Aurelia Butler

(Reuters) – The lightning-fast collapse of Silicon Valley Bank this spring laid bare an inconvenient truth: Some U.S. banks are not prepared to borrow from the Federal Reserve if they need to, and a Reuters analysis shows that problem is most acute among the nation’s smallest banks.SVB, a top-20 bank with over $210 billion in assets at the time it failed, had an insufficient stash of collateral and in the year before it went down had not tested its access to the “discount window” through which the Fed doles out emergency loans. That “lack of preparedness may have contributed to the speed of SVB’s demise,” the Fed said in a review of the collapse published in April.It’s a vulnerability that has come into stark relief since SVB’s failure unleashed record demand for emergency credit from the Fed, raising concerns at both headquarters in Washington and across the 12 Fed districts stretched across the country. Fed Chair Jerome Powell last Wednesday acknowledged that the banking stress earlier this year revealed that using the discount window “can be a little bit clunky.” “So why not be in a situation where you’re just much more ready in case you…need to access this discount window?” he said in news conference after the central bank’s policy meeting.Indeed, the Fed and other bank regulators amplified that message on Friday with updated guidance saying “the agencies encourage depository institutions to incorporate the discount window as part of their contingency funding arrangements” and banks should maintain “operational readiness” to tap into it in a pinch. An analysis of Fed data by Reuters, though, shows a lot still needs to be done to meet that goal.While California-based SVB was unusual among its peers — a majority of banks with $100 billion or more in assets have run frequent tests of their discount-window access — many smaller ones have not and may not be prepared to borrow at all, the data suggests.”I was very, very surprised. I’ve been involved in monetary policy implementation for over two decades, and I was surprised by this most recent banking stress, the number of banks that are not fully set up for the discount window,” Dallas Fed President Lorie Logan said in July.Every bank in Texas and in the nation should establish access and “test the plumbing,” she said. MISSION CRITICALFor all the focus the Fed draws for its center-stage role in setting interest rates for the U.S. and beyond, its most critical mission is far more basic: Lend when no one else will.Created in the early 20th century to bring a halt to the cycles of bank panics that had crippled the economy with alarming frequency since the birth of the republic, the Fed has a virtually boundless capacity to provide credit to banks in moments of crisis and thus ensure the wider stability of the financial system.There’s a catch, of course. Banks must be willing to ask for that lifeline in their hour of need, and they have to be set up to do so. While borrowing at the Fed may sound simple, it does require filing the paperwork, posting the collateral and, ideally, conducting regular test runs.The Fed won’t reveal which banks, or even how many, have done the work to gain access, a process that it has said can take weeks. But central bank data shows there are many banks which have not stepped up to the discount window, either to borrow money for real need, or to test it. SIZE MATTERSIn general, the smaller the bank, the less likely it has dipped into the discount window.From July 2010 to June 2021, nearly all banks with more than $50 billion in assets, and about 70% of banks with $1 billion or more in assets, borrowed at least once from the discount window, either in small amounts that suggest a test, or in larger amounts that point to actual need. But only about 40% of the approximately 1,800 banks with between $250 million and $1 billion in assets in communities across the nation touched the discount window during that time, the data shows. In Logan’s district – Texas and parts of New Mexico and Louisiana – the figure for such small banks was about 20%.For the tiniest banks, those with less than $250 million in assets, less than a fifth nationwide had tapped the window.The data records details on more than 40,000 transactions, from thousands of $1,000 test loans to the $5 billion Goldman Sachs (NYSE:GS) borrowed during the COVID-19 government-mandated shutdowns in 2020. All told, about 3,800 banks borrowed from the discount window during the 11-year period detailed in the central bank data. That’s just over 40% of the more than 9,000 depository institutions, including credit unions and branches of foreign banks, currently entitled to borrow from the Fed. There are limits to what the data tells us.It doesn’t include banks that filed the proper paperwork, and even posted collateral, but for whatever reason did not try out the discount window during that time frame.And it doesn’t capture any banks that have newly set up access or tested since 2021, and particularly since SVB’s collapse in March focused fresh attention on the need for liquidity. The Fed publishes discount window transactions two years after the fact. Even so, says Richmond Fed economist Huberto Ennis (NYSE:EBF), based on the data “it seems safe to assume a meaningful proportion of banks still did not have ready access to the discount window, at least until recently.” Reuters reached out to the 10 biggest banks with no public record of borrowing from the discount window. Most of them indicate in public filings that they have pledged collateral at the Fed. Several told Reuters they had tested their access, without specifying a date. One said its test took place prior to 2010. The National Credit Union Association requires members with $250 million or more in assets to have discount window or other emergency liquidity access. Only 1,100 of its 4,700 members meet that threshold. But some 1,366 were signed up to use the discount window as of December, the NCUA said. Banks are not subject to any such requirement, and the Fed declined to provide a count of those with access. But Fed Governor Michelle Bowman said in May that “a number” of banks had not registered. VeraBank, a $4.5 billion bank in Henderson, Texas, has done testing for years: each July it borrows $100,000 from the Fed, and repays it the next day, the data shows. “I think you should always have the access — you just never know,” CEO Brad Tidwell says. “If you are not testing it with some regularity, I don’t know how you can assure yourself that it’s going to be there if you need it.”Among the biggest banks — there are 33 currently with more than $100 billion in assets — regular testing is not universal. Just over half tapped the discount window on a quarterly or yearly basis during the 11 years of data examined, generally in amounts of $1 million or less that suggests they were tests. Others ran less-frequent tests, and seven borrowed just once or not at all. SVB went to the window just one time, borrowing $200 million for a day in August 2018. PRUDENT PLANNINGFor much of its history, the Fed actively discouraged banks from discount-window borrowing, requiring them for example to exhaust other funding sources first, or, more recently, by charging above-market interest rates. When the COVID-19 pandemic hit, the Fed reversed course. It slashed that so-called penalty rate, and joined with other bank regulators to encourage banks to borrow as part of broader efforts to stave off market and credit dislocation. The biggest banks also stepped up to borrow so as to reduce discount window stigma.After the SVB collapse this past March set off a new round of market turmoil, the Fed expanded its emergency lending further, opening a new one-year lending facility that unlike the long-established window does not impose a “discount” on pledged collateral but instead lends at the security’s full face-value. And now it and other regulators are officially encouraging banks to sign up and test at the window, part of what Chicago Fed President Austan Goolsbee told Reuters is a “big push to try to get operational readiness, of everyone that we can.” A recent “Ask the Fed” webinar for bank executives included detailed guidance on onboarding for its emergency-lending facilities, and offered assurances that establishing and testing access would be seen by supervisors as prudent planning rather than as a red flag signaling liquidity concerns.Richmond Fed’s Ennis says not all small banks actually need access. They may keep large stashes of cash on hand, or have a correspondent relationship with a bigger bank. Most banks are members of their local Federal Home Loan Bank, sometimes called the nation’s lender of second-last resort, where they can call on liquidity in a pinch.But his research suggests that banks with riskier, less-liquid books may find themselves in need of the discount window in times of financial market stress. Minneapolis Fed President Neel Kashkari said small banks should think of the discount window as a backup. “We point out, hey, there might come a time when the Home Loan Bank isn’t able to meet your needs,” he told Reuters in May. “It’s an ongoing discussion. I mean, banks historically always think they’re fine, until they are not.” More

