Thursday, August 21 09:25:07
U.S. regulators are sending some of the biggest global banks verbal warnings as they crack down on the firms' poor grasp of their own weaknesses, and push for rapid improvements in risk assessment, according to two sources familiar with the matter.
The firms who received the warnings are among the largest banks in the world, but the sources declined to name individual firms because the enforcement actions are not public. Given the regular contact between supervisors and bank officials, the warnings could have come in meetings, phone calls, or letters.
Banks are responding to the stepped-up pressure by hiring people with experience in data governance and analytics. One of the sources said recruitment calls have spiked in the last 18 months as regulators have issued more non-public enforcement actions.
The world's largest banks have only grown bigger since the 2007-2009 financial crisis, and now contain even more separate entities involved in a dizzying web of credit obligations and trading positions. Banks, hobbled by what regulators believe is poor risk- management data, are struggling to get a handle on the full scope of their trading activities and asset quality.
The result is that six years after the financial crisis, regulators and the industry they oversee cannot confidently assess big-picture threats to the U.S. financial system.
And what was once viewed as an issue for data geeks has now been elevated to a safety-and-soundness concern that could eventually lead to restrictions on bonuses, dividends and share repurchases.
"The information that external investors and supervisors have about these firms is essentially hostage to the quality of the data management within these firms," said Lewis Alexander, who between 2010- 2011 helped lead the U.S. Treasury's effort to set up the Office of Financial Research, or OFR.
Alexander is now U.S. chief economist at Nomura and also chairs the OFR's advisory committee.
Regulators have been taking a two- pronged approach. Publicly, officials including Federal Reserve Governor Daniel Tarullo and Comptroller of the Currency Thomas Curry have issued warnings that banks with more than $50 billion in assets need to fix shoddy infrastructure that prevents them from identifying, measuring, monitoring and controlling risk.
Curry in particular has hammered at this theme, especially after JPMorgan Chase & Co's risk models in 2012 failed to capture the dangers of its "London Whale" derivatives trades that led to a $6.2 billion loss.
And privately, regulators have been issuing enforcement actions in recent months.
A senior bank supervisor said in an interview that these warnings a part of a "heightened expectations" program in which U.S. regulators have clamped down on the largest U.S. banks and foreign bank units with tougher risk management rules.
For example, the New York Fed sent a letter to Deutsche Bank in December that criticized the U.S. divisions of Germany's largest bank for producing financial reports that were "low quality, inaccurate and unreliable," said a source familiar with the letter.
These private enforcement actions appear to build on some weaknesses that were made public as part of the Fed's annual stress tests of the largest banks.
Bank of America in April was forced to resubmit a capital plan, and had to suspend planned increases in shareholder pay-outs, after it had incorrectly reported data used to calculate capital ratios to the Fed.
A plan by Citigroup was rejected altogether, with the Fed saying the bank's internal examination process did not sufficiently consider how its sprawling business across the world would weather a hypothetical crisis scenario. (Reuters)
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Euro zone business growth slows in July, prices fall-PMI
Euro zone private business growth slowed more than expected this month, despite widespread price cutting, as manufacturing and service industry activity both dwindled, a survey showed on Thursday.
Euro zone economic growth ground to a halt in the second quarter, dragged down by a shrinking economy in Germany and a stagnant France, even before any impact from sanctions imposed on and by Russia over Ukraine.
Markit's Composite Purchasing Managers' Index (PMI) will provide gloomy reading for the European Central Bank (ECB), suggesting its two biggest economies are struggling like smaller members.
Based on surveys of thousands of companies across the region and a good indicator of overall growth, the Composite Flash PMI fell to 52.8 from July's 53.8, far short of expectations in a Reuters poll for a modest dip to 53.4.
However, readings above 50 still indicate expansion. Markit said the data point to third-quarter economic growth of 0.3 percent, matching predictions from a Reuters poll last week.
"We are not seeing a recovery taking real hold as yet. We are not seeing anything where we look at it and think 'yes, this is the point where the euro zone has come out of all its difficulties'," said Rob Dobson, senior economist at Markit.
The euro zone has also yet to feel the full effect of escalating tensions with Russia.
Europe stung Moscow with economic sanctions, prompting a tit-for-tat response from Russian President Vladimir Putin, over the Kremlin's support for rebels in eastern Ukraine.
The composite PMI in Germany - Russia's biggest trade partner in the European Union which has already seen exports to the country plunge in the first half of the year - fell to 54.9 from 55.7.
For France, the euro zone's second largest economy, the Composite PMI rose from 49.4 to the break-even mark at 50.
Struggling to support growth while battling the threat of deflation, the ECB is providing another round of temporary access to cheap cash for banks. There is also a one-in-three chance it embarks on an asset purchase programme next year, a Reuters poll showed.
Consumer prices in the euro zone rose just 0.4 percent on the year in July, the weakest annual rise since October 2009 at the height of the financial crisis, and well within the ECB's "danger zone" of below 1 percent.
Worryingly, according to the composite output price index firms cut prices for the 29th month - and at a faster rate than in July. It dipped to 48.9 from 49.0.
Also of concern, suggesting factories do not expect things to improve anytime soon, manufacturing headcount fell at the fastest rate in nine months. The sub-index dropped to 49.1 from 49.9.
Optimism about the future also sank among services firms - the business expectations index plummeted to 58.6 from 61.7, its lowest reading in a year. (Reuters)
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