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Talking the talk: Cyber security cited as a top priority, but 25 percent of world’s banks still victimized in 2011

September 24, 2012 Comments off

Talking the talk: Cyber security cited as a top priority, but 25 percent of world’s banks still victimized in 2011
Source: Deloitte

Deloitte Touche Tohmatsu Limited’s (DTTL) 8th global financial services industry security survey once again confirms information security is a top priority for financial services industry organizations globally. And despite the challenges of balancing the cost of improved security initiatives with perceived risk of sophisticated threats and emerging technologies, organizations say that have become more proactive in implementing innovative security measures and creating greater awareness within their business, which is hopefully good news for the 25 percent of financial institutions that suffered a breach in 2011.

Here’s a quick glance at the additional top three findings in this year’s survey:

  • Increased coordinated activity among security and business groups: almost two thirds of respondents believe that their information security function and business are engaged; most organizations are using a Security Operation Center (SOC) model to monitor traffic and data and actively respond to incidents and breaches.
  • Growing adoption of new technologies and security innovation: as the use of social media increases, 37 percent of respondents are revising organizational policies and 33 percent are educating users on social networking to address the security risks.
  • Policing cyber threats and due diligence with data assets: almost half of the organizations surveyed (49 percent) claim to actively manage their vulnerabilities, with 82 percent also actively researching new threats to proactively protect their environment from emerging threats.

Foreclosure Externalities: Some New Evidence

September 11, 2012 Comments off

Foreclosure Externalities: Some New Evidence

Source: Federal Reserve Bank of Atlanta

In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in "above average" condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices.

The LIBOR Scandal The Fix Is In—the Bank of England Did It!

August 6, 2012 Comments off

The LIBOR Scandal The Fix Is In—the Bank of England Did It!
Source: Levy Economics Institute at Bard College

As the results of the various official investigations spread, it becomes more and more apparent that a large majority of financial institutions engaged in fraudulent manipulation of the benchmark London Interbank Offered Rate (LIBOR) to their own advantage, and that bank management and regulators were unable to effectively monitor the activity of institutions because they were too big to manage and too big to regulate. However, instead of drawing the obvious conclusion—that structural changes are needed to reduce banks to a size that can be effectively regulated, as proposed on numerous occasions by the Levy Economics Institute—discussion in the media and political circles has turned to whether the problem was the result of the failure of central bank officials and government regulators to respond to repeated suggestions of manipulation, and to stop the fraudulent behavior.

Just as the “hedging” losses at JPMorgan Chase have been characterized as the result of misbehavior on the part of some misguided individual traders, leaving top bank management without culpability, politicians and the media are now questioning whether government officials condoned, or even encouraged, manipulation of the LIBOR rate, virtually ignoring the banks’ blatant abuse of principles of good banking practice. Just as in the case of JPMorgan, the only response has been to remove the responsible individuals, rather than questioning the structure and size of the financial institutions that made managing and policing this activity so difficult. Again, the rotten apples have been removed without anyone noticing that it is the barrel that is the cause of the problem. But in the current scandal, the ad hominem culpability has been extended to central bank officials in the UK and the United States.

Too big to fail? Canadian banks are not immune from global crises

July 6, 2012 Comments off

Too big to fail? Canadian banks are not immune from global crises
Source: Canadian Centre for Policy Alternatives

A new report released by CCPA says that Canada is not immune to the banking problems we see abroad, and cautions that like all banks worldwide, Canadian banks are structurally vulnerable to instability.

The report, No More Swimming Naked: The Need for Modesty in Canadian Banking, examines how banks work, why they are inherently prone to instability, and how banking crises spread—even to banks and banking systems that appear to be stable.

According to the report, overconfidence is part of the problem. Complacency tends to encourage risk-taking among banks, while it deters Canadians from asking tough questions about banking. Yet this overconfidence ignores the fact that banking problems are often not apparent until systemic instability is growing.

The report cautions that current regulations have not eliminated these problems, and since governments have no alternative but to support large banks when systemic stability is threatened, this additional security creates a perverse incentive for banks to increase their appetite for risk.

CRS — The Consumer Financial Protection Bureau (CFPB): A Legal Analysis

June 26, 2012 Comments off

The Consumer Financial Protection Bureau (CFPB): A Legal Analysis (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

In the wake of the worst U.S. financial crisis since the Great Depression, Congress passed and the President signed into law sweeping reforms of the financial services regulatory system through the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), P.L. 111- 203.

