FDIC Chairman's "Living Will" Speech @ Wharton, NY Fed Revises GDP Down, FDIC Publishes Annual Report & Survey Shows Slight Wage Relief

Remarks by Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation “Resolving a Systemically Important Financial Institution: A Progress Report”, The Wharton School University of Pennsylvania; Philadelphia, PA


You can learn a great deal by listening to the "public" speeches given by Fed leadership. It's one thing to give testimony on Capital Hill, it's quite another to give a speech in front of people that actually know what you're talking about. In this speech, Gruenberg, the Chairman of the FDIC, discusses the actions taken over the past 10 years to ensure against another "Great Recession".

He discusses the establishment of the Dodd-Frank Act and the authority it gave the FDIC to manage the orderly failure of banks in times of crisis. Among other things, the new authorities gave the FDIC:

        The ability to place the financial firm, including its holding company, into a receivership process;
        An Orderly Liquidation Fund to assure liquidity for the orderly wind down and liquidation of the failed firm;
        Authority to impose a short stay on derivatives contracts; and
        The ability to coordinate with foreign authorities in the case of a firm with global operations.

"The progress has been substantial and I believe not well appreciated," Gruenberg concludes. What hasn't he and his team been appreciated for?


The Evolution of the Living Will Process


As a way to create a framework around an orderly bank liquidation, the FDIC created the living will process. According to Gruenberg, the living will "required both the Federal Reserve and the FDIC to consider the objectives of the process, the standards and the guidance that would need to be provided to the firms to achieve the objectives, and the means of engagement with the firms to assist them in following the guidance". This process required banks to provide a description of the following:

    The firm’s strategy for orderly resolution in bankruptcy during times of financial distress;
    The range of actions the firm proposes to take in resolution; 
    Liquidity and capital needs and resources of the firm;
    A description of the firm’s organizational structure, material entities, interconnections, and interdependencies; and
    The firm’s corporate governance process. 

The only thing that really matters here is liquidity. With the right liquidity and capital resources, any crisis can be avoided or at least pushed off, but for how long?


The truth is, none of these changes would have saved Lehman Brothers or Bear. None of these resolutions would have made AIG confess to creating bad securities. The truth is, everything happened exactly how the banks wanted it to happen. They got a huge bailout, 10 years of free money, and trillions in reserves at the Fed. To top it all off, Dodd-Frank approved a resolution to pay banks for those reserves. Who pays the interest? We do. The American taxpayer. We don't control rates or the amount of reserves held at the Fed, but we have to pay whatever rate the Fed sets on those reserves. Sounds fair. This is why people are gravitating toward Bitcoin and precious metals.

In other news, Nowcast is a forecast of the upcoming GDP announcement. It was updated and revised down to 3.11%. The leading causes are due to a decline in:

•     capacity utilization,
•     industrial production,
•     general business conditions (as reported in a daily brief last week); and,
•     retail sales.

In other words, all things driven by consumer demand are starting to decline, while anything driven by debt (inflation, pricing and housing) are on the rise.

The Empire State Manufacturing Survey/Business Leaders Survey included a supplemental survey on wages, a critical piece of the consumer demand equation. Wages are of key interest because without wages, GDP will continue to fall -- not everyone has access to massive amounts of debt. What does the survey show? Job openings are taking longer to fill, manufacturers are hiring more, and starting pay is going up. Will it be enough to impact earnings? My guess is no. Why? Wall Street doesn't like wage increases.

The FDIC Lowers Credit Standards, Household Debt Jumps, General Business Conditions Fall & There's An Increase in Jumbo Loans

 

 

On February 14, 2018, the FDIC Board of Directors adopted a rule to permit the removal of "external credit ratings". 

 

"The final rule removes references to external credit ratings and replaces them with appropriate standards of creditworthiness."

In other words, as long as a bank makes under $1 billion in total assets it doesn't need to reference external credit ratings in order to label an asset or security as "investment grade".  These classifications are used for capital allocation and pledged assets. The rule reduces the need to classify assets as investment grade with a much lower bar -- as of this ruling "An entity has adequate capacity to meet financial commitments if the default risk is low, and the full and timely repayment of principal and interest is expected."

The rule also "adds cash to the list of assets eligible for pledging and separately lists Government Sponsored Enterprise obligations as a pledgeable asset category."

So mortgaged backed securities are now considered pledgeable assets as well as cash? And, if you have cash, why do you need to pledge assets?

