Central Banks Issue Warning; Citi Enters Iraq; Banks Support Bail-in

by Andy Peters
JUN 24, 2013 8:20am ET

Receiving Wide Coverage ...

Central Banks Warn Private Sector to Act: The world's central banks have done their job; now it's time for political leaders to do theirs. That's the message delivered by the Bank for International Settlements, colloquially known as the central bankers' bank, in the wake of Federal Reserve Chairman Ben Bernanke's comments that the Fed may slow its bond-buying program later this year. "Cheap and plentiful central bank money had merely bought time," the BIS said in its annual report, and additional stimulus will only make it more difficult for the global economy to return to health, the FT reported. Two leaders of the BIS, whose members include the Federal Reserve Board and the European Central Bank, said that "returning to stability and prosperity is a shared responsibility" and the "The balance between costs and benefits is deteriorating," the Times noted. The most dangerous aspect of the efforts of central banks is that it deludes the private sector from making its own reforms, with a BIS executive saying "low interest rates and unconventional monetary policies have made it easy for the private sector to postpone deleveraging," the Journal reported. Financial Times, New York Times, Wall Street Journal

Citi to Open Office in Iraq: Iraq continues to experience outbursts of violence, but that's not stopping Citigroup from opening an office in Baghdad—the first U.S. bank to have a physical presence there. The Citi executive tapped to run the office, Dennis Flannery, hopes "some of the political and security issues might be abated" in Iraq, the Journal reported. Both the FT and the Journal note Iraq's oil riches and the allure for banks; Citi projects Iraq to become a $2 trillion economy by 2050, the FT says. Wall Street Journal, Financial Times

Wall Street Journal

A group of large banks submitted to federal regulators last month their favored method for how to deal with another Lehman Brothers-esque failure—bondholder bail-ins. Bank of America, Citigroup, Wells Fargo, "other banks" and the Clearing House trade group attended a private meeting with the Fed on May 22, when the plan was submitted. Bail-ins put the onus on bondholders, not taxpayers. Those banks said they would be willing to hold "combined debt and equity equal to 14% of their risk-weighted assets," the Journal reported, citing unnamed sources. The banks think that if they support the bail-in concept, they will be throwing a bone to regulators who "have been calling for banks to hold a minimum amount of long-term debt," the paper explains. The banks' preferred plan would pre-empt regulators' ordering them to hold more long-term debt. No word yet if the regulators like the plan.

Bernanke must hang tough with plans to start scaling back bond purchases, despite loud and persistent whining from the markets, the Journal's Heard on the Street column opines. "Failing to do so could set it up for even greater difficulties engineering an exit at some later point," the article says.

Officials with the U.S. Department of Education are probing possible student-loan scams, with alleged incidents of applicants taking federal loans and grants to use at three or more schools in a year, the Journal reports. The story notes that "most federal student aid requires no credit check and comes with few restrictions on how the money is spent."

Financial Times

The FT reported findings from a study of bank executives' pay, co-authored with the private firm Equilar, including this one: average pay "fell by a tenth last year" to $11.5 million. The paper cites well-known reasons for the pay drop, including Chase's London Whale incident, and shareholder unrest.