Title X of the Dodd-Frank Act is entitled the Consumer Financial Protection Act of 2010 (CFP Act). The CFP Act establishes the Bureau of Consumer Financial Protection (CFPB or Bureau) within the Federal Reserve System (FRS) with rulemaking, enforcement, and supervisory powers over many consumer financial products and services, as well as the entities that sell them. The CFP Act significantly enhances federal consumer protection regulatory authority over nondepository financial institutions, potentially subjecting them to analogous supervisory, examination, and enforcement standards that have been applicable to depository institutions in the past. The act also transfers to the Bureau much of the consumer compliance authority over larger depositories that previously had been held by banking regulators. Additionally, the Bureau acquired the authority to write rules to implement most federal consumer financial protection laws that previously was held by a number of other federal agencies.

Although the powers that the CFPB has at its disposal are largely the same or analogous to those that other federal regulators have held for decades, there is a great deal of uncertainty in how the new agency will exercise these broad and flexible authorities, especially in light of its almost exclusive focus on consumer protection. As a result, the CFP Act has proven to be one of the more controversial portions of the financial reform legislation.

The 112 th Congress is actively involved in conducting oversight of the implementation of the CFP Act. Additionally, the 112 th Congress has considered a number of bills that would significantly alter the structure of the Bureau. For example, H.R. 2434, the Financial Services and General Government Appropriations Act, 2012, would make the CFPB’s primary funding subject to the traditional appropriations process, and H.R. 1315, the Consumer Financial Protection Safety and Soundness Improvement Act, would convert the CFPB’s leadership structure from a sole directorship to a commission and would allow the newly established Financial Stability Oversight Council (FSOC) to overturn CFPB-issued regulations with a simple majority vote, as opposed to the current super majority requirement. H.R. 2434 was reported favorably out of the House Committee on Appropriations, and H.R. 1315 was referred to the Senate Committee on Banking, Housing, and Urban Affairs after passing the full House by a vote of 241 to 173. Additionally, 44 Senators signed a letter to the President expressing support for the Bureau-related objectives of H.R. 2434 and H.R. 1315.

This report provides an overview of the regulatory structure of consumer finance under existing federal law before the Dodd-Frank Act went into effect and examines arguments for modifying the regime in order to more effectively regulate consumer financial markets. It then analyzes how the CFP Act changes that legal structure, with a focus on the Bureau’s organization; the entities and activities that fall (and do not fall) under the Bureau’s supervisory, enforcement, and rulemaking authorities; the Bureau’s general and specific rulemaking powers and procedures; and the Bureau’s funding.

Deloitte Shadow Banking Index Debuts: ‘Only’ $9.53 Trillion in Size at End of 2011

June 12, 2012 Comments off

Deloitte Shadow Banking Index Debuts: ‘Only’ $9.53 Trillion in Size at End of 2011
Source: Deloitte

The shadow banking system in the United States might not be as large today as regulators and market participants feared, according to a new quarterly index introduced today by the Deloitte Center for Financial Services. However, with regulatory changes and financial innovation looming, the shadow banking system could creep back very quickly, the Deloitte research group cautions.

The Deloitte Shadow Banking Index shows the volatile shadow banking system totaled $9.53 trillion at the end of 2011 ‒ more than 50 percent below its peak in 2008 ‒ and a figure considerably lower than many estimates.

The Big Banks’ Big Secret: Estimating government support for Canadian banks during the financial crisis

June 8, 2012 Comments off

The Big Banks’ Big Secret: Estimating government support for Canadian banks during the financial crisis
Source: Canadian Centre for Policy Alternatives
From press release:

A study released today by the Canadian Centre for Policy Alternatives (CCPA) estimates the previously secret extent of extraordinary support required by Canada’s banks during the financial crisis.

According to the study, by CCPA Senior Economist David Macdonald, support for Canadian banks reached $114 billion at its peak—that’s $3,400 for every man, woman, and child in Canada.

“At some point during the crisis, three of Canada’s banks—CIBC, BMO, and Scotiabank—were completely under water, with government support exceeding the market value of the company,” says Macdonald. “Without government supports to fall back on, Canadian banks would have been in serious trouble.”

Between October 2008 and July 2010, Canada’s largest banks relied heavily on financial aid programs provided by the Bank of Canada, the Canada Mortgage and Housing Corporation (CMHC), and the U.S. Federal Reserve—all at the same time.

