from Financial Regulatory Forum:

Obama to push consumer financial watchdog agency

October 8, 2009

FINANCIAL-REGULATION/    WASHINGTON, Oct 7 (Reuters) - President Barack Obama will seek this week to rally support for his proposal to create a watchdog agency that would protect consumers from risky financial products.
   The Consumer Financial Protection Agency idea was included in a sweeping package of financial regulatory proposals Obama unveiled in June. He is seeking passage of the regulatory package by the end of the year.
   The agency is one of the more controversial elements of the package and is opposed by many in the financial industry.
   The bill would also bring new oversight to derivatives markets and hedge funds and would create a process for winding down troubled financial firms whose failure could threaten market stability.
   A U.S. official said that on Friday, Obama will host an event at the White House in which "he will call on Americans to stand up to the opponents of a new Consumer Financial Protection Agency" and urge swift action on the regulatory reform measures.
   The regulatory package is aimed at tightening oversight of banks and capital markets to try to prevent a repeat of the 2008-2009 financial crisis.
   Obama will be joined at Friday's event by Treasury Secretary Timothy Geithner. The two will meet with four people who have been hurt by lack of oversight in the financial system, the U.S. official said.
   The U.S. House of Representatives is on track to vote on a financial regulation bill next month, leaders in that chamber said this week.
   The Senate, however, has yet to set a timetable, leaving undefined the final steps for Obama's reforms. (Reporting by Caren Bohan; Editing by Chris Wilson) ((caren.bohan@thomsonreuters.com; +1 202 898 8300)) Keywords: FINANCIAL REGULATION/OBAMA
   
Thursday, 08 October 2009 02:02:27RTRS [nN07498102] {C}ENDS

from Financial Regulatory Forum:

U.S. banking regulator eyes bank creditor claims

October 5, 2009

USA/    ISTANBUL, Oct 5 (Reuters) -   Federal Deposit Insurance Corp Chairman Sheila Bair told a group of international bankers on Sunday that officials might want to consider "the very strong medicine" of limiting secured claims to 80 percent, although she said such a proposal would need to be carefully weighed. 
   She said curbing claims would encourage secured creditors, who are protected from losses when a bank fails, to more closely monitor the risks a bank is taking and could speed up the process when an institution needs to be wound down.
   "This could involve limiting their claims to no more than say 80 percent of their secured credits. This would ensure that market participants always have 'skin in the game'," Bair told a meeting of the Institute of International Finance here.
   While Bair said the far-reaching proposal could have a "major impact" on the cost of funding for banks subject to any official resolution mechanism, it also had advantages.
   "A major advantage is that all general creditors could receive substantially greater advance payments to stem any systemic risks without the extensive delays typically characteristic of the bankruptcy process," she said.
   "Obviously, the advantages and disadvantages need to be thoroughly vetted. In any event, there is a serious question about whether the current claims priority for secured claims encourages more risky behavior," Bair added.
   The U.S. Congress is currently considering wide-ranging regulatory reforms that would give regulators the authority to "resolve" -- or wind down -- systemically important non-bank institutions. The FDIC already has such authority for deposit-taking banks.
   Bair said officials around the world should consider resolution regimes that cover both banks and non-bank operations of financial conglomerates, whether or not their failure might spark wider troubles for the financial system.
   She said resolution authority should include the ability to reject "burdensome" contracts, sell assets, resolve claims, and establish and operate bridge financial companies. (Reporting by Tim Ahmann; Editing by Ruth Pitchford) ((Reuters Messaging: tim.ahmann.reuters.com@reuters.net; e-mail: tim.ahmann@thomsonreuters.com; +90 212 296 3621))

from Financial Regulatory Forum:

New US Council, not just Fed, must eye risk

October 1, 2009

Chairman of the Federal Reserve Ben Bernanke speaks at the Congressional Black Caucus Foundation's 39th Annual Legislative Conference at the Washington Convention Center in Washington, September 25, 2009.   REUTERS/Larry Downing (UNITED STATES POLITICS BUSINESS)   By Kevin Drawbaugh
   WASHINGTON, Sept 30 (Reuters) - The head of the Federal Reserve will step back from one of the most controversial parts of the Obama administration's drive for financial regulation reform, saying sweeping new oversight powers proposed for the U.S. central bank should be shared with other regulators.
   Federal Reserve Chairman Ben Bernanke will tell a Congressional panel on Thursday that a new, broad council of financial regulators, not just the Federal Reserve, should be granted powers to monitor systemic risk in the economy.
   His remarks were included in a text of his testimony to be delivered to the House of Representatives Financial Services Committee which were obtained by Reuters on Wednesday.
   Bernanke's prepared comments come amid growing skepticism in Congress and beyond about an administration proposal to give the Fed the lead role in policing the economy for systemic risk, albeit in coordination with an inter-agency council.
   The Fed is "well suited" to supervise major financial institutions whose failure could damage the economy, Bernanke said in the text.
   In addition, he said all systemically important financial firms should be subject to a consolidated regulator, whether or not the firms own banks.
   But an inter-agency council should be used to monitor the very broadest sorts of risk, he said, placing new emphasis on an idea embraced by increasingly vocal critics of the Fed.
   While the administration has backed the idea of creating an inter-agency council to work with the Fed, it has been firm on its determination to place the most power in the central bank.
   Some of the Fed's critics point to the failure of the Fed, along with other regulators, to spot the threat to the financial system posed by overexposure of banks and other firms to the housing market which eventually helped cause the credit crisis and push the world into a recession.
   World Bank President Robert Zoellick on Monday sounded a cautionary note about granting greater regulatory power to the Fed, saying there had been lapses by central banks in monitoring risks in the run-up to the crisis.
   Bernanke, in his prepared remarks, said it was a good idea for one single regulator to be responsible for supervising individual firms.
   "However, the broader task of monitoring and addressing systemic risks that might arise from the interaction of different types of financial institutions and markets -- both regulated and unregulated -- may exceed the capacity of any individual supervisor," he said.
   "Instead, we should seek to marshal the collective expertise and information of all financial supervisors to identify and respond to developments that threaten the stability of the system as a whole."
   The comments appeared to represent a change of tone by Bernanke. He told a congressional committee on July 24 that taking on formal responsibility for supervising the broad health of the financial system would be a natural outgrowth of the central bank's existing duties.
   A shift in emphasis by the Fed chairman would not be surprising, said Joe Engelhard, policy analyst at investment research firm Capital Alpha Partners in Washington.
   "There's been a lot of negative reaction, particularly by Republicans, on the House side. In the Senate, (banking committee) Chairman Christopher Dodd hasn't been too supportive either" of the administration's proposal, Engelhard said.
   House Financial Services Committee Chairman Barney Frank has been trying to find a new formulation that would give the council more power, but preserve a central Fed role.
   "It would be smart for the chairman of the Federal Reserve to take that approach, as well," Engelhard said.
    A key to the final outcome of the debate will be if the Fed gets clear power to intervene when systemic risk is detected.
   "Frank still wants the Fed to have all the authority it needs to address a future AIG or a future Lehman Brothers ... They're perfectly willing to beef up the oversight council because at the end of the day, as long as the Fed's got the authority, it can do what it has to do," he said.
   On another front, Bernanke said in his comments prepared for delivery on Thursday that a new "special resolution authority" should be created to allow the government to wind down a failing systemically important financial institution.
   Policymakers should also ensure that consumers are protected from unfair and deceptive practices in their financial dealings, he said in the text. (Writing by Kevin Drawbaugh and William Schomberg; Editing by Gary Hill, Bernard Orr) ((kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202 488 3459 (fax))) Keywords: USA FED/BERNANKE 
  
Thursday, 01 October 2009 07:38:42RTRS [nN01248184] {C}ENDS

from Financial Regulatory Forum:

NEWSMAKER-Bank of America CEO Lewis: Fallen hero

October 1, 2009

Bank of America's Ken Lewis joins TARP recipient financial institution leaders before they testify before House Financial Services Committee on Capitol Hill in Washington, in this  February 11, 2009 file photo. Bank of America Corp shareholders voted to oust Lewis as chairman of the board on April 29, 2009 after months of mounting criticism of his stewardship of the largest U.S. bank. REUTERS/Larry Downing/Files (UNITED STATES BUSINESS POLITICS HEADSHOT IMAGES OF THE DAY)   By Jonathan Stempel
   NEW YORK, Sept 30 (Reuters) - A little over a year ago, Bank of America Corp <BAC.N> Chief Executive Kenneth Lewis was a hero on Wall Street with his audacious purchase -- some would say rescue from certain collapse -- of Merrill Lynch & Co, following less than two days of talks.
   "The strategic opportunity of a lifetime," Lewis then called the takeover, which was valued at $50 billion, or more than $1 billion for each hour it took to put together.
   It cost him his job.
   Lewis' planned exit at year end from the bank that has been home for his adult life is an unceremonious finale to a 40-year career in which the Mississippi native, 62, rose from junior credit analyst to steward of the nation's largest bank.
   He has run Charlotte, North Carolina-based Bank of America for 8-1/2 years. Merrill was to be his crowning achievement. It proved his undoing.
   "It was only a matter of time," said Campbell Harvey, a professor at Duke University's business school. "There is too much collateral damage."
   Completed just six months after Bank of America's takeover of mortgage lender Countrywide Financial Corp, the Merrill merger unleashed a blizzard of federal and state probes, a reported Justice Department and FBI investigation, and many lawsuits.
   The key issues: why did Lewis not tell shareholders sooner about Merrill's soaring losses, and the $3.6 billion of bonuses his bank let Merrill pay its employees.
   U.S. District Judge Jed Rakoff this month said the bank's settlement with the U.S. Securities and Exchange Commission over its lack of disclosure of the bonuses, where it did not admit wrongdoing, violated "the most elementary notions of justice and morality."
  
   LEAVING UNDER DURESS
   Pressured by regulators to complete the merger, Lewis took $20 billion of taxpayer money to absorb Merrill. The government then ordered him to raise another $33.9 billion of capital.
   Bank of America shares are down 50 percent since the merger was announced on Sept. 15, 2008, the same morning Lehman Brothers Holdings Inc <LEHMQ.PK> went bankrupt.
   Suddenly, Lewis was no longer the conquering hero who saved Wall Street -- a mantle now held, if by anyone, by his counterpart at JPMorgan Chase & Co <JPM.N>, Jamie Dimon.
   Lewis had repeatedly said he hoped to stay on at Bank of America until he turned 65 in 2012, or at least until the bank was clearly on a path to repay its $45 billion of taxpayer money from the government's Troubled Asset Relief Program.
   Yet in departing sooner than he wanted, Lewis joins a long line of top U.S. financial executives to be fired or cede their jobs under duress since the global financial crisis began.
   Among them: Merrill's own Stanley O'Neal and John Thain, Bear Stearns Cos' James Cayne, Citigroup Inc's <C.N> Charles Prince, Countrywide's Angelo Mozilo, Lehman's Richard Fuld, Wachovia Corp's Ken Thompson and Robert Steel, and Washington Mutual Inc's <WAMUQ.PK> Kerry Killinger, to name a few.
   Many analysts have also questioned how long Prince's successor at Citigroup, Vikram Pandit, can hold on.
    The list of A-list survivors is short: Dimon and Goldman Sachs Group Inc's <GS.N> Lloyd Blankfein, to name two. Morgan Stanley's <MS.N> John Mack, 64, this month said he would step down as chief executive at year end, but remain chairman.
   "I now have a strong sense that the work that has consumed me for the past eight years is largely finished," Lewis said in a memo to staff on Monday. He called his departure "my decision, and mine alone."
  