Two out of three ain’t so good. On Tuesday, Fitch became the second major agency, after Standard & Poor’s in 2011, to strip the United States of its prized triple-A credit rating.Fitch cut by a notch to AA+ and cited fiscal deterioration over the next year and repeated down-to-the-wire negotiations on Capitol Hill over the country’s debt ceiling.Two months ago, lawmakers were haggling over the government borrowing limit and the two sides seemed so far apart that the process threatened to tip the world’s largest economy into a technical default.The event itself has not come as a shock, given Fitch warned back in June, after the crisis was resolved, that it would finalise that view later in the year. But the timing has caught a few in the market by surprise.Investors have responded by knocking equities and scooping up government bonds, which has pushed the yield on the 10-year U.S. Treasury note down towards 4.0%, while the dollar is looking fragile. For now, investors agree that the downgrade is unlikely to do much to shift international demand for Treasuries or for U.S. stocks, which explains the very muted market reaction. But it’s a dent to the country’s reputation and puts the health of U.S. public finances in the spotlight, a factor a number of market watchers expect to act as a negative driver of the dollar over the longer term. A May report by Moody’s (NYSE:MCO) Analytics – a unit of rating agency Moody’s Investors Service, which still has an “Aaa” rating for the U.S. government – said a downgrade of Treasury debt would set off a cascade of credit implications and downgrades on the debt of many other institutions.There have been warnings from rating agencies, economists, politicians and strategists that the U.S. government spending relative to tax collections isn’t sustainable. Fitch says it expects the U.S. general government deficit to rise to 6.3% of GDP this year, from 3.7% in 2022.Jefferies notes that, with two of the three major agencies listing U.S. debt at AA, U.S. bonds no longer count as AAA in some key indices. However, according to Jefferies, most investors have moved away from some of the stricter criteria around holding triple-A rated debt, given Germany is the only large issuer left with that rating.But either way, with a presidential election just over a year away, it’s not a good look. Key developments that could provide more direction to U.S. markets later on Wednesday: * U.S. corp earnings: Dupont Nemours, Exelon (NASDAQ:EXC), CVS Health (NYSE:CVS), Entergy (NYSE:ETR), Kraft Heinz (NASDAQ:KHC), Garmin (NYSE:GRMN), Yum! Brands (NYSE:YUM), Phillips 66 (NYSE:PSX), Bunge (NYSE:BG) Ltd, Lincoln National (NYSE:LNC), Albemarle (NYSE:ALB), Occidental Petroleum (NYSE:OXY), ETSY, Cognizant Technology Solutions (NASDAQ:CTSH), Atmos Energy (NYSE:ATO), Equinix (NASDAQ:EQIX), Qualcomm (NASDAQ:QCOM), MGM Resorts (NYSE:MGM), Ingersoll Rand (NYSE:IR), MetLife (NYSE:MET), Clorox (NYSE:CLX), Marathon Oil (NYSE:MRO)* U.S. ADP July private sector payrolls, EIA weekly crude stocks. More

Donald Trump is facing his most serious criminal challenge yet after federal prosecutors charged the former president with attempting to overturn the outcome of the 2020 election.The 45-page indictment issued yesterday by prosecutor Jack Smith builds on the work of the bipartisan congressional committee that investigated the events leading up to the January 6 2021 Capitol riot.It also includes new evidence such as a contemporaneous set of notes taken by then vice-president Mike Pence from a meeting on January 4, during which Trump allegedly made claims of election fraud.The indictment accuses six co-conspirators of working with Trump to overturn the results of the 2020 polls. The unnamed individuals include attorneys, a DoJ official and a political consultant.Trump, who is already facing a federal criminal trial related to the handling of classified documents and state charges for falsifying business records, will appear in a Washington DC court tomorrow. The trial is expected to start next year, during campaigning for the 2024 presidential election.Trump likened the latest charges to the persecution of political figures in Nazi Germany in the 1930s or in the Soviet Union and said they were another “pathetic attempt” by the Biden administration to “interfere” in the outcome of the 2024 election.The evidence of previous criminal proceedings suggest the latest charges could help rather than hinder Trump’s re-election chances. Trump, who is favourite to secure the Republican party nomination for president, has put his legal battles at the heart of his campaign and has used each new case as an opportunity to raise further funds.Figures released this week showed Trump’s campaign committee and his Save America political action committee raised $50mn in the first six months of the year but spent $57mn, including more than $20mn on legal consulting and expenses.Analysis: The case against Trump is a “much more legally complicated case” than the Mar-a-Lago one, said an expert. Read more on how Jack Smith plans to prosecute his case against the former president.Opinion: The latest case against Trump goes to the heart of the argument that he is a threat to American political freedom, writes Gideon Rachman.Here’s what I’m keeping tabs on today:Antitrust: The Federal Trade Commission will begin in-house proceedings with an evidentiary hearing before an administrative judge related to its complaint against the proposed merger of Microsoft and Activision Blizzard.Results: Carlyle, Taco Bell parent Yum Brands, Kraft Heinz, CVS Health DoorDash, Etsy, Zillow, Robinhood, PayPal and Shopify are among the companies reporting earnings today.Economic data: The ADP national employment survey is published and is expected to show that private sector job growth in the US dropped in July.Pope Francis in Portugal: A six-day visit by the leader of the Catholic church to Portugal begins in Lisbon to mark World Youth Day.Five more top stories1. A decision by Fitch to downgrade the US’s credit rating from triple A to double A plus has triggered equity market falls in Asia and Europe. Futures trading suggests shares will also decline at the open of trading in New York. Read more on the investor reaction to Fitch’s decision. More on the downgrade: Fitch blamed an “erosion of governance” over the past two decades for its decision which led to a backlash by politicians.2. The White House will ask Congress to fund arms for Taiwan as part of a supplemental budget request for Ukraine, in an effort to speed up the supply of weapons to the country amid the rising threat from China. Read more on what the request, if passed, would mean for Taiwan. 3. The US House of Representatives China committee yesterday accused BlackRock and MSCI of profiting from investments that help the Chinese military and undermine American values and security. Read more on what the lawmakers said.4. Staffing shortages at air traffic control, which have delayed passengers in Europe and forced US airlines to cut flights this summer, have sparked an industry blame-game on both sides of the Atlantic. Read more on the impact the shortages of air traffic controllers is having.5. Uber yesterday reported its first operating profit, marking a turning point for the chronically lossmaking company after years of heavy spending in a controversial dash for growth. The ride-hailing company had recorded $31.5bn in operating losses since 2014, the first year for which it disclosed details of its finances. Read more on the landmark results. The Big Read

Andrés Manuel López Obrador © FT montage/Shutterstock/Getty Images/EPA

The influence of Mexico’s military has grown dramatically under populist president Andrés Manuel López Obrador. To realise his vision of stamping out corruption and run services efficiently, López Obrador has brought in the army and navy to run airports, ports and the national customs agency. He even has plans for a military-run passenger airline. But as the militarisation of Mexico’s economy grows, critics ask whether the outgoing president is creating a monster that he and his successors will not be able to control. Read more of today’s fascinating Big Read.We’re also reading . . . Inside the race to lead EY: One of the architects of the Big Four firm’s bungled break-up plan is a frontrunner in the race to succeed the current global chair and chief executive.China’s slowing economy: The world’s second-largest economy is facing a dangerous downward deflationary spiral, writes Robin Harding. Niger coup: The threat of military action by west African leaders in response to the coup is a shift to a tougher approach after criticism over how they dealt with past putsches.Chart of the day

Turkish equities have posted blistering gains this summer as an economic policy overhaul and fears about a fresh flare-up in inflation draw local savers and foreign investors into the market. Take a break from the newsThe Apple TV+ series Hijack opens new vistas of wardrobe deconstruction while capturing the broad social and sartorial panorama of contemporary air travel. Subtle colour coding, the hero’s layered look and, mercifully, no sweatpants lend a sly glamour to the Idris Elba thriller.

Sam (Idris Elba) poised for action in a long-sleeve olive Sunspel polo over a Sunspel white tee © Apple TV+

Additional contributions by Tee Zhuo and Benjamin Wilhelm More

1. Fitch downgrades U.S. credit ratingFitch has lowered its rating of U.S. debt to AA+ from the top tier level of AAA, citing concerns over a rising debt burden and eroding confidence in Washington’s leadership, only months after lawmakers brought the world’s largest economy to the brink of a sovereign default.The downgrade, which is the first by a major ratings agency in over a decade, points to fears that repeated political standoffs over the debt limit could threaten the stability of the $25 trillion global Treasury market. Treasuries have typically been seen as a safe-haven asset backed by trust that America will pay back its obligations, and this faith has helped to underpin U.S. debt as a benchmark for stocks and other bonds.While Fitch’s move is not expected to immediately alter this role, it does raise some questions around America’s reputation for reliability. In a statement on Tuesday, the ratings firm argued that there has been “a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters.”Fitch also predicted that the general government deficit will climb to 6.3% of gross domestic product in 2023, up from 3.7% in 2022, “reflecting weaker federal revenues, new spending initiatives and a higher interest burden.”The announcement was met with some derision, with economist Lawrence Summers calling it “bizarre and inept” in light of recent signs of U.S. economic resilience and Treasury Secretary Janet Yellen saying it was “arbitrary and based on outdated data.”2. Futures lower after Fitch announcementU.S. stock futures moved lower on Wednesday, while the dollar slipped and Treasury futures rose, as investors attempted to gauge the impact of Fitch’s decision.By 05:18 ET (09:18 GMT), the Dow futures contract had dropped by 232 points or 0.64%, S&P futures lost 39 points or 0.84%, and Nasdaq 100 futures shed 182 points or 1.15%.The dollar index, which tracks the greenback against a basket of other currencies, fell by 0.16% to 102.14, but remained relatively close to three-month highs. Yields on U.S. Treasuries, meanwhile, declined. Prices for these bonds typically increase when yields fall.Investors had a relatively muted reaction to the downgrade, with some analysts saying they expect the fallout to be limited. However, they flagged that it still injects added uncertainty into markets at a time when the immediate path ahead for the world economy is murky.3. AMD and StarbucksAlong with the Fitch downgrade, markets were pouring over the latest quarterly earnings from chipmaker Advanced Micro Devices (NASDAQ:AMD) and coffeehouse chain Starbucks (NASDAQ:SBUX).AMD forecast that the release of its artificial intelligence chips will drive up its annual results, sending shares higher in premarket trading.The semiconductor group plans to launch its MI300 AI chips later this year. The technology is expected to compete directly with rival Nvidia (NASDAQ:NVDA) in the increasingly lucrative market for AI-powering chips. Chief Executive Officer Lisa Su noted that customer interest in the MI300 series of chips is “very high.”Starbucks, meanwhile, reported global comparable sales that missed estimates, as demand for the Frappuccino maker’s drinks and food showed signs of slowing in North America. Quarterly transactions in the region rose by just 1%, down from a 6% uptick in the prior three-month period.But Starbucks still topped profit estimates thanks in large part to a sharp recovery in sales in China, which analysts said helped mitigate a premarket slide in the company’s shares.4. Qualcomm highlights earnings dayThis week’s wave of quarterly corporate earnings gathers pace Wednesday, with chipmaker Qualcomm (NASDAQ:QCOM) set to headline the slate of companies reporting.The San Diego-based group, which makes chips that help power a wide range of smartphones, is expected to deliver fiscal third-quarter adjusted earnings per share (EPS) of $1.81 on adjusted revenue of $8.51 billion, according to Bloomberg consensus estimates. In the corresponding period last year, the company posted an EPS of $2.96 and revenues of $10.93B.Analysts at JPMorgan said earlier this week that Qualcomm could beat relatively low estimates, citing recent returns from its rivals that suggest “improved trends” in the sluggish smartphone market.Demand for handset devices has faced headwinds as inflation-hit consumers rein in spending on non-essential items, replacement cycles elongate, and smartphone makers struggle to come up with new advances to entice customers. In the first quarter, global smartphone shipments slipped by 13%, according to research firm Canalys.Elsewhere, other firms posting results include pharmacy chain CVS (NYSE:CVS), fintech group PayPal (NASDAQ:PYPL), and fast food corporation Yum! Brands (NYSE:YUM).5. Crude prices climb after U.S. inventories drawOil prices rose Wednesday, nearing their highest levels since April, after industry data pointed to a hefty fall in U.S. inventories, indicating robust demand from the world’s biggest fuel consumer.Data from the American Petroleum Institute on Tuesday showed that U.S. crude inventories shrank by 15.4 million barrels in the week to July 28, the largest draw seen in data stretching back to 1982. Official data from the Energy Information Administration are due later in the session for confirmation.Outside of the U.S., Saudi Arabia is expected to announce that it will extend its voluntary output cuts into September at an OPEC+ meeting on Friday, Reuters has reported.By 05:19 ET, the U.S. crude contract traded 0.98% higher at $82.17 a barrel, while the Brent contract climbed 0.86% to $85.64. More

Here is a list of countries whose sovereign debt is still rated ‘AAA’ by at least two of the top three ratings agencies:Country/rating S&P Fitch Moody’s (NYSE:MCO)agencyCanada AAA AA+ AAAGermany AAA AAA AAAAustralia AAA AAA AAASingapore AAA AAA AAASwitzerland AAA AAA AAADenmark AAA AAA AAASweden AAA AAA AAANorway AAA AAA AAALuxembourg AAA AAA AAANetherlands AAA AAA AAA More