Over the entire aid period, Canada’s banks reported $27 billion in total profits between them and the CEOs of each of the big banks were among the highest paid Canadian CEOs. Between 2008 and 2009, each bank CEO received an average raise in total compensation of 19%.

Federal Reserve Board releases action plans and engagement letter to correct deficiencies in residential mortgage loan servicing and foreclosure processing

June 2, 2012 Comments off

Federal Reserve Board releases action plans and engagement letter to correct deficiencies in residential mortgage loan servicing and foreclosure processing
Source: Federal Reserve Board

The Federal Reserve Board on Thursday released action plans for Citigroup and HSBC Finance Corporation to correct deficiencies in residential mortgage loan servicing and foreclosure processing. It also released the engagement letter between Ally Financial Inc. and the independent consultant retained by Ally to review foreclosures that were in process in 2009 and 2010.

In addition, the Federal Reserve released a supplemental agreement with Ally to address the institution’s foreclosure review obligations following the recent action by Ally’s mortgage servicing subsidiaries to seek protection under the U.S. Bankruptcy Code.

The action plans are required by formal enforcement actions issued by the Federal Reserve last year. The enforcement actions require the mortgage loan servicers regulated by the Federal Reserve and the parent holding companies of mortgage servicers to submit acceptable plans to improve their procedures and controls as well as oversight of foreclosure activities.

The enforcement actions further require the mortgage servicing subsidiaries to provide appropriate remediation to borrowers who suffered financial injury as a result of errors by the servicers. The engagement letter describes the procedures that will be followed by the independent consultant in reviewing Ally’s foreclosure files to determine whether borrowers suffered financial injury as a result of servicer error.

Predatory Credit Card Lending: Unsafe, Unsound for Consumers and Lenders

May 12, 2012 Comments off

Predatory Credit Card Lending: Unsafe, Unsound for Consumers and Lenders
Source: Center for Responsible Lending
From press release:

Credit card losses in the current downturn mounted faster at banks using unfair, deceptive card practices, new CRL research finds. That’s because high-cost penalty fees and interest rates were not used to mitigate risk—as credit card issuers claimed—but instead were the risk that led to higher default rates. Read the report, “Predatory Credit Card Lending: Unsafe, Unsound for Consumers and Lenders.”

In addition to showing that practices that hurt consumers also hurt credit card issuers, the study finds:

  • Bad practices are a better predictor of consumer complaints and an issuer’s losses during a downturn than an institution’s type, size or location.
  • Consumer safeguards on credit cards enhance banks’ financial health, contrary to issuers’ past claim that safeguards undermine it.
  • Credit card issuers with higher loss rates before the recession did not on average have a bigger jump in losses during the recession, indicating that having more high-risk customers did not predict which company’s problems would grow fastest.

New credit card rules have curbed or ended many of the unfair practices the study examined, such as doubling interest rates on existing balances for being a day late in making a payment. But some persist, and none of the new rules apply to business credit cards. Regulators need to better police those areas.

Measuring financial inclusion : the Global Findex Database

May 7, 2012 Comments off

Measuring financial inclusion : the Global Findex Database

Source:  World Bank
This paper provides the first analysis of the Global Financial Inclusion (Global Findex) Database, a new set of indicators that measure how adults in 148 economies save, borrow, make payments, and manage risk. The data show that 50 percent of adults worldwide have an account at a formal financial institution, though account penetration varies widely across regions, income groups and individual characteristics. In addition, 22 percent of adults report having saved at a formal financial institution in the past 12 months, and 9 percent report having taken out a new loan from a bank, credit union or microfinance institution in the past year. Although half of adults around the world remain unbanked, at least 35 percent of them report barriers to account use that might be addressed by public policy. Among the most commonly reported barriers are high cost, physical distance, and lack of proper documentation, though there are significant differences across regions and individual characteristics.
+ Full Paper (PDF)

Consumer Response Annual Report

April 16, 2012 Comments off
Source:  Consumer Financial Protection Bureau
A total of 9,307 consumer complaints regarding credit cards and 2,326 regarding mortgages were filed with the Consumer Financial Protection Bureau in 2011, the CFPB says in its first annual report on its consumer response operation.
Of total credit-card-related complaints, 1,278, or 13.7 percent, were related the billing disputes, the CFPB reports. Another 1,014 (10.9 percent) and 950 (10.2 percent) had to do with identity theft/fraud/embezzlement or APR/interest rate.
Of total mortgage-related complaints, 889, or 38.2 percent, were related to problems face by consumers unable to pay. These can address loan modification, collections or foreclosure. The second-most-frequent complaint about mortgage was just about making payments. A total of 501 such complaints, or 38.2 percent of all mortgage-related complaints, were filed in the month of December, the report shows.
These are the only categories of complaints the CFPB addressed during 2011. It began taking credit-card complaints July 21, when the bureau commenced operation. The CFPB began taking mortgage-related complaints since Dec. 1.

