Climate change, merger control and other challenges facing banks and investors

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The problems facing banks today are a sign of the times. In addition to banks having to adapt to new policies from the Federal Reserve and the Federal Deposit Insurance Corporation, a focus on activism and disclosure of climate change metrics poses challenges for organizations and their investors. It has become.

JPMorgan Chase and Citigroup agree to disclose climate The index comes after facing pressure from the New York City Comptroller's Office and three New York City pension funds. These New York City companies are now proposing that Bank of America, Goldman Sachs, and Morgan Stanley also disclose their energy supply loan ratios.

In their latest proxy statements, Bank of America and Goldman both advised shareholders to vote against the resolution. Morgan Stanley has not yet released a proxy statement.

read more: Investors again call on Goldman to disclose more pay gap data

Bank of America said in its argument that Bloomberg is currently calculating energy supply lending ratios for banks around the world. He also mentioned the goal of achieving net zero greenhouse gas emissions by 2050 and supporting customers in the transition to net zero.

Peter Max – Stock.adobe.com

Goldman wrote that it plans to disclose “a significant amount of new sustainability and climate-related data over the next year,” which could include energy supply financing ratios. In explaining the new disclosures, he cited European regulations.

of F.D.I.C.The draft policy statement on bank merger transactions is unsatisfying for major banks and financial institutions considering mergers. The proposed SOP would assess competitiveness in a broader way, including considering “specific products or customer segments.” Ian Katz, managing director at Capital Alpha Partners, argued that some mergers over $50 billion could still be approved. But the larger the company, the higher the odds of success, he said.

“Current banking regulators may approve some non-SME M&A applications in the name of financial stability, especially if the target bank is in distress,” Katz said. american banker Ebrima Santos Sanne. “However, mergers between medium-sized and large banks are more difficult and time-consuming, but not impossible.”

read more: Banks targeted by activist investors prepare for proxy season

All of this comes amid uncertainty in the stock market and the performance of major stock listings under scrutiny. Bank stocks are still recovering from a tough 2023 and are awaiting a strong signal from the Federal Reserve that a rate cut is indeed on the cards, which could spur serious stock gains. Meanwhile, the Fed's board is closely monitoring potential record valuations in the stock market. financial stability riskwith particular attention to the performance of the “Magnificent Seven” and the potential threat of stock market bubbles.

Learn about these and other challenges facing banks and investors below.

Al Drago/Bloomberg

Fed investigates 'Magnificent Seven' stocks and their role in the market

Federal Reserve Board Member lisa cook In a speech in March, he said boards should play an outsized role in the so-called “Magnificent Seven” stocks, including Amazon, Apple, Facebook parent Meta, Google parent Alphabet, Microsoft, and microchip makers Nvidia and Tesla. He said he was looking for. These serve to boost the market capitalization of major indexes.

“Having worked as a stock analyst, I've always been concerned about increases in value beyond a company's underlying fundamentals,” Cook said after giving a guest lecture at Harvard University. “We are monitoring this closely from a financial stability perspective.”

The topic of a stock market bubble was raised in connection with the then-high closing prices of the top US exchanges. A few days before her speech, the Nasdaq Composite Index, which is heavily weighted by Japan's top technology companies, closed at an all-time high.

read more: Fed's Cook: 'Magnificent Seven' stocks could threaten stability

Bloomberg Creative Photo/Bloomberg Creative

Citigroup and JPMorgan Chase agree to disclose energy supply financing ratios

After facing pressure from the New York City Comptroller's Office and New York City's three pension authorities, Citigroup and JPMorgan Chase & Co. will soon introduce so-called energy supply measures that measure corporate lending levels for low-carbon energy and fossil fuels. We plan to start publishing the loan ratio. funds.

A JPMorgan Chase spokesperson said in a statement: “We are working with the New York City Comptroller's Office regarding disclosure of clean energy financing ratios, understanding that developing an approach that informs decision-making takes some time and resources. We found common ground.”

The moves by these two banks follow a loss of momentum last year. Climate change activists tried to use shareholder voting process to pressure banks This is to limit fossil fuel financing. In 2023, city, JP Morgan And Bank of America has less support than a year ago for proposals to phase out financing for fossil fuel projects.

read more: Citigroup and JPMorgan Chase to disclose new climate indicators

Proposed FDIC policy would have a dampening effect on large bank mergers

In March, the Federal Deposit Insurance Corporation released a new draft policy statement on bank merger transactions, formalizing the administration's widely understood skepticism about bank consolidation, especially when it comes to large corporations. The statement is expected to prompt Biden administration regulators to place greater emphasis on financial stability and market competitiveness when scrutinizing transactions, and is likely to increase dissatisfaction among large financial institutions looking to merge. .

”[It highlights] What a brutal challenge it is to be a bank with $50 billion to $250 billion in assets, even though you face the same regulatory costs as JPMorgan. [fifteen times] “It's small, and it seems unlikely that regulators will approve a merger for scale,” Brian Graham, a partner at Claros Group, told American Bankers. Ebrima Santos Sanne. “When combined with acting auditors, speech This FDIC action on M&A a few weeks ago highlights a more open outlook for bank M&A involving banks with less than $50 billion in assets, and even small banks are subject to additional regulations. Banks need to grow in size so that they can bear the costs and burdens. It's suitable. ”

read more: Large companies seeking mergers face long hurdles under proposed FDIC policy

Michael Nagle/Bloomberg

Bank stocks are recovering but need further boost from Fed rate cuts

Bank stocks are recovering after a tough year in 2023, but they're still weak and may need further signals from the Federal Reserve that interest rate cuts are on the horizon this year for a real rally. The Fed was reluctant to cut interest rates in March, but the KBW Nasdaq Bank Index rose more than 2% that day, suggesting a rate cut was coming.

Fed officials have kept their target interest rate in the range of 5.25% to 5.50%, but a majority of policymakers said in their report that they expect three cuts this year are possible. Next they meet in May and then again in June.

However, Fed Chairman Jerome Powell said at a press conference in March that in the short term, “the path forward is uncertain.” “We remain strongly committed to returning inflation to our 2% target.”

read more: Why bank stocks still have room to rise

Angus Mordaunt/Bloomberg

Capital One develops community investment plan with Discover acquisition

Capital One is “actively meeting” with organizations to support the creation of an accompanying community benefits plan. $35 billion acquisition of Discover Financial Services pending; of Companies disclosed in Merger application filed in March to the Federal Reserve System.

Community benefit plans have become common in connection with corporate acquisitions as banks seek to explain to regulators how their transactions meet the requirements of the Community Reinvestment Act. Such agreements often include pledges to expand banking services in low- and moderate-income areas. Commitments typically fall into three buckets of financing and investing in community development. Affordable housing and mortgage financing. and philanthropic funds.

One group that has not been active in discussions with Capital One is the National Community Reinvestment Coalition, a fair lending advocacy group that has negotiated 21 community benefits plans with the bank since 2016, according to its website. It is. NCRC, which has more than 700 member organizations, argues that much of Capital One's business model takes advantage of low-income credit card holders and that the acquisition will weaken competition, and that Capital One's pending Discover I am against the takeover.

read more: Capital One explores community plan for Discover deal amid hesitation from some activists