Questions over stress test scores
The newest stress
tests for US banks produced scores that are at odds with other measures of
lenders' safety, in another sign that some institutions may be too big for
regulators to understand and executives to manage.For example, Citigroup, which
has been bailed out multiple times by the US government, showed up on the score
sheets posted by the Federal Reserve on Thursday as being clearly safer than
JPMorgan Chase & Co.That conclusion is at odds with the views of investors,
bond analysts and credit-rating agencies, as well as when measured by a
yardstick regulators themselves want to use in the future."At the end of
the day, there is a legitimate question about the ability of regulators to
fully evaluate $2 trillion institutions because of the complexity and exposures
they have," said Fred Cannon, director of US research at Keefe, Bruyette
& Woods.On Thursday, the Federal Reserve reported the latest results of the
tests that began after the 2007-2009 financial crisis to determine if banks
have enough capital to withstand a severe economic crisis. The Fed concluded
that the banks are in "a much stronger position" than before the
financial crisis in 2008.While experts are not arguing with the fact that the
banks are better capitalised now and that the system is safer than it was in
the run-up to the financial crisis, some of the numbers the regulators
published left analysts and bank executives groping for explanations. The test
raises questions about the ability of regulators to head off the next big
threat to the financial system because of the complexity of the
institutions.The results are also important as they will help the Fed decide
how much capital banks can return to investors.The report showed that
Citigroup's capital, as tracked by the Tier 1 common capital ratio, would dip
to 8.3% during two years of hypothetical stress. JPMorgan's would fall to 6.3%.
Both numbers are better than the 5% minimum under current regulations, but they
show Citigroup having a bigger cushion to weather losses.That does not make a
lot of sense to Kathleen Shanley, a bond analyst at GimmeCredit, a research
service for institutional investors."I wouldn't say that Citi is safer
than JPMorgan, for a variety of reasons, including its track record,"
Shanley said.Citigroup has lower credit ratings than JPMorgan, and prices for
credit default swaps show the market views JPMorgan as safer. Citigroup is the
third-biggest US bank by assets and JPMorgan is the biggest.A Federal Reserve
spokesperson declined to comment, as did representatives for Citigroup and
JPMorgan.Citigroup's score came out better partly because it started the test
with a better Tier 1 common ratio, 12.7% compared with JPMorgan's 10.4%.The
starting ratios were based on the banks' financial statements at the end of
September. They were calculated based on a set of international regulations
known as Basel 1, which the Federal Reserve intends to replace as inadequate
with a pending new set known as Basel 3.Under the expected Basel 3 rules,
Citigroup has estimated its ratio was 8.6% at the end of the third quarter,
about the same as the 8.4% JPMorgan estimated.Among the reasons that
Citigroup's ratio will fall so much under Basel 3 from the Basel 1 level is
that the new rules will not treat as favourably Citigroup's deferred tax
assets.Citigroup expects those assets to allow it to pay lower taxes on future
profits because it lost so much money when the financial crisis and recession
hit. Also, Basel 3 will reduce the benefits of stakes Citigroup has in joint
ventures, such as its brokerage with Morgan Stanley.The Federal Reserve did not
publish stress scores for the banks under Basel 3 because the regulators have
not finalised those rules yet.Analyst Cannon said there was one reason to think
of Citigroup as being safer: its capital markets business is smaller than
JPMorgan's. Regulators regard capital markets operations as riskier than
consumer banking businesses.The Fed's scoring is also at odds with results some
of the banks calculated for themselves under the same scenarios, which shows
there is room for subjectivity in the testing.JPMorgan, for example, found that
its ratio would fall to 7.6%, significantly better than the 6.3% reported by
the Fed. Goldman Sachs Group determined its low during the hypothetical stress
period would be 8.6%, compared with the 5.8% reported by the Fed, with some of
the difference related to its extensive capital markets activities.Goldman
declined to comment.Wells Fargo & Co pegged its low at 8.3% compared with the
Fed's 7%.Wells Fargo said in a statement that it could not fully explain the
difference because the Fed does not disclose all of the models it uses to score
the banks. The bank said that for some securities, it takes into account more
risk factors than the regulators do."It is primarily model-driven
assumptions that will drive the differences," said Fernando De La Mora,
who leads PricewaterhouseCoopers' banking and capital markets risk.Last year,
differences between scores by the banks and by the regulator were not
disclosed, but people in the industry knew of significant disagreements over
expected losses in some portfolios, said De La Mora.This year, the Fed told the
banks that it "will focus on the robustness" of each bank's
testing.For Citigroup, the Fed's ratio this year of 8.3% was nearly as high as
the 8.4% the bank tallied for itself.