   NOT OVER YET
   Also his were efforts to build on the legacy of predecessor Hugh McColl, who through acquisitions transformed the former NCNB and NationsBank into Bank of America.
   Lewis spent north of $130 billion on acquisitions, including FleetBoston Financial Corp, the credit card issuer MBNA Corp, LaSalle Bank Corp, Countrywide, Charles Schwab Corp's <SCHW.O> U.S. Trust private banking unit, and Merrill.
   In buying the latter, Bank of America added a giant investment bank to what had already been the largest U.S. retail bank, credit card issuer and mortgage provider. (Wells Fargo & Co <WFC.N> has since passed it in mortgages.)
   Early results suggested the addition of Merrill was helping Bank of America offset the pain of soaring losses in its consumer operations, especially in credit cards.
   It did not matter. Angry shareholders demanded that Lewis give up his role as bank chairman, and won. The government ordered an overhaul of the bank's board, and won that.
   While Lewis still had his supporters, they grew fewer as the public opposition grew louder.
   And that opposition is not laying down now.
   Following Lewis' announcement, New York Attorney General Andrew Cuomo said he plans to press ahead with his probe of the Merrill merger, which could include civil charges against Lewis and other top executives.
   Ohio Attorney General Richard Cordray, who is leading pension funds conducting an investor class-action lawsuit, said the bank and its executives "still need to be held accountable for the harm done to investors and retirees."
   And Rep. Edolphus Towns said his House oversight committee "has uncovered troubling facts" about the Merrill merger, and considers Lewis "at the center of this controversy."
   Lewis has three months to go before he will -- or at least plans -- to step aside. That means he is sure to remain at that center of controversy for that time. And probably beyond.
   "This company has really been dealt some blows in the past year," said Nancy Bush, an independent banking analyst. "This is going to be another blow."
   (Reporting by Jonathan Stempel; Additional reporting by Paritosh Bansal, Elinor Comlay and Rachelle Younglai; Editing by Richard Chang) ((jon.stempel@thomsonreuters.com +1 646 223 6317; Reuters Messaging: jon.stempel.reuters.com@reuters.net)) Keywords: BANKOFAMERICA/LEWIS 
  
  Keywords: BANKOFAMERICA/LEWIS 
  
Thursday, 01 October 2009 01:36:05RTRS [nN30237402] {C}ENDS

from Financial Regulatory Forum:

Full text of Federal Reserve’s Bernanke to Congress

October 1, 2009

FINANCIAL-REGULATION/    WASHINGTON, Sept 30 (Reuters) - The following is the full text of remarks due to be delivered to the U.S. House Financial Services Committee on Thursday, Oct. 1 by Federal Reserve chairman, Ben Bernanke:
      For release on delivery 9:00 a.m. EDT October 1, 2009 Statement by Ben S. Bernanke Chairman Board of Governors of the Federal Reserve System before the Committee on Financial Services U.S. House of Representatives October 1, 2009.
Chairman Frank, Ranking Member Bachus, and other members of the Committee, I appreciate the opportunity to discuss ways of improving the financial regulatory framework to better protect against systemic risks. In my view, a broad-based agenda for reform should include at least five key elements.
    First, legislative change is needed to ensure that systemically important financial firms are subject to effective consolidated supervision, whether or not the firm owns a bank.
   Second, an oversight council made up of the agencies involved in financial supervision and regulation should be established, with a mandate to monitor and identify emerging risks to financial stability across the entire financial system, to identify regulatory gaps, and to coordinate the agencies' responses to potential systemic risks. To further encourage a more comprehensive and holistic approach to financial oversight, all federal financial supervisors and regulators--not just the Federal Reserve--should be directed and empowered to take account of  risks to the broader financial system as part of their normal oversight responsibilities.
   Third, a new special resolution process should be created that would allow the government to wind down a failing systemically important financial institution whose disorderly collapse would pose substantial risks to the financial system and the broader economy. Importantly, this regime should allow the government to impose losses on shareholders and creditors of the firm.
   Fourth, all systemically important payment, clearing, and settlement arrangements should be subject to consistent and robust oversight and prudential standards.
   And fifth, policymakers should ensure that consumers are protected from unfair and deceptive practices in their financial dealings.
Taken together, these changes should significantly improve both the regulatory system's ability to constrain the buildup of systemic risks as well as the financial system's resiliency when serious adverse shocks occur.
   Consolidated Supervision of Systemically Important Financial Institutions The current financial crisis has clearly demonstrated that risks to the financial system can arise not only in the banking sector, but also from the activities of other financial firms--such as investment banks or insurance companies--that traditionally have not been subject to the type of  regulation and consolidated supervision applicable to bank holding companies. To close this important gap in our regulatory structure, legislative action is needed that would subject all systemically important financial institutions to the same framework for consolidated prudential supervision that currently applies to bank holding companies. Such action would prevent financial firms that do not own a bank, but that nonetheless pose risks to the overall financial system because of the size, risks, or interconnectedness of their financial activities, from avoiding comprehensive supervisory oversight. Besides being supervised on a consolidated basis, systemically important financial institutions should also be subject to enhanced regulation and supervision, including capital, liquidity, and risk-management requirements that reflect those institutions' important roles in the financial sector. Enhanced requirements are needed not only to protect the stability of individual institutions and the financial system as a whole, but also to reduce the incentives for financial firms to become very large in order to be perceived as too big to fail. This perception materially weakens the incentive of creditors of the firm to restrain the firm's risk-taking, and it creates a playing field that is tilted against smaller firms not perceived as having the same degree of government support. Creation of a mechanism for the orderly resolution of systemically important nonbank financial firms, which I will discuss later, is an important additional tool for addressing the too-big-to-fail problem. The Federal Reserve is already the consolidated supervisor of some of the largest and most complex institutions in the world. I believe that the expertise we have developed in supervising large, diversified, and interconnected banking organizations, together with our broad knowledge of the financial markets in which these organizations operate, makes the Federal Reserve well suited to serve as the consolidated supervisor for those systemically important financial institutions that may not already be subject to the Bank Holding Company Act. In addition, our involvement in supervision is critical for ensuring that we have the necessary expertise, information, and authorities to carry out our essential functions as a central bank of promoting financial stability and making effective monetary policy. The Federal Reserve has already taken a number of important steps to improve its regulation and supervision of large financial groups, building on lessons from the current crisis. On the regulatory side, we played a key role in developing the recently announced, internationally-agreed improvements to the capital requirements for trading activities and securitization exposures, and we continue to work with other regulators to strengthen the capital requirements for other types of on- and off-balance-sheet exposures. In addition, we are working with our fellow regulatory agencies toward the development of capital standards and other supervisory tools that would be calibrated to the systemic importance of the firm. Options under consideration in this area include requiring systemically important institutions to hold aggregate levels of capital above current regulatory norms or to maintain a greater share of (See Bank for International Settlements (2009), "Basel II Capital Framework Enhancements Announced by the Basel Committee," press release, July 13, www.bis.org/press/p090713.htm; and Basel Committee on Banking Supervision (2009), Enhancements to the Basel II Framework (Basel: Basel Committee, July), available at www.bis.org/publ/bcbs157.htm.) capital in the form of common equity or instruments with similar loss-absorbing attributes, such as "contingent" capital that converts to common equity when necessary to mitigate systemic risk.
  
