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Washington Wrap: DOJ looks like systemic risk as it pushes RMBS settlements

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Washington Wrap: DOJ looks like systemic risk as it pushes RMBS settlements

News

The U.S. Justice Department is still not done with the 2008financial crisis, and Congress appears nowhere close to done with

Reports that U.S. prosecutors were seeking a againstDeutsche Bank AGramped up pressure on the bank this week. The size of the potential settlementis so large that it could threaten the bank's capital position, the yield on the bank'sdebt as shares tumbled. The bank was already in danger of failing to meetregulatory capital requirements, and the large fine could make it an impossibletask.

In a tight spot, reports emerged that the German governmentwas secretly working on a bailoutplan for the bank. Executives at the bank the reports, sayingthere was no need for state support.

Shares in the company rebounded Friday amid a that the bank was intalks for a $5.4 billion settlement.

Deutsche Bank was by no means alone. On Sept. 27, theRoyal Bank of Scotland GroupPlc settled one RMBS suit but is still facing an investigation fromthe Department of Justice's RMBS Working Group. The bank was able two outstanding civillawsuits regarding RMBS improprieties with the National Credit UnionAdministration for $1.1 billion.

On Sept. 30, the FinancialTimes reportedthat the U.S. prosecutors are eager to reach RMBS settlements with Deutsche,Barclays Plc andCredit Suisse GroupAG ahead of the presidential election in November. The reportsuggested prosecutors wanted to grab headlines with "eye-catching"sums.

Perhaps the Justice Department is merely looking to validatecomments made this week by George Osborne, former Chancellor of the Exchequerfor the U.K. At a Washington D.C. conference, the DOJ represented a"cause of systemic risk."

Lobbyists are finding a silver lining in the ordeal, asevidence appears to be mounting that international regulators will on the capitalrequirements originally envisioned in Basel IV. Facing negative interest rates,banks are unable to come up with the additional capital, lobbyists argue.


Wells FargoChairman and CEO John Stumpf had a tough week as the bank'sunauthorized-accounts scandal shows no sign of fading.

On Sept.29, Stumpf testified in front of the House Financial Services Committee andreceived a bipartisan grilling despite news several days earlier that the executive wouldforfeit $41 million of unvested equity awards because of the scandal.Congressmen raised the potential of insider trading as Stumpf had sold stock a coupleof months before The Los Angeles Times detailedhow the bank's tough sales culture led to unauthorized accounts. There werealso suggestions of Sarbanes-Oxley violations as the company did not disclosethe issue in regulatory filings.

Stumpf wasquick with apologies, but he did not offer as much detail as congressmenwanted, often responding "I don't know" to questions. Hesaid management was committed to repairing the institution's reputation. Duringthe interrogation, Rep. Maxine Waters, D-Calif., the bank was too large tomanage and should be broken into pieces.

The ordealhas sent the bank's stock tumbling to the point that it is the largest U.S. bank bymarket capitalization, ceding the top spot to JPMorgan Chase & Co.


Chatter

Some upside for banks came in the form of increased talks ofregulatory reform. Federal Reserve Gov. Daniel Tarullo on Sept. 26 one of the biggestissues for banks: stress testing. The regulator said the central banks wouldpropose a rule exempting banks with less than $250 billion in assets andwithout significant international or nonbank activity from a large portion ofthe stress tests.

On Sept. 27, a House Financial Services subcommitteediscussed a package of six bills, including one that would ensure reciprocaldeposits are not classified as brokered deposits. The move would improvefunding sources for community banks and boost credit to local economies,attendees testifiedat the hearing.


The toughrate environment, often referred to as "lower for longer," should beconsidered the "new normal" for banks, Charles Evans, president and CEO ofthe Federal Reserve Bank of Chicago. Speaking at a conference in St. Louis,Evans said community banks need to prepare for a low-rate environment for anextended period of time.

At the sameconference, Federal Reserve Gov. Jerome Powell regulators should do more toencourage de novo bank formation. He said banks with less than $100 million inassets represented "a key source of dynamism and competition."


Presidentialcandidates Hillary Clinton and Donald Trump traded barbs in the first presidential debate Sept. 26.On policy specifics, Trump said he would increase tariffs on foreign imports tospur U.S. manufacturing, and Clinton hinted at a policy that would encouragecompanies to engage in profit sharing.


Bill tracker

Legislators introduced various bills aimed at spurringbusiness investment or expanding credit this week.

On Sept. 28, Sen. Steve Daines, R-Mont., introduced the Crowdfunding EnhancementAct, which would raise the dollar amount limit for companies looking totake advantage of crowdfunding. On Sept. 27, Sen. Mike Rounds, R-S.D.,introduced a billthat would allow banks to treat municipal obligations as level 2B liquidassets.

There were also two pieces of legislation targeting smallbusinesses. Sen. Chris Coons on Sept. 29 introduced a bill that wouldexpand tax credit education and training for small businesses. And Sen. SherrodBrown, D-Ohio, introduced a bill looking toboost origination of qualified small-issue manufacturing bonds.

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