construction boom.

Reporting by Yoruk Bahceli, additional reporting by Saikat Chatterjee; editing by Sujata Rao and Hugh Lawson

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Exclusive: Chesapeake Energy to file for bankruptcy as soon as this week

Exclusive: Chesapeake Energy to file for bankruptcy as soon as this week – sources
David French, Mike Spector

NEW YORK (Reuters) – Chesapeake Energy Corp (CHK.N) is preparing to file for bankruptcy as soon as this week, said three people familiar with the matter, becoming the largest oil and gas producer to unravel after an energy market rout caused by the coronavirus outbreak.

Chesapeake Energy Corporation’s 50 acre campus is seen in Oklahoma City, Oklahoma, April 17, 2012. From a single 6,000-square-foot building in 1989, the multi-building complex today contains almost one million square feet of office space and includes employee perks like on-site Botox treatments at the headquarters. Chesapeake Energy Corp. CEO Aubrey McClendon is one of the most successful energy entrepreneurs of recent decades. But he hasn’t always proved popular with shareholders of the company he co-founded, the second-largest natural gas producer in the United States. Now, a series of previously undisclosed loans to McClendon could once again put Chesapeake’s CEO and shareholders at odds.

The Oklahoma City-based company, co-founded by the late wildcatter Aubrey McClendon, is in the final stages of negotiating a roughly $900 million debtor-in-possession loan to support its operations while under Chapter 11 bankruptcy-court protection, two of the sources said.

The company is also in talks with creditors to “roll up” some of its existing debt and make it part of the bankruptcy loan, bringing the total debtor-in-possession financing closer to $2 billion, the sources added. The company is reeling under a mountain of debt totaling more than $9 billion.

Chesapeake is also attempting to negotiate an equity infusion from creditors to help it emerge from bankruptcy proceedings, one of the sources said.

Chesapeake plans to complete its negotiations with its creditors and file for bankruptcy as soon as Thursday, the three sources said. The timing could slip to next week depending on the progress the company makes in these discussions, the sources added.

If the company manages to emerge from bankruptcy, creditors that include Franklin Resources Inc (BEN.N), will take over Chesapeake in exchange for eliminating more than $7 billion of its debt under the outlines of a plan being negotiated, one of the sources said. Franklin is among Chesapeake’s most significant creditors, holding large portions of its debt.

The sources requested anonymity because the bankruptcy preparations are confidential. Chesapeake and Franklin did not immediately respond to requests for comment.

Chesapeake, which employed about 2,300 people as of the end of last year, skipped an interest payment on debt due on Monday, two of the sources said. Another obligation looms on July 1.

In May, the company warned it might seek bankruptcy protection, and added that there was substantial doubt about its ability to continue as a going concern. Reuters in April reported Chesapeake was preparing a potential bankruptcy filing.

Chesapeake helped pioneer the extraction of oil and gas reserves from shale rock formations, an environmentally controversial process called hydraulic fracturing, or fracking.

McClendon and Oklahoma businessman Tom Ward founded Chesapeake with a small investment in 1989. McClendon became the company’s chairman and chief executive. The company was named for his love of the Chesapeake Bay region around Maryland and Virginia.

Over time, the company snapped up land across the United States and became a dominant player in fracking, with McClendon believing that natural gas could eventually supplant oil and coal for energy needs. By 2005, Chesapeake was the second-largest U.S. natural gas producer behind only Exxon Mobil Corp (XOM.N).

McClendon helped create tens of thousands of jobs for the Oklahoma City area and became a well-known community philanthropist while running Chesapeake. He was a part owner of the Oklahoma City Thunder professional basketball team, which he helped bring to town. The team still plays in the Chesapeake Energy Arena.

A natural gas glut reversed Chesapeake’s fortunes, and prices fell over the past decade. McClendon relinquished his chairmanship and stepped down as chief executive in 2013, as investigations swirled into possible antitrust violations and whether he blurred lines between his personal dealings and those of the company.

A federal indictment in March 2016 charged McClendon with conspiring to suppress land prices by rigging bids for leases while he led Chesapeake. At the time, he disputed the charge and vowed to prove his innocence.

McClendon died in a single-car crash the following day, which a state medical examiner later determined to be an accident.

Chesapeake last year started reworking its balance sheet and pushed out some debt maturities while attempting to pivot away from gas toward a greater emphasis on oil production.

