Banking: Get ready for wholesale funding
Get ready for a rise in wholesale funding, at least at bigger banks. Tighter monetary policy usually comes with a drop in retail deposits, as the FRBNY points out in a recent Liberty Street Economics post. Demand to hold money typically drops as rates rise and falling central bank reserves put a squeeze on money supply. Into the breach flows wholesale funds to keep existing books of bank assets afloat. But not all banks are equal, as the FRBNY points out. Bigger banks generally rely more on wholesale funds than smaller banks, and the flow of wholesale funds into bigger banks tends to be heavier as policy tightens. The bigger they are, the faster their cost of funds goes up.
Banking: Scrutiny for bank CRE lending
Banks’ have continued their embrace of commercial real estate despite subtle warnings from regulators. S&P reported recently that 488 banks at the end of 2015 exceeded regulators’ 2006 guidance on CRE concentrations, up from 422 at the end of 2014. Regulators in 2006 promised to put a spotlight on any bank if (i) total CRE loans hit at least 300% of risk-based capital with a 50% or greater jump in balances over the last three years or (ii) total construction and land development (C&D) loans have breach 100% of risk-based capital. Those old rules drew some new attention after a memo from regulators last December on prudent risk management for commercial real estate lending. S&P speculated in its note that the 2015 growth in CRE and the warning shot from regulators would slow bank CRE loan growth this year.
Banking: a little relief from FHA
FHA looks set to limit banks’ liabilities for some loan errors. The agency last Tuesday said that its new certification, which puts lenders on the hook for loan quality, will allow banks to avoid severe penalties for errors in the origination process. "Minor mistakes that do not affect the decision to approve a loan are not the focus of our compliance efforts," said HUD's Ed Golding. "We are interested only in errors that would have altered a decision to approve the loan." This move is expected to encourage lending to less-creditworthy borrowers, often with higher debt loads.
Banking: Bernanke on negative rates
Some analysts have argued that negative rates signal the final shot in central banks' efforts to loosen monetary policy, but Ben Bernanke is the latest to counter that the armory is full. In a Friday post, Bernanke even argues that negative rates might be more effective than more QE. There is some legal questions about whether the Fed could charge negative rates, he points out, but the Fed's authority to charge fees could serve the same purpose. Fed research has suggested that rates could easily go to –35 bp, and the experience in Europe and Japan signal that rates could go even lower. Money market mutual funds might lose business if negative rates prevent them from posting a constant $1.00 NAV, but bank profits would probably survive. As Bernanke sees it, after dropping fed funds back to zero and strengthening forward guidance, negative rates just might work better than the big guns of more QE.