Morning Report: Banks fail the living will test 4/13/16

Markets are higher this morning after equities rallied overnight. Bonds and MBS are down on the “risk-on” trade.

Mortgage applications increased 10% last week as purchases rose 8.4% and refis rose 11.3%. The average 30 year fixed rate mortgage rate fell from 3.86% to 3.82%. Refis dipped to 54.9% of all loans.

Retail Sales fell 0.3% in March which was lower than expected. The control group, which excludes autos, gas and building products rose 0.1%, which again was lower than expected. January and February were revised higher, however.

Inflation remains muted at the wholesale level, with the Producer Price Index falling 0.1% in March, again below estimates. On a year over year basis, the core rate is up 0.9%, well below the Fed’s inflation target of 2%.

Business inventories fell 0.1% in February, in line with expectations. January was revised downward as well.

JP Morgan reported better than expected earnings this morning. Mortgage Banking revenues increased 7.3% YOY, and charge-offs fell. It appears that units fell while average loan sizes increased.

Regulators have rejected the living wills submitted by 5 of the largest banks, which could ultimately force them to raise more capital and could subject them to being broken up. In spite of all of these TBTF banks, we do have the least concentrated banking system in the world. Most countries are dominated by 3 or 4 massive banks.

Confirming everyone’s suspicions, the government knew that Fannie and Fred were about to become profitable when they changed the rules and began to take everything the GSEs made. The government’s cover story was that the two GSEs were too weak and therefore all profits needed to be swept to protect taxpayers. Fannie stock rallied from 1.33 to 2.05 on the news.

18 Responses

  1. Frist!

    Like

  2. Second.

    Brent, do you know WHY the banks failed the LW test? Was the test a moving target?

    I have amended my question after reading this part of the article:

    Almost two years ago, 11 of the largest banks were told their plans fell far short of what regulators deemed acceptable, though the agencies didn’t formally reject them. Since then, the industry has rehashed how derivatives contracts are written, and the agencies have imposed tough capital and liquidity demands on each lender. Even so, bankers were anxious to hear whether their efforts had gone far enough.

    So was no guidance given after the previous examination? Are there any objective standards to be met or just loosely defined goals?

    Also, Citigroup PASSED. Why don’t the others copy Citi’s plan?

    Like

    • Why don’t the others copy Citi’s plan?

      How would all of the consultants make any money if the banks refuse to reinvent wheels?

      Like

    • Mark:

      Are there any objective standards to be met or just loosely defined goals?

      The latter. Or at least much of it is very subjective. Which is why a bank can end up with a split determination, ie the Fed saying it is OK and the FDIC saying it is not OK.

      Like

    • Mark:

      Also, Citigroup PASSED. Why don’t the others copy Citi’s plan?

      I don’t know for sure, but I suspect it is because the plan is very portfolio specific. What might make sense to a regulator with regard to the assets/liabilities held by Citi may not make sense to a regulator with regard to the assets/liabilities held by JPM. For example, JPM was apparently cited for insufficient resources for winding down derivatives in the event of a downgrade. Citi’s derivatives exposure may look very different from JPM’s.

      Like

    • “Brent, do you know WHY the banks failed the LW test? Was the test a moving target? ”

      Remember Krugman’s post that I linked to the other day about how you can’t constrain regulators by having actual fixed rules, you have to just let them use their own judgement?

      This is what that looks like in practice.

      Like

  3. Like

    • It is astonishing the human race made it as long as it has

      Like

      • I blame the Patriarchy for our continued existence.

        Those assholes!

        Liked by 1 person

      • A friend of mine and I wrote a very short book that we never published, a satire on The Communist Manifesto we titled “The Fifteen Minute Delay”. We posed that all of human history could be explained by the widely experienced delayed reaction of females to male passion, against which any notion of “class struggle” was purely hypothetical.

        We posed 2 extremes of nature: rabbits, who procreate like rabbits but never evolve beyond rabbit-ness, and animals that had gone extinct because the females never responded to male passion. These animals were of course figments of our imagination, but well documented in obscure German texts. Pre-internet, who knew?

        The fifteen minute delay was shorthand for the period of courtship, which had been fairly lengthy during the Victorian Age, then four consecutive dates in the fifties, and by 1968 seemed to be approaching a new limit of fifteen minutes. We posed the fifteen minute delay as having permitted humans to engage in peripheral [to rutting] activities like learning, building, and destroying. We posed it as the major influence on art and literature. We suggested that the advent of The Pill was threatening to reduce the fifteen minute delay beyond the safe levels for human development. “Researchers” had now noticed women who actually lead the ritual, and
        thus threatened to unbalance the curve of history. The Pill relieved the fear of unwanted pregnancy, of course, so there would still be some time left for building and destroying, if not extended learning.

        We scrapped our idea of publishing our explanation of all that mattered in human history when herpes and then HIV
        set the order of things on end once again. I suppose we could add a chapter on how Sanders/Trump are the American expression of the rage at the frustration of passion that followed herpes/HIV. People who aren’t getting any, so to speak. I don’t know how we get to source our fake research in the age of the internet. Perhaps ‘Goose will have a suggestion.

        I am due for a visit with my collaborator, anyway.

        We thought it was a great and funny work of “social science”.

        Like

        • I don’t know how we get to source our fake research in the age of the internet. Perhaps ‘Goose will have a suggestion

          PLoS. Or I’ll bet I can find you the title of a designer journal or two that aren’t actually peer reviewed (PLoS is) and you can cite them.

          🙂

          Like

    • That is amazing.

      Like

    • Hogwash

      Like

  4. NoVA: This should be your new motto:

    “Scott, how has your discussion of Trump affected your Dilbert brand?

    Have you gotten backlash or support in a personal capacity over this?

    [–]ScottAdamsSaysVerified Scott Adams[S] 203 points 1 day ago

    It is terrible for the brand, of course.

    But they don’t call it “fuck you money” if you have care about that.”

    Like

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