This is a comparison of Wednesday’s Federal Open Market Committee statement with the one issued after the Fed’s previous policymaking meeting in January.
Text removed from the January statement is in red with a horizontal line through the middle.
Text appearing for the first time in the new statement is in red and underlined.
Black text appears in both statements.
Arrows pointing outwards More
Headline inflation slid by more than expected to an annual 3.4% in February, its lowest level since September 2021, fresh data showed Wednesday.
January labor market data last week showed a weaker picture across all key metrics, with wage growth slowing, unemployment rising and vacancy numbers slipping for the 20th consecutive month.
The Bank of England in the City of London, after figures showed Britain’s economy slipped into a recession at the end of 2023.
Yui Mok | Pa Images | Getty Images
LONDON — The Bank of England is widely expected to keep interest rates unchanged at 5.25% on Thursday, but economists are divided on when the first cut will come.
Headline inflation slid by more than expected to an annual 3.4% in February, hitting its lowest level since September 2021, data showed Wednesday. The central bank expects the consumer price index to return to its 2% target in the second quarter, as the household energy price cap is once again lowered in April.
The larger-than-expected fall in both the headline and core figures was welcome news for policymakers ahead of this week’s interest rate decision, though the Monetary Policy Committee has so far been reluctant to offer strong guidance on the timing of its first reduction.
The U.K. economy slid into a technical recession in the final quarter of 2023 and has endured two years of stagnation, following a huge gas supply shock in the wake of Russia’s invasion of Ukraine. Berenberg Senior Economist Kallum Pickering said that the Bank will likely hope to loosen policy soon in order to support a burgeoning economic recovery.
Pickering suggested that, in light of the inflation data of Wednesday, the MPC may “give a nod to current market expectations for a first cut in June,” which it can then cement in the updated economic projections of May.
“A further dovish tweak at the March meeting would be in line with the trend in recent meetings of policymakers gradually losing their hawkish bias and turning instead towards the question of when to cut rates,” he added.
At the February meeting, two of the nine MPC decision-makers still voted to hike the main Bank rate by another 25 basis points to 5.5%, while another voted to cut by 25 basis points. Pickering suggested both hawks may opt to hold rates this week, or that one more member may favor a cut, and noted that “the early moves of dissenters have often signalled upcoming turning points” in the Bank’s rate cycles.
Berenberg expects headline annual inflation to fall to 2% in the spring and remain close to that level for the remainder of the year. It is anticipating five 25 basis point cuts from the Bank to take its main rate to 4% by the end of the year, before a further 50 basis points of cuts to 3.5% in early 2025. This would still mean interest rates would exceed inflation through at least the next two years.
“The risks to our call are tilted towards fewer cuts in 2025 – especially if the economic recovery builds a head of steam and policymakers begin to worry that strong growth could reignite wage pressures in already tight labour markets,” Pickering added.
Heading the right way, but not ‘home and dry’
A key focus for the MPC has been the U.K.’s tight labor market, which it feared risked entrenching inflationary risks in the economy.
January data published last week showed a weaker picture across all labor market metrics, with wage growth slowing, unemployment rising and vacancy numbers slipping for the 20th consecutive month.
Victoria Clarke, U.K. chief economist at Santander CIB, said that, after last week’s softer labor market figures, the inflation reading of Wednesday was a further indication that embedded risks have reduced and that inflation is on a path towards a sustainable return to target.
“Nevertheless, services inflation is largely tracking the BoE forecast since February, and remains elevated. As such, we do not expect the BoE to conclude it is ‘home and dry’, especially with April being a critical point for U.K. inflation, with the near 10% National Living Wage rise and many firms already having announced, and some implemented, their living wage-linked pay increases,” Clarke said by email.
“The BoE needs data on how broad an uplift this delivers to pay-setting, and hard information on how much is passed through to price-setting over the months that follow.”
Santander judges that the Bank could decide it has seen enough data to cut rates in June, but Clarke argued that an August trim would be “more prudent” given the “month-to-month noise” in labor market figures.
This sentiment was echoed by Moody’s Analytics on Wednesday, with Senior Economist David Muir also suggesting that the MPC will need more evidence to be satisfied that inflationary pressures are contained.
“In particular, services inflation, and wage growth, need to moderate further. We expect this necessary easing to unfold through the first half of the year, allowing a cut in interest rates to be announced in August. That said, uncertainty is high around the timing and the extent of rate cuts this year,” Muir added. More
Trade tensions between Europe and Beijing will likely escalate due to China’s growing ability to manufacture more cheaply in strategic industries, according to Jens Eskelund, president of the European Union Chamber of Commerce in China.
He said the chamber was seeing “overcapacity across the board,” whether in chemicals, metals or electric vehicles. “I’ve met very few companies that do not face it,” he said.
Eskelund was speaking at a media briefing for the chamber’s report, co-authored with consultancy China Macro Group and released Wednesday, on the growing political risks for European businesses in China.
A photovoltaic module company in Hefei, Anhui province, on Feb. 20, 2024.
Future Publishing | Future Publishing | Getty Images
BEIJING — Trade tensions between Europe and Beijing will likely escalate due to China’s growing ability to manufacture more cheaply in strategic industries, according to Jens Eskelund, president of the European Union Chamber of Commerce in China.
“What we see right now is the unfolding of a slow-motion train accident,” he told reporters at a briefing last week.
“Europe cannot just accept that strategically viable industries constituting the European industrial base are being priced out of the market,” Eskelund said. “That’s when trade becomes a security question and I think that is perhaps not fully appreciated in China just yet.”
There needs to be an honest conversation between Europe and China about what this is going to mean.
Jens Eskelund
president, EU Chamber of Commerce in China
Chinese authorities have promoted high-end manufacturing as a way to boost technological self-sufficiency and wean the economy off its reliance on real estate for growth. Investment and state financial support for manufacturing have gone up, while that for property has dropped.
Beijing’s emphasis on manufacturing has prompted concerns about overcapacity — China’s ability to produce far more goods than the country or other countries can absorb can then result in price wars.
Eskelund said the chamber was seeing “overcapacity across the board,” whether in chemicals, metals or electric vehicles. “I’ve met very few companies that do not face it,” he said.
“We haven’t seen all that capacity coming online just yet,” he said. “This is something that’s going to hit markets over the next few years.”
“There needs to be an honest conversation between Europe and China about what this is going to mean,” Eskelund said, noting that both sides need to find a way to ensure most trade flows aren’t disrupted.
“It is hard for me to imagine that Europe would just sit by and quietly witness the accelerated deindustrialization of Europe, because of the externalization of low domestic demand in China,” he said.
Manufacturing accounts for nearly one-fifth of employment in the EU — making it the largest category. The sector is also the largest contributor to what the bloc calls its “business economy value added,” with a share of nearly a quarter.
The EU was China’s largest regional trading partner until Southeast Asia recently surpassed it. The U.S. is China’s largest trading partner on a single-country basis.
Growing emphasis on security
Eskelund was speaking at a media briefing for the chamber’s report, co-authored with consultancy China Macro Group and released Wednesday, on the growing political risks for European businesses in China.
Despite the EU’s currently targeted policy stance, broader U.S. actions and Beijing’s response have made operations in China more difficult for European businesses, the report said.
The U.S. has cited national security for export restrictions on Chinese companies’ access to advanced semiconductor technology. Recent legislative efforts have targeted popular social media app TikTok for risks due to its Chinese ownership.
China has us in a geopolitical trap. We remain dependent on sourcing from China but we cannot sell to the market.
Unnamed executive
EU Chamber of Commerce in China report
In China, mentions of security have increased significantly in Beijing’s latest five-year planning document versus prior ones, said Markus Herrmann Chen, co-founder and managing director of China Macro Group, at the media briefing.
He pointed out that every major Chinese ministry, except for veteran affairs, has adopted the concept of “coordinating development and security.”
Trade tilting out of balance
While not directly in the crosshairs of U.S.-China tensions, there are already signs of impact on European businesses.
The report cited one unnamed member in advanced manufacturing as saying their company’s market share in China collapsed to nothing, down from 35%, over the course of 10 years.
“China has us in a geopolitical trap. We remain dependent on sourcing from China but we cannot sell to the market,” the unnamed executive said in the report. “We are investing elsewhere to diversify, but in practice this will take a long-time – maybe more than 10 years.”
