Megabanks all sailed through the first half of their annual stress test from the Federal Reserve last week.
But industry watchdogs say the results should not assuage concerns about their readiness for the next economic downturn. It’s not that the likes of Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup and Bank of America have gotten more resilient, they argue. Rather, the exam has gotten easier, part of a broader Trump-era push to roll back the post-crisis rules governing the financial sector.
“The results confirm that our financial system remains resilient,” Fed Vice Chairman Randal Quarles, who has led the central bank’s effort to relax the tests, said in a Friday afternoon statement. “The nation’s largest banks are significantly stronger than before the crisis and would be well-positioned to support the economy even after a severe shock.”
The test, the first version of which was deployed in the teeth of the financial crisis in 2009, aims to ensure that the biggest banks have a sufficient capital cushion to withstand a severe economic shock without presenting a risk to the rest of the system. The Fed splits the test into two parts. The “quantitative” portion, the results of which it released Friday after the market close, evaluates the preparedness of banks for different kinds of potential downturns. The second portion, set for release on Thursday, examines each bank’s plans to pay out dividends or buy back stocks.
But the first half of the test presented the biggest hurdle, and no banks are in serious jeopardy of failing now. By some measures, the firms look to be showing steady strengthening. “Under the Fed’s ‘severely adverse scenario,’ the big banks would together lose $410 billion — an improvement from the $464 billion aggregate losses projected in last year’s worst-case hypothetical scenario for the same firms,” the Wall Street Journal’s Lalita Clozel writes. “Their common equity Tier 1 capital ratio, which measures high-quality capital as a percentage of assets, would fall to a low of 9.2%, from an actual level of 12.3% at the end of last year.”
Those appearances may be deceiving, Bloomberg News’s Mark Whitehouse wrote in an opinion piece last week. “On the surface, the scenarios appear to be getting tougher over the years. But they keep generating smaller pre-tax losses: Net of income, losses amounted to a weighted average of just 0.7% of assets for the four largest banks in the 2018 tests, down from 1.9% in the 2013 tests,” he writes, pointing to this graphic:
Whiteside ticked through some of the tweaks the Fed has made easing the banks’ burden: “It has largely eliminated the 'qualitative objection,' which allowed officials to flunk institutions that couldn’t demonstrate an adequate grasp of the risks they faced. It has released details of the model it uses to estimate losses, similar to showing banks the exam before they take it. And it intends to share the test results before banks decide on their plans for dividends and stock buybacks, allowing them to avoid the embarrassment of having their plans publicly rejected.”
The changes drew a rare rebuke last month from Daniel Tarullo, the Fed governor who led the effort to forge Wall Street’s post-crisis rulebook. Among other problems with relaxed stress tests, he said, by offering more advanced clues to banks, the process allows the firms to “find clever ways to reshape their assets” to pass without reducing risk. After the current crop of regulators have moved on, Tarullo said, “somewhere down the line, someone else will suffer that damage.”
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— Stocks are up but investors are down. WSJ's Akana Otani: "The share of individuals who say they expect U.S. stocks to rise over the next six months has held below 30% for six consecutive weeks, according to the American Association of Individual Investors. That marks the longest such streak since the leadup to the 2016 elections. Money managers also are glum. Half of fund managers believe that the global economy will weaken over the next 12 months, up from roughly 5% in May and marking the biggest one-month jump in pessimism since Bank of America began asking investors the question in the mid-’90s. Much of the deterioration in sentiment appeared to be fueled by the back-and-forth between the U.S. and its trading partners in the past few weeks."
— Concerns over trade, the Fed have markets moving in tandem. WSJ's Avantika Chilkoti and Pat Minczeski: "Bonds, stocks and currencies are moving in tandem more often, as central-bank surprises and trade uncertainty assert their grip over markets. Known by investors as 'risk-on, risk-off,' the phenomenon happens when markets essentially split into two broad buckets that move together: risk-off, or haven assets, which rally when investors grow skittish; and risk-on, or growth assets, which rally when risk appetite returns."
"A basket of assets that reflect either risk-on or risk-off sentiment has moved together nearly a quarter of the past 100 days through June 19, the highest level since mid-2016... The number of risk-on, risk-off days has stepped up quickly since the beginning of the year as investors focus on the change in strategy from the Federal Reserve and the European Central Bank, the on-and-off trade tensions coming out of Washington, and signals of whether China will move to stimulate its economy."
— What’s in store for Trump-Xi’s G-20 meeting: “ … The biggest event in Osaka is likely to be a sideline meeting between Trump and Chinese President Xi Jinping, which financial markets will be watching carefully,” Bloomberg Businessweek’s Shawn Donnan and Peter Martin report. “After playing down its likelihood, Trump raised expectations on June 18 when he tweeted that, after a ‘very good telephone conversation,’ the two leaders would hold an ‘extended meeting’ during the summit.”
