All across America, the US’ new push to fight money laundering has meant that many banks are being forced to shut off the tap on a more than $50 bn remittance market. Remittances are the name for when immigrants living in one country send money home to their families in another, and up until now, many banks, including Bank of America and J.P. Morgan, had been operating low cost offerings to cater to the market. Many are unhappy with the new regulations as they mean higher costs for sending money as well as putting banks in an effective policing role, as they are now forced to investigate each transfer to a much greater extent. Banks and organisations that can stay in the business are likely to raise fees, and immigrants are already being forced to turn to retail firms which transfer money, often at double the cost of the now shuttered banks’ fees. The government says remittance systems were being abused by criminals and drug lords, especially for transfers between Mexico and the US.
FINSUM: This seems a perversion of how the system should operate. In order to stop a handful of criminals, banks are forced out of a safe and steady business, and immigrants, who are already poorer than average, will have to bear the burden of much higher fees.
The global thirst for yield has spawned a familiar, if alarming, trend in the hedge fund space. In order for banks to better sell Triple A CLO tranches, and for hedge funds to make better returns, the pairing has come up with a new plan. Banks are now lending money to hedge funds so that the money managers can buy Triple A CLO tranches back from the banks. The trade helps hedge funds magnify returns through leverage and helps banks dispose of hard-to-sell assets. Such high quality tranches generally have relatively low yields, which has long kept hedge fund investors out of the space, but with the new ability to add leverage and magnify returns, the segment has become attractive. Many are sceptical of the new trades, saying they are highly risky carry trades that will prove hard to exit and could unwind in several ways. One high ranking banker says that there is way too much supply on the issuance side because of the reach for yield on the buyside, meaning lots of low quality CLOs are being offered.
FINSUM: This sounds like old-fashioned pre-crisis “risk-on” leverage that is buying into complex assets. Hopefully, if rates are raised rationality will return to the market.
Entrepreneurs all over the United States are complaining of their inability to secure bank financing. One successful body armour and riot gear manufacturer in Florida, Safariland, has fallen victim to a lack of bank lending and believes the dearth of lending is why the US economy is not performing as well as it could. Banks have been put in a jam by fragile balance sheets and regulatory demands which limit the exposures they can have, all of which has left a major “lending void” to be filled. This has created the opportunity for shadow banks, much less lightly regulated financial entities, to step and inject cash into the economy. The shadow banks can be structured in myriad ways, including as asset managers or insurance companies, but a common new classification are “business development companies”, which are non-bank financing entities. These new entities are directly competing with banks for business, and taking staff and clients, all of which is now leading to banks fighting back. Goldman Sachs CFO Gary Cohn has said that “risk is risk, whether its sits in a regulated entity or not” and that he fears regulation has inadvertently forced some of the riskier behaviour into unregulated entities.
FINSUM: This is a great piece for understanding what shadow banks mean in the US context and how they will affect the economy moving forward. The story also begs one to ask why the government has gone to all the trouble to regulate banks if ‘non-banks” can easily spring up and behave the same way?
Hong Kong regulators have grown increasingly tense over the startling growth in lending to China by Hong Kong’s banks, and now they are moving to curb the practice four years ahead of schedule. The regulators were obliged to follow the new Basel III capital rules, which would have led to curbing the practice in 2018, but they decided to move far ahead of schedule because of their fears for Hong Kong banks’ exposure to slowing China. Hong Banks’ loans to the mainland were $456 bn last year, a 32% increase on 2012, and now account for over half of their respective credit portfolios, at ~$800 bn. Regulators had been admonishing banks to implement tighter lending rules and screen borrowers more carefully, but the advice proved insufficient, and regulators felt they had to act. Some see China’s overseas borrowing from Hong Kong as a worrying sign that troubled domestic banks are refusing to extend credit because of already soured portfolios.
FINSUM: Hong Kong seems to have grasped the size of the impending Chinese credit event and wants to limit its exposure to it. Hopefully, such a credit crisis will not come to bear and China can find a way to limp through its current obligations and slowly deleverage its economy.