   Keywords: USA FED/BERNANKE TEXT
   The financial crisis also highlighted weaknesses in liquidity risk management at major financial institutions, including an overreliance on short-term funding. To address these issues, the Federal Reserve helped lead the development of revised international principles for sound liquidity risk management, which have been incorporated into new interagency guidance now out for public comment. In the supervisory arena, the recently completed Supervisory Capital Assessment Program (SCAP), popularly known as the stress test, was quite instructive for our efforts to strengthen our prudential oversight of the largest banking organizations. This unprecedented interagency process, which was led by the Federal Reserve, incorporated forward-looking, crossfirm, aggregate analyses of 19 of the largest bank holding companies, which together control a majority of the assets and loans within the U.S. banking system. Drawing on the SCAP experience, we have increased our emphasis on horizontal examinations, which focus on particular risks or activities across a group of banking organizations, and we have broadened the scope of the resources we bring to bear on these reviews. We also are in the process of creating an enhanced quantitative surveillance program for large, complex organizations that will use supervisory information, firm-specific data analysis, and market-based indicators to identify emerging risks to specific firms as well as to the industry as a whole. This work will be (See Basel Committee on Banking Supervision (2008), Principles for Sound Liquidity Risk Management and Supervision (Basel: Basel Committee, September), www.bis.org/publ/bcbs144.pdf. Information about the proposed guidance is available at Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Office of Thrift Supervision, and National Credit Union Administration (2009), "Agencies Seek Comment on Proposed Interagency Guidance on Funding and Liquidity Risk Management," joint press release, June 30, www.federalreserve.gov/newsevents/press/bcreg/20090630a.htm. For more information about the SCAP, see Ben S. Bernanke (2009), "The Supervisory Capital Assessment Program," speech delivered at the Federal Reserve Bank of Atlanta 2009 Financial Markets Conference, held in Jekyll Island, Ga., May 11, www.federalreserve.gov/newsevents/speech/bernanke20090511a.htm) performed by a multidisciplinary group composed of our economic and market researchers, supervisors, market operations specialists, and other experts within the Federal Reserve System. Periodic scenario analysis will be used to enhance our understanding of the consequences of  changes in the economic environment for both individual firms and for the broader system. Finally, to support and complement these initiatives, we are working with the other federal banking agencies to develop more comprehensive information-reporting requirements for the largest firms.
Systemic Risk Oversight For purposes of both effectiveness and accountability, the consolidated supervision of an individual firm, whether or not it is systemically important, is best vested with a single agency. However, the broader task of monitoring and addressing systemic risks that might arise from the interaction of different types of financial institutions and markets--both regulated and unregulated--may exceed the capacity of any individual supervisor. Instead, we should seek to marshal the collective expertise and information of all financial supervisors to identify and respond to developments that threaten the stability of the system as a whole. This objective can be accomplished by modifying the regulatory architecture in two important ways. First, an oversight council--composed of representatives of the agencies and departments involved in the oversight of the financial sector--should be established to monitor and identify emerging systemic risks across the full range of financial institutions and markets. Examples of such potential risks include rising and correlated risk exposures across firms and markets; significant increases in leverage that could result in systemic fragility; and gaps in regulatory coverage that arise in the course of financial change and innovation, including the development of new practices, products, and institutions. A council could also play useful roles in coordinating responses by member agencies to mitigate emerging systemic risks, in recommending actions to reduce procyclicality in regulatory and supervisory practices, and in identifying financial firms that may deserve designation as systemically important. To fulfill its responsibilities, a council would need access to a broad range of information from its member agencies regarding the institutions and markets they supervise and, when the necessary information is not available through that source, the authority to collect such information directly from financial institutions and markets. Second, the Congress should support a reorientation of individual agency mandates to include not only the responsibility to oversee the individual firms or markets within each agency's scope of authority, but also the responsibility to try to identify and respond to the risks those entities may pose, either individually or through their interactions with other firms or markets, to the financial system more broadly. These actions could be taken by financial supervisors on their own initiative or based on a request or recommendation of the oversight council. Importantly, each supervisor's participation in the oversight council would greatly strengthen that supervisor's ability to see and understand emerging risks to financial stability. At the same time, this type of approach would vest the agency that has responsibility and accountability for the relevant firms or markets with the authority for developing and implementing effective and tailored responses to systemic threats arising within their purview. To maximize effectiveness, the oversight council could help coordinate responses when risks cross regulatory boundaries, which often will be the case. The Federal Reserve already has begun to incorporate a systemically focused approach into our supervision of large, interconnected firms. Doing so requires that we go beyond considering each institution in isolation and pay careful attention to interlinkages and  interdependencies among firms and markets that could threaten the financial system in a crisis. For example, the failure of one firm may lead to runs by wholesale funders of other firms that are seen by investors as similarly situated or that have exposures to the failing firm. These efforts are reflected, for example, in the expansion of horizontal reviews and the quantitative surveillance program I discussed earlier. Keywords: USA FED/BERNANKE TEXT
   Improved Resolution Process Another critical element of the systemic risk agenda is the creation of a new regime that would allow the orderly resolution of failing, systemically important financial firms. In most cases, the federal bankruptcy laws provide an appropriate framework for the resolution of nonbank financial institutions. However, the bankruptcy code does not sufficiently protect the public's strong interest in ensuring the orderly resolution of a nonbank financial firm whose failure would pose substantial risks to the financial system and to the economy. Indeed, after the Lehman Brothers and AIG experiences, there is little doubt that we need a third option between the choices of bankruptcy and bailout for such firms. A new resolution regime for nonbanks, analogous to the regime currently used by the Federal Deposit Insurance Corporation for banks, would provide the government the tools to restructure or wind down a failing systemically important firm in a way that mitigates the risks to financial stability and the economy and thus protects the public interest. It also would provide the government a mechanism for imposing losses on the shareholders and creditors of the firm. Establishing credible processes for imposing such losses is essential to restoring a meaningful degree of market discipline and addressing the too-big-to-fail problem. The availability of a workable resolution regime also would replace the need for the Federal Reserve to use its emergency lending authority under section 13(3) of the Federal Reserve Act to prevent the failure of specific institutions.
Payment, Clearing, and Settlement Arrangements Payment, clearing, and settlement arrangements are the foundation of the nation's financial infrastructure. These arrangements include centralized market utilities for clearing and settling payments, securities, and derivatives transactions, as well as the decentralized activities through which financial institutions clear and settle such transactions bilaterally. While these arrangements can create significant efficiencies and promote transparency in the financial markets, they also may concentrate substantial credit, liquidity, and operational risks, and, absent strong risk controls, may themselves be a source of contagion in times of stress. Unfortunately, the current regulatory and supervisory framework for systemically important payment, clearing, and settlement arrangements is fragmented, creating the potential for inconsistent standards to be adopted or applied. Under the current system, no single regulator is able to develop a comprehensive understanding of the interdependencies, risks, and riskmanagement approaches across the full range of arrangements serving the financial markets today. In light of the increasing integration of global financial markets, it is important that systemically critical payment, clearing, and settlement arrangements be viewed from a systemwide perspective and that they be subject to strong and consistent prudential standards and supervisory oversight. We believe that additional authorities are needed to achieve these goals.
Consumer Protection As the Congress considers financial reform, it is vitally important that consumers be protected from unfair and deceptive practices in their financial dealings. Strong consumer protection helps preserve households' savings, promotes confidence in financial institutions and markets, and adds materially to the strength of the financial system. We have seen in this crisis that flawed or inappropriate financial instruments can lead to bad results for families and for the stability of the financial sector. In addition, the playing field is uneven regarding examination and enforcement of consumer protection laws among banks and nonbank affiliates of bank holding companies on the one hand, and firms not affiliated with banks on the other hand. Addressing this discrepancy is critical both for protecting consumers and for ensuring fair competition in the market for consumer financial products.
Conclusion Thank you again for the opportunity to testify on these important matters. The Federal Reserve looks forward to working with the Congress and the Administration to enact meaningful regulatory reform that will strengthen the financial system and reduce both the probability and severity of future crises.
  
