NEWS,10.03.2013

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.