“The best-case scenario laid out by officials and analysts from both countries is that the meeting might yield a pause in any new U.S. tariffs and a resumption of the talks that broke down in May. While such a truce would extend the uncertainty of the past year, it would at least offer the hope of short-term peace. The worst-case scenario would turn the simmering trade tensions into a new cold war.”
— … Meanwhile Trump blacklists more companies: “The U.S. put five more Chinese tech entities on a trade blacklist just days ahead of a high-stakes summit between [Trump] and [Xi] even as it offered a quiet olive branch by postponing a potentially provocative speech,” Bloomberg News’s Jenny Leonard and Shawn Donnan report.
“The move on Friday to list four companies and a research institute involved in China’s super-computing efforts follows the similar blacklisting of Chinese telecommunications giant Huawei Technologies Co. last month, blocking it from buying U.S. software and components.”
Huawei itself is digging in for an extended fight, The Post's Jeanne Whalen reports.
The White House is considering additional measures for 5G equipment: “The Trump administration is examining whether to require that next-generation 5G cellular equipment used in the U.S. be designed and manufactured outside China, according to people familiar with the matter. The move could reshape global manufacturing and further fan tensions between the countries,” the WSJ’s Stu Woo and Dustin Volz report.
“A White House executive order last month to restrict some foreign-made networking gear and services due to cybersecurity concerns started a 150-day review of the U.S. telecommunications supply chain. As part of that review, U.S. officials are asking telecom-equipment manufacturers whether they can make and develop U.S.-bound hardware, which includes cellular-tower electronics as well as routers and switches, and software outside of China, the people said.”
— Amazon Merchants are feeling pain from the trade war: “Amazon.com Inc. merchants around the world are scrambling to navigate an unpredictable trade war that’s upending their proven business model of buying inexpensive goods in China and selling them at a markup in the U.S. The problem is particularly acute now as Trump weighs another $300 billion worth of tariffs, many on consumer goods,” Bloomberg News’s Shelly Banjo and Spencer Soper report.
“Mom and pop sellers won’t be able to wait for Trump’s decision: They have to place factory orders now and figure out pricing if they want to get their goods made in time for the lucrative Christmas shopping season, when they make as much as half their annual revenue. The most obvious solutions — raising prices, shifting production to other countries, stockpiling inventory — all have costs and complications of their own.” (Amazon CEO Jeff Bezos owns The Washington Post.)
— Trump denies threatening to demote Powell: “[Trump] said he never threatened to demote Federal Reserve Chairman Jerome Powell, though he maintained he has the authority to do so,” CNBC’s Spencer Kimball reports. ‘I didn’t ever threaten to demote him,’ Trump said in an interview with NBC’s “Meet The Press” that broadcast Sunday. ‘I’d be able to do that if I wanted, but I haven’t suggested that.’
“Trump went on to criticize the Federal Reserve for raising interest rates, saying [Powell] made a mistake. ‘Obama had someone that kept the rates very low,’ Trump said. ‘I had somebody that raised the rates very rapidly — too much. He made a mistake, that’s been proven.’”
— Trump administration pushes to deregulate with less enforcement: “[Trump’s] promises to reverse the regulatory actions of the Obama administration have been stymied by court challenges, but his administration is achieving the goal another way: by not hiring people to do the work of enforcing rules that are on the books,” WSJ’s Alex Leary reports.
“At the Consumer Financial Protection Bureau, created to crack down on unscrupulous small lenders and debt collectors, enforcement is down by 80% from its 2015 peak … Even so, there is growing dissatisfaction among business leaders over the administration’s pace of rolling back actual regulations. Until regulations are eliminated, industry operators still must be prepared for inspections, even if they are less likely. And if Democrats retake the White House in 2020, a new president could easily ramp the rules back up and enforce those that remain on the books.”
— Google's enemies to help build anti-trust case. WSJ's Ryan Tracy and Valentina Pop: "As U.S. officials prepare an antitrust probe of Alphabet Inc.’s Google and possibly other Silicon Valley giants, a loose-knit crew of its rivals is gearing up to help. In industries from news to travel to online shopping, competitors of Google are readying documents and data in anticipation of meetings with the Justice Department, according to industry representatives.
"Many of these companies have long argued that Big Tech platforms illegally abuse their market power. In recent years some of them have found a receptive audience in Europe, where authorities have thrice fined Google for alleged monopolistic practices. Google has paid the fines but is challenging them in court. Now rivals are stepping up their advocacy in the U.S., where antitrust enforcers recently divvied up the job of examining antitrust concerns at large tech platforms, with the Justice Department preparing a Google probe."
— Restaurants are pushing delivery companies to lower fees: “Some of the biggest restaurant operators are pushing back against fees charged by delivery companies, turning up the heat on young businesses already wrestling with rivals in an increasingly crowded market for bringing food to people’s doors,” the WSJ’s Heather Haddon reports.
“ … Growing competition in the delivery business is emboldening many restaurants to seek lower rates from such companies. McDonald’s Corp., Applebee’s and Cousins Submarines Inc. are among chains negotiating to pay lower commissions and asking their delivery partners to spend more on marketing and promotional discounts, people familiar with the negotiations said. Restaurateurs say high fees dent their profits. They add that lower fees and more promotional spending by delivery companies could increase customer choice by enticing more establishments to offer delivery.”
— San Francisco is set to ban e-cigs: “San Francisco is expected to become the first city in the U.S. to ban e-cigarettes this week, a move that will likely pit the city against one of its fastest-growing startups: Juul Labs Inc.,” the WSJ’s Talal Ansari reports. “The San Francisco Board of Supervisors will hold a final vote on the ordinance, which bans the sale, distribution and manufacturing of e-cigarettes, on Tuesday. The measure will then need to be signed by the mayor, London Breed.”
“San Francisco’s move doesn’t affect the sale of cigarettes, which will remain legal. Juul Labs, the dominant e-cigarette maker, has criticized the measure.”
— A Toys R Us comeback?: “Maybe American kids will only have to live through one Christmas without Toys 'R' Us. About a year after shuttering U.S. operations, the remnant of the defunct toy chain is set to return this holiday season by opening about a half dozen U.S. stores and an e-commerce site, according to people familiar with the matter,” Bloomberg News’s Matthew Townsend and Joe Deaux report.
“The stores are slated to be about 10,000-square feet, roughly a third of the size of the brand’s big-box outlets that closed last year, the people said. The locations will also have more experiences, like play areas. The startup costs could be minimized with a consignment inventory model in which toymakers ship goods but don’t get paid until consumers buy them, some of the people said.”
— Sanders to propose eliminating student debt by taxing Wall Street. The Post's Jeff Stein: "Sen. Bernie Sanders (I-Vt.) will propose on Monday eliminating all $1.6 trillion of student debt held in the United States, a significant escalation of the policy fight in the 2020 Democratic presidential primary two days before the candidates’ first debate in Miami. Sanders is proposing the federal government pay to wipe clean the student debt held by 45 million Americans — including all private and graduate school debt — as part of a package that also would make public universities, community colleges and trade schools tuition-free.
"Sanders is proposing to pay for these plans with a tax on Wall Street his campaign says will raise more than $2 trillion over 10 years, though some tax experts give lower revenue estimates."
— Democrats poised to challenge Waters over Ex-Im Bank: “House Democrats are poised to challenge a deal negotiated by Rep. Maxine Waters that would impose new restrictions on the Export-Import Bank, the first show of resistance among members of the Financial Services Committee since she became chairwoman in January,” Politico’s Zachary Warmbrodt reports.
“The new legislation that the California Democrat drafted with the finance panel’s top Republican, Rep. Patrick McHenry (R-N.C.), would renew the agency’s operations for seven years and expand its capacity to offer loan guarantees to foreign buyers of U.S. exports. Without action, the bank's charter would expire at the end of September … The clash over the bill is shaping up to be a major test for Waters, who as committee chairwoman has pledged to work with her GOP counterpart to pass legislation to maintain the Export-Import Bank, federal flood insurance and terrorism insurance.”
— What business issues to watch for in this week’s debates: “Business has dominated the early policy discussions in the 2020 Democratic presidential primary,” CNBC’s Jacob Pramuk reports. “Expect more talk about candidates’ plans for corporate America when 20 hopefuls square off over two nights in the first Democratic debates this week.”
“Candidates have sparred over how large a role the government should take in molding the economy. They have differed over how free trade affects the economy — and whether trade deals can sufficiently protect American workers. Business issues will give candidates a platform to set themselves apart as they elbow for position in a jammed field.”
- The Council on Foreign Relations holds a conversation with Federal Reserve Chair Jerome H. Powell on Tuesday.
- The Senate Agriculture, Nutrition and Forestry Committee holds a hearing on the derivatives market and possible reauthorization of the Commodity Futures Trading Commission on Tuesday.
- The Senate Banking, Housing and Urban Affairs Committee holds a hearing on whether Fannie Mae and Freddie Mac should be designated as “systemically important financial institutions” on Tuesday.
- FedEx is among the notable companies reporting its earnings on Tuesday, per Kiplinger.
- The Economic Policy Institute and the Institute for Policy Studies hold a day-long conference on taxing the “very rich” on Tuesday.
- The Peterson Institute for International Economics presents the University of Maryland’s survey of 2,993 voters on trade-related topics on Wednesday.
- The House Committee on Financial Services Taskforce on Artificial Intelligence holds a hearing on the future on the current and future of AI in financial services on Wednesday.
- The Brookings Institution holds an event on the legacy of the late economist Alan Krueger on Wednesday.
- General Mills, KB Homes and Blackberry are among the notable companies reporting their earnings on Wednesday, per Kiplinger.
- The Banking Committee holds a hearing on the reauthorization of the Export-Import Bank on Thursday.
- Nike, Accenture, Conagra and McCormick are among the notable companies reporting their earnings on Thursday, per Kiplinger.
From The Post's Tom Toles: