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Yellen strongly defends easy Fed policies, cites U.S. labor slack

CHICAGO (Reuters) – Federal Reserve Chair Janet Yellen gave a strong defense of the central bank’s easy-money policies on Monday, saying its “extraordinary” commitment to boosting the economy, especially the still struggling labor market, will be needed for some time to come.

In her first public speech since becoming Fed chair two months ago, Yellen cited the struggles of three American workers in backing the policies of low interest rates and continued bond-buying. She said there remains “considerable” slack in the economy and job market, a sign that further monetary stimulus can still be effective.

“I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policy-makers at the Fed,” Yellen said at a community reinvestment conference.

The Fed, frustrated with the slow recovery from the 2007-2009 recession, has kept rates near zero for more than five years. It has said it will keep them there for a considerable time even after it ends a bond-buying program, which is to be wound down later this year.

In a speech that sounded political at times, Yellen, long concerned with the hardships of the unemployed and under-employed, said the U.S. economy remains “considerably short” of the Fed’s goals of maximum sustainable employment and stable inflation at 2 percent.

The “scars from the Great Recession remain, and reaching our goals will take time,” she told about 1,100 people gathered at a downtown convention center here. “The recovery still feels like a recession to many Americans, and it also looks that way in some economic statistics.”

The U.S. unemployment rate has dropped from a post-recession high of 10 percent in 2009 to 6.7 percent last month, and has fallen more quickly than the Fed expected.

Yet that drop is due in part to the droves of Americans who have given up the search for work, setting up a debate over whether the Fed should keep up its stimulus in hopes that they will ever return again.

While some economists and more hawkish Fed officials believe there remains little so-called slack in the labor market, and that inflation will soon rise, Yellen gave a series of reasons why she does not believe that to be the case.

For one, she said, there is not yet evidence of worker compensation rising. And she pointed to the unexpectedly large proportion of part-time workers and long-term unemployed as reason to believe that further improvement in the labor market could draw people back into jobs, or into better jobs.

Taking a page from a politician’s notebook, Yellen cited three workers who either lost their jobs or absorbed sharp pay cuts when the recession hit, including one who “scrambled for odd jobs and temporary work.”

“This is not just an academic debate,” Yellen said at the at the 2014 National Interagency Community Reinvestment Conference.

“For Dorine Poole, Jermaine Brownlee, and Vicki Lira, and for millions of others dislocated by the Great Recession who continue to struggle, the cause of the slow recovery is enormously important.”

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

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IMF still sees advantage for ‘too important to fail’ banks

WASHINGTON (Reuters) – Top banks in the euro zone benefited from an implicit taxpayer subsidy of $90 billion to $300 billion in 2012 due to ongoing state support which makes them “too important to fail,” the International Monetary Fund said in a report on Monday.

Subsidies in the United Kingdom and Japan may have been as high as $110 billion in the period of 2011-12, while they ranged from $20 billion to $70 billion in the United States, the IMF said in a chapter of its twice-yearly “Global Financial Stability Report.”

The IMF, a Washington-based global financial institution, analyzes the economic and financial policies of its 188 member countries and warns about potential problems. Its report could influence regulators in the United States and Europe that are implementing tough new rules for the financial industry to minimize the likelihood and cost of bailing out big banks.

Bank assets have grown dramatically in many countries since 2000, while the number of banks has fallen. In most countries, the assets of the three largest banks make up at least 40 percent of total banking assets, while in Canada, France and Spain that figure is at least 60 percent, the IMF said.

That means problems or failure in one of a country’s top banks could throw its entire financial system into chaos.

This problem only got worse in the wake of the global financial crisis in 2007-08, when many governments intervened in the banking sector or encouraged mergers to prevent banks from collapsing, according to the report.

“Countries emerged from the financial crisis with an even bigger problem: many banks were even larger than before and so were the implicit government guarantees,” the IMF said.