Household Debt Jumps as 2017 marks the 5th consecutive year of annual growth based on the latest Quarterly Report on Household Debt and Credit. 

 

The report reveals that total household debt reached a new peak in Q4 of 2017, rising $193 billion to reach $13.15 trillion. Balances climbed:

• 1.6% on mortgages, 
• 0.7% on auto loans, 
• 3.2% on credit cards; and, 
• 1.5% on student loans.

This adds to the market's general instability, but we're not hearing anything about that from the Fed. It's also important to remember that debt is a form of inflation. It's essentially the creation of money out of nothing. Due to quantitative easing, banks have an unprecedented level of capital to "lend" and it's pumping all that "fake cash" into the market every day via mortgages, auto loans, credit cards and student loans. Asset values are the highest they've been in years, far surpassing what they were in 2007, jut prior to the Great Recession. Gas prices have been on the rise since July of 2017, still inflation is low and steady. Clearly there's some manipulation at play.

According to the Empire State Manufacturing Survey, a monthly survey of manufacturers in NY conducted by the Federal Reserve, the general business conditions index fell five points to 13.1.  

 

This suggests a "slower pace of growth than in January".  This at a time when the stock market was setting new highs. Perhaps the most notable takeaway is a remark about input prices and prices paid which confirms a theory of higher inflation. According to the report, "Input price increases picked up noticeably, with the prices paid index reaching its highest level in several years." The highest level in several years is quite significant. So companies are paying more for inputs and they are charging more for products and services. I wonder who is paying for those products and services?

 

A report by the Fed regarding jumbo loans -- these are loans that are over ~$625,500 -- suggests the number is growing.

According to the Fed, there's been a marked increase in the number of jumbo loans on the market today. This isn't surprising because banks have an unlimited amount of capital to lend due to quantitative easing and the $2.2 trillion sitting in reserves at the Fed. This post shows how "the supply of jumbo mortgages has improved in recent years as banks have become more willing to take on mortgage credit risk on their own balance sheets".

Final Thoughts: The Fed has been waiting on inflation to go above 2% to raise rates. The truth is, inflation has been over 2% since 2008. It went up and never really came back down. Meanwhile, the Fed kept rates artificially low and corporations have taken advantage of the loophole by using stock buybacks to artificially push up earnings. Now it's too late to raise rates, the economy is about to crash on its own.

Fry's Electronics' Bank Fails FDIC Inspection & SEC Freezes $2M In Assets

The June 2015 List of Banks Examined for CRA Compliance was published. As usual, most banks passed, however, there were two that received a "needs to improve" including: Sewickley Savings Bank or Sewickley, PA, and First State Bank of Socorro, NM. Only one bank, First Electronic Bank of Sandy, UT, received a non-compliance rating. First Electronic Bank is a wholly owned subsidiary of Fry's Electronics. This is the first time I've seen this low rating given out. 

The SEC froze $2 million in assets of two brokerage accounts connected to trading schemes. The schemes were set up to manipulate Avon and other stocks.  

Only three weeks after the manipulation of Avon stock occurred, this emergency court order keeps not only the alleged illicit profits from being transferred offshore, but preserves the SEC’s ability to recover substantial penalties. -Andrew Ceresney, Director of the SEC Enforcement Division

Strategic Capital Partners Muster Ltd., Strategic Wealth Investments Inc., and PTG Capital Partners LTD were also charged. According to the announcement, the stock schemes: 

followed similar patterns where the accounts had substantial holdings in a company that had been losing value and the companies’ stock values substantially increased after a false filing or press release originating from Bulgaria.

Evidently, the firms hid behind proxy serves, false filings and phony foreign entities to hide their tracks, a strategy which clearly didn't work.

GDP Revised Down, #FFIEC Requests Public Comment, #CEI Shows NY Deceleration and FDIC Issues Q3 CRA Schedule

GDP Was Revised Down

The #FFIEC Requests Public Comment

The #CEI Shows Deceleration in NY &

The FDIC Issued Its Q3 CRA Schedule

A summary of noteworthy news and publications from financial regulatory and supervisory agencies on May 29, 2015.

Source: BEA Website

Perhaps the biggest news of the day is that GDP was revised down to a .7% decrease from a .2% increase in the first estimate. Either way the economy slowed in Q1 and either way the Fed will dismiss negative news as transitory in nature. 