Sturdy US job gains show economy growing
US employers added a
greater-than-expected 236 000 workers to their payrolls in February and the
jobless rate fell to a four-year low, offering a bright signal on the economy's
health.The data from the Labour Department on Friday showed the economy gaining
traction. The jobless rate fell 0.2 percentage point to 7.7%, the lowest since
December 2008 as more people found work and others gave up the hunt.Economists
welcomed the report, but worried that budget tightening in Washington could
slow the recovery's momentum."We had already moved from a slog to a jog
and we are on course to really get rolling. The risk here is, while the economy
is gathering speed, the politicians are stepping on the brakes," said Bill
Cheney, chief economist at John Hancock Financial Services in Boston.A 2%
payroll tax cut ended and tax rates went up for wealthy Americans on January 1,
and $85bn in federal budget cuts started taking effect on March 1.The
employment report, which showed broad-based job gains, was just the latest sign
of the economy's fundamental health, and it added fuel to a rally in US stocks
that had already propelled the Dow Jones industrial average to record highs.At the same time, the
dollar raced to a 3-1/2 year high against the yen, while the yield on the
benchmark 10-year US Treasury note hit an 11-month high.While payrolls growth
beat economists' expectations for 160 000 jobs, it was not seen as a game
changer for the Federal Reserve, which has pumped more than $2.5 trillion into
the economy to foster faster growth."It's a first step down a long road
before the Fed is convinced we are really seeing a substantial improvement in
labour market conditions," said Michael Hanson, a senior economist at Bank
of America Merrill Lynch in New York."They will want to see 200 000 job
growth, not just in one month, but several months in a row. The unemployment
rate is still too high."The central bank is buying $85bn in bonds per
month and has said it would keep up asset purchases until it sees a substantial
improvement in the labour market outlook. It is likely to remain leery of
withdrawing its support too soon given the tightening of fiscal policy.Although
December and January's employment data was revised to show 15 000 fewer jobs
added than previously reported, details of the report were solid, with
construction adding the most jobs since March 2007 and hours for all workers
increasing.The pace of hiring in February marked an acceleration from the
195000 per month average of the prior three months, and it approached the
roughly 250 000 jobs per month economists say are on a sustained basis to
significantly reduce unemployment.Still, employment remains 3 million jobs
below the peak reached in January 2008.Highlighting the need for faster
employment growth, the share of the work age population with a job was
unchanged at a historically low 58.6% for a third straight month a reminder of
the immense slack that remains in the labour market.In addition, the report
showed in February the jobless experienced longer periods of unemployment.In
February, construction employment increased by 48 000 jobs after rising by 25 000 in January. The housing market has turned around decisively and employment
is also being supported by rebuilding on the East Coast after the destruction
by Superstorm Sandy in late October.Manufacturers also stepped up hiring. Factory jobs
increased 14 000 last month after rising 12 000 in January.Retail employment increased by 23 700 jobs, an eighth straight
monthly gain that defied a recent slowdown in sales.Healthcare and social
assistance saw another month of solid job gains. The same was the case for
leisure and hospitality.Government continued to shed jobs. Public payrolls
dropped 10 000 last month after falling 21 000 in January.The sustained steady job gains are lending some stability to
wages. Average hourly earnings rose four cents last month. That was the fourth
straight monthly gain. Earnings were up 2.1% in the 12 months through February,
rising by the same margin for a third month in a row."This provides a
significant offset to the multitude of headwinds plaguing the consumer in the
first quarter and suggests spending could do a bit better than
anticipated," said Tom Porcelli, chief US economist at RBC Capital Markets
in New York.
Coffee growers end strike
Striking Colombian
coffee growers who have blocked roads for 11 days ended their protest Friday
after winning a government subsidy to offset lower prices for their product on
international markets. "We are going back to our land to continue
producing the best coffee in the world," said Guillermo Gaviria, a protest
leader, after the deal was signed with the government.The government concession
is a subsidy of up to the equivalent of $80 per 125 kilos (£275) of coffee
beans, the agriculture ministry said. But it will only be in effect for one
year.Treasury Minister Mauricio Cardenas said it would cost the government the
equivalent of $443m.In Colombia, some 560 000 families make their living
growing coffee, and 95% of them are small-scale producers.This industry so key
to Colombia's economy is going through hard times. Last year prices fell 35% on
the international market and the Colombian peso appreciated 10%.
UK fiscal watchdog rebuffs Cameron
Britain's independent
fiscal watchdog has criticised Prime Minister David Cameron for misrepresenting
its position on the impact of measures aimed at cutting the national debt.In a
speech on Thursday, Cameron said Britain's economy had been hurt not by the
government's deficit-cutting agenda but by problems in the eurozone and higher
oil prices - a view he claimed the independent watchdog endorsed.The claims
were untrue, said Office for Budget Responsibility Chairperson Robert
Chote."It is important to point out that every forecast published by the
OBR since the June 2010 Budget has incorporated the widely held assumption that
tax increases and spending cuts reduce economic growth," Chote wrote in an
open letter published on Friday.The rebuke is embarrassing for the government
which set up the watchdog shortly after it came to power in May 2010. The
government uses the OBR's projections as the basis for its budget planning and
has made much of the credibility of its forecasts.Chote's letter marks the
first public clash between the watchdog and the prime minister, and will be
seized upon by critics who blame the government's spending cuts and tax hikes
agenda for the country's economic woes.Britain is perilously close to tipping
into its third recession in four years and was stripped of its triple A credit
rating by Moody's last month.