The Fund said that funding advantage has gone down somewhat since 2009, especially in the United States, due to tighter regulations and effective supervision.

But the subsidies may be even higher for banks in the euro zone. And ‘systemically important banks’ still enjoy implicit subsidies of around 60 basis points on average compared to their less weighty peers.

The IMF used three different methods for calculating the funding advantage of top banks: comparing their bond yields to those of other banks; comparing actual credit default swaps for bank bonds to what they would be using just equity price information; and using credit rating agencies’ estimates of government support.

While the three estimates diverged somewhat, they still showed that these top banks benefited from investors’ belief that governments would rescue them in a panic situation.

The IMF said it may not be possible to remove ‘too important to fail’ subsidies completely, since governments cannot predict everything, and sometimes bailing out a bank may be better for the economy than letting it collapse.

Shrinking banks or revamping their structure also may not be a good solution, as there is some evidence that large banks enjoy economies of scale and scope that keep costs low for consumers and promote market liquidity. Restricting what banks do could also lead to riskier activities migrating into less regulated parts of the financial industry.

The IMF said regulators should instead focus on ensuring banks are less likely to fail, such as boosting the quality and size of capital buffers. It also recommended having banks pay a levy based on the size of their liabilities.

“Given the difficulty of completely ruling out bailouts in practice, some level of government protection, and thus some positive subsidy, may be unavoidable,” according to the report. “Bank levies can allow governments to recoup part of it.”

The IMF also called on countries to do a better job of coordinating bank resolution frameworks, especially for cross-border banks, or risk creating further problems. For example, poor coordination on resolving multinational failed banks fed into greater financial fragmentation in Europe.

“Local initiatives may well end up being mutually destructive,” the IMF said.

(This story corrects year to 2012 from ‘last year’ in first paragraph)

(Reporting by Anna Yukhananov; Editing by James Dalgleish)

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Euro zone inflation drops to lowest since 2009

BRUSSELS (Reuters) – Euro zone inflation hit its lowest level since November 2009 in March, a shock drop that raises expectations the European Central Bank will take radical action to stop the threat of deflation in the currency bloc.

Annual consumer inflation in the 18 countries sharing the euro was 0.5 percent in March, with the pace of price rises cooling from February’s 0.7 percent reading, the EU’s statistics office Eurostat said on Monday.

Economists polled by Reuters had predicted a 0.6 percent reading – itself worrying for an economy that is barely pulling out of a record-long recession after a crisis that nearly broke up the currency area.

The euro zone is far from the deflation that Japan suffered from the early 1990s, when falling prices weakened demand, leading to wage cuts and even lower prices, but the bloc’s low inflation rate is a clear sign of economic fragility.

Inflation has now been in the ECB’s “danger zone” of below 1 percent for six consecutive months, and the flash reading increases the chances the ECB will cut interest rates when its Governing Council meets on Thursday. Speculation has also grown that it may employ other easing measures such as a negative deposit rate or even U.S.-style bond-buying.

But this year’s late Easter, which has delayed the impact of rising travel and hotel prices at a time when many people go away in Europe, could encourage the euro zone’s central bank to wait until its June meeting to act.

“This will keep the possibility of further monetary policy easing very much alive,” said Nick Kounis, head of economic research at ABN AMRO in Amsterdam. “Nevertheless, the central bank has shown quite some tolerance for low inflation recently.”

The ECB, which targets inflation of just below 2 percent, left borrowing costs unchanged at 0.25 percent in March and has argued that deflation risks in the bloc are limited.


Some euro zone members, like Ireland, Cyprus and Greece have experienced falling prices in recent months. For the bloc as a whole, price rises for industrial goods outside the energy sector were very modest in March, a sign demand remains weak.

On Monday, the International Monetary Fund’s top European official said the ECB had more room to cut interest rates to counter risks from low inflation, although he said the Fund did not see deflation setting in.

“We are not so much worried about deflation by itself, but we are very worried about what we call ‘low-flation’,” said Reza Moghadam, Director of the IMF’s European Department.

