Banks have so far mostly avoided the cost-cutting fad sweeping over the world, but they won’t be able to put off the big cuts much longer. Credit Suisse, Barclays, Deutsche Bank, and Royal Bank of Scotland (RBS) are among the banks announcing new layoffs, closures, and other cost-cutting initiatives this week. Bank of America took the small steps of closing some child-care centers it operates for U.S. employees and cutting staff at its Tokyo trading office. More importantly, it is accelerating previously planned layoffs and closures, a move most observers had anticipated when the cuts were first announced last year. At Credit Suisse, it is the asset management division that is on the chopping block; at RBS, the cuts in investment banking and in Ireland operations will go farther than previously announced.
It is not just banks themselves cutting costs. Banks are requiring some troubled large businesses to meet cost-cutting targets as a condition of operating loans, particularly in the troubled Japanese electronics sector.
Stress tests in Spain were not as bad as European banks and traders had feared. Banks are in financial distress but the capital deficits are less than most previous estimates. Bankia is in the worst trouble, needing €25 billion to keep operating. Spain had previously signaled a need for a €100 billion financial system bailout, but now will probably be asking for between €40 and €50 billion.
Spain unveiled new cuts in government services today, while leaders in France called for an increase in taxes to narrow a budget gap, and Fitch warned of a UK downgrade in the near future. Austerity budgets and sovereign downgrades seem destined to continue for at least the next two years even if economic circumstances begin to turn around immediately. Downgrades are also affecting municipal governments across the United States. Downgrades involving schools and hospitals reflect the loss of federal funds that take effect early next year under Congress’s current budget plans, and those cuts could be far steeper under a budget adjustment proposal being floated by House Republican leaders. A related planned cut in Build America Bonds is affecting municipalities that participate in that federal infrastructure financing plan.
Libor will live on under new ownership, according to a plan released today by U.K. banking regulators. An independent board will supervise the data (still actually collected by Thompson Reuters) and rate computations. The proposal calls for legislation making it a crime to falsify data reports intended for use in base interest rates such as Libor. Bank employees would have to be certified before they could participate in Libor reports. To simplify things, the number of Libor rates will shrink from more than 100 to just 20. Libor indexes in national currencies of countries such as Sweden and Denmark will be phased out quickly. Even with the cutbacks, the report calls for unspecified reforms so that Libor is not so dependent on opinions and rate cards, but reflects actual transactions.
Separately, RBS is thought to be the next bank that will settle Libor fraud allegations with regulators.
Bank of America has filed a $2 billion settlement related to statements to stockholders about its acquisition of failed brokerage Merrill Lynch. The proposed settlement will be reviewed by a federal court.
In terms of the political calendar, tonight would be an opportune time for one low-profile bank closing, and there was one in Illinois. State regulators closed First United Bank, based in Crete, Illinois. It had 5 locations within a 10-mile radius at the south end of the Chicago metro area in Illinois and Indiana. It had $316 million in deposits. Old Plank Trail Community Bank, of Wintrust Financial Corporation, is paying a 0.6 percent premium for the deposits and is purchasing the assets.