“A key challenge is that pricing mechanisms in Europe are so depressed that if we were to drop our Chinese partners today, we would not be able to sell at European auctions, due to us not being able to compete with the prices of Chinese players,” the executive was quoted as saying.
Businesses in Europe and many countries are only buying more from Chinese companies.
China is increasingly sending more goods to Europe via container ships than the other way around, Eskelund said, noting a significant increase since before the pandemic.
“China’s exports achieved the highest share of global exports ever,” he said. “What worries me is that China imports are underperforming as much as they are.” More
The Fed has a lot to do at its meeting this week, but ultimately may not end up doing a whole lot in terms of changing the outlook for monetary policy.
Though the quarterly plot of individual members’ expectations is pretty arcane, this meeting likely will be all about the Federal Open Market Committee’s “dot plot” of individual member’s interest rate expectations.
Officials also will release their quarterly update on the economy, specifically for gross domestic product, inflation and the unemployment rate.
Federal Reserve Bank Chairman Jerome Powell testifies before the House Financial Services Committee in the Rayburn House Office Building on Capitol Hill on March 06, 2024 in Washington, DC.
Chip Somodevilla | Getty Images
The Federal Reserve has a lot to do at its meeting this week, but ultimately may not end up doing a whole lot in terms of changing the outlook for monetary policy.
In addition to releasing its rate decision after the meeting wraps up Wednesday, the central bank will update its economic projections as well as its unofficial forecast for the direction of interest rates over the next several years.
As expectations have swung sharply this year for where the Fed is headed, this week’s two-day session of the Federal Open Market Committee will draw careful scrutiny for any clues about the direction of interest rates.
Yet the general feeling is that policymakers will stick to their recent messaging, which has emphasized a patient, data-driven approach with no hurry to cut rates until there’s greater visibility on inflation.
“They’ll make it clear that they’re obviously not ready to cut rates. They need a few more data points to feel confident that inflation is heading back to target,” said Mark Zandi, chief economist at Moody’s Analytics. “I expect them to reaffirm three rate cuts this year, so that would suggest the first rate cut would be in June.”
Markets have had to adjust to the Fed’s approach on the fly, scaling back both the timing and frequency of expected cuts this year. Earlier this year, traders in the fed funds futures market were anticipating the rate-cutting campaign to kick off in March and continue until the FOMC had cut the equivalent of six or seven times in quarter percentage points increments.
Now, the market has pushed out the timing until at least June, with only three cuts anticipated from the current target range of 5.25%-5.5% for the Fed’s benchmark overnight borrowing rate.
The swing in expectations will make how the Fed delivers its message this week all the more important. Here’s a quick look at what to expect:
The ‘dot plot’
Though the quarterly plot of individual members’ expectations is pretty arcane, this meeting likely will be all about the dots. Specifically, investors will look at how the 19 FOMC members, both voters and nonvoters, will indicate their expectations for rates through the end of the year and out to 2026 and beyond.
When the matrix was last updated in December, the dots pointed to three cuts in 2024, four in 2025, three more in 2026, and then two more at some point to take the long-range federal funds rate down to around 2.5%, which the Fed considers “neutral” — neither promoting nor restricting growth.
Doing the math, it would only take two FOMC members to get more hawkish to reduce the rate cuts this year to two. That, however, is not the general expectation.
“It only takes two individual dots moving higher to raise the 2024 median. Three dots are enough to push the long-run dot 25bp higher,” Citigroup economist Andrew Hollenhorst said in a client note. “But the combination of inconclusive activity data and slowing year-on-year core inflation should be just enough to keep dots in place and [Fed Chair Jerome] Powell still guiding that the committee is on track to gain ‘greater confidence’ to cut policy rates this year.”
The rate call for March
More immediately, the FOMC will conduct a largely academic vote on what to do with rates now.
Simply put, there is zero chance the committee votes to cut rates at this week. The statement from the last meeting all but ruled out an imminent move, and public statements from virtually every Fed speaker since then have also ruled out a decrease.
What this statement could indicate is perhaps a thawing in the outlook and an adjustment of the bar that the data will need to clear to justify future cuts.
“We still expect the Fed to cut interest rates in June, although we don’t expect officials to provide a strong steer either for or against” following the March meeting, wrote Paul Ashworth, chief North America economist at Capital Economics.
