Author Archives: Aaron Jacobs


A decade ago the G20 leaders, supported by their finance ministers and central bank governors, approved a program of reform to restore the resilience and stability of the international financial system in the wake of the 2007-09 crisis. It is timely to think about what was left out or undone in the light of events since the spring, when the COVID pandemic upended financial markets…

Content Link

Press Release

Event Registration – 14 October 2020

Statement By the Systemic Risk Council Addressed to the Chairman, Financial Stability Board, Bank for International Settlements on CCP Resolution

On 4 May 2020 the Financial Stability Board issued draft guidance on the resolution of central-counterparty clearing houses, seeking comments by 31 July. The Systemic Risk Council considers that the proposed guidance is not fit for purpose as it currently stands, since it does not provide a clear, internationally agreed solution to the problems of procyclicality and the currently inadequate incentives embedded in plans based on clearing houses’ existing rules.

Content Link PDF

Press Release PDF

Bank Dividends in Peril With Crisis Veterans Warning of Trouble

By Lisa Lee and Shahien Nasiripour — Bloomberg

A long-running clash over the ability of Wall Street banks to weather hard times and still pay shareholder dividends is gaining urgency as the number of Covid-19 cases ticks up and economic data remain gloomy. Critics, including a number of government and Federal Reserve veterans of the 2008 financial crisis, say they’d rather see the banks marshal resources for a rocky road ahead than continue paying shareholders. On Thursday, the central bank will announce results of its annual stress tests, which for the first time will include a “sensitivity analysis” to gauge how well banks can navigate an economy shattered by a global pandemic. While the Fed will
release evaluations for individual institutions, the outcome of the sensitivity exam will have a single score for all the banks in the test. The findings could feed a growing clamor for the biggest banks to suspend or cut dividend payments after they temporarily quit share buybacks for this quarter. Sheila Bair, who led the Federal Deposit Insurance Corp. during the last crisis, said the Fed shouldn’t need stress tests to put a stop to dividends.
“It troubles me that the Fed seems to be struggling to make a judgment independent from what the big banks want,” Bair said in an interview. “We don’t know how bad it will get. It’s common sense and prudence to ask banks to retain capital.”

Net Incomes

During the months-long coronavirus lockdown, the biggest U.S. banks stuck to their intention to continue dividends. For the first three months of 2020, the four biggest U.S. commercial banks — Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. — all paid them, with JPMorgan and Wells Fargo paying out more than their net incomes.
From the start of 2017 through March, the four banks cumulatively returned about $1.26 to shareholders for every $1 they reported in net income, according to data compiled by Bloomberg. Citigroup returned almost twice as much money to its stockholders as it earned, according to the data, which includes dividends on preferred shares. The banks declined to comment.

Fed watchers, including Bloomberg Intelligence analyst Ben Elliott, say it’s unlikely the central bank will mandate a broad-based cut or suspension of dividend payments this week. The Fed declined to comment.


“The Fed has been great in all other respects,” Jeremy Stein, chairman of the Harvard University economics department and a Fed governor from 2012 to 2014, said in an interview, referring to the central bank’s bailout programs. “But here, on bank regulation, they’re behind.” Stopping dividends is “a no-brainer.” Federal Reserve Bank of Minneapolis President Neel Kashkari, who as a Treasury Department official in 2008 helped
design the Troubled Asset Relief Program, called on the banks to raise capital rather than spend it on payments to shareholders. In a Financial Times op-ed in April, Kashkari said that would be “the most patriotic thing.” And in an interview, Donald Kohn, who was the Fed’s vice chair under Ben Bernanke during the financial crisis, said it’s important to “make sure the banks have enough capital to survive a prolonged downturn in the
economy.” Read more: Banks’ Dividend Outlook Gets Murky With Fed’s
Stress Test Twist Recent data foretell months of hardship. This week, 31
states reported mounting cases of Covid-19, compared with 21 last month. More than 37 million Americans are struggling with hunger, a number that’s expected to climb to 54 million, including 18 million children, by the end of the year, according to advocacy group Feeding America. About 20.5 million Americans filed continuing claims for jobless benefits in the first week of June, according to the Labor Department, and extended benefits — the extra $600 a week the government is paying people who recently lost their jobs — are set to expire July 31. Home-loan delinquencies increased to
the highest since 2011, and weekly corporate bankruptcies soared to the most since 2009. The strength of the recovery is going to depend on banks’
willingness to lend, and one lesson policy makers took from the 2008 financial crisis is that banks with high capital levels tend to extend more credit to households and businesses, said Thomas Hoenig, who was president of the Federal Reserve Bank of Kansas City during the financial crisis and is now at George Mason University.