But the coronavirus outbreak, which resulted in a sharp travel downturn, and a Saudi-Russian oil price war upended the company’s plans.

Reporting by David French and Mike Spector; Editing by Christian Schmollinger

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Credit Suisse CEO sees business ‘going in right direction’

Credit Suisse CEO sees business ‘going in right direction’

FILE PHOTO: The logo of Swiss bank Credit Suisse is seen at a branch office in Basel, Switzerland March 2, 2020. REUTERS/Arnd Wiegmann
ZURICH (Reuters) – Business conditions are improving after a tough start to the year, Credit Suisse (CSGN.S) Chief Executive Thomas Gottstein said in a presentation released on Wednesday.

“Those early indications that we have seen now in the last couple of weeks have been actually quite promising and going in the right direction. We clearly had a lot of stress in the system in the second half of March but things really calmed down in April and they continue to be quite robust in May and June,” he said in an audiocast for a Goldman Sachs conference.

“So far, so good. Clearly we expect very bad economic data for Europe and the U.S. for Q2 but overall actually if I speak to my colleagues on the corporate banking side in Switzerland, to my colleagues in investment banking, we actually see high engagement with our clients and that makes me actually feel quite optimistic in the circumstances.”

Increased activity within its private banking business was more than compensating for a reduction in recurring revenues caused by a drop in the level of managed assets, Gottstein said, adding asset levels were now also recovering.

Switzerland’s second-biggest bank was also seeing a “very high degree” of appetite from its corporate customers to refinance themselves either through equity or debt, Chief Financial Officer David Mathers said, adding capital markets activity was picking up across the market.

Gottstein reiterated the bank’s mid-term return on tangible equity target, repeating comments made in April that for 2020, the bank could not commit to its 10% target due to ongoing uncertainty.

The bank still expects to pay the second half of its 2019 dividend in the fourth quarter, and would consider resuming a share buyback suspended during the coronavirus pandemic after seeing the financial results of the second and third quarters, he said, noting decisions on both were still pending.

Reporting by Brenna Hughes Neghaiwi and Oliver Hirt, Editing by Michael Shields

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What rebound? North Dakota in economic crunch as virus batters oil, agriculture

Laila Kearney, Karl Plume
7 MIN READ

NEW YORK/CHICAGO (Reuters) – When the novel coronavirus first appeared in the United States, North Dakota was in the envious position of having more money in its state coffers than it had budgeted.

Now, it is making sweeping cuts to state agencies in a bid to stem the financial bleeding from a historic oil price collapse sparked by the coronavirus pandemic, and a battered farm economy still struggling with the fallout from the U.S.-China trade war.

Governor Doug Burgum has asked state agencies to begin slashing upcoming budgets between 5% and 15% to weather what he has described as an economic Armageddon as energy-related revenues plummet.

North Dakota is among the states most dependent on both energy and agriculture. The impact of the virus and trade war on its lifeblood industries could ripple through its budget for years through cuts to education, government and highway services.

With North Dakota generally maintaining a balanced budget and carrying little debt, its current struggles point to a long road to recovery for other U.S. states dependant on commodity production, many that were already on shakier financial ground when the virus hit. For a graphic, click tmsnrt.rs/2YqeVYr

Oklahoma, one of the top producers of oil and wheat in the country, is projecting a $1.36 billion hole in its budget from the downturn. Alaska has suffered a credit downgrade, while New Mexico and Oklahoma have been given negative credit outlooks, meaning they’re are on the verge of being downgraded.

“Never after 25 years of working on the state budget have I been through a more volatile period of tremendous and multi-faceted changes,” said Joe Morrissette, director of the state’s Office of Management and Budget.

The state’s unemployment rate jumped to 8.5% in April, up from just 2% in March. Rising unemployment could cut North Dakota’s tax revenues in half, according to North Dakota State University economists. State GDP may drop by 15% to 25% within a year, the economists said, putting it near the lowest in a decade.

Signs of trouble are appearing across the state. At truck dealerships in the more-populous east, untouched rows of shiny vehicles are finding few buyers.

There was a 29% drop in sales of medium and heavy-duty vehicles, and a 4% decline of lighter auto sales, in the first four months of 2020 compared to the same period last year, according to the latest data from the National Automobile Dealers Association.

Extended stay hotels in the state’s oil patch, normally buzzing with oilfield workers, sit largely unoccupied.

“This energy slowdown happened right in conjunction with coronavirus. Our hotels went from a 70% to 80% occupancy rate to a 20% occupancy rate,” said Rachel Richter Lordemann, president of the Williston Area Chamber of Commerce.

