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Monday Morning Cup of Coffee: Citi allowed to self-police operations

Deutsche Bank is not as lucky

February 23, 2014
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Monday Morning Cup of Coffee takes a look at news coming across the HousingWire weekend desk, with more coverage on bigger issues to come.

Citi bank is one of several big financial institutions that will be allowed to self-police.

The Federal Reserve Board announced that Citi has been approved to exit parallel, international standard Basel III reporting for U.S. regulatory capital purposes, effective for the second quarter of 2014.

One of the stipulations for this approval is that Citi will be required to increase its estimated risk-weighted assets associated with operational risk to $288 billion from the $232 billion reported as of Dec. 31, 2013, the company said in a statement.

Other firms, such as Goldman Sachs (GS) and JP Morgan (JPM) were also reportedly granted such freedom.

German megabank, Deutsche Bank did not get a similar accord and will significantly adjust its American businesses.

According to the Financial Times, Deutsche Bank has for the first time laid out plans to slash its U.S. balance sheet as it seeks to allay concerns over how it would deal with tough new rules imposed by the Federal Reserve on foreign banks.

The lender aims to reduce assets held in its U.S. arm by up to a quarter largely through reassigning some operations to Europe or in Asia, the article states. This comes after the Fed confirmed last week that overseas lenders operating in the U.S. would have to ringfence capital in the country to safeguard against future financial crises.

Big news over the weekend was the continued reporting on the minutes from the Federal Open Market Committee meetings from 2008, which were released on Friday.  

As we reported Friday, the minutes reveal how the regulators misjudged the depth of the crisis at the beginning, and how the growing realization of the scope of the problem showed some of their human side.

Highlights from the weekend coverage of the minutes:

1. Inflation was a buzzword

Regulators were still talking a lot about inflation, not recession, in late 2008. At the Sept. 16 meeting, according to The New York Times, "The transcript for that meeting contains 129 mentions of “inflation” and five of “recession.” 

2. Rosy reports fromm outside

The regulators were getting "amazingly rosy" reports from outside consultants in early 2008, according to Mish's Global Economic Trend Analysis, including these excerpts from the transcript of the Jan. 29 meeting:

Mr. Reifschneider: As you know, we are not forecasting a recession. While the model estimates of the probability of recession have moved up, they are not uniform in their assessment that a recession is at hand. Another argument against forecasting recession is that, with the notable exception of housing, we see few signs of a significant inventory overhang. In addition, the recent weakness in the labor market and spending indicators is still limited; for example, initial claims have drifted down in recent weeks rather than surging as they typically do in a major downturn. Finally, a good deal of monetary and fiscal stimulus is now in process that should help support real activity. That said, it was a close call for us.

Mr. Evans:  My modal outlook for 2008 is close to that in the Greenbook. I expect that we will eke out positive growth in the first half of 2008. This expectation largely reflects the judgment that businesses have not begun to ratchet down spending plans in the nonlinear fashion that characterizes a recession. Our cumulative actions following this meeting should provide noticeable stimulus to the economy by midyear. 

Mr. Evans:  My modal outlook for 2008 is close to that in the Greenbook. I expect that we will eke out positive growth in the first half of 2008. This expectation largely reflects the judgment that businesses have not begun to ratchet down spending plans in the nonlinear fashion that characterizes a recession. Our cumulative actions following this meeting should provide noticeable stimulus to the economy by midyear. 

Mr. Rosengren: Our forecast returns to full employment by 2010 only if we reduce interest rates more than they are in the Greenbook. Thus, our baseline forecast assumes that we reduce rates 50 basis points at this meeting followed by additional easing in 2008, which eventually results in core inflation below 2 percent and the unemployment rate settling at our estimate of the NAIRU, somewhat below 5 percent.

In a commentary Sunday, Forbes posits that the complexity of reading our economy would have stymied anyone, not just the particular set of people in the room during these Fed meetings.

The Federal Deposit Insurance Corp. did not close any banks in February. Can we make it one month? We'll know this Friday.

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