The economic outlook
Along with the dot plot, the Fed will release its quarterly update on the economy, specifically for gross domestic product, inflation and the unemployment rate. Collectively, the estimates are known as the Summary of Economic Projections, or SEP.
Again, there’s not a lot of expectations that the Fed will change its outlook from December, which reflected cuts in the expectation for inflation and an upgrade for GDP. For this meeting, the focus will fall squarely on inflation and how that affects the expectations for rates.
“While inflation has hit a bump in the road, the activity data suggest the economy is not overheating,” Bank of America economist Michael Gapen wrote. “We think the Fed will still forecast three cuts this year, but it is a very close call.”
Most economists think the Fed could raise its GDP forecast again, though not dramatically, while possibly tweaking the inflation outlook a touch higher.
Big picture
On a broader scale, markets likely will be looking for the Fed to follow the recent plotline of fewer cuts this year — but still cuts. There also will be some anticipation over what the Fed says about its balance sheet reduction. Powell has indicated the issue will be discussed at this meeting, and some details could emerge of when and how the Fed will slow and ultimately halt the reduction in its bond holdings.
It won’t be just Wall Street watching, either.
Though not official policy, most central banks around the world take their cues from the Fed. When the U.S. central bank says it is moving cautiously because it fears inflation could spike again if it eases too soon, its global counterparts take notice.
With worries escalating over growth in some parts of the globe, central bankers also want some type of go signal. Higher interest rates tend to put upward pressure on currencies and raise prices for goods and services.
“The rest of the world is waiting for the Fed,” said Zandi, the Moody’s economist. “They would prefer not to have their currencies fall in value and put further upward pressure on inflation. So they would really, really like the Fed to start leading the way.” More
A radical monetary-policy experiment has all but come to an end. On March 19th officials at the Bank of Japan (BoJ) announced that, with inflation of 2% “in sight”, they would scrap a suite of measures instituted to pull the economy out of its deflationary doldrums. The bank raised its key interest rate for the first time since 2007, from minus 0.1% to between 0 and 0.1%, becoming the last central bank in the world to do away with a negative-interest-rate policy. It will also stop purchasing exchange-traded funds and abolish its yield-curve-control framework, a tool to cap long-term bond yields. Even so, the BoJ also made clear that its stance would remain broadly accommodative: the withdrawal of its most unconventional policies does not augur the beginning of a tightening cycle.This shift reflects changes in the underlying condition of the Japanese economy. Inflation has been above the bank’s 2% target for 22 months. Data from annual negotiations between trade unions and large firms released last week suggest wage growth of over 5% for the first time in 33 years. “The BoJ has confirmed what many people have been suspecting: the Japanese economy has changed, it has gotten out of deflation,” says Hoshi Takeo of the University of Tokyo. That hardly means Japan is booming—consumption is weak and growth is anaemic. But the economy no longer requires an entire armoury of policies designed to raise inflation. When Ueda Kazuo, the BoJ’s governor, was asked what he would name his new framework, he said it did not require a special name. It was “normal” monetary policy.image: The EconomistJapan’s economy slid into deflation in the 1990s, following the bursting of an asset bubble and the failure of several financial institutions. The BoJ began trying new tools cautiously at first. Although in 1999 the bank cut interest rates to zero, it lifted them the following year, only to see prices fall again (one of two board members opposed to the decision at the time was Mr Ueda). The BoJ then went further, becoming the first post-war central bank to implement quantitative easing—the buying of bonds with newly created money—in 2001.Yet it did not fully embrace the wild side of monetary policy until the arrival of Kuroda Haruhiko as governor in 2013. Backed by then-prime minister Abe Shinzo, Mr Kuroda embarked on a programme of vast monetary easing, vowing to unleash a “bazooka” of stimulus. The bank adopted a 2% inflation target and began “quantitative and qualitative easing”, which saw enormous government-bond purchases coupled with aggressive forward guidance (promises to keep policy loose). In 2016 the bank set its key overnight rate at minus 0.1%, and then implemented yield-curve control in order to restrain longer-term interest rates, too. Although inflation picked up a bit, it never consistently reached the central bank’s target during Mr Kuroda’s term, which ended nearly a