Making Rules

Fed bank presidents and former regulators have little actual pull beyond their bully pulpits. As the Fed’s vice chairman for supervision, Randal Quarles can help make rules. In a presentation Friday, Quarles described the process that brought the financial industry to this point. After the
2008 meltdown, he said, Congress and the regulators established a system for making sure banks remained solvent — and can even keep issuing dividends — during another crisis. The crisis has arrived, and the Fed board decided to let its stress-test process go forward instead of insisting that
banks hold off on dividends for a while. That said, Quarles promised that the Fed’s special Covid-19 analysis will influence what the agency directs banks to do with their capital plans. Fed Chair Jerome Powell has agreed with Quarles on this strategy. In a reminder of how quickly losses can mount in a deteriorating economy, U.S. banks entered April with an almost
spotless loan book. A growing economy and tougher lending standards had combined to produce years of falling delinquency rates. At the end of March, just 1.59% of the industry’s loans were at least 30 days late, according to FDIC data, a far cry from the record 7.39% in 2010, as the last crisis reverberated. But banks can see dark clouds forming, so last quarter they added to the amount of money they set aside to cover delinquencies and defaults. It’s now about half the industry’s peak level of 10 years ago.
Investors have battered bank stocks this year and may not be sympathetic to suspending dividends, though James Bullard, president of the Federal Reserve Bank of St. Louis, told Bloomberg TV on Tuesday that he thought markets have probably already priced in dividend reductions. “Banks’ ability to raise the capital needed to provide credit to businesses and households will be permanently reduced if investors learned that bank dividends would always be cut in bad times, irrespective of each bank’s current capitalization and future prospects,” said Greg Baer, chief executive officer of the industry group Bank Policy Institute. Stephen Schwarzman is among those who see less reason to worry about the economic future. The Blackstone Group Inc. CEO said Monday he expects a so-called V-shaped recovery — quick and dramatic — due in part to the government’s stimulus
programs. After years of regulators directing them to build up capital, the biggest U.S. banks came into the coronavirus crisis on far sounder footing than they had in 2008, when a credit crunch froze lending around the world, and far better than their counterparts in Europe, where dividends have been suspended.

Huge Cost

“We’ve done the math and even under pretty negative scenarios, banks have enough capital to pay the dividends,” said Mike Mayo, a bank analyst at Wells Fargo. “The Fed can always change its mind in two quarters. There’s a huge cost of not waiting. It will send a negative signal to the market that could potentially lead to a negative feedback loop.” But Paul Tucker, a former Bank of England deputy governor who now chairs the think tank Systemic Risk Council, dismissed that argument. The Fed already is propping up markets, he said, and allowing the biggest banks to continue paying dividends is a mistake that could haunt the central bank if the economy doesn’t come roaring back. “Is it a plausible proposition that talk in about five years’ time will be, ‘If only they had allowed banks to pay
dividends, we would have gotten through these times so much better?’” Tucker said of the Fed. “I don’t think so.”

The Fed Has Averted A Systemic Financial Crisis—For Now. Here are 3 Areas To Monitor.

By Reshma KapadiaApril 6, 2020 7:30 am ET

Photograph by Cliff Hawkins/Getty Images

Bad news is said to come in threes, but let’s hope full-blown crises don’t. The Covid-19 global health crisis rapidly became a global economic crisis, but, so far, it has not touched off a financial crisis. U.S. banks, for the most part, are in good shape, and central bankers injected trillions of dollars to stabilize financial markets—and stand willing to do more. But three areas—emerging markets, corporate bonds, and, of course, the banks themselves—require close monitoring to ensure today’s fragile fiscal stability doesn’t turn into a big problem.