Mineral rights owners, many who supplement their retirement income with royalty payments from oil and gas production in the state, have seen an 85% cut in payments compared to January, said Bob Skarphol a retiree with mineral rights and head of the Williston Basin Royalty Owners Association.

“If you’re someone who’s living month to month on oil revenue, a drop like that is very significant and can force you to choose what not to pay – do you not pay your utility bill, do you not buy your drugs, do you not buy food?” Skarphol said.

In Williston, an oil hub that has more than doubled in population over the last decade, specialty kitchen store Cooks On Main is selling far fewer pricy espresso machines and cutlery sets and far more staples like yeast, flour and coffee amid the pandemic and the oil crisis.

“Everybody, no matter what industry you’re in, is feeling some sort of negative impact,” said owner Angela DeMars-Skogen.

TAX REVENUES ERODE
Taxes collected on oil production – the biggest contributor to North Dakota’s tax revenue – more than halved to $95 million in March from around $200 million previously, said Morrissette.

Oil producers have cut output quickly in North Dakota as benchmark prices fell below their costs of production. North Dakota’s shale patch is prolific – the second largest in the country – but it’s more expensive to pump oil from the state than from the giant shale fields of Texas.

Half of those revenues, which were projected to total $4.9 billion over the state’s two-year budget, are redistributed to the school districts and localities where energy is produced, which will now get less than what was budgeted for.

The rest goes into a series of special-purpose state funds and to North Dakota’s general fund, the primary cash account that pays for day-to-day operations of the widest range of state agencies, from its university system to law enforcement.

DOWN ON THE FARM
Farming, the state’s biggest industry and responsible directly or indirectly for nearly a quarter of all its jobs, is in a prolonged downturn, North Dakota Agriculture Commissioner Doug Goehring said. The sector has suffered a string of crises in the past three years, from low prices due to global oversupply to crop-damaging storms and the U.S. trade war with China. North Dakota typically sells about two-thirds of its soybean crop to China, but those sales have been curtailed since 2018 due to the trade war.

North Dakota’s farmers are cutting spending and hoarding grain instead of selling at loss-making prices, with spring stockpiles of corn and soybeans reaching the second highest on record for the state.

Paul Sproule, a farmer in Grand Forks, would normally trade in tractors and combine harvesters every two to three years for new ones. He is sticking with his existing farm fleet this year instead.

“The economics aren’t there,” said Sproule. “You get what you absolutely need and repair what you’ve got. We’ll be doing no purchasing at all.”

Five months after the two countries signed an interim trade deal that should have revived sales from North Dakota, tensions with China have risen over the virus, as well as China’s policies toward Hong Kong.

A survey by the Minneapolis Federal Reserve Bank found that 82% of agricultural lenders expect second-quarter farm incomes in North Dakota to fall from a year earlier, and 76% expect farm capital spending to decrease.

The impact from the downturn will be more acutely felt once harvesting begins in late summer and farmers are unable to turn a profit on grain sales, said Frayne Olson, an agricultural economist at North Dakota State University.

“There are only one or two crops, given today’s prices, that a farmer can make any money on, and they are not the major ones like corn, soybeans or wheat,” Olson said.

Editing by Simon Webb and Edward Tobin

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Wall Street and Fed fly blind as coronavirus upends annual stress tests

Pete Schroeder
5 MIN READ

WASHINGTON (Reuters) – U.S. financial regulators, banks and their investors will get their first glimpse into the health of the nation’s banking system as it confronts soaring corporate and consumer defaults in the economic crisis sparked by the novel coronavirus.

And no-one, including the U.S. Federal Reserve which sets the annual bank “stress test” exams, has a clue what to expect.

“That is the $100,000 question. Actually, it’s much bigger than that and I am sure the Fed is working hard to get it right. We’re curious, and we don’t have clarity,” said Kevin Fromer, CEO of the Financial Services Forum, which represents the biggest banks in the U.S.

Factbox: What’s new with the Fed’s 2020 bank stress tests?
That could mean banks may be on the hook for billions more in capital than they had anticipated, which could ultimately force them to slash dividends, slim down their balance sheets or reduce lending.

Since the 2009 financial crisis, the Fed has tested annually a snapshot of big bank balance sheets against an extreme hypothetical economic shock. The results ultimately dictate how much capital banks can dish out to shareholders.

