Friday, March 14, 2014

This Week in Bank Failures

Depending on what happens next, Crimea could become the next Cyprus (or the new Puerto Rico, as some in the Russian media have suggested without any intentional irony). The autonomous maritime region of Ukraine is relying more on tanks and machine guns than on the legal process as it considers its political future. Amid the tense standoff, depositors are withdrawing as much money as they can from their bank accounts. The largest bank is limiting withdrawals to $150 per day as there are few options for delivering more cash to the region, and other banks are having similar difficulties. Banks likely won’t be able to pay depositors if the region becomes an independent country or a territory of Russia. On the other hand, there will be difficulties even if Crimea elects to maintain its current status. The already weak economic base of Crimea has surely been shaken by the military occupation and the threat of war.

Fannie Mae and Freddie Mac will finally be wound down under a plan worked out in the Senate Banking Committee — though that assumes the two mortgage giants don’t fail on their own first. Legislation has not been drafted yet and is not expected to clear the Senate, never mind the House, before the end of this year. Assuming legislation passes next year, it is sure to be challenged in court. It could be 2016, then, before Fannie Mae and Freddie Mac go into wind-down mode. In recent quarters, legal victories and gains in the real estate market have allowed the two companies to report profits, but that doesn’t provide a path to sustainable operations.

Citigroup executives are leading an investigation into fraudulent loans made by the bank’s Mexican operations. This escalation of the internal investigation suggests that the bank worries some of its senior managers in both Mexico and the United States might have been in on the scheme.

Target knew on November 30 that its transaction network was being targeted by spyware that would copy data outside the network but managers did not investigate the intrusion immediately. It was only after the Justice Department noticed a suspicious pattern of payment card transactions two weeks later that the retailer began to remove the spyware from its point-of-sale terminals.

You might be surprised to learn that most ATMs worldwide run on Microsoft Windows XP, a trouble-prone and now end-of-life operating system. After several extensions, Microsoft will stop supporting the aging OS next month. A few banks are rushing to upgrade the operating systems for their ATMs, but most will be paying Microsoft for extended support for the terminals, giving them more time to upgrade over the next three years. Extended support is an expensive arrangement, and even with that, security experts worry openly about what could happen to the ATM networks with most terminals running obsolete software. Even if there aren’t any troubles, it will be an added cost for banks. It is a surprising problem for banks to have stumbled into, as experts say the cost to replace an obsolete ATM terminal with an up-to-date terminal is only about $2,000.