year ago.Officials are now confident that inflation has at last become embedded and the Japanese economy is strong enough to get by without extreme measures. Supply-chain snags and rising import costs pushed inflation up at first, but price rises have since become widespread. GDP growth figures for the last quarter of 2023 were recently revised into positive territory owing to an uptick in capital expenditure.image: The EconomistThe missing piece of the puzzle had been wages. Last year annual wage negotiations produced gains of 3.8%, the highest in three decades. But wage growth still trailed inflation itself, leaving real incomes falling. Then came last week’s blockbuster numbers. They included a big boost to the so-called base-up portion of Japanese wages, which is not linked to seniority. A sustained period of rising prices has emboldened unions to push forcefully for higher pay; Japan’s shrinking labour force is also forcing firms to compete for talent. Policymakers “have been very, very patient, deliberately waiting for the right timing”, says Nakaso Hiroshi, a former BoJ deputy governor. “And now the time is right.”For such a momentous decision, the short-term impact is likely to be limited. The BoJ had hinted at its intentions ahead of time, meaning markets priced in the move. The yen depreciated slightly against the dollar following the announcement. The bank had already loosened its yield cap last year. Long-term yields have settled at around 0.7% to 0.8%, below the scrapped 1% reference point. Although some Japanese investors may bring funds home as a consequence of the policy shift, global capital flows are unlikely to move drastically, since rates in Japan will still be quite low by international standards, notes Kiuchi Takahide of Nomura Research Institute, a research outfit. Nor will the change to the policy rate have a big effect: under the BoJ’s old framework, there were three tiers of accounts, and the share of funds held in those subject to negative rates was minimal.The big question is where the BoJ goes from here. Officials have been careful to signal that they are not embarking on a tightening cycle. In a speech last month, Uchida Shinichi, a deputy governor, said there would not be a rapid series of rate rises. Mr Ueda offered few clues about where he suspects rates will settle; most economists reckon they will not exceed 0.5%. The BoJ will also continue buying “broadly the same amount” of government bonds to continue controlling long-term rates. Normalisation of its own balance-sheet will be a gradual process. “The BoJ has left a huge footprint on the market,” says Kato Izuru of Totan Research, a think-tank. “They want to reduce that footprint, but it cannot be reduced suddenly.”Monetary menaceAs the BoJ enters its new era of policymaking, several risks loom. One comes from overseas. If there is a slowdown in America or China, Japan’s two biggest trading partners, it would weigh on external demand and drag down the outlook for Japanese firms, making them less likely to invest.Another risk comes from within. In the long run, interest payments on Japan’s sizeable government debt will rise, putting pressure on the public finances. The financial system looks sound, but Japan’s financial regulator recently stepped up oversight of regional lenders’ loan books. Many observers are concerned about the impact of rate rises on mortgages and small and medium-sized businesses that do not have large cash buffers.Most worrying, inflation could fall below target once again. Price inflation, while still above 2%, is already falling. Two doveish board members voted against the decision to abolish negative interest rates, arguing that more time was needed to be sure that inflation will stick. For the trend to continue, Japan needs reforms that raise productivity and boost the potential growth rate, Mr Nakaso argues. If there is one lesson from Japan’s era of monetary-policy experiments, it is that there are limits to central banks’ powers. During Japan’s new era, others will have to take the lead. ■ More
The forces that consumed three regional lenders last March have left hundreds of smaller banks wounded, as merger activity — a key potential lifeline — has slowed to a trickle.
Klaros Group analyzed about 4,000 institutions and found 282 with both high levels of commercial real estate exposure and large unrealized losses from the rate surge — which may force these lenders to raise fresh capital or merge.
Behind the scenes, regulators have been prodding banks with confidential orders to improve capital levels and staffing, according to Klaros co-founder Brian Graham.
The forces that consumed three regional lenders in March 2023 have left hundreds of smaller banks wounded, as merger activity — a key potential lifeline — has slowed to a trickle.
As the memory of last year’s regional banking crisis begins to fade, it’s easy to believe the industry is in the clear. But the high interest rates that caused the collapse of Silicon Valley Bank and its peers in 2023 are still at play.