This year, however, the real life economic blow dealt by the pandemic has by several measures exceeded the doomsday scenario the Fed unveiled in February, leading some banks to grumble it may as well scrap the tests this year.

Instead, the Fed told banks after they had handed in their exam papers in April that it was adding an extra test to reflect the rapid deterioration of economic conditions in recent months.

That eleventh-hour change combined with other tweaks the Fed passed last year has thrown the stress test playbook out the window.

“Unnecessarily increasing bank capital could serve to limit bank balance sheets at exactly the wrong time, likely chilling economic recovery,” the Securities Industry and Financial Markets Association wrote in a note on Friday in which it urged the Fed to stick to its original plan.

While the banking sector has so far proved resilient, some Fed officials worry it will come under greater stress as mass unemployment leads to more corporate and consumer debt defaults, according to minutes from the Fed’s April meeting

The country’s largest four lenders – JPMorgan Chase & Co (JPM.N), Wells Fargo & Co (WFC.N), Bank of America Corp (BAC.N), and Citigroup Inc (C.N) – combined put aside $20 billion to cover expected loan losses in the first quarter alone. Those lenders, alongside Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), are among the 34 banks to best tested this year.

Banks say they are in the dark about the potential outcome because the Fed hasn’t provided any details on how the extra analysis will work or which factors it plans to probe.

Some analysts expect the central bank to adjust for more job losses, which has already blown through the 10% level outlined in its February scenario, and to significantly raise lenders’ potential loan loss rates from the roughly 6% of previous years.

Nellie Liang, a former Fed official who is now a senior fellow at Brookings Institution, said the central bank will likely also probe banks’ exposures to struggling sectors like hotels.

“From a credibility standpoint, they need to be very severe, not just try to catch up with what’s already happened,” said Tim Clark, another former Fed official who helped build the stress tests and now works with the advocacy group Better Markets.

Regulatory changes to the tests agreed before the pandemic have created another unknown. This year the Fed will integrate the stress test results with other capital rules so as to better tailor banks’ overall capital level to their business mix.

Analysts at Keefe, Bruyette & Woods and Evercore ISI have said they expect the tests to result overall in less excess capital which may force banks to cut dividends. While the Fed declined to comment, some officials have said lenders should be prepared for that outcome, according to the April minutes.

But with pressure from the government and lawmakers to keep banks lending, some analysts are leaning the other way. Goldman Sachs said in a note last week that while the Fed could order higher bank capital, it may actually lower requirements “given the extra-ordinary demands on balance sheets.”

Reporting by Pete Schroeder; editing by Michelle Price and Edward Tobin

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Money markets raise bets that British interest rates will drop below zero

LONDON (Reuters) – Money markets ramped up expectations of negative interest rates in the United Kingdom for the first time ever as policymakers debated further steps to support the struggling British economy, yanking the pound to more than a three-week low.

Unlike the United States where Federal Reserve officials have portrayed a more unified stance in dismissing negative interest rate talk, comments by Andy Haldane, the Bank of England’s chief economist, over the weekend fuelled speculation that British officials are not averse going down that path.

“While we don’t think that negative interest rates are a near term possibility as the central bank has a few more bullets left, Haldane’s comments opens the door to that possibility,” said Lee Hardman, an FX strategist at MUFG in London.

The central bank is looking more urgently at options such as negative interest rates and buying riskier assets to prop up the country’s economy as it slides into a deep coronavirus-driven slump, Haldane was quoted as saying in the Telegraph newspaper over the weekend.

Top BoE officials have previously expressed objections to taking rates below zero – as the central banks of the euro zone and Japan have done – because it might hinder the ability of banks in Britain to lend and hurt rather than help the economy.

But with the BoE’s benchmark at an all-time low of 0.1% and Britain facing potentially its sharpest economic downturn in 300 years, talk of cutting rates to below zero has resurfaced.

Futures contracts from December 2020 have dipped into negative territory while contracts maturing in June 2021 are pricing in as much as minus 0.03% in benchmark policy rates.

The possibility of negative interest rates would also hurt the pound more at a time when the stalemate between Britain and the EU on Brexit talks is keeping investor sentiment downbeat.

The latest round of Brexit negotiations has raised the prospect that there will be no deal struck on Britain’s formal departure from the bloc after the end of the current transition period at the end of this year.

Reporting by Saikat Chatterjee; Editing by Simon Jessop and Toby Chopra

Source: Reuters.com