Date: August 8, 2018
Banks After Tax Cuts: Loan Growth Slows and 3,200 Jobs Disappear
Banks were among the top beneficiaries when Republicans slashed corporate taxes in December to stoke the U.S. economy. So how are the nation’s largest financial institutions treating employees, customers and investors? Twenty-three firms deemed most important by the Federal Reserve saved, on average, $388 million each in the first half of this year, based on declines in their reported tax rates. Over the same period, members of the group said they collectively eliminated 3,200 jobs. Lending, their main contribution to the economy, rose 0.9 percent in the first half. But a year earlier — before the tax cuts — the growth rate was twice that. Shareholders were the huge winners. After profits climbed during the first six months, firms signaled plans to boost dividends and other payouts by more than $28 billion through mid-2019. The numbers provide an initial snapshot of how major banks are responding to their windfall. But as executives across the industry posted financial results in recent weeks, many cautioned they’re still figuring out how the tax cuts will ultimately play out. Some customers, for example, don’t need as much financing at the moment, because they just got tax cuts of their own. “They used that liquidity to really make investments versus borrowing from us,” said David Turner, chief financial officer at Regions Financial Corp., the largest bank in Alabama. “We’re OK with the delayed loan growth. We think it’ll pick up as the economy continues to recover.” Regions used some of its increased earnings from tax relief to increase its dividend, share buybacks and the minimum wage paid to staff. Other banks including JPMorgan Chase & Co. and Wells Fargo & Co. also have laid out targets for sharing the wealth. In fact, there’s evidence many bankers and support staff are faring better — assuming they weren’t fired. Personnel expenses increased by an average of 5.9 percent at the banks — roughly in line with their increase in total revenue. So the average worker probably got a raise. Still, the majority of banks — 14 of the 23 — allocated a smaller slice of revenue to worker pay than last year, showing they aren’t necessarily sharing their windfall.
Italy’s Tria Says Growth Needed for Markets to Gain Confidence
Italy needs growth to gain the trust of financial markets, Finance Minister Giovanni Tria said, and the government’s spending plans won’t jeopardize its commitment to cut the country’s debt nor membership in the euro zone. In an interview with business daily Il Sole 24 Ore, Tria said the introduction of a “flat tax” would be done in stages, and that the state will resume selling off holdings. “One has to separate euroskeptic positions on an academic level, like those of Bagnai, from the fact that the official line of the government does not put our membership in the euro in discussion in any way,” Tria said, referring to Senate finance committee head Alberto Bagnai, whose appointment spooked Italian debt markets. Tria, a former university professor and political novice with no power base of his own, represents a government headed by two anti-establishment parties whose promises threaten to widen Italy’s deficit and whose campaign rhetoric at times questioned Italy’s euro membership. Tria’s two-page interview sought to allay any fears. The yield on Italian 10-year bonds has jumped to a recent 2.8 percent from around 1.8 percent in May, but Tria said that while an economic slowdown has favored a move toward more secure debt instruments, there is no “flight” from Italian bonds. Budget talks began in Rome last week as the two parties in the ruling coalition push to implement their spending plans in 2019. They both agree on the need to boost investment in Italy and want to partially undo recent increases in the retirement age. In addition, the League’s signature economic policy is a flat tax while the Five Star Movement based much of its campaign on introducing a citizen’s income. Ministers will meet again later in the day, Tria said. “In the end, it was me who assured my colleagues that the onset of the measures in the government contract is compatible with the limits on public finances, and not the other way around,” he said.
How to End Japan’s Deflation? Abolish Cash
Monetary medicine in Japan is keeping the economy alive, but with nasty side effects. The search for a new cure should begin with a simple question: What if the Bank of Japan were to throw out its money-printing presses? Instead of pushing more yen into an economy that has already absorbed a threefold increase in cheap central-bank funds in five years without any sign of the much-awaited 2 percent inflation, maybe it’s time to abolish cash altogether. While previous BOJ chiefs were rightly blamed for not acting aggressively enough to prevent the country’s slide into deflation, timidity is not a charge that can be leveled against Haruhiko Kuroda. Starting with his first policy meeting as governor in April 2013, Kuroda has expanded the central bank’s holdings of government bonds and bills to 48 percent of outstanding securities, from just 12 percent. He has also made the BOJ one of the top 10 shareholders in 40 percent of Japanese publicly traded companies, according to Travis Lundy, an analyst who publishes on Smartkarma. Then, in early 2016, Kuroda embarked on an even bigger adventure to expunge the deflationary mindset of Japanese firms. Following the lead of Denmark, Sweden, Switzerland and the euro area, the BOJ embraced a policy of negative policy interest rates. A year and a half of that experiment — not to mention more than 20 years of zero interest rates preceding it — has gone nowhere. Core inflation excluding fresh food came in at 0.8 percent in June. With the jobless rate standing at a 26-year low of 2.2 percent, as Bloomberg’s Japan economist Yuki Masujima notes, inflation should in theory be hurtling toward 1.5 percent. Not only are prices off target, a side effect of negative interest rates is now obvious in worsening profitability of Japanese banks. The reason is simple: Even if the BOJ forces commercial lenders to park more of their surplus funds with it at minus 0.1 percent, it’s not so easy for banks to pass on negative interest rates to depositors. That’s because people have an alternative that pays a guaranteed rate of zero percent: cash.