Friday, October 10, 2014

This Week in Bank Failures

JPMorgan Chase executive Jamie Dimon returned to work and used his first public appearance to warn about the destabilizing effect of the shadow banking system.

If a bank is too big too fail, then its derivatives contracts have to be “too big to cancel.” Contract terms for many derivatives are being rewritten, effective January 1, 2015, so that parties no longer have the option to cancel the contract if the counterparty is caught up in a financial crisis. These terms in the past have exposed banks to a second level of risk connected with a broad range of financial events. Under the current standard contract language, a triggering event at a bank could lead to trillions of dollars in derivatives cancellations, and that easily could be enough to push even the largest bank into insolvency. Relatively minor and unrelated financial events, such as the sale of a subsidiary, could be sufficient to trigger a wave of cancellations. It’s a scenario that regulators in the United States and Europe realized was inconsistent with the principle of “too big to fail.”

What if Scotland had voted to secede? Bank of England had contingency plans to provide public reassurance and billions of pounds in emergency liquidity if needed. The main objective would have been to reassure depositors that their banks were still going concerns in spite of the political changes.

A credit union was liquidated tonight. State regulators closed County & Municipal Employees Credit Union of Edinburg, Texas. Member accounts were transferred to Navy Army Community Credit Union. The failed credit union had 7,000 members. Monday is a holiday, so full member services will be available on Tuesday.