The economic crisis is clear to see—companies see revenue dry up overnight, unemployment spikes, nations fall into a recession. Though less visible, financial crises can be even more debilitating, threatening the flow of money through an economy and sparking contagion through the financial system. Financial crises usually arise when high asset prices (like stocks after a decade-long bull market) fall sharply at a time when there is too much debt in the system (such as after years of companies, and countries, using record-low interest rates to borrow heavily). Sound familiar? That’s often when panic hits, sending investors to dump assets in a fire-sale, and threaten bank-runs. Sometimes a crisis can be limited to financial institutions, but it can touch off, or worsen, a broader economic crisis. And sometimes a severe economic downturn itself, can jeopardize financial stability, as rising unemployment and drop in economic production triggers a wave of defaults, hurting banks.

But policy makers have learned from 2008, and moved aggressively at the first signs of trouble. Between March 16 and April 2, for starters, the Federal Reserve purchased nearly $1.3 trillion in Treasury securities. It also moved to backstop money market funds when the market for extremely short-term debt obligations began seizing up, and created a dollar swap line with other central banks to help with countries’ short-term financing needs. These measures provided much-needed liquidity for companies to make payroll and continue operating, keep economies working, and help calm markets.

But economists and investors say policy makers must stay vigilant. Economic activity has ground to a halt in large swaths of the world, and it’s unclear how many companies—and countries—may have to default on their obligations. “I don’t think we are out of the woods,” says Adam Tooze, a Columbia University economic historian and author of Crashed: How a Decade of Financial Crises Changed the World. “This will require continued firefighting from the Fed. They have to be on tender hooks, constantly waking up trying to deal with the second- and third-order effects.”

The global economy is facing the biggest downturn in 150 years, says Kenneth Rogoff , former chief economist at the International Monetary Fund and current professor at Harvard University. And whether we can avoid a financial crisis rests on how fast the world can pull itself out of this economic pause, he adds. Crisis-watchers are closely monitoring three key areas that could trigger a systemic risk to global financial stability: Emerging markets, corporate bonds, and banks themselves.

Emerging Markets Are The First To Fall

Emerging markets are often the first dominoes to fall, since many developing countries have less room to navigate in terms of monetary and fiscal policy. For years, investors trying to find yield in a low-interest rate world have flocked to emerging markets as eager lenders. Countries and companies went on a borrowing binge—and are now struggling to service their dollar-denominated debt. That comes against an already-difficult economic backdrop in countries like South Africa and Brazil, and a brutal blow from the collapse in oil prices for commodity exporters like Colombia and Lebanon.

Investors are fleeing. In the first quarter, investors pulled $62 billion out of emerging markets assets, roughly twice the size of outflows recorded at the peak of the global financial crisis, according to the Institute for International Finance. And it may not be over yet: IIF Chief Economist Robin Brooks is worried about a broader contagion as foreign investors rethink emerging markets.

Rogoff expects a wave of emerging markets will need to restructure debt, and independent research firm Capital Economics warns of a wave of emerging market sovereign defaults. Countries like Ecuador, Argentina, and Zambia have seen major stress already, with borrowing costs soaring. And there could be trouble elsewhere: South Africa, for instance, has a substantially overvalued currency; a very weak balance of payments and persistent current account deficit; and negative growth, Brooks says. Also vulnerable: Many state-owned enterprises, including Mexico’s oil giant Petroleous Mexicanos, better known as Pemex, and Brazil’s Petróleo Brasileiro (ticker: PBR), or Petrobras.

Already, some 85 emerging market countries have asked the International Monetary Fund, the lender of last resort, for assistance. The IMF has said it is mobilizing a $1 trillion lending capacity to help countries. But in a note to clients, Capital Economics said the IMF’s ability to help may be more limited, since some of that $1 trillion is already spoken for. While the IMF should have enough resources to bail out smaller emerging markets, its finances could struggle if much larger economies—the likes of Turkey or South Africa—need assistance, according to Capital Economics.

