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Wall Street bank profits fall as economic clouds approach, some beat Reuters expectations

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© Reuters. Signs are seen at JPMorgan Chase & Co’s New York headquarters in Manhattan, New York City, US, June 30, 2022. REUTERS/Andrew Kelly

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Written by Saeed Azhar, Noor Zeinab Hussain and Nikit Nishant

(Reuters) – Profits at Wall Street’s biggest banks fell in the third quarter as they prepared for a weaker economy while investment banking was hit hard, but investors saw a positive side with some banks beating estimates.

JPMorgan Chase & Co. (NYSE:) , Morgan Stanley (NYSE :), City Group Inc (NYSE 🙂 and Wells Fargo (NYSE: & Co’s) showed a drop in net income after turbulent markets choked investment banking activity and lenders set aside more rainy day money to cover losses for borrowers who are behind in payments.

“We’re in an environment where it’s kind of weird,” said Jamie Dimon, chief executive of JPMorgan, who said that while the bank had hoped for the best, we always remained vigilant and prepared for bad outcomes.

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Central banks around the world are struggling with rising inflation that is expected to cause an economic slowdown. The Federal Reserve raised its benchmark interest rate from near zero in March to the current range of 3.00% to 3.25% and indicated further increases.

Higher rates tend to boost bank profits, but the broader risk of economic downturn from rising inflation, supply chain bottlenecks and the war in Ukraine could affect future earnings.

On a conference call, Dimon said US consumers remained strong and he wasn’t expecting a recession but “there are a lot of headwinds out there.”

He warned that the money people have in their checking accounts “will likely be exhausted by the middle of next year” as they face headwinds such as inflation, high interest rates and high mortgage rates.

Banks are allocating more money in preparation for a blow from a possible economic slowdown. JPMorgan allocated $808 million in reserves, Citi added $370 million to reserves, and Wells received a $385 million increase in provision for credit losses.

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However, JPMorgan and Wells Fargo shares rose strongly, rising 2.5% and 3.7% respectively while Citi shares rose 1.2% as the earnings drop was not as deep as feared.

JPM also said it hopes to be able to resume share buybacks early next year, although other banks were less optimistic as Citi said buybacks were still pending and Wells Fargo said it remained cautious about repurchases. repurchase.

“JPMorgan delivered a robust set of results, from top to bottom,” Susan Ruth Katzky, an analyst at Credit Suisse, wrote in a note. “At least as important is evidence of management’s preparedness through whatever turn the macroeconomics takes; expect the latter to be in focus.”

JPMorgan reported a 17% drop in third-quarter profit to $9.74 billion, although this was lower than expected. Wells Fargo posted a 31% drop to $3.53 billion but also beat expectations. Citi reported a 25% drop to $3.5 billion which also beat expectations.

“Most of these banks are generating more income than ever before because of the change in interest rates,” said Chris Marinac, director of research at Janie Montgomery Scott. “And that was the first quarter where you had the full impact of the Fed, because the Fed increased quite a bit in May.”

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JPMorgan said net interest income rose 34% to a record $17.6 billion, up 34%.

“Overall it appears that banks are benefiting from a higher rate environment, and clearly we have seen that banks are able to generate profits, in terms of revenue, at higher interest rates,” said Eric Theoret, global macroeconomic analyst at Manulife Investment Management.

Marinac said investors will want to see banks build reserves at this point in the economic cycle.

“They are preparing for a hard landing, because they are building reserves,” said Marinac. “But that’s not necessarily a bad thing.”

While a number of banks managed to beat expectations, Morgan Stanley announced a 30% drop in profit to $2.49 billion, which did not deviate from estimates. Its shares fell 5%.

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Morgan Stanley earnings showed investment banking revenue more than halved to $1.3 billion with declines across the bank’s advisory, equity and fixed income sectors.

James Gorman, Morgan Stanley’s chairman and CEO, said his company’s performance was “resilient and balanced in an unstable and challenging environment.”

Corporate interest in mergers and acquisitions and initial public offerings has faded, particularly hitting banks hard in investment banking. Global mergers and acquisitions slumped in the third quarter with volumes in the US down nearly 63% as the rising cost of debt forced companies to put off big acquisitions.

And while banks were optimistic that they might beat a potentially tougher economy ahead, some observers were concerned about the long-term outlook for growth.

“Against the backdrop of economic headwinds, strong earnings reports from this morning will quickly move into the rearview mirror,” said Peter Torrente, KPMG’s US National Head of Banking and Capital Markets. Inflation fears, which are showing few signs of slowing. down, casting a shadow on future prospects.”

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Torrente said that while bank returns reflect the benefit of higher interest rates and continued demand for loans, the accumulation of loan loss provisions also reflects the uncertainty in the road ahead.

“In the next quarter and beyond, credit risk, loan growth and deposit balances will be key areas to watch in the banking industry,” Torrente said.

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Economic

New York Federal Reserve Securities Link Reverse Repo to Bank Regulatory Change by Reuters

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© Reuters. FILE PHOTO: The Federal Reserve building is seen in front of the Federal Reserve Board and is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, US, January 26, 2022. REUTERS/Joshua Roberts

Written by Michael S Derby

(Reuters) – Continued massive cash flows at a key Fed facility are largely driven by a change in bank liquidity regulations from last year, a New York Federal Reserve report said on Friday.

The Fed offers what’s called a reverse repo, which allows eligible businesses to store cash at the central bank for a risk-free return. The rule that plays into the inflows is a regulation called the supplementary leverage ratio, which determines how much liquidity banks need on hand.