“There is more room for further (ECB) easing, not least because inflation is under control.”

ECB President Mario Draghi suggested after the ECB’s March meeting that the bank will either do nothing or take bold action should the outlook deteriorate.

He has also said the bank has been preparing additional policy steps to guard against possible deflation, and that the longer inflation remained low, the higher was the probability of deflationary risks emerging.

The relentless weakening trend may focus minds, especially

after the head of Germany’s powerful central bank came out to discuss some of the bolder options in more detail, for example pumping more money into the economy via a bond-buying programme.

“There’s still a case for easing, but we don’t think there’s going to be enough agreement within the Governing Council members to ease on Thursday,” said Guillaume Menuet, an economist at Citigroup in London.

One factor that may temper the ECB’s response is a sense among economists that inflation has hit bottom and will rise in the coming months. Commerzbank’s Christoph Weil said he expected consumer prices to be back at 0.9 percent in April, noting the late Easter and also stabilizing food and energy prices.

(Writing by Robin Emmott; Editing by Catherine Evans)

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GE explores $2.75 billion sale of GE Money Bank Nordics: sources

LONDON/STOCKHOLM (Reuters) – U.S. conglomerate General Electric (GE.N) is exploring the sale of its GE Money Bank unit in the Nordic region, which could fetch up to 2 billion euros ($2.75 billion), as it retreats from the finance sector, sources close to the matter told Reuters.

GE Money Bank, established in the Nordic market in 1993, is part of General Electric’s (GE) financial arm GE Capital, which is working with Bank of America Merrill Lynch (BAC.N) to review its options, three sources said.

GE and Bank of America declined to comment.

GE has said it aims to shift its earnings mix to 70 percent from the industrial sector and 30 percent from the financial sector.

Its banking business, GE Capital, which has a consumer finance and banking business specializing in credit cards, personal loans, auto financing and savings, contributed 45 percent of GE’s earnings in 2012.

The conglomerate has already sold its consumer credit business in Austria and Germany to Spanish bank Santander (SAN.MC) and floated its Swiss consumer lending business, renamed Cembra Money Bank (CMBN.S).

Potential buyers for GE Money Bank Nordics include private equity firms as well as strategic players with a consumer finance presence in the region, the sources said.

GE Money Bank Nordics employs 800 people with a presence in Denmark, Norway and Sweden and is active in loans and credits, credit cards, deposits and insurance.

Bank of America also acted as joint bookrunner on the Cembra flotation in October.

($1 = 0.7258 Euros)

(Additional reporting by Arno Schuetze in Frankfurt; Editing by Mark Potter)

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Swiss, UK watchdogs step up scrutiny on forex traders

ZURICH/LONDON (Reuters) – Swiss and British regulators stepped up their scrutiny of alleged manipulation of foreign exchange markets on Monday, as watchdogs take a closer look at whether banks have a tight enough grip on the behavior of their traders.

Switzerland’s competition commission WEKO said it opened an investigation into several Swiss, British and U.S. banks over potential collusion to manipulate currency rates.

The UK Financial Conduct Authority (FCA), meanwhile, said it will assess if banks have cut the risk of traders manipulating benchmark rates in the coming year, to see if lessons have been learned from the scandal over benchmark rate rigging.

WEKO said it is investigating UBS, Credit Suisse, Zuercher Kantonalbank (ZKB), Julius Baer, JP Morgan, Citigroup, Barclays and Royal Bank of Scotland.

“Evidence exists that these banks colluded to manipulate exchange rates in foreign currency trades,” WEKO said, adding it assumed the most important exchange rates were affected.

Regulators around the world are looking closely at traders’ behavior on a number of key benchmarks, spanning interest rates, foreign exchange and commodities markets.

Eight financial firms have already been fined billions of dollars by U.S. and European regulators in the past two years for manipulating benchmark interest rates and several more are being investigated.

