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2. Group sues regulators over Volcker Rule delays

The high-yield bond market has been on a terrific run, striking many as an inflating bubble.

As noted by Bloomberg, banks have underwritten $90 billion of high-yield debt so far in 2013, up 36 percent from the comparable period a year ago. That comes on top of $433 billion of in sales for all of 2012, an all-time record for the market. Such activity generated $6 billion in fees for underwriters. The returns were terrific, close to 20 percent, which prompted strong inflows to mutual funds and ETFs that focus on junk bonds.

But now, the bubble may be about to deflate.

One expert was quoted saying, "I've been in the business for 40 years, and the reality is that we've never had a situation like this because this is totally manufactured by the Fed. You have the prices of bonds acting like dot- com prices."

Issuers are in a great position relative to the pre-recession days. But while a surge in defaults isn't likely, it's hard to discount the fact that interest rates may be poised to begin a long-term climb at some point over the next year or so, a phenomenon that would have massive consequences for the entire fixed-income market. Indeed, I noted recently the view that a Great Rotation out of fixed income and into stocks may soon materialize.

Banks have been grappling as of late with the need to take appropriate risks with their portfolios. And the days of rushing into riskier fixed-income classes---including lots of securitized offerings---in search of yield may be dwindling, as some calculate that the days of heady bond price appreciation may be limited. Already some have shifted to shorter-term maturities to reduce interest-rate risks.

For the big underwriters, the prospect of a sharp fall in fees looms large. Indeed, a Federal Reserve governor recently warned that banks were vulnerable to a massive correction in the market.

For more:
- here's the article

Read more about: High Yield
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By Jim Kim

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3. Mortgage margins already compressing

Will the Volcker Rule ever be implemented?

People have been asking that since at least July, when the rule was supposed to have been put in place. But given the ambition of the rule and the sheer complexity, delays were perhaps inevitable. This has been a somewhat bitter pill for financial reform advocates and a clear victory for lobbyists.

One reform group, Occupy the SEC, has just gone to court to compel five regulatory agencies--the SEC, CFTC, FDIC, OCC and Federal Reserve--to finalize the rule quickly, reports Reuters. The group points to the London Whale fiasco at JPMorgan Chase as evidence that proprietary trading still puts banks (and account holders) at undue risk.

The conventional wisdom has been that the rule would be finalized in early 2013, but that doesn't seem likely.

What has evolved in the wake of the non-implementation has been a voluntary effort by banks to curb proprietary trading risks, one that represents an improvement over the situation leading up to the financial crisis but one that falls far short of the intent of the rule.

Many banks have indeed cut back on proprietary trading units, freeing their staff to move to hedge fund firms, and some banks seem bent on honoring the rule that prevents banks with insured funds from holding more than 3 percent of a proprietary alternative investment. However, the industry is sticking to its guns on merchant banking-like activity, lumping this under the rubric of long-term investing and lending.

When it comes to market making, it's unclear what effect the rule has had in aggregate. Some banks may have tried to limit market makers from taking certain positions, but some may be operating under pre-Dodd Frank rules.

It's still unclear how the final rules will aim to preserve certain exceptions to the rule, such as legitimate market making and hedging, while banning proprietary positions. In any case, at this point, it appears as though more delays are in the works, despite the Occupy the SEC suit.

For more:
- here's the article

Related articles:
How the Volcker Rule will be enforced

Read more about: Volcker Rule
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By Jim Kim

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4. Banks offer good service as well as bad service

Last September to October, the primary-secondary spread widened to a phenomenal 120 basis points, prompting people to get all giddy about the mortgage market going forward.

The enhanced profitability of mortgage originations came as a pleasant surprise for the likes of Wells Fargo, U.S. Bank and other big lenders in this area, but it was not destined to endure. The spread has since narrowed to about 90 basis points, and no one would be too surprised if the spread narrowed even more in the year ahead, according to Bloomberg.

The big driver will likely be some interesting fixed-income dynamics that play out as people ponder the end of quantitative easing. Yields on mortgage-backed securities may well spike, just as more lenders enter the hot market for mortgages, which might have the effect of driving down rates.

And what of the other big factor here: Mortgage rates?

Higher rates would moderate any widening of the primary-secondary spread, and there are plenty of people who think that mortgage rates have no place to go but up. That said, some think that as the mortgage market heats up as more purchasers come out of the woodwork--home sales just hit a 4 and a half year high--banks will face enough competitive pressure that they will raise rates only slowly, if at all.

In any case, given all the easing talk, the natural momentum seems to be behind widening spreads, but we'll just have to see how all this plays out.

For more:
- here's the article

Read more about: mortgages, mortgage margins
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By Jim Kim

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5. Pensions may miss the Great Rotation

When it comes to customer services, banks have made progress at the consumer level.

According to the most recent American Customer Satisfaction Index, banks as a whole scored a 77, with small banks scoring a 79. Credit unions as a group scored 82. For the biggest consumer banks, the scores were mixed. Bank of America scored 66--an 11-year low--compared with 68 a year ago. Citigroup fell 3 points to 70. Wells Fargo fell 2 points to 71. JPMorgan Chase rose 4 points to 74, to take the top spot among big banks.

At the business level, banks as a whole have fared even better, as the perception of good customer service seems to be a bit rosier.

A study from Greenwich Associates has found that from 2009 to 2012, the share of small businesses rating their banks as Excellent in Overall Service increased by approximately 7 percentage points and the share of mid-sized companies rating their banks as such rose by about 9 percentage points.

"Over the same period, the share of small businesses rating the performance of their Relationship Managers as 'Excellent' climbed about nine percentage points while the share of mid-sized companies assigning that strong rating to Relationship Managers increased by approximately 11 percentage points. Comparable increases were recorded in Sales Specialist Performance, Treasury Management Overall Satisfaction and Personal Banking Satisfaction," according to the study.

The dichotomy between perceptions of good service vs. bad service is a murky one. In the consumer realm, the media at times seems to fixate on negative stories that just might have translated into a larger negative impression. A good example comes from the LA Times, which reported on a dispute between Bank of America and a California customer over a service fee.

This is an important issue. It would be nice to see some rigorous work on exactly what kind of service banks are delivering--and thus whether their reputation in the consumer and business markets are justified.

For more:
- here's the article
- here's a look at the study

Read more about: Customer Service
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By Jim Kim

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