After hiking rates 11 times through July, the Federal Reserve has yet to start cutting its benchmark. As a result, hundreds of billions of dollars of unrealized losses on low-interest bonds and loans remain buried on banks’ balance sheets. That, combined with potential losses on commercial real estate, leaves swaths of the industry vulnerable.
Of about 4,000 U.S. banks analyzed by consulting firm Klaros Group, 282 institutions have both high levels of commercial real estate exposure and large unrealized losses from the rate surge — a potentially toxic combo that may force these lenders to raise fresh capital or engage in mergers.
The study, based on regulatory filings known as call reports, screened for two factors: Banks where commercial real estate loans made up over 300% of capital, and firms where unrealized losses on bonds and loans pushed capital levels below 4%.
Klaros declined to name the institutions in its analysis out of fear of inciting deposit runs.
But there’s only one company with more than $100 billion in assets found in this analysis, and, given the factors of the study, it’s not hard to determine: New York Community Bank, the real estate lender that avoided disaster earlier this month with a $1.1 billion capital injection from private equity investors led by ex-Treasury Secretary Steven Mnuchin.
Most of the banks deemed to be potentially challenged are community lenders with less than $10 billion in assets. Just 16 companies are in the next size bracket that includes regional banks — between $10 billion and $100 billion in assets — though they collectively hold more assets than the 265 community banks combined.
Behind the scenes, regulators have been prodding banks with confidential orders to improve capital levels and staffing, according to Klaros co-founder Brian Graham.
“If there were just 10 banks that were in trouble, they would have all been taken down and dealt with,” Graham said. “When you’ve got hundreds of banks facing these challenges, the regulators have to walk a bit of a tightrope.”
These banks need to either raise capital, likely from private equity sources as NYCB did, or merge with stronger banks, Graham said. That’s what PacWest resorted to last year; the California lender was acquired by a smaller rival after it lost deposits in the March tumult.
Banks can also choose to wait as bonds mature and roll off their balance sheets, but doing so means years of underearning rivals, essentially operating as “zombie banks” that don’t support economic growth in their communities, Graham said. That strategy also puts them at risk of being swamped by rising loan losses.
Powell’s warning
Federal Reserve Chair Jerome Powell acknowledged this month that commercial real estate losses are likely to capsize some small and medium-sized banks.
“This is a problem we’ll be working on for years more, I’m sure. There will be bank failures,” Powell told lawmakers. “We’re working with them … I think it’s manageable, is the word I would use.”
There are other signs of mounting stress among smaller banks. In 2023, 67 lenders had low levels of liquidity — meaning the cash or securities that can be quickly sold when needed — up from nine institutions in 2021, Fitch analysts said in a recent report. They ranged in size from $90 billion in assets to under $1 billion, according to Fitch.
And regulators have added more companies to their “Problem Bank List” of companies with the worst financial or operational ratings in the past year. There are 52 lenders with a combined $66.3 billion in assets on that list, 13 more than a year earlier, according to the Federal Deposit Insurance Corporation.
Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., February 7, 2024.
Brendan Mcdermid | Reuters
“The bad news is, the problems faced by the banking system haven’t magically gone away,” Graham said. “The good news is that, compared to other banking crises I’ve worked through, this isn’t a scenario where hundreds of banks are insolvent.”
‘Pressure cooker’
After the implosion of SVB last March, the second-largest U.S. bank failure at the time, followed by Signature’s failure days later and that of First Republic in May, many in the industry predicted a wave of consolidation that could help banks deal with higher funding and compliance costs.
But deals have been few and far between. There were fewer than 100 bank acquisitions announced last year, according to advisory firm Mercer Capital. The total deal value of $4.6 billion was the lowest since 1990, it found.
One big hang-up: Bank executives are uncertain that their deals will pass regulatory muster. Timelines for approval have lengthened, especially for larger banks, and regulators have killed recent deals, such as the $13.4 billion acquisition of First Horizon by Toronto-Dominion Bank.
A planned merger between Capital One and Discovery, announced in February, was promptly met with calls from some lawmakers to block the transaction.
“Banks are in this pressure cooker,” said Chris Caulfield, senior partner at consulting firm West Monroe. “Regulators are playing a bigger role in what M&A can occur, but at the same time, they’re making it much harder for banks, especially smaller ones, to be able to turn a profit.”
Despite the slow environment for deals, leaders of banks all along the size spectrum recognize the need to consider mergers, according to an investment banker at a top-three global advisory firm.
Discussion levels with bank CEOs are now the highest in his 23-year career, said the banker, who requested anonymity to speak about clients.
“Everyone’s talking, and there’s acknowledgment consolidation has to happen,” said the banker. “The industry has structurally changed from a profitability standpoint, because of regulation and with deposits now being something that won’t ever cost zero again.”
Aging CEOs
Another reason to expect heightened merger activity is the age of bank leaders. A third of regional bank CEOs are older than 65, beyond the group’s average retirement age, according to 2023 data from executive search firm Spencer Stuart. That could lead to a wave of departures in coming years, the firm said.
“You’ve got a lot of folks who are tired,” said Frank Sorrentino, an investment banker at boutique advisory Stephens. “It’s been a tough industry, and there are a lot of willing sellers who want to transact, whether that’s an outright sale or a merger.”
Sorrentino was involved in the January merger between FirstSun and HomeStreet, a Seattle-based bank whose shares plunged last year after a funding squeeze. He predicts a surge in merger activity from lenders between $3 billion and $20 billion in assets as smaller firms look to scale up.
One deterrent to mergers is that bond and loan markdowns have been too deep, which would erode capital for the combined entity in a deal because losses on some portfolios have to be realized in a transaction. That has eased since late last year as bond yields dipped from 16-year highs.
That, along with recovering bank stocks, will lead to more activity this year, Sorrentino said. Other bankers said that larger deals are more likely to be announced after the U.S. presidential election, which could usher in a new set of leaders in key regulatory roles.
Easing the path for a wave of U.S. bank mergers would strengthen the system and create challengers to the megabanks, according to Mike Mayo, the veteran bank analyst and former Fed employee.
“It should be game-on for bank mergers, especially the strong buying the weak,” Mayo said. “The merger restrictions on the industry have been the equivalent of the Jamie Dimon Protection Act.” More
Grayscale’s CEO Michael Sonnenshein told CNBC on Monday that fees on its flagship bitcoin ETF will come down over time, softening an earlier stance defending costs above the market average.
Grayscale’s GBTC has logged outflows of more than $12 billion since it was converted into an ETF in early January, due in no small part to its higher-than-average fees.
Grayscale also wants to introduce other ways of giving investors less costly ways of accessing its bitcoin ETF, including a “mini” version of its flagship product.
Michael Sonnenshein, CEO, Grayscale Investments at the NYSE, April 18, 2022.
Source: NYSE
LONDON — The boss of digital asset management firm Grayscale, which manages the $26 billion exchange-traded fund GBTC, has said that fees on its flagship product will come down over time, after its outflows reached $12 billion.
Grayscale CEO Michael Sonnenshein said that the crypto fund manager expects to bring fees on its Grayscale Bitcoin Trust ETF down in the coming months, as the nascent crypto ETF market matures.
“I’ll happily confirm that, over time, as this market matures, the fees on GBTC will come down,” Sonnenshein told CNBC in an interview on Monday. The firm previously defended its costlier-than-market-average charges.
“We have seen this in countless other exposures, countless other markets, you name it, where typically when products are earlier in their lifecycle, when they’re new to be introduced, these [fees] tend to be higher. And, as those markets mature, and as those funds grow, those fees tend to come down, and we expect the same to be true of GBTC.”
GBTC has logged outflows of more than $12 billion since it was converted into an ETF in early January, according to data from crypto investment firm CoinShares, due in no small part to its higher-than-average fees.
CoinShares’ data shows that GBTC recorded its biggest single daily outflow on Monday, with withdrawals totalling $643 million.
“Of course, we anticipated having outflows,” Sonnenshein told CNBC. “Investors have been wanting to either take gains on their portfolio, or arbitragers coming out of the fund, or people unwinding positions that were part of bankruptcies through forced liquidation.”
Market commentators argue that the bankruptcy of crypto giant FTX has played a significant role in the selloff of GBTC. FTX was a major holder of GBTC before it filed for insolvency in November 2022, holding about 22 million shares as of Oct. 25.
