Banking

Financial system gets a mixed review; Goldman starts bitcoin derivative trading

Receiving Wide Coverage …

Sun and clouds

The Federal Reserve gave the U.S. financial system a mixed review in its semiannual Financial Stability Report. “The Covid-19 pandemic remains one of the biggest near-term risks to the stability of the system, while noting that asset prices are vulnerable to significant declines if investor sentiment shifts,” the report said, according to The Wall Street Journal.

But “other parts of the financial system appear resilient. Banks remain well capitalized, and leverage is low among broker-dealers. Household debt is manageable, and businesses are better able to service their obligations as interest rates remain low and earnings improve.”

But the Fed “warned that existing measures of hedge fund leverage ‘may not be capturing important risks,’ pointing to the collapse of Archegos Capital as an example of hidden vulnerabilities in the global financial system,” the Financial Times said. “But the Fed also acknowledged that regulators lack the tools to monitor the risk taking of traders like Bill Hwang, who placed large leveraged bets on stocks through his Archegos family office.”

“The Archegos event illustrates the limited visibility into hedge fund exposures and serves as a reminder that available measures of hedge fund leverage may not be capturing important risks,” said Lael Brainard, the Fed governor who chairs the central bank’s committee on financial stability. “The potential for material distress at hedge funds to affect broader financial conditions underscores the importance of more granular, higher-frequency disclosures.”

“The Fed’s new report painted a generally sunny picture in which banks, consumers and businesses have weathered the coronavirus shock in decent financial shape, and it said that by some measures, risk appetite looked typical,” The New York Times said. But the report noted that “episodes of high trading volumes and price volatility for so-called meme stocks” pointed to “elevated risk appetite in equity markets.”

“The report said banks have stayed well-capitalized through the coronavirus crisis,” The Washington Post said. “Yet events from the past few months highlight a need for greater transparency within the financial system, including for hedge funds and other financial entities with the power to roil Wall Street.”

Let the trading begin

Goldman Sachs “is allowing Wall Street investors to trade with a derivative tied to bitcoin prices,” Reuters reported, citing Bloomberg. “Goldman has opened up trading with non-deliverable forwards that eventually pay out in cash. The bank will protect itself from the cryptocurrency’s volatility by buying and selling bitcoin futures in block trades on CME Group.”

“The move comes after the Wall Street bank restarted its cryptocurrency trading desk earlier this year, with plans to begin dealing bitcoin futures and non-deliverable forwards for clients.”

Meanwhile, Citigroup, “one of the world’s largest currency trading banks, is considering taking its first steps into cryptocurrency markets after a surge in interest from clients,” the Financial Times reported. Itay Tuchman, the bank’s global head of foreign exchange, “said the bank had not yet decided whether it would offer its clients cryptocurrency-related services, but he said that trading, custody and financing were all under consideration.”

Wall Street Journal

Tail wags the dog

Square said gross profit from its Cash App “more than doubled in the first three months of 2021, reaching $495 million. The first quarter marked the first time that Cash App’s gross profit exceeded gross profit at Square’s seller segment, which increased 32% to $468 million.”

Surrender

Edward Bramson’s Sherborne Investors “said it sold its entire stake in Barclays, giving up on a years-long activist campaign to restructure the bank. Sherborne was one of the bank’s biggest shareholders with a 6% stake before the sale. Mr. Bramson unsuccessfully attempted to join the board of Barclays and petitioned its chief executive, Jes Staley, to scale back investment-banking operations in favor of investing more in its U.K. retail bank.”

Financial Times

Treading carefully

U.S. banks are “inching towards an official term replacement for Libor” so they do “not to have to repeat the whole exercise upon discovering that the replacements are as flawed as the thing they set out to replace.”

Burning red

“A senior EY anti-fraud specialist who investigated whistleblower allegations of fraud at Wirecard” told a German parliamentary hearing Thursday that the accounting firm ignored “red flags” that “pointed to accounting manipulations at the disgraced payments group.”

Wirecard ultimately blocked EY’s anti-fraud team from investigating the issues further and eventually aborted the probe in early 2018.”

Quotable

“Should risk appetite decline from elevated levels, a range of asset prices could be vulnerable to large and sudden declines, which can lead to broader stress to the financial system.” — The Federal Reserve’s semiannual Financial Stability Report.


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