   ((Reuters Washington bureau +1-202-898-8390)) Keywords: USA FED/BERNANKE TEXT =3
  
Thursday, 01 October 2009 01:18:20RTRS [nN30730929] {C}ENDS

from Financial Regulatory Forum:

Moody’s secretive nature described to Congress

October 1, 2009

moodys    By Rachelle Younglai
    WASHINGTON, Sept 30 (Reuters) - Lawmakers slammed a "culture of secrecy" at Moody's <MCO.N> and expanded a credit ratings industry probe to find out why securities regulators ignored a tip that Moody's managers routinely put profits above
ratings quality.
    The allegations about Moody's business practices came as Congress considered legislation to curtail rating companies' practices and expose them to greater legal liability if their
rating assessments prove to be wrong.
    Lawmakers blame credit raters for fueling the financial crisis by assigning top ratings to mortgage-backed securities that later crumbled in value.
    Two former Moody's executives, in testimony at a House Oversight and Government Reform Committee hearing, said workers were encouraged to remain silent and cover up evidence of
alleged improper practices in assigning and monitoring credit ratings.
    The two "described a culture of secrecy, a place where putting things in writing was frowned upon," said Rep. Edolphus Towns, the Democratic chairman of the panel. "Can you imagine
working at a place where the very act of writing a memo or sending an email is suspect?"
    Towns also said his committee would investigate why the Securities and Exchange Commission failed to act on a March 2009 letter sent by Moody's former senior vice president of
compliance. The executive urged the SEC to take a closer look at Moody's weak compliance department and ratings process.
    Separately, top executives from the largest credit agencies -- Standard & Poor's <MHP.N>, Fitch Ratings <LBCP.PA> and Moody's -- warned a House Financial Services subcommittee that
Congress should not go too far in imposing stricter regulation.
    The top Democrat on that panel has already circulated draft legislation to rein in credit agencies.
    Moody's has born the brunt of criticism, its stock losing roughly one-fourth of its value in the past two weeks. On Wednesday, shares initially tumbled as much as 8 percent before ending the trading session down 1.7 percent at $20.46.
     Moody's chief executive Raymond McDaniel told the subcommittee that the company may agree to disclose some of its fees to regulators.
     But McDaniel said a proposal to impose "collective liability" on the sector could lead to frivolous lawsuits and was regulatory overkill, a view echoed by rivals Standard & Poor's and Fitch.
    