The SLR standard was relaxed during the most severe phase of the coronavirus pandemic in 2020, when concerns about market performance prevailed, and it was restored at the end of March 2021, to return to a more stringent level.

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Banking economists Jara Afonso, Marco Cipriani, and Gabriel La Spada write: “After the end of the SLR exemption period, banks had less flexibility to expand their balance sheets by increasing their holdings of reserves and Treasuries.” This had a knock-on effect on money market funds, the main users of reverse repo, which drove liquidity into the reverse repo facility.

After the regulations changed, the newspaper said, banks were less inclined to take deposits, and instead the money flowed into financial funds, which had to invest that money somewhere. Meanwhile, banks have cut back on short-term debt offerings, restricting where money can be invested. Moreover, the federal interest rate increases pushed cash into money market funds as financial markets experienced a shift in the cost of short-term borrowing, according to the authors.

The Federal Reserve’s esteemed buyback facility is an essential part of the toolkit it uses to manage its federal funds rate target setting, which it uses to influence the economy’s trajectory to achieve its inflation and employment targets. A reverse repo tool provides money market funds and other companies a place to deposit cash into the Federal Reserve overnight and earn a return. It is currently at 3.8% and is an investment with a better return than many private securities that come with greater risks.

The Fed’s reverse repo facility was largely unused in the spring of 2021, and then flows increased steadily. Inflows peaked at $2.426 trillion at the end of September before easing slightly to Friday’s inflow of $2.05 trillion.

Fed officials were optimistic about the huge levels of inflows. Some have argued that as the Fed raises interest rates and reduces the size of its balance sheet to combat high inflation, inflows into the reverse repo facility should decrease over time. But so far it hasn’t really happened.

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Meanwhile, issues related to the correct setup of the SLR are under consideration by the financial authorities, who are treading cautiously on the issue. “History shows the massive costs incurred by society when bank capital is inadequate, and therefore the urgency that the Fed properly adjusts capital regulation,” Michael Barr, the Fed’s official on bank supervision, said in comments Thursday.

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US Federal Reserve proposes plan for banks to manage climate-related financial risks By Reuters

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© Reuters. FILE PHOTO: An eagle graces the facade of the US Federal Reserve Building in Washington, July 31, 2013. REUTERS/Jonathan Ernst

Written by Chris Prentice

WASHINGTON (Reuters) – The U.S. Federal Reserve on Friday joined other major bank regulators in proposing a plan for how big banks can manage climate-related financial risks, drawing immediate opposition from one member and reservations from another.

The proposed principles detail the expectations for banks with more than $100 billion in assets to incorporate climate-related financial risks into their strategic planning. The proposal was approved for public comment in a 6-1 vote of the Fed’s Board of Governors.

The proposal marks the latest effort by US policymakers to prepare for potential financial risks from climate change, bringing the Fed into line with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), which have separately proposed their own plans.

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The potential impacts of climate change — rising sea levels, worsening floods and fires, and government policies moving away from carbon-heavy industries — could destroy trillions of dollars in assets worldwide.

The Fed said these financial implications “constitute an emerging risk to the integrity and integrity of financial institutions and to the financial stability of the United States.”

The Fed’s plan requires banks to consider climate-related financial risks in their audits, manage other risks, and add climate-related scenario analysis to the traditional stress test. The report suggested that banks should also assess and consider whether they should include climate-related risks in their liquidity reserves.

The debate over the extent of financial system risks posed by climate change has been politically charged. Federal Reserve Governor Christopher Waller opposed Friday’s proposal, raising the question of whether it represented a serious risk to the safety of large banks or financial stability in the United States.

“Climate change is real, but I do not agree with the premise that it poses a serious risk to the safety and integrity of major banks and the financial stability of the United States,” Waller said in a statement released alongside the proposal. “The Fed conducts regular stress tests on large banks that deliver very severe macroeconomic shocks and show that banks are resilient.”

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Gov. Michele Bowman endorsed the plan for public input with reservations, noting that the board should consider the “costs and benefits of any new projections.”

The proposal will be open to public comment for 60 days.

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More than 1,000 New York Times union employees plan to quit over payroll, reports Reuters

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© Reuters. FILE PHOTO: The New York Times Building in Manhattan, New York, US, August 3, 2020. REUTERS/Shannon Stapleton/File Photo

(Reuters) – More than 1,000 unionized employees of The New York Times Company have pledged to quit if the news publisher does not agree to a “full and fair contract” by Dec. 8, according to a union tweet on Friday.

The New York Times NewsGuild sought “inflationary” wages as well as preserving and enhancing health insurance and retirement benefits promised during employment, according to a letter signed by 1,036 members.

“We will be out and about for 24 hours, Thursday, December 8th, if we do not have a full and fair contract agreement in place by then,” the letter said.

Union members are also asking for flexibility to work remotely, among other demands.

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A spokesperson for The New York Times said “While we are disappointed that NewsGuild is threatening to strike, we stand ready to ensure The Times continues to serve our readers without interruption,” adding that the company’s current pay offer offered “significant increases.”

Earlier in March, a group of nearly 600 tech employees at The New York Times voted to unionize as the company faced allegations that it illegally interfered with organizing work.

In August, approximately 300 Thomson Reuters (NYSE: Corp) journalists in the US, represented by the same NewsGuild, also staged a 24-hour strike while the union negotiated a new three-year contract with the company.

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