Friday, August 10, 2012

This Week in Bank Failures

Reuters reports that U.S. banking regulators have directed five giant banks to draw up emergency liquidity plans. These “recovery” plans are different from the liquidation plans that a larger number of banks are required to have, though there is some overlap. If a bank loses access to its usual sources of liquidity, it might sell assets, such as its branch network. The emergency liquidity plans are similar in nature to the alternate financing plans all large, well-run businesses have, but are more detailed, running to several hundred pages that describe strategies for selling “non-core” assets. They are also more dynamic. Banks have been directed to draw up plans that will work within three to six months. Few non-financial business would need to plan within such a short financial planning horizon.

Libor must carry on, a review panel in London has concluded, but not in its current form. Libor is the base rate for trillions of dollars in long-term loans, so it cannot easily be discontinued. Yet Libor in its past forms and in its current interim form is too much based on opinions and guesses to properly serve its purpose as a base rate. A revised Libor must be based more on actual transaction reports, and will probably have to be supervised more directly by the Financial Services Authority (FSA). U.K. banks will likely be required to report certain transactions, such as overnight loans between banks, so that the data can be used to compute the new Libor. Parliament is expected to collect ideas and draft new legislation on the subject next year.

The U.S. Justice Department has abandoned its criminal probe of the marketing of subprime mortgage derivatives at Goldman Sachs. The broker survived the financial squeeze in 2007–2008 by selling subprime mortgage securities in enormous volumes to its clients, while at the same tine secretly betting against the entire subprime mortgage market. Criminal charges are not on the way, the Justice Department said yesterday, unless stronger evidence emerges. However, various other investigations and court cases on Goldman’s subprime dealings continue.

Standard Chartered Bank acknowledges a history of misconduct at its New York subsidiary, but says New York banking regulators have hurt its reputation by claiming that it stripped codes from wire transfers when the codes could have identified its illicit customers. The bank has seen its stock decline by a fourth and is hinting at a lawsuit against the regulators whose complaint sparked the decline. Banking regulators have suggested canceling the U.K.-based bank’s banking license in New York for keeping false records in connection with its money-laundering business. A hearing is scheduled for Wednesday.

Knight Capital will survive its high-speed trading debacle, at least for now. It lost $440 million in less than an hour with ill-timed trades when the stock market opened last Wednesday. Spooked customers abandoned it. Over the weekend, though, it lined up $400 million in new capital and reassured its largest customers. It opened for business as usual on Monday. The new capital, though, dilutes previous stockholders by about two thirds. The transaction clearinghouse says it still does not know what caused its trading overload last week. The SEC said it will look into the technology issues involved (next month — it is hard to get anything done on Wall Street in August), and in the meantime, admonished all high-speed traders to be sure their trading programs “are operating properly.”

A credit union failed this week. State regulators in Michigan determined that United Catholic Credit Union was insolvent and closed it yesterday. It had 200 members and less than $1 million in member accounts. The NCUA will issue checks to members for their deposits.