Full Report (PDF)


Workforce Analytics: Using advanced analysis to manage talent and risk

April 4, 2012 Comments off

Workforce Analytics: Using advanced analysis to manage talent and risk
Source: Deloitte

Given the importance of talent and people in the financial services industry (FSI), it’s time to move beyond instinct, gut and tribal wisdom in making workforce decisions. If you’re not using workforce data and analytics to drive your talent decisions, you may be behind the curve — and at risk of losing your competitive edge. As HR works with FSI leaders on the front lines, analytics are becoming critical in making more effective decisions related to workforce planning and recruitment, risk management, compensation, development programs and deploying critical talent.

Workforce analytics involves using statistical models that integrate internal and external data to predict future workforce and talent-related behavior and events. These models can help financial services organizations focus limited resources on critical talent decisions. For example, models have been demonstrated to predict the likelihood that a particular employee will leave in the next six months — and can provide likely reasons for the prediction.

+ Full Report (PDF)

FBI Releases Bank Crime Statistics for Third Quarter of 2011

March 31, 2012 Comments off

FBI Releases Bank Crime Statistics for Third Quarter of 2011
Source: Federal Bureau of Investigation

During the third quarter of 2011, there were 1,094 reported violations of the Federal Bank Robbery and Incidental Crimes Statue, a decrease from the 1,325 reported violations in the same quarter of 2010.1 According to statistics released today by the FBI, there were 1,081 robberies, 11 burglaries, two larcenies, and one extortion of a financial institution2 reported between July 1, 2011 and September 30, 2011.

Highlights of the report include:

  • Loot was taken in 89 percent of the incidents, totaling more than $9.3 million.
  • Of the loot taken, 25 percent of it, or more than $1.9 million, was recovered and returned to financial institutions.
  • Bank crimes most frequently occurred on Friday. Regardless of the day, the time frame when bank crimes occurred most frequently was between 9:00 a.m. and 11:00 a.m.
  • Acts of violence were committed in 5 percent of the incidents, resulting in 18 injuries, three deaths, and four persons taken hostage.3
  • Demand notes4 were the most common modus operandi used.
  • Most violations occurred in the Western region of the U.S., with 375 reported incidents.

+ Full Report

Just how big is the too big to fail problem?

March 30, 2012 Comments off

Just how big is the too big to fail problem?
Source: Milken Institute
From press release:

“Just How Big Is the Too Big to Fail Problem?”, a new report from the Milken Institute, examines the impact of changes in banking regulation since the recent financial crisis. The authors — Senior Finance Fellow James Barth, Economist Penny Prabha and Senior Fellow Philip Swagel — suggest that it is uncertain if the changes will truly eliminate TBTF risk.

According to the authors, the new resolution authority designed to allow troubled big banks to fail will, apart from other issues, “be incomplete and perhaps unworkable until there is more progress on the international coordination of bankruptcy regimes.”

Other provisions in Dodd-Frank, such as the Volcker rule, limit firms’ activities and scale. “But it is difficult to evaluate the cost-benefit ratio,” the authors state, “since there is little evidence on either side. In a sense, it is not even easy to pinpoint the problem to which the Volcker Rule is the solution.”

The report also puts the U.S. “too big to fail” institutions into international comparison, pointing out that of the 50 biggest banks in the U.S., only seven are among the 50 biggest banks in the world. According to the report, “To the extent that the U.S. banks are limited in size they may be put at a competitive disadvantage as compared to the biggest banks in other countries.”

Free registration required to download full report.

Federal Reserve survey provides information on mobile financial services

March 19, 2012 Comments off
Source:  Federal Reserve Board
One out of five American consumers used their mobile phone to access their bank account, credit card, or other financial account in the 12 months ending in January 2012 and an additional one out of five indicated they would likely use mobile banking at some point in the future, according to a Federal Reserve Board survey (2.5 MB PDF).
The survey’s findings suggest that the use of mobile banking is poised to expand further over the next year, with usage possibly increasing to one out of three mobile phone users by 2013. However, the survey indicates that many consumers remain skeptical of the benefit of mobile banking and the level of security associated with the technology.
The use of mobile banking is highly correlated with age, according to the survey results. People between 18 and 29 account for approximately 44 percent of mobile banking users, relative to 22 percent of all mobile phone users. Conversely, people age 60 and over account for only 6 percent of all mobile banking users, but 24 percent of mobile phone users. The survey showed a significantly higher level of mobile banking uptake among African Americans (16 percent) and Hispanics (17 percent), relative to 11 percent and 13 percent of mobile phone users, respectively.
The widespread use of mobile technology has the potential to expand access to financial services for previously underserved populations. Underbanked individuals (people with bank accounts but who use check cashers, payday lenders, or payroll cards) make relatively heavy use of mobile banking, according to the survey. Of this group, 29 percent used mobile banking in the year ending in January 2012.
The survey found that the most common mobile banking activities are consumers checking their account balances or monitoring recent transactions. Less frequently used mobile banking functions include making online bill payments from a bank account, locating an in-network automated teller machine, and depositing a check by phone.
The majority of consumers who have a mobile phone but do not use mobile banking said they either had no need for these services or expressed security concerns. When asked to rate the security of mobile banking, non-users were more likely to report that they believed it was unsecure or that they simply didn’t know how secure the technology was.

Consumers and Mobile Financial Services

***NEW*** HUD OIG’s reviews of foreclosure practices at five of the nation’s largest FHA servicers

March 14, 2012 Comments off

HHS OIG’s reviews of foreclosure practices at five of the nation’s largest FHA servicers
Source: U.S. Department of Housing and Urban Development, Office of Inspector General

As part of the Office of Inspector General’s (OIG) nationwide effort to review the foreclosure practices of the five largest Federal Housing Administration (FHA) mortgage servicers (Bank of America, Wells Fargo Bank, CitiMortgage, JP Morgan Chase, and Ally Financial, Incorporated) we reviewed Wells Fargo’s foreclosure and claims processes. In addition to this memorandum, OIG issued separate memorandums for each of the other four reviews. OIG performed these reviews due to reported allegations made in the fall of 2010 that national mortgage servicers were engaged in widespread questionable foreclosure practices involving the use of foreclosure “mills” and a practice known as “robosigning” of sworn documents in thousands of foreclosures throughout the United States.

+ Issue Date: March 12, 2012
Audit Memorandum No. 2012-KC-1801 (PDF)
Title: CitiMortgage, Inc. Foreclosure and Claims Process Review O’Fallon, MO

+ Issue Date: March 12, 2012
Audit Memorandum No. 2012-PH-1801 (PDF)
Title: Ally Financial, Incorporated Foreclosure and Claims Process Review Fort Washington, PA

+ Issue Date: March 12, 2012
Audit Memorandum No. 2012-CH-1801 (PDF)
Title: JPMorgan Chase Bank N.A. Foreclosure and Claims Process Review Columbus, OH

+ Issue Date: March 12, 2012
Audit Memorandum No. 2012-FW-1802 (PDF)
Title: Bank of America Corporation, Foreclosure and Claims Process Review Charlotte, NC

+ Issue Date: March 12, 2012
Audit Memorandum No. 2012-AT-1801 (PDF)
Title: Wells Fargo Bank, Foreclosure and Claims Process Review, Fort Mill, SC

Federal Reserve announces summary results of latest round of bank stress tests

March 14, 2012 Comments off

Federal Reserve announces summary results of latest round of bank stress tests
Source: Federal Reserve Board

The Federal Reserve on Tuesday announced summary results of the latest round of bank stress tests, which show that the majority of the largest U.S. banks would continue to meet supervisory expectations for capital adequacy despite large projected losses in an extremely adverse hypothetical economic scenario.

The Federal Reserve in the Comprehensive Capital Analysis and Review (CCAR) evaluates the capital planning processes and capital adequacy of the largest bank holding companies. This exercise includes a supervisory stress test to evaluate whether firms would have sufficient capital in times of severe economic and financial stress to continue to lend to households and businesses.

Reflecting the severity of the stress scenario–which includes a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices–losses at the 19 bank holding companies are estimated to total $534 billion during the nine quarters of the hypothetical stress scenario. The aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, falls from 10.1 percent in the third quarter of 2011 to 6.3 percent in the fourth quarter of 2013 in the hypothetical stress scenario. That number incorporates the firms’ proposals for planned capital actions such as dividends, share buybacks, and share issuance.

