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CRS — Federal Reserve: Oversight and Disclosure Issues (September 19, 2014)

October 28, 2014 Comments off

Federal Reserve: Oversight and Disclosure Issues (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

Critics of the Federal Reserve (Fed) have long argued for more oversight, transparency, and disclosure. Criticism intensified following the extensive assistance to financial firms provided by the Fed during the financial crisis. In 2010, the identities of borrowers were publicly disclosed for the first time. Recently, critics have sought a Government Accountability Office (GAO) audit of the Fed.

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ECB report details structural changes in the euro area banking sector

October 16, 2014 Comments off

ECB report details structural changes in the euro area banking sector
Source: European Central Bank

The European Central Bank has today published the Banking Structures Report 2014, which reviews the main structural developments in the euro area banking sector to the end of 2013. The report makes use of a number of publicly available data sources, notably aggregate annual banking sector statistics which are published by the ECB.

The report shows that the on-going consolidation of the euro area banking system continued in 2013. The rationalisation process suggests that overall efficiency of the system continues to be enhanced. The total number of credit institutions decreased further to 5,948 in 2013, down from 6,100 in 2012 and 6,690 in 2008.

Total assets of the euro area banking sector declined to €26.8 trillion, down from €29.6 trillion in 2012 and from €33.5 trillion in 2008, largely driven by developments regarding large banks, with the reduction in derivative positions accounting for around half the total balance sheet shrinkage. This is largely reflective of the on-going balance sheet repair and related deleveraging of non-core assets. The banking sectors of those euro area countries most strongly affected by the financial crisis generally also experienced the most pronounced structural changes.

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Federal Reserve Board releases answers to frequently asked questions regarding competitive review process for bank acquisitions, mergers, and other transactions

October 14, 2014 Comments off

Federal Reserve Board releases answers to frequently asked questions regarding competitive review process for bank acquisitions, mergers, and other transactions
Source: Federal Reserve Board

The Federal Reserve Board on October 9 released answers to frequently asked questions (FAQs) regarding the competitive review process for bank acquisitions, mergers, and other transactions.

The FAQs provide answers to questions often raised by banking organizations considering filing applications and explain changes to the application process mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FAQs, which were developed jointly with the Department of Justice, also cover factors considered by both agencies in conducting competitive analysis for bank applications.

By law, both the Federal Reserve and the Department of Justice are required to analyze bank merger applications to ensure, in part, that the proposed transactions do not raise competitive concerns. The Federal Reserve has the authority to deny applications on these or certain other grounds, while the Department of Justice can use its prosecutorial discretion to challenge specific applications that raise competitive concerns.

Mortgage Rates, Household Balance Sheets, and the Real Economy

October 13, 2014 Comments off

Mortgage Rates, Household Balance Sheets, and the Real Economy
Source: Social Science Research Network

This paper investigates the impact of lower mortgage rates on household balance sheets and other economic outcomes during the housing crisis. We use proprietary loan-level panel data matched to consumer credit records using borrowers’ Social Security numbers, which allows for accurate measurement of the effects. Our main focus is on borrowers with agency loans, which constitute the vast majority of U.S. mortgage borrowers. Relying on variation in the timing of resets of adjustable rate mortgages, we find that a sizable decline in mortgage payments ($150 per month on average) induces a significant drop in mortgage defaults, an increase in new financing of durable consumption (auto purchases) of more than 10% in relative terms, and an overall improvement in household credit standing. New financing of durable consumption by borrowers with lower housing wealth responds more to mortgage payment reduction relative to wealthier households. Credit-constrained households initially use more than 70% of the extra liquidity generated by mortgage rate reductions to repay credit card debt— a deleveraging response that can significantly restrict the ability of monetary policy to stimulate these households’ consumption. These findings also qualitatively hold in a sample of less-prevalent borrowers with private non-agency loans. We then use regional variation in mortgage contract types to explore the impact of lower mortgage rates on broader economic outcomes. Regions more exposed to mortgage rate declines saw a relatively faster recovery in house prices, increased durable (auto) consumption, and increased employment growth, with responses concentrated in the non-tradable sector. Our findings have implications for the pass-through of monetary policy to the real economy through mortgage contracts and household balance sheets.

A time for stress: The challenges facing Europe’s banks

October 10, 2014 Comments off

A time for stress: The challenges facing Europe’s banks (PDF)
Source: McKinsey & Company

In November the European Central Bank (ECB) will officially take overall responsibility for the supervision of major European banks under the Single Supervisory Mechanism. This is one of the biggest structural changes in the financial-services regulatory environment in the past 30 years. Europe’s banks are facing tough new minimum that they need to make some major changes.

CRS — Systemically Important or “Too Big to Fail” Financial Institutions (September 19, 2014)

October 8, 2014 Comments off

Systemically Important or “Too Big to Fail” Financial Institutions (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

Although “too big to fail” (TBTF) has been a perennial policy issue, it was highlighted by the near-collapse of several large financial firms in 2008. Financial firms are said to be TBTF when policy makers judge that their failure would cause unacceptable disruptions to the overall financial system, and they can be TBTF because of their size or interconnectedness. In addition to fairness issues, economic theory suggests that expectations that a firm will not be allowed to fail create moral hazard—if the creditors and counterparties of a TBTF firm believe that the government will protect them from losses, they have less incentive to monitor the firm’s riskiness because they are shielded from the negative consequences of those risks. If so, they could have a funding advantage compared with other banks, which some call an implicit subsidy. S.Con.Res. 8, passed by the Senate on March 22, 2013, and H.Con.Res. 25, as amended and passed by the Senate on October 16, 2013, create a non-binding budget reserve fund that allows for future legislation to address the TBTF funding advantage.

Global Payments 2014: Capturing the Next Level of Value

September 23, 2014 Comments off

Global Payments 2014: Capturing the Next Level of Value
Source: Boston Consulting Group

The payments and transaction-banking businesses continue to represent vital elements of the banking industry and the global financial-services landscape. The importance of these businesses both as critical sources of stable revenues and as the foundation of customer relationships and loyalty has grown steadily in recent years and shows no signs of slowing down. The growth in payments and transaction banking, moreover, is driving stiff competition among not only traditional players but new entrants as well. Consequently, financial institutions must differentiate themselves, refine their strategies, and raise their execution skills if they want to remain competitive.

In this twelfth edition of The Boston Consulting Group’s Global Payments report, we offer a comprehensive overview of the industry. We then take a regional approach to retail (consumer) payments—exploring the most important trends in Europe, North America, and rapidly developing economies (RDEs, also commonly referred to as emerging markets)—before closing with a global examination of the wholesale transaction-banking business.

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