The Survey also showed that profits of domestic financial corporations decreased $2.6 billion in Q1, compared with a decrease of $12.5 billion in Q4, while profits of non-financial corporations decreased $100.4 billion compared to an increase of $18.1 billion in Q4. Taxes on corporate income increased $9.3 billion in Q1 in contrast to a decrease of $4.8 billion in Q4. Dividends increased $5.1 billion in Q1, compared with an increase of $18.6 billion in Q4. 

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Every 10 years the Federal Financial Institutions Examination Council (FFIEC) examines the relevance of certain rules and regulations on financial institutions. Due to Dodd-Frank the review will be a sizable one this year. The FFIEC is requesting public comment for 90 days. You can provide your comments about the need for regulation of the financial industry at the following website: http://egrpra.ffiec.gov/submit-comment/submit-comment-index.html

The April Index of Coincident Economic Indicators was published and showed a deceleration of economic activity in New York City, however it grew at a moderate pace in New York State and New Jersey.

The FDIC issued the Q3 schedule for CRA bank examinations. Your bank might be on the list. To view the schedule by region click here.

Eurodollar Market, FDIC Reports 7% Increase In Bank Income & Survey Says Americans Unprepared For Economic Downturn

Fed Publishes A Primer On the Eurodollar Market

FDIC Publishes The Quarterly Banking Profile

Fed Publishes The 2014 Survey of Household Economics and Decision-making 

Liberty Economics, the research leg of the New York Federal Reserve, published a post titled The Eurodollar Market in the United States. It provides insight into the Eurodollar market and is a great primer for anyone looking for some background into the market. This comes months before the release of a new rate that will be based on both federal funds and Eurodollar transactions as reported on the FR 2420 Report of Selected Money Market Rates. The rate is expected to provide a broader measure of overnight funding costs for U.S.-based banks as a complement to the fed funds rate.

The FDIC released the Quarterly Banking Profile and it shows a marked improvement in the industry, with a 6.9% increase in net income, and a 2.6% increase in net operating revenue. Community banks lead the industry on net income growth of 16% over last year. Net interest margin continues to struggle, falling 3.02% in the quarter.

The Federal Reserve Board published the 2014 Survey of Household Economics and Decision-making. The survey provides information about how Americans view their economic security. According to the survey, 65% of respondents feel their families are "doing okay" or "living comfortably" financially, 29% say they expect household income to be higher next year. The results also suggest, as can be seen in the video to the left, that many Americans are not prepared for a financial crisis or retirement. Over 5,800 people completed the survey which was conducted in October and November of 2014.

Does Tick Size Matter, Asia Economic Review, FDIC Strategic Plan, Low GDP Blamed on Baby Boomers, and The FRAC Wants You!

• SEC approved a pilot to increase the tick size on small caps
• Changyong Rhee gives economic review of Asia Pacific
• The FDIC published their strategic plan for 2015-2019
• CFTC Commissioner Mark Wetjen testified before Congress
• CFTC charged United Arab Emirates residents with spoofing
• NY Fed published paper blaming low GDP on baby boomers
• SIFMA wrote a letter to the Treasury reporting on the economy
• Lagarde's remarks at "Conversation with Janet Yellen"
• The OFR’s (FRAC) is seeking members
• IMF published "High Liquidity Creation and Bank Failures"

The SEC approved a pilot to assess the impact of widening the tick size on smaller companies. The goal is to see if wider tick sizes equate to a better market for investors. “The data generated by this important market structure initiative will deepen our understanding of the impact of tick sizes on market quality and help us consider new policy initiatives that can improve trading in the securities of smaller-cap issuers,” said SEC Chair Mary Jo White. The pilot will target stocks with a market cap of $3 million or less. Expect more analysis of this topic coming soon.

The IMF released a video where the Asia and Pacific Department Director, Changyong Rhee, provides an economic review of the Asia and Pacific Regions including outlook, risks and policy.

The FDIC published their strategic plan for 2015-2019. The FDIC's primary mission is to insure depositors for up to $250K in deposits. The plan discusses how the FDIC plans to carry out this goal as well as the factors that exist outside of the span of control that may make it difficult for the company to reach its goal. In addition to providing a list of annual performance goals the company also provides an update on the status of those goals.

Commissioner Mark Wetjen testified before Congress to provide his thoughts on the reauthorization of the U.S. Commodity Futures Trading Commission (CFTC). This is the third day of hearings. Within the speech Wetjen focuses on "(1) key rules the commission should promulgate to continue implementation of Dodd-Frank; (2) the cross-border implications of the commission’s rules (identifying several discreet issues in particular); (3) swap-trade execution; (4) clearing and FCM risk management; and (5) swap reporting and data."

