Good weekend for the banks

by
Money

If you’re a bank, there were several good developments over the weekend that are likely making it easier for you to plan for the coming year. The first is a possible $10 billion mortgage settlement to resolve some claims of foreclosure wrongdoing.

Here are the basics from the New York Times:

$10 billion settlement to resolve claims of foreclosure abuses by 14 major lenders is expected to be announced as early as Monday, several people with knowledge of the discussions said on Sunday.

The settlement comes after weeks of negotiations between federal regulators and the banks, and covers abuses like flawed paperwork and botched loan modifications, said these people, who spoke on condition of anonymity because the deal had not been made public.

An estimated $3.75 billion of the $10 billion is to be distributed in cash relief to Americans who went through foreclosure in 2009 and 2010, these people said. An additional $6 billion is to be directed toward homeowners in danger of losing their homes after falling behind on their monthly payments.

All 14 banks , including JPMorgan Chase, Bank of America and Citigroup, are expected to sign on.

The agreement comes almost a year after a sweeping deal in February between state attorneys general and five large mortgage lenders.

The other piece of the good news for banks was that global banking regulators decided to delay implementing capital requirements. The Wall Street Journal has the details here:

Global banking regulators watered down a key element of their plan for creating a safer financial system, giving ground to banks that argued the rules were unworkable and financially risky.

The Basel Committee on Banking Supervision, a group of the world’s top regulators and central bankers, said Sunday that it agreed to relax a rule designed to ensure that big banks are able to weather financial crises without running short of cash. Bowing to two years of intense pressure from the banking industry, the regulators made it easier for banks to meet the rule, known as the “liquidity coverage ratio,” and delayed its full implementation until 2019.

It is the latest instance of regulators chipping away at their landmark 2010 response to the global financial crisis. The regulators argue that the changes make banking rules much stronger than they were before the crisis.

The so-called Basel III accord, known for the Swiss city in which it has historically been negotiated, required banks to greatly thicken their capital cushions and come up with trillions of dollars of liquidity. The banking industry argued that the changes were overkill and would prompt them to dramatically reduce lending. Regulators ultimately accepted some of those arguments, and agreed to delay or ease key elements of the rules.

So that’s good news on the capital front, meaning banks can allocate the money somewhere else. But negotiations aren’t easy. The foreclosure settlement wasn’t a sure thing, according to the Times story:

The settlement almost fell apart over the weekend. Some officials at the Federal Reserve threatened to scuttle the deal unless the banks agreed to pay an additional $300 million for their role in the 2008 financial crisis, which upended the housing market and led to millions of foreclosures.

The Fed officials argued for additional aid for homeowners ensnared in a flawed foreclosure process, according to several people briefed on the negotiations who spoke on condition of anonymity. The $300 million demand was to come on top of the $10 billion payout, but was met with resistance from the banks, especially because it was raised late in the day on Friday, according to these people.

The Federal Reserve officials backed down, allowing the $10 billion pact to move forward ahead of bank earnings releases this month, these people said.

And many media outlets seem to imply that banks got off light. The Financial Times actually quotes someone saying so:

“This is quite a lot more favourable to the industry than I and the market were expecting. The changes to the asset definitions and the outflow calculations in particular look like a fairly massive softening of approach,” said Daniel Davies, banking analyst for Exane BNP.

Sir Mervyn King, who heads the Basel committee’s oversight group, called the agreement “a very significant achievement [and] a clear commitment to ensure that banks hold sufficient liquid assets to prevent central banks from becoming lenders of first resort”.

For banks having a number to put on a big chunk of the foreclosure mess and a clearer understanding of capital requirements should be a good thing. At least it clears up some of the uncertainty that they’re dealing with, which should be a good thing for everyone, right?