America Went on a Borrowing Binge, but Banks Were Left Out

Link: https://www.wsj.com/articles/america-went-on-a-borrowing-binge-but-banks-were-left-out-11612953008

Excerpt:

Large U.S. lenders saw their loan books shrink in 2020 for the first time in more than a decade, according to an analysis of Federal Reserve data by Jason Goldberg, a banking analyst at Barclays. The 0.5% drop was just the second decline in 28 years.

Bank of America Corp.’s loans and leases dropped by 5.7%. Citigroup Inc.’s loans dropped by 3.4% and Wells Fargo & Co.’s shrank by 7.8%. Among the biggest four banks, only JPMorgan Chase & Co. had more loans at the end of the year than the start.

Lenders are flush with cash that they want to put to use, and executives say they are hopeful loan growth will pick up in 2021. Brisk lending typically suggests there is enough momentum in the economy to give companies and consumers the confidence to borrow. But the current weakness suggests questions remain about the vigor of the economic recovery.

Author(s): Ben Eisen

Publication Date: 10 February 2021

Publication Site: WSJ

Pandemic led to U.S. housing boom, reduced credit card debt, New York Fed says

Link: https://www.reuters.com/article/us-usa-fed-report/pandemic-led-to-us-housing-boom-reduced-credit-card-debt-new-york-fed-says-idUSKBN2AH28Z

Excerpt:

The coronavirus pandemic changed the way U.S. consumers use credit, as lower interest rates spurred a boom in home buying and refinancing and virus-related shutdowns led to a drop in credit card use and an increase in paying off debt, according to a report released on Wednesday by the New York Federal Reserve.

Total household debt last year increased by $414 billion to $14.56 trillion at the end of December, the New York Fed found in its quarterly household debt and credit report.

Author(s): Jonnelle Marte

Publication Date: 17 February 2021

Publication Site: Reuters

Matching adjustment becomes a battleground in UK’s Solvency II consultation

Link: https://www.insuranceerm.com/analysis/matching-adjustment-becomes-a-battleground-in-uks-solvency-ii-consultation.html

Excerpt:

Solvency II sets strict requirements over what kinds of liabilities and assets are eligible for the MA [matching adjustment], and the governance of them. In the UK’s Solvency II consultation, respondents have argued a looser regime would be good for insurers – and good for the country.

…..

Many of these suggestions have been previously floated in industry circles, some since even before Solvency II came into effect in 2016. But there are a growing number of experts calling for a much more dramatic rethink of the MA – and whether it should even exist.

Dean Buckner, a former regulator at the Bank of England who worked on the MA, and Kevin Dowd, professor of finance and economics at Durham University, have been at the forefront of arguing the MA creates “fake capital” and puts annuity payments at risk.

In their submission to the consultation, they write: “The MA allows firms to recognise some anticipated risky future profits as if they were certain, thereby allowing them to be distributed before being realised. If the risky future profits are not realised – bear in mind that they are called ‘risky’ for a reason – then the capital created by MA will vanish, and policyholders will be at risk.”

Author(s): Christopher Cundy

Publication Date: 23 February 2021

Publication Site: Insurance ERM

Your Credit Score Should Be Based on Your Web History, IMF Says

Link: https://gizmodo.com/your-credit-score-should-be-based-on-your-web-history-1845912592

Excerpt:

In a new blog post for the International Monetary Fund, four researchers presented their findings from a working paper that examines the current relationship between finance and tech as well as its potential future. Gazing into their crystal ball, the researchers see the possibility of using the data from your browsing, search, and purchase history to create a more accurate mechanism for determining the credit rating of an individual or business. They believe that this approach could result in greater lending to borrowers who would potentially be denied by traditional financial institutions.

At its heart, the paper is trying to wrestle with the dawning notion that the institutional banking system is facing a serious threat from tech companies like Google, Facebook, and Apple. The researchers identify two key areas in which this is true: Tech companies have greater access to soft-information, and messaging platforms can take the place of the physical locations that banks rely on for meeting with customers.

Author(s): Rhett Jones

Publication Date: 18 December 2020

Publication Site: Gizmodo

SEC Charges Ratings Agency With Disclosure And Internal Controls Failures Relating To Undisclosed Model Adjustments

Link: https://www.sec.gov/news/press-release/2021-29

Excerpt:

he Securities and Exchange Commission today filed a civil action alleging that former credit ratings agency Morningstar Credit Ratings LLC  violated disclosure and internal controls provisions of the federal securities laws in rating commercial mortgage-backed securities (CMBS).

Credit ratings are used by market participants to help evaluate credit risk, price certain securities, and guide the investment decisions of individuals and institutional investors alike.  To promote transparency in the process, the federal securities laws require credit rating agencies to publicly and accurately describe the procedures and methodologies used to determine credit ratings, and to implement effective internal controls to ensure that they follow those procedures and methodologies. 

According to the complaint, in 30 CMBS transactions totaling $30 billion that Morningstar rated from 2015 to 2016, the credit rating agency permitted analysts to make undisclosed adjustments to key stresses in the model that it used in determining the rating for that transaction.  The complaint also alleges that Morningstar failed to establish and enforce an effective internal control structure governing the adjustments for a total of 31 transactions.

Additional link: https://www.sec.gov/litigation/complaints/2021/comp-pr2021-29.pdf

Publication Date: 16 February 2021

Publication Site: SEC