"A statistician is someone
who tells you, when you've got your head in the fridge and your feet in the
oven, that you're - on average - very comfortable." Statisticians are
licking their chops over the new Producer Price Index information that will
be released today. "The Labor Department's producer price index had
previously tracked only the wholesale prices of goods. Now, beginning with
Wednesday's release of January data, the index will also cover services and
construction. By tracking what manufacturers and farmers charged for their
goods, the producer price index has traditionally provided an early read of
inflation trends. It captured how much of the change in oil, grains and other
raw material costs was being passed on by producers." This has nothing to
do with loan level price adjustments for loans, but figured I'd pass it along.
NAMB issued a
"Government Affairs Update" for the 2014 Legislative and Regulatory
Conference to be held in Washington DC from March 2-4. The organization has
offered to let readers & members weigh in on the top 3 questions you would ask the
CFPB. For information on the conference write to Richard
Bettencourt at governmentaffairs@namb.org.
Historically,
the Wells Fargo Economics group does exceptional work, and their current paper
titled The Labor Market and Credit Risk
is no exception. In their first report on this topic, the group focused on the
development of the Labor Market Index, which they believe is a more
comprehensive measure of the labor market than the unemployment rate. In their
second report, they focused on the link between the unemployment rate and the
broader economy as measured by real GDP. In this third report, released just
prior to the New Year, they ask and evaluate a simple question: How reliable
is the unemployment rate as a predictor of credit quality in the modern
economy? More specifically, they are interested in identifying a possible
statistical relationship between the Labor Market Index and credit market
indicators including the delinquency rate and charge-offs over the past 20
years. The cliff-notes version: their conclusion shows that the unemployment
rate should not be used solely to predict delinquency rates.
The
Dallas Federal Reserve has released an interesting economic letter entitled, "Weakly Capitalized Banks Slowed
Lending Recovery After Recession." This article finds that
large, highly leveraged banks and thrifts followed a softer lending growth path
than their better-capitalized counterparts in 2009-10 during the sluggish
recovery from, what has now being coined, the "Great Recession."
As we know, commercial banks, credit unions and savings and loans sustained
substantial losses during this period. Real estate was especially sluggish,
culminating with residential loan delinquencies peaking at 11.3% in first
quarter 2010 and commercial real estate delinquencies at 8.8%, according to
the Dallas Fed research. J.B. Cooke and Christoffer Koch write, "The
resulting loan losses ate into bank capital, the first line of defense for
large depositors and debt holders, boosting the institutions' leverage. A
simultaneous decline in wholesale funding-via commercial paper or large
time-deposits, for example-reduced the supply of loans...this slowdown
occurred even though Fed monetary policy was highly accommodative in a
concerted effort to stimulate economic growth." Good economic research
can be classified as counter-intuitive, and this is the case with Dallas'
recent release. The ultimate conclusion, and argument made by Cooke and Koch is
that a reluctance to lend, particularly by those larger institutions with very
low ratios of capital to assets, worsened the fiscal crisis; if these
institutions had behaved as the other banks did, the cumulative amount of loan
activity might have been 5-6% higher and might have provided greater support to
Fed recovery efforts.
A
couple weeks ago the National Association of Insurance Commissioners (the NAIC)
released its updated breakpoints for RMBS securities based on November 2013
submissions. Why is this important? Because their demand of product helps determine
mortgage interest rates. Overall, breakpoints increased across the board
largely due to improvements in collateral assumptions reflecting an
improved outlook for the housing market. According to a Bloomberg article
published earlier this month, "As of this point, STACR and CAS
(Structured Agency Credit Risk & Connecticut Avenue Securities) deals have
not been included in the year-end results." However, according to NAIC
meeting notes, they are under potential consideration to be treated as RMBS and
are to be assigned NAIC designations in the future. As a result of these
improved assumptions, NAIC breakpoints have improved across the board,
especially for the credit-dented sectors. Breakpoints increased by
approximately 6-7% for sub-prime, POA and Alt-A ARM bonds compared with 1-3%
for prime bonds. In 2013-year end results, around 15% of bonds have been
modeled as having zero-loss compared with 11% in the 2012-year end results.
On
January 14th the Federal Reserve Board, the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency, and the
Securities and Exchange Commission approved a modification to the Volcker
rule that would allow banks to keep interests in certain funds backed by
trust-preferred securities. The change was aimed at easing small bank's
concerns that they needed to dump certain investments they had previously
thought would be allowed under the rule, losing money in the process. A bank
trade group sued regulators over the dispute, and lawmakers from both parties
have backed the banks. Trust-preferred securities, or TruPS, have hybrid
characteristics of debt and equity and can get favorable tax treatment.
Regulators said banks could keep certain collateralized debt obligations backed
by TruPS if they obtained them before the Volcker rule was finalized on Dec.
10: Bloomberg.
The
Federal Financial Institutions Examination Council (the FFIEC) was established
in 1979. By charter, their principle focus is "to prescribe uniform
principles, standards, and report forms and to promote uniformity in the
supervision of financial institutions." I would bet business is booming at
the FFIEC. The Council has six voting members: the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency, the National Credit Union Administration,
the Consumer Financial Protection Bureau, and the State Liaison Committee. Last
month, the Council released final guidance on the applicability of consumer
protection and compliance laws, regulations, and policies to activities
conducted via social media by banks, savings associations, and credit unions,
as well as nonbank entities supervised by the Consumer Financial Protection
Bureau. The new guidance is effective immediately; its release does not
impose any new requirements on financial institutions, but is intended to help
financial institutions understand potential consumer compliance and legal
risks. The guidance provides considerations that financial institutions may
find useful in conducting risk assessments and crafting and evaluating policies
and procedures regarding social media. The full release can be found at FFIEC: www.FFIEC.gov.
Tasty treats today include the
Mortgage Bankers Association report on mortgage applications, the Housing
Starts and Building Permits duo for January, along with the Producer Price
Index (expected lower). But not so fast! The Bureau of Labor Statistics (BLS)
will be rolling out a new version of the Producer Price Index (PPI). The new
system for reporting price changes at the producer level aims to "expand
coverage and improve upon the current methodology", and give analysts
something to talk about like "significant changes, merits, and drawbacks
of the new system."