The CFTC charged United Arab Emirates residents with spoofing in the gold and silver futures markets. Heet Khara and Nasim Salim allegedly placed bids and offers in the gold and silver futures markets with the intent to cancel them before execution. On May 5 a judge ordered that all of Khara and Salim's assets be frozen to prohibit them from destroying evidence.

Liberty Economics, the research leg of the New York Federal Reserve System, published the working paper, "U.S. Potential Economic Growth: Is It Improving with Age?" The paper seeks to find a relationship between the contribution of labor and potential growth. Ultimately, the authors found that "...potential growth is no longer improving with age." The reason for the falloff -- people are living longer. 

The Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association (SIFMA) wrote a letter to the Secretary of the Treasury reporting on the economy.  The Committee blamed weaknesses in the economy on  various factors including "unseasonably harsh winter weather, a sharp contraction in oil drilling activity, and strikes that snarled operations at West Coast ports." 
  
Christine Lagarde, Managing Director, International Monetary Fund gave a speech entitled "Ethics and Finance  -- Aligning Financial Incentives with Societal Objectives". The speech was delivered at an event referred to as "Conversation with Janet Yellen, Chair of the Board of Governors of the Federal Reserve System". Strangely, there was no mention of this event on the Fed calendar. The speech was found on the IMF's website.

The OFR’s Financial Research Advisory Committee (FRAC) is seeking members. Established in 2012 the FRAC is a group of 30 rotating members and several will rotate in August 2015. "Applicants should have expertise in fields related to the OFR mission, such as economics, financial institutions and markets, financial markets analysis, econometrics, applied sciences, risk management, data management, information standards, and technology." Membership terms are two-to-three years.

The IMF published a working paper entitled High Liquidity Creation and Bank Failures. "...results suggest that regulatory authorities can mitigate systemic distress and reduce the costs of bank failures to society through early identification of high liquidity creators and enhanced monitoring of their funding and investment activities."

Which Bank In Ohio Failed The FDIC's CRA?

Of all the banks evaluated in the most recent CRA report only one, located in Bellaire, Oh, failed with a rating of "NI" which means "needs improvement". Three banks, however, located in MS, NE, and UT received a rating of "outstanding".

The Federal Deposit Insurance Corporation (FDIC), an institution created in 1933 to restore confidence in the banking system, issued a list of banks that were evaluated in January 2015 for compliance with the Community Reinvestment Act (CRA). The CRA is a 1977 law designed to monitor the financial health of banks. In other words, it's a test of financial health. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) mandated the public disclosure of CRA evaluations and the most recent evaluation was published last week. Here's a quick summary of what you will find. 

In the Atlanta Region (AL, FL, GA, NC, SC, VA, WV) all 9 banks received a satisfactory grade.

In the Chicago Region (IL, IN, KY, MI, OH, WI) 14 out of the 15 banks received a satisfactory grade. Only Belmont Savings Bank in Bellaire, Ohio (see below) received a rating of "Needs To Improve".

28348

Belmont Savings Bank

P.O. BOX 654

BELLAIRE

OH

43906-0000

NI

Of the 13 banks in the Dallas Region (AR, CO, LA, MS NM, OK, TN, TX) that were evaluated all were given a satisfactory rating except for the Bank of Morton (see below) in Morton, MS which received a rating of "O" for outstanding.

8556

Bank of Morton

P.O. BOX 229

MORTON

MS

39117-0000

O

In the Kansas City Region (IA, KS, MO, ND, NE, SD) all but one bank received a satisfactory rating -- Heartland Bank in Geneva NE received an "outstanding".

18740

Heartland Bank

P.O. BOX 313

GENEVA

NE

68361-0000

O

All eight banks in the New York Region (CT, DE, DC, MA, MD, ME, NH, NJ, NY, PA, PR, RI, VI, VT) received a satisfactory rating, as did all but one of the four banks in the San Fransisco region (AK, AZ, CA, GU, HI, ID, MT, NV, O, UT, WA, WY). Transportation Alliance Bank, Inc. in Ogden, UT received an "outstanding".

34781

Transportation Alliance Bank, Inc.

4185 HARRISON BOULEVARD, SUITE 200

OGDEN

UT

84403-0000

O

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