Could the turmoil in emerging markets trigger a systemic crisis globally? Probably not. Bigger emerging markets—Brazil, India, Russia, China, Korea—have large currency reserves, less of their debt owned by foreign investors, and large domestic bond markets, all of which means they are unlikely to need bailouts, even if the situation worsens, according to Capital Economics. Two exceptions: If China’s all-important property market melts down or China devalues the renminbi, though the Chinese government will likely use their considerable resources to avoid using either of those two options.

Corporate Bonds Can Cause Bigger Problems

Emerging markets may be the first to fall, but when problems arise in the U.S. corporate debt market, it’s more worrisome. Extremely low interest rates have encouraged companies to borrow heavily in recent years, and problems can arise quickly when levered companies see demand for their business evaporate. In March alone, $92 billion of bonds became “fallen angels,” dropping from investment-grade down to high-yield. Risks lie not just in the investment-grade bond universe, but also lower-quality collateralized loan obligations and structured finance that could be the 2020 version of subprime mortgages.

Companies are already drawing on credit lines and revolvers, and highly-rated companies have rushed to tap bond markets while they can, willing to pay one or two percentage points more than a couple weeks ago to lock in extra money now—a sign of anxiety among companies of what could lie ahead, Tooze says. Harvard’s Rogoff expects massive corporate defaults if the economy stays on pause. The question for global financial stability: Whose balance sheets will suffer when those companies can’t make good on their debt?

In 2008, the toxic assets were mortgages, and they sat on the balance sheets of banks that were highly-levered. This time around much of the potentially troubled assets are sitting on the balance sheets of nonbank financial institutions—like pensions and insurance companies—that can provide credit to businesses and households and manage risks. Many of the biggest owners are foreign investors, including European and Japanese insurers and pensions that gravitated toward U.S. debt in search of yield as they faced negative yields at home, says Deutsche Bank Chief Economist Torsten Slok.

The IMF has been warning about rising debt levels in non-bank financial institutions for a while, cautioning that there are fewer tools to use in a crisis to offset the fallout from a sharp economic downturn. The threat of rising risks outside of the banking sector requires increased focus on asset managers and exchange-traded funds, where investors might liquidate risky investments suddenly, according to a recent blog post by Adrian Tobias, director of the IMF’s Monetary and Capital Markets Department.

The trouble? “No one has eyes on it,” says Neil Shearing, chief economist at Capital Economics of the opacity of the risk in these institutions. “The lessons from 2008 is that problems can spread from the financial plumbing in ways you can’t see.”

How bad the fallout will be depends in part on what investors do with those beaten up assets. If they sell, that could ripple through the market. But it may not be as bad as 2008, in part because most of these owners, unlike those who owned mortgages in 2008, aren’t that levered. “The risk of systemic problems in the financial system are smaller this time around and the location of the problem assets is on the buy-side, not on the sell-side,” Slok says.

Banks Can’t Get Complacent

Banks are the nerve center of the global financial system, and many economists have taken comfort in the stress-tests that improved the health of the system after the global financial crisis.

But caution is needed where complacency has arisen: “It is a mistake to say or imply all will be OK out there, whatever happens. Some jurisdictions have suspended stress-tests. That’s a mistake,” says Sir Paul Tucker, former Bank of England deputy governor and current chairman of the Systemic Risk Council, which was set up after the global financial crisis. They should still conduct tests, he tells Barron’s, but using current worst-case scenarios: “Either a second wave if they reopen the economy in the summer in one of the major countries, and it turns out to be a mistake—or for an economic lockdown that continues until there’s a vaccine. None of that is implausible.”

Authorities need to assess how the system would cope with surging credit demand and losses from inactivity in those instances, Tucker says, adding that the Council has stressed that authorities should call for a halt to bank dividends and high-end bonuses, as well.

The IMF’s Tobias expressed similar caution in a recent blog post, warning that pressure on the banking system was growing and higher debt defaults were imminent, with conditions in many countries as severe as the adverse scenario of stress tests regulators often use for the banking system. Many of the current assumptions are based on economic activity restarting later in the year. “Under more severely strained circumstances, we will have to rethink our playbook substantially. Some banking systems might have to be recapitalized or even restructured,” Tobias wrote.