The FTX bankruptcy estate reportedly offloaded the majority of its shares in Grayscale’s bitcoin ETF, according to January reporting from Bloomberg and CoinDesk.
“None of that came as a surprise, right,” Sonnenshein said, speaking about the outflows. “What we’ve seen is GBTC continue to trade liquidly with tight spreads, and across a very diversified shareholder base. So we kind of think we’re between the first and the second inning of this.”
“We’re kind of at the end of that first inning now, where the pent-up demand for buying has hopefully been satisfied, the pent up demand for selling has also hopefully been satisfied,” Sonnenshein added.
“And now we’re kind of starting to move towards that second and third inning, where there’s so much more of the market that still is not yet accessing these products.”
The crypto fund manager charges a 1.5% management fee for GBTC holders, significantly higher than the charge commanded by many ETF providers, including BlackRock and Fidelity.
Read more about tech and crypto from CNBC Pro
Vanguard has waived fees for investors entirely until March 2025 in a bid to lure in deposits.
Grayscale’s Sonnenshein defended the firm’s high fees at the time, telling CNBC they were justified by GBTC’s liquidity and track record. He said that the reason other ETFs have lower fees is that their products “don’t have a track record,” and the issuers are trying to lure investors with fee incentives.
Sonnenshein said the reason other ETFs have lower fees is that the products “don’t have a track record” and the issuers are trying to attract investors with fee incentives. “I think from our standpoint, it may at times call into question their long-term commitment to the asset class,” he said.
Sonnenshein told CNBC Monday that “all of these new issuers really came into the market to compete with us” and are also rivaling each other.
Grayscale also wants to introduce other ways of giving investors less costly ways of accessing its bitcoin ETF, including a “mini” version of its flagship product — the Grayscale Bitcoin Mini Trust, announced last week. The new ETF is set to trade under the ticker “BTC” and have a materially lower fee than GBTC.
The new BTC ETF would be effectively spun out of the Grayscale Bitcoin Trust ETF and seeded with an as-yet undisclosed portion of bitcoin underlying GBTC shares.
Under this structure, existing holders of GBTC would be able to benefit from a lower total blended fee while maintaining the same exposure to bitcoin, spanning ownership of shares of both GBTC and BTC.
Existing GBTC shareholders would also be able to convert into BTC without paying capital gains tax.
The firm is currently awaiting approval from the U.S. Securities and Exchange Commission for its Bitcoin Mini Trust ETF.
Moving forward, Sonnenshein wants investors to turn their attention toward the business’ other crypto investment products, which track prices of different cryptocurrencies including ether and solana.
The company is trying to have its Grayscale Ethereum Trust converted into an ETF, but is awaiting SEC approval. More
More than $40 million was reportedly withdrawn from the state-owned Commercial Bank of Ethiopia or transferred to other banks before transactions were halted.
The bank’s President Abie Sano told a press conference on Monday that a large portion of the cash was withdrawn by students.
In a post on X, the CBE confirmed the service interruption but denied that it was the result of a cyber attack. It added that its ATM services were now “fully operational.”
ADDIS ABABA, Ethiopia – Dec. 7, 2023: A branch of the Commercial Bank of Ethiopia in Addis Ababa.
Bloomberg | Bloomberg | Getty Images
Ethiopia’s largest bank is struggling to recoup millions of dollars after a glitch over the weekend allowed customers to withdraw unlimited funds, according to local media reports.
More than $40 million was reportedly withdrawn from the state-owned Commercial Bank of Ethiopia or transferred to other banks, as customers discovered they could withdraw more than their total balance. Transactions were halted several hours later.
The bank’s President Abie Sano told a press conference on Monday that a large portion of the cash was withdrawn by students, with the BBC reporting that long lines formed at campus ATMs.
Several universities have urged students to return cash that isn’t theirs, and Sano reportedly told Monday’s press conference that anybody who returns the money will not be criminally prosecuted.
In a post on X, the CBE confirmed the service interruption but denied that it was the result of a cyber attack. It added that its ATM services were now “fully operational,” according to a Google translation.
Ethiopia’s central bank, which oversees its financial sector, said in a statement that the interruption was a result of system security checks and “not an incident that endangers the bank, its customers and the entire financial system,” according to a Google translation.
CNBC has contacted the CBE for comment. More