Despite the large hypothetical declines, the post-stress capital level in the test exceeds the actual aggregate tier 1 common ratio for the 19 firms prior to the government stress tests conducted in the midst of the financial crisis in early 2009, and reflects a significant increase in capital during the past three years. In fact, despite the significant projected capital declines, 15 of the 19 bank holding companies were estimated to maintain capital ratios above all four of the regulatory minimum levels under the hypothetical stress scenario, even after considering the proposed capital actions, such as dividend increases or share buybacks.

+ Methodology and Results for Stress Scenario Projections (PDF)

CRS — China’s Banking System: Issues for Congress

March 13, 2012 Comments off

China’s Banking System: Issues for Congress (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

China’s banking system has been gradually transformed from a centralized, government-owned and government-controlled provider of loans into an increasingly competitive market in which different types of banks, including several U.S. banks, strive to provide a variety of financial services. Only three banks in China remain fully government-owned; most banks have been transformed into mixed ownership entities in which the central or local government may or may not be a major equity holder in the bank.

The main goal of China’s financial reforms has been to make its banks more commercially driven in their operations. However, China’s central government continues to wield significant influence over the operations of many Chinese banks, primarily through the activities of the People’s Bank of China (PBOC), the China Banking Regulatory Commission (CBRC), and the Ministry of Finance (MOF). In addition, local government officials often attempt to influence the operations of Chinese banks.

Despite the financial reforms, allegations of various forms of unfair or inappropriate competition have been leveled against China’s current banking system. Some observers maintain that China’s banks remain under government-control, and that the government is using the banks to provide inappropriate subsidies and assistance to selected Chinese companies. Others claim that Chinese banks are being afforded preferential treatment by the Chinese government, given them an unfair competitive advantage over foreign banks trying to enter China’s financial markets.

While some question what they characterize as unfair competition in China’s banking sector, others are concerned that many of China’s banks may be insolvent and that China may experience a financial crisis. According to these commentators, efforts to resolve a serious accumulation of non-performing loans (NPLs) only disguised the problem. In addition, China’s NPL situation may have been worsened by its November 2008 stimulus program and the emergence of “local government funding platforms” that generated an estimated $1.7 trillion in local government debt.

A financial crisis in the city of Wenzhou revealed the previously underappreciated risk associated with China’s “underground” banking activities. Some analysts fear that a sharp decline in China’s property values could precipitate a financial crisis that could effect the U.S. economy.

China’s banking system raises two key issues that may be of interest to Congress. First, Congress may choose to examine allegations of inappropriate bank subsidies to major Chinese companies, particularly state-owned enterprises (SOEs). Second, under its WTO accession agreement, China was to open its domestic financial markets to foreign banks. Congress may consider reviewing China’s compliance with the WTO agreement and press the Obama Administration to raise the issue with the Chinese government.

This report will be updated as circumstances warrant.

The Effect of TARP on Bank Risk-Taking

March 12, 2012 Comments off

The Effect of TARP on Bank Risk-Taking
Source: Federal Reserve Board

One of the largest responses of the U.S. government to the recent financial crisis was the Troubled Asset Relief Program (TARP). TARP was originally intended to stabilize the financial sector through the increased capitalization of banks. However, recipients of TARP funds were then encouraged to make additional loans despite increased borrower risk. In this paper, we consider the effect of the TARP capital injections on bank risk taking by analyzing the risk ratings of banks’ commercial loan originations during the crisis. The results indicate that, relative to non-TARP banks, the risk of loan originations increased at large TARP banks but decreased at small TARP banks. Interest spreads and loan levels also moved in different directions for large and small banks. For large banks, the increase in risk-taking without an increase in lending is suggestive of moral hazard due to government ownership. These results may also be due to the conflicting goals of the TARP program for bank capitalization and bank lending.

+ Full Paper (PDF)

FDIC Announces a Quick Guide for Consumers on Credit, Debit and Prepaid Cards

March 9, 2012 Comments off

FDIC Announces a Quick Guide for Consumers on Credit, Debit and Prepaid Cards
Source: Federal Deposit Insurance Corporation

In observance of National Consumer Protection Week 2012 (NCPW), the FDIC has issued a guide to help consumers understand the differences between debit, credit and prepaid cards. The guide is intended to help consumers, who routinely use cards to pay for goods and services but who don’t always understand the differences in how these cards work or the applicable consumer protections. The quick guide and an accompanying list of 10 things to know about credit, debit and prepaid cards can be found at www.fdic.gov/ncpw.

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