It may take some unorthodox measures, but Harvard’s Rogoff sees one reason to not panic. “We’re not going to let our banking system collapse,” he says. “Worst-case scenarios is that we end up like Europe, with a banking system that is moribund—a lot of the reason why Europe has stagnated.”

At this point, a moribund banking system sounds like a glass-half-full view.

Write to Reshma Kapadia at

Covid-19: Implications for international financial regulation

Paul Tucker, chair of the Systemic Risk Council and former deputy governor of the Bank of England, joins Mark Sobel, US chairman of OMFIF, to discuss the implications of coronavirus for the world economy. Since the 2008 financial crisis, much has been done to strengthen banks. But in recent years, the financial system has seen a worrying build-up of leverage and interconnectedness, especially in non-banks. Inadequate margin requirements have aggravated the liquidity shocks from the crisis, forcing central banks into even more dramatic action than otherwise would have been entailed. There will clearly be a need for post-mortems and reforms.

Paul discusses the blurring of fiscal and monetary policies, how these interactions will raise questions about democratic accountability, and how fiscal and monetary authorities should organise themselves. International co-operation is insufficient, particularly in comparison with the 2008 crisis. It is unfortunate in this regard that US authorities so heavily framed the country post-global financial crisis in terms of the Dodd–Frank Wall Street Reform and Consumer Protection Act, rather than acknowledging and embracing more firmly the international regulatory reform dimension.

Crisis-era regulators call on banks to halt distributions, de-leverage trading

Thursday, March 19, 2020 11:13 a.m. CDT by Thomson Reuters

By Michelle Price

WASHINGTON (Reuters) – Banks should immediately halt share buybacks, dividends and most staff bonuses to bolster capital and increase the capacity to lend to the real economy, a group of former senior regulators said in a statement to G20 finance ministers and central bankers on Thursday.

The Systemic Risk Council (SRC), a non-partisan body which comprises a number of officials who navigated the financial system through the 2008 crisis, said regulators should also require banks to gradually de-leverage their trading books and unwind deals, such as swaps and securities-lending portfolios, that do not support the real economy.

The statement to finance leaders in the Group of 20 industrialized economies was issued amid a scramble for dollar liquidity globally as businesses suffer revenue hits from disruption caused by the spreading coronavirus outbreak.

“Weaknesses in the financial system are exacerbating the potential feedback loops, which risk deepening the downturn and impeding eventual economic recovery,” the group wrote, pointing to a massive rise in corporate leverage and liquidity mismatches in the non-bank lending sector.

On Sunday, the largest eight US banks announced they had suspended stock buyback programs at least through the end of June as they redeploy capital to support the US economy in the face of a widening health crisis, although the Wall Street giants did not comment on dividends or remuneration. [L1N2B95JV]

The SRC also repeated criticisms of deregulatory measures taken by the Trump administration and other governments in the world, to reduce bank equity and liquidity requirements, saying those efforts should be immediately suspended.

The Council, which includes Sir Paul Tucker, a former deputy governor of the Bank of England, and Jean-Claude Trichet, a former president of the European Central Bank, also added to calls for central banks to provide direct liquidity to businesses hurt by business disruption. [L4N2BA5HN]

The group also recommended that authorities widen the collateral used in their longer-term market operations, such as in repurchase agreements, prepare to act as market makers of last resort in capital markets and where necessary conduct wider outright purchases of private securities.

(Reporting by Michelle Price; Editing by Paul Simao and David Gregorio)

More found at:

Republican $1tn plan, Paul Tucker on damage limits

Friday, March 20

Republicans in the US Senate have introduced legislation to inject more than $1tn of fiscal stimulus into the economy as it grapples with the coronavirus outbreak. Sir Paul Tucker, the former deputy governor of the Bank of England and current chair of the Systemic Risk Council, says it’s time for policymakers and bankers to prepare for a wartime setting if conditions deteriorate. Plus, the only US drugmaker that makes a potential treatment for the coronavirus raised the price nearly 100 per cent in January as the outbreak wreaked havoc in China. 

More found at: