COMMENTARY: "TBTF" AND THE FUTILITY OF THE LIVING WILL
Since our largest financial institutions blew through their capital in record time during the financial crisis, regulators concluded that more capital was better than less. According to a commentary in American Banker today, setting aside more capital only sets a higher watermark for counting down to failure. To understand the risks that systemically important financial institutions (SIFIs) present to the financial system, regulators must first understand their interdependences internally within their own corporate structure, then externally, across multiple financial institutions. The public resolution plan filings dated July 1, 2014, include a section called Material Entities. The largest SIFIs list 15 to 30 material entities each. However, these same SIFIs listed thousands of legal entities. For example, Citigroup listed 1,817 legal entities, Goldman Sachs has 14,527, JPMorgan Chase has 4,376 and Morgan Stanley has 8,825. When we couple the organizational complexity of thousands of legal entities with the underlying complexity of generations of legacy systems, we can begin to understand the enormity of the task of dismantling global financial conglomerates, according to the commentary. We need something more substantial than the living wills that regulators have, understandably, found wanting. Read the full commentary.
ANALYSIS: SMALL BUSINESS LENDING IS SLOW TO RECOVER
Across the U.S., small-business lending has been stuck in a slow, grinding recovery behind most other types of business and consumer loans, the Wall Street Journal reported yesterday. At the end of the first quarter, banks held $585 billion in loans to small businesses, up 1 percent from last September but still 18 percent less than the peak of $711 billion in 2008, according to the Federal Deposit Insurance Corp. The number of loans for $1 million or less held by banks has been down about 14 percent to 23.5 million since 2008. In nearly one-third of all U.S. counties, small-business lending remains below 2005 levels, estimates PayNet Inc., a Skokie, Ill., tracker of loans by banks, corporations and alternative lenders such as finance companies. Read more. (Subscription required.)
COMMENTARY: WHY A RULE ON LOAN LOSSES COULD SQUEEZE CREDIT
The world's accounting rule-makers have decided that banks should immediately post a loss every time they make a loan, on the theory that some percentage of loans will inevitably go bad, according to a commentary in Friday's New York Times. Requiring an immediate reporting of losses, long before a borrower has missed even one payment deadline, "could have serious unintended consequences," one accounting expert warned two years ago. A bank facing a difficult quarter, and needing to do whatever it can to keep from further depressing earnings, could simply decide to stop making loans, at least until the quarter had passed. That, said Hans Hoogervorst, the chairman of the International Accounting Standards Board, "would be a very easy way for banks to boost their profits." But while profits would look better, the economy could suffer. The rule could reduce the availability of credit just when a troubled economy might be most in need of financing to help promote a recovery, according to the commentary. Read more.
FSR'S CAMPAIGN ATTACKS CFPB COMPLAINT SITE
The Financial Services Roundtable (FSR) is launching an advertising campaign accusing the Consumer Financial Protection Bureau of potentially spreading misinformation through the agency's online complaint database, AmericanBanker.com reported today. The CFPB proposed a plan last month to expand its complaint portal to allow consumers to share a "narrative" of specific disputes with financial institutions. But the industry immediately criticized the move, saying that it could result in the publication of unsubstantiated claims against banks. FSR said yesterday that it will target the CFPB's portal with advertisements posted in Washington, D.C. subway stations and via a social media campaign, with the intent of highlighting "the problems that the CFPB's rushed plan poses to consumers." The trade group said that the agency's plan would provide companies named in a complaint with "little opportunity to respond." Read more.
FEATURE: INSIDE THE DARK, LUCRATIVE WORLD OF CONSUMER DEBT COLLECTION
The New York Times Magazine ran a feature this weekend taking a inside look at the consumer debt collection business. When debtors stop paying those bills, the banks regard the balances as assets for 180 days. After that, they are of questionable worth. So banks "charge off" the accounts, taking a loss, and other creditors act similarly. These huge, routine sell-offs have created a vast market for unpaid debts -- not just credit card debts but also auto loans, medical loans, gym fees, payday loans, overdue cellphone tabs, old utility bills, delinquent book-club accounts. From 2006 to 2009, for example, the nation's top nine debt buyers purchased almost 90 million consumer accounts with more than $140 billion in "face value." And they bought at a steep discount. On average, they paid just 4.5 cents on the dollar. Read the full feature taking a close look at the purchasing and servicing of those accounts.
Running with the feature is a game that the New York Times included called "Bad Paper." It allows participants to play either the role of the debtor or the debt collector. Click here to find out more.
BANKS, RETAILERS SPEED UP DRIVE TO ADD CHIPS TO CREDIT, DEBIT CARDS
Banks and retailers are pushing for new credit cards fitted with technology to combat fraud in the wake of a number of high-profile data breaches in recent months, the Wall Street Journal reported today. Major lenders, regional banks and credit unions are rolling out the new cards, which contain a computer chip in addition to the traditional magnetic strip on the back. Merchants, too, are installing new terminals at cash registers to accept the cards. In all, U.S. lenders will issue more than 575 million chip credit and debit cards by the end of 2015, representing roughly half of the one billion cards now in circulation, according to an industry-group projection. U.S. credit card fraud losses totaled roughly $18 billion last year, according to Javelin Strategy & Research, a consulting firm unit of Greenwich Associates. About a third of those losses are attributed to counterfeit cards, according to consulting firm Aite Group. Read more. (Subscription required.)
CREDIT SWAPS POLISHED IN $19 TRILLION DERIVATIVE OVERHAUL
The biggest overhaul to the $19 trillion credit derivatives market in more than a decade will seek to solve flaws that have stopped some contracts from paying out as buyers anticipated, Bloomberg News reported today. The changes come too late for investors in the junior debt of Banco Espirito Santo SA, whose credit-default swaps were devalued this month when the Portuguese lender was rescued and restructured by the government. Since the contracts are tied to the majority of a company's debt, the swaps don't necessarily stay tied to the securities that they're meant to protect if the borrower is reorganized. Investors will start signing up to convert outstanding trades into new contracts as early as this week after the International Swaps & Derivatives Association rewrote the documentation to address the weaknesses. The biggest impact of the shakeup may be in the cost of swaps tied to subordinated bank bonds like those of Banco Espirito Santo, which will be about 50 percent more than existing contracts, according to Citigroup Inc. Read more.
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NEW CASE SUMMARY ON VOLO: SUNSHINE HEIFERS LLC V. CITIZENS FIRST BANK (IN RE PURDY; 6TH CIR.)
Summarized by Paul Hage of Jaffe Raitt Heuer & Weiss P.C.
Reversing the bankruptcy court, the U.S. Court of Appeals for the Sixth Circuit held that dairy cow leases were true lease agreements, as opposed to disguised security agreements, and thus, lessor's reversionary interest in cows trumped the secured creditor's security interest.
There are more than 1,400 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.
NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: LESSONS FROM POSTAL BANKING'S PAST
A recent post examines the history of the U.S. Postal Banking system and how lessons can be learned from it.
Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.
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