Issuers in the US should be pleased by the latest consumer figures from the US Federal Reserve: the annualised monthly growth rate for revolving credit rose by just over eight percent in May, beating the previous high in the year to date, April's 7.9 percent gain. Since there had been a decline in March, the news will be a relief for lenders, while the authorities see no cause for alarm about possible overleveraging. Why? The growth in debt has come in the main from consumers with good credit scores, says the Fed: this is not a subprime bubble in the making. "However, when the next recession inevitably hits, default rates will surely increase", commented Patrick Houlihan of Verisk Financial Research. "Of much greater concern is the rather opaque shadow banking industry, where much of the risk from the pre-Financial Crisis era now resides. More conventionally, student loans should be a huge concern: they may not be discharged in bankruptcy. When the next recession hits, non-performing loans will inevitably increase, perhaps dangerously so."
Two months before he was elected as US President, Donald Trump told the Detroit Economic Club that he would repeal the Volcker Rule, which bans speculative trading using customer deposits. Named after former Fed chair and stagflation nemesis, Paul Volcker, the measure is one of the most prominent innovations of the 2010 Dodd-Frank Law. Repeal had long been lobbied for by universal banks, but, when it came to a vote on a larger overhaul package, the Senate proved more cautious and opted to leave the way open for reform. The idea was then taken up, with cross-party support, to relieve the Rule's burden on community banks; meeting the requirements was also deemed by the Fed and OCC as far too onerous for smaller banks, incapable by definition of systemic risk. (Two years ago, Deutsche Bank, about as far from a community bank as you can get, was fined $157 million for breaking the Rule.) This week, the long-expected announcement came from Washington that community banks with assets below $10 billion - and uninvolved in trading activities valued above five percent of those assets - would indeed be exempted. That leaves some 95 percent of banks' aggregate trading unaffected, while only some dozen-and-a-half banks are now required to demonstrate that they are in compliance: the Volcker Rule, if anything, has a new lease of life.
Across the Atlantic, it is clear that the nature of payments systems is fast becoming one of the deepest concerns for the authorities. One crude but revealing metric is to compare how many times the word "payments" is used in the latest edition of the Bank of England's biannual Financial Stability Review: 74 by our count, as opposed to 22 times in the previous issue. Sometimes the shallows betray the depths. A deeper dive reveals that a no-deal Brexit, should one occur, will not interfere with Single Euro Payments Area (SEPA) access. More broadly, the central bank acknowledges that UK authorities have a delicate balancing act in prospect: meeting the responsibility for stability in challenging conditions while cultivating positive innovation. As Britain's thriving fintech culture shows, it cannot be faulted to date in the latter regard, but with Facebook's Libra now to be considered and the ruling Conservative party minded to opt out of any and all European arrangements if necessary, the rules of the game might be about to change.
Earlier in the year, some commentators feared that Australian banks might reconsider their (dominant) market presence in neighbouring New Zealand were more stringent capital requirements to be introduced, as the central bank in Wellington has been proposing. Now comes news from their home territory, sure to be greeted warmly by the same banks, that the Australian Prudential Regulation Authority, softening its previous proposal, has decided that total capital in its major banks must be three percent of risk-weighted assets by the beginning of 2024: this finalised change to the capital adequacy framework presents a considerably more palatable undertaking than the four to five percentage point range that had been originally floated. There's a caveat though. The authority plans to eventually get banks to that higher level by an alternative method that takes local market characteristics into account. Painful though they may be in the creation, all involved will be grateful for strong capital buffers in a downturn. In the words of Sir John Vickers, "Given the awfulness of systemic bank failures, ample insurance is needed, and equity is the best form of insurance".
As we pointed out in our most recent market report on Japan, the technological advances for which that country is famous have made inroads in consumer behaviours when it comes to payments, but cash remains firmly entrenched as the medium of choice for low-value transactions. One result is that debit cards feature less at the POS than in other developed markets and in fact are used in the main to access cash at the ATM. Now, with the country's consumption tax rising by 25 percent in three months, the authorities are concerned that spending volumes might be impacted. The time seems ripe therefore to push mobile payments, a logical move with such a tech-savvy populace. The plan is that QR code-using consumers will be able to avail of a new system that generates discounts for future purchases.
To end, links to some other stories of interest this week...