Friday, October 17, 2014

This Week in Bank Failures

The European Banking Authority (EBA) has clarified the status of the “non-bonus” bonuses being paid by dozens of European banks to top-level managers. These extra payments are legal, but must be counted as bonuses under new EU rules that limit banking bonuses to 100 percent of salary, or 200 percent of salary for a bonus specifically approved by stockholders. This means that most employees who received the “non-bonus” bonuses this year will not be eligible for year-end bonuses. Banks can still get around the bonus cap by raising salaries. In most businesses, limiting bonuses to 100 percent of salary would have no effect, since few workers get bonuses that high, but in banking, thousands of workers were receiving performance bonuses over €1 million every year in spite of salaries much lower than this. Bonuses in banking are a problem because they can encourage high-risk strategies that can put a bank’s future profits and solvency at risk, or aggressive market strategies that may involve misleading or cheating customers.

The White House has put its authority behind a move to more secure credit cards. Starting next year, U.S. government credit cards will have chip-based security devices. This move should give the transaction network an extra incentive to upgrade its equipment, which in turn should get banks to issue the more secure credit cards to more of their customers. Improving the physical form of credit cards should reduce the risk of fraud when credit card transaction data is stolen, something that has happened far too often in the past year. Last weekend, it was Kmart’s turn to announce a major point-of-sale data breach.

Russia’s economy continues its slide, and this was reflected by a downgrade by Moody’s, rating the country’s debts barely above junk status. The costs of military adventures, sanctions against Europe and North America, the government’s promises to prop up a stumbling banking sector, and a general malaise and industrial decline were already hurting the Russian economy. And now, a decline in global oil prices has cut Russia’s earning capacity by a staggering 10 percent, and oil prices seem likely to fall farther before they turn upward again. Russia’s currency has declined by 15 percent since the beginning of the year, largely because of the central bank’s moves to support the banking sector.

Banco Espírito Santo, which collapsed spectacularly last summer, was employing shady off-balance sheet maneuvers to shore up its capital as long ago as 2002, regulators and investigators have discovered. Among other strategies, the bank set up offshore investment funds that mainly invested in the bank’s own stock. The bank and its offshore investment funds lent money to customers which they lent back to the bank, a form of transaction that sounds illegal, but it depends on the details, which investigators are now taking a close look at.

A mid-month bank failure: Maryland bank regulators closed NBRS Financial, which had 5 locations in northeastern Maryland and adjacent Lancaster County, Pennsylvania. The failed bank had deposits around $200 million earlier this year. Deposits and assets are transferred to Howard Bank, based in the greater Baltimore area just to the west. Howard Bank will immediately be selling off about a tenth of the assets. It is a big expansion for Howard Bank, which had just 7 branch locations last month before purchasing one of NBRS’s branches in a separate transaction.