The probe into currency trading could be even more costly. Authorities in the United States, Britain, Switzerland, Germany and Singapore are looking into allegations of collusion and manipulation by traders at major banks of the largely unregulated $5.3 trillion-a-day foreign exchange market.

“Even if there is no further alleged wrongdoing, the current concerns will take years to work out,” said Marshall Bailey, head of the ACI Financial Markets Association, the sector’s main international umbrella organization.

Credit Suisse said it was “astonished” to be drawn into such a probe after not being subject to a preliminary investigation last year. It said WEKO’s statement contained incorrect references to Credit Suisse which were “inappropriate and harmful” to its reputation.


Aside from the fines, banks fear that the response to the row from international regulators and politicians will put an end to the self-regulation model the sector has championed for decades and, in the process, raise the cost of foreign exchange dealing for banks, companies and individuals.

WEKO said it was in touch with some international authorities but had not been prompted by a foreign authority to open the investigation. “We have to conduct the investigation ourselves. There’s no legal basis at the moment to exchange data directly with foreign authorities,” WEKO Director Rafael Corazza told Reuters.

WEKO opened a preliminary investigation last October after learning about potential manipulation of foreign exchange markets.

Julius Baer said an internal investigation had found no evidence of foreign exchange market abuse. Zuercher Kantonalbank, Switzerland’s biggest regional bank, said it would cooperate with authorities.

RBS said it would co-operate with any investigation, but declined further comment. UBS, JP Morgan, Barclays and Citi all declined to comment.

WEKO Vice Director Olivier Schaller said the WEKO investigation would take months and could result in fines of up to 10 percent of the turnover generated in the relevant market in Switzerland over the last three years.

UBS last week suspended up to six FX traders, bringing the total number of traders suspended, placed on leave or fired to around 30.

The Swiss National Bank (SNB) last year estimated the daily turnover in foreign exchange markets of 25 sizeable banks in Switzerland amounted to $216 billion.

London dominates foreign exchange trading, accounting for 40.9 percent of global turnover last year, compared with 18.9 percent in the United States and 3.2 percent in Switzerland, according to Bank of International Settlements (BIS) data.

The FCA said it will also look at whether investment banks are handling potential conflicts of interest adequately and ensuring so-called “Chinese walls” are strong enough – to prevent confidential information received in one part of the business not being abused by a different part of the business.

(Additional reporting by Steve Slater, Silke Koltrowitz, Oliver Hirt, Rupert Pretterklieber and Anirban Nag; Editing by Jane Merriman and David Holmes)

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The tally is in: Ethanol ‘blend wall’ cost refiners at least $1.35 billion

NEW YORK (Reuters) – Last year’s spike in the price of ethanol blending credits cost independent refiners at least $1.35 billion, more than three times as much as the year before, according to a Reuters’ review of securities filings.

The tally, which has not been previously reported, is a conservative estimate as it includes only nine refiners that disclosed the figures. Others affected did not specify the cost of buying Renewable Identification Number (RINs), paper credits used to meet quotas for blending biofuel into gasoline and diesel.

While it has long been clear that refiners lacking the facilities to blend their own fuel would end up footing a billion-dollar-plus RINs tab last year, the data may give the companies more firepower as they urge regulators to stick to a proposal to cut back ethanol requirements for this year.

A final rule is due to be completed in the coming months, and some analysts say the U.S. Environmental Protection Agency (EPA) could alter the proposal after outcry from the biofuel lobby.

The review also highlights how the impact was unevenly distributed, with independent refiners CVR Refining (CVRR.N) and LyondellBasell (LYB.N) alone shouldering more than a fifth of the cost although they only account for 2.5 percent of the nation’s daily refining capacity.

Gina Bowman, CVR’s vice president of government relations, called the market for the credits “volatile and unfair” and pointed to it as evidence for why the biofuel blending regulations need to be reformed.

Valero Energy Corp (VLO.N), the biggest U.S. refiner with 10 percent of capacity, spent about $517 million on RINs in 2013.

“We were clear that Valero could not bear that cost alone, so much or all was passed on to consumers,” said Valero spokesman Bill Day. The company estimates that it will spend another $250 million to $350 million on RINs in 2014.

Some biofuel proponents say the tab is not as large as it sounds when compared with the overall profits the industry is making. In 2013, the refiners that disclosed RIN costs made $9.4 billion in net profits, according to their filings, excluding one refiner whose parent company is an airline.

Still, the data highlights the burden that many refiners face under U.S. environmental regulations that require them to mix increasing amounts of ethanol into their gasoline output.

In 2012, before an unprecedented price spike sent the credits up as much as 2,900 percent, six of the refiners that disclosed their RIN costs put the tab at $427 million.

Some that did disclose them in 2013 did not do so in 2012, when the credits’ cost was not as material an expense. RIN prices rose as high as $1.45 each in July 2013, up from about 5 cents each at the end of 2012. They traded for 52.5 cents each on Friday.


The regulatory burden is at the heart of a fierce lobbying battle between refiners fighting to ease the rules and ethanol proponents hoping to keep them in place. Saddled with hundreds of millions in additional costs, refiners turned up the ante in Washington last year, successfully convincing environmental regulators that ethanol blending capacity had hit its peak.

In November, the EPA explicitly recognized the so-called “blend wall,” proposing to cut corn ethanol blending quotas from 14.4 billion gallons to about 13 billion gallons for 2014. The proposal caused RINs to fall as low as 22 cents each.

But in recent months, RINs have risen anew, largely on uncertainty over whether the proposed cuts will stay in place. The EPA’s proposal is not yet finalized, and since it was unveiled in November, the biofuel industry has redoubled its efforts lobbying the White House and the EPA to change course.

In February, EPA administrator Gina McCarthy caused a stir in the RINs market after telling state agricultural officials that the final rule will be “in a shape that you will see that we have listened to your comments.

The American Fuel and Petrochemical Manufacturers, which represents the refining industry, said the RIN bill showed the need for the EPA to keep its proposed cuts in place.

“What was supposed to be a transaction cost has become this artificial commodity that is obviously costing fuel producers,” said Brendan Williams, senior vice president of advocacy for the group. “What it does is it shows you the blend wall’s here.”


Proponents of the blending regulations say the higher compliance costs should incentivize refiners to do what they should under the law: blend more ethanol into their fuel output to avoid paying the higher costs.

But only a handful of them, such as Marathon Petroleum Corp (MPC.N), the No. 5 refiner, said in its filings that the company curbed the cost rise by investing in blending infrastructure.

A Marathon spokesman said the company began investing in its terminals several years ago to allow for gasoline to be blended with up to 10 percent ethanol at all of its facilities.

Many others simply paid the costs. Delta Air Lines Inc (DAL.N), which bought a 185,000 barrel-per-day (bpd) refinery in Trainer, Pennsylvania, in 2012, said it paid $64 million for the credits because the plant does not blend biofuels.

The company said in an annual U.S. Securities and Exchange Commission filing that it was “pursuing legal, regulatory and legislative solutions to this problem.”

Others refiners, such as Tesoro Corp (TSO.N) said it dipped into reserves of the credits built up the previous year to meet compliance obligations. The so-called “banked RINs” could be in short supply if mandates go higher in 2014.

Meanwhile, a handful of smaller operators, including CVR and Delek US Holdings (DK.N), said they have applied for exemptions from the blending rules for some plants. The EPA has granted the so-called hardship exemption to at least one refinery, Alon USA Energy’s (ALJ.N) Krotz Springs, Louisiana, plant.

There are currently 14 active exemption requests under consideration by the EPA, according to the agency’s website.

The total tally in RIN costs is likely more than $1.5 billion including refiners such as Philadelphia Energy Solutions (PES), owned by the Carlyle Group (CG.O), which operates the biggest plant on the East Coast.

The firm is not required to disclose the company’s financial details, but last October Chief Executive Officer Philip Rinaldi said RIN costs could be as much as $250 million for 2013. A spokeswoman declined to provide an updated figure, saying only that last year’s costs were “very substantial.”

“Did merchant refiners take a hit? Yes, but that affected their shareholders, not the American public,” said Todd Becker, chief executive officer of Green Plains Renewable Energy, a Nebraska-based ethanol producer.

He said that looking at both sides of the market, the run-up in RIN costs had not driven up gasoline prices, as some refiners have said.

“It was a zero-sum game. The blenders had a windfall.”


Conspicuous by their silence are large oil majors, such as BP Plc (BP.L) and Royal Dutch Shell Plc (RDSa.L), which operate U.S. refineries as well as biofuel blending operations. Last July, BP’s top refining executive said the company did “quite well” trading its surplus RINs for a profit.

Some pipeline operators, such as Kinder Morgan Energy Partners (KMP.N), also said in its filings that the company made money selling RINs, though they did not provide exact figures.

The biggest known beneficiary, according to a search of public SEC filings, was Murphy USA Inc (MUSA.N), a gasoline station chain, which said it sold 171 million RINs in 2013 for a total of $91.4 million – a windfall compared with the company’s $8.9 million of sales the prior year.

Vitol S.A. VITOLV.UL, the world’s largest oil trader and a leading importer of Brazilian ethanol, has been one of the biggest traders in the market and is believed to have done well in the run-up in RIN prices. It is unclear how it has fared lately.

(Reporting by Cezary Podkul; Editing by Jonathan Leff and Lisa Shumaker)

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U.S. funds raise cash stakes as stock market wobbles

NEW YORK (Reuters) – U.S.-based fund managers cut their average stock holdings to a five-month low in March and held their highest average position in cash since December, as Russia’s move into Crimea spooked global markets, a Reuters poll showed.

It was the second straight month that fund managers have lowered their equity holdings in global model portfolios, suggesting investors do not expect the market to continue a rally that pushed the benchmark Standard Poor’s 500 index up nearly 30 percent in 2013.

“What we’re seeing is that more investors are taking risk off the table. I know I am,” said Alan Gayle, a fund manager at RidgeWorth Investments, who oversees approximately $400 million in assets.

Gayle has been adding to his short-term bond positions due to a combination of rising geopolitical risk in the wake of Russia’s expansion into Crimea and a brutal winter in much of the United States that has cut into corporate profits and home sales, he said.

“Investors are putting a lot of pressure on the economy to deliver in the second quarter and it may be challenging for the economy to live up to expectations,” he said.

The benchmark Standard Poor’s 500 fell 1.3 percent on March 13, pushing the index into a loss for the year.

The market staged a slight rebound since, giving it a year to date gain of less than 1 percent. By this point last year, the SP 500 was already up over 8 percent for the year, according to Thomson Reuters data.

Geopolitical tensions have put a sizeable dent into analysts’s forecasts for stock market gains, a separate Reuters poll conducted earlier this month showed.

Overall, the average equity holding in global portfolios dipped to 56.0 percent of assets from 56.2 percent the month before, while bond positions fell to 35.3 percent of assets from 35.5 percent.

Cash levels rose to 4.1 percent, their highest since the start of the year. Cash was the only asset class that saw an increase in March.

The poll of 12 fund management firms was conducted between March 12 and March 28.

Within equity portfolios, the largest declines came in euro zone stocks, which fell from 15.2 percent of stock portfolios to 14.7 percent. The largest gain came among U.S. and Canadian companies, which ticked up to 67.2 percent of assets, the highest level since November.

Model bond portfolios were static, although average recommended allocations to sovereign debt rose to its highest in six months while allocations to high-yielding bonds fell.

(Polling by Sarbani Haldar and Anu Bararia)

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X2 raises another US$3.75 billion

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Acra shapes up as ‘major gold system’

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