    MOODY'S WHISTLEBLOWERS
    Two former Moody's executives -- Scott McCleskey and Eric Kolchinsky -- testified that senior managers were willing to silence employees who raised concerns about the ratings process
or compliance efforts.
    McCleskey said that while he was the head of compliance at Moody's, he voiced concerns that the firm was not properly monitoring ratings on municipal debt. McCleskey, who was dismissed by Moody's in 2008, said he was instructed not to mention the issue in e-mails or writing.
    Kolchinsky, a Moody's managing director who was recently suspended by the firm, said senior managers pushed revenue over ratings quality and were willing to fire employees who
disagreed.
    The two whistleblowers were flanked by Moody's current chief credit officer, Richard Cantor. Cantor sat impassively, staring straight ahead as his former colleagues described their concerns to the lawmakers.
    In his testimony, Cantor said Moody's had recently hired an independent law firm to review Kolchinsky's allegations.
    That was criticized as an empty gesture by Chairman Towns, who said the law firm had no deadline and would not produce a written report.
    Kolchinsky told lawmakers that Moody's compliance group was understaffed and lacked independence. He also alleged Moody's knowingly issued misleading ratings on complex securities and that analysts were "bullied" by managers, who overrode their decisions to protect revenue.
    Kolchinsky said he would soon meet with the SEC to discuss his charges. SEC officials said the regulator had contacted Kolchinsky about his concerns in March 2009.
    McCleskey, meanwhile, sent the SEC a letter in March 2009 warning about Moody's weak compliance department and ratings process. He said Moody's management had ignored his warnings
that the company failed to properly monitor municipal bond ratings.
    The company also spurned his suggestion to erect a firewall between the compliance department and its revenue-generating units, he said.
    Allegations that the SEC ignored the whistleblowers' concerns could be another black mark against the regulator, which is still reeling from its failure to uncover Bernard Madoff's $65 billion investment scam.
    The SEC says it has established an examination program for credit rating agencies that includes reviews of disclosures, policies, and procedures regarding municipal securities ratings.
    "We are focusing carefully on the tips and complaints we receive and following up, where appropriate, with examinations targeting suspected problems," SEC spokesman John Nester said.
       
    RELATED NEWS:
    * Another ex-Moody's exec slams process    [ID:nN29169536]
    * Draft bill puts raters on short leash    [ID:nN25527439]
    * SEC mulls liability standards for raters [ID:nN11458924]
    * Lawmaker eyes "radical" reforms          [ID:nN24477151]
    * Rating agencies protest broader oversight [ID:nN30225878]
 
   
   
 (Reporting by Rachelle Younglai, additional reporting by
Jonathan Stempel in New York and Kim Dixon in Washington;
Editing by Julie Vorman)
 ((rachelle.younglai@thomsonreuters.com; +1 202 898 8411))
 ((Multimedia versions of Reuters Top News are now available
for: * 3000 Xtra: visit http://topnews.session.rservices.com
     * BridgeStation: view story .134
 For more information on Top News: http://topnews.reuters.com))
Keywords: FINANCIAL/REGULATION CREDITAGENCIES 
   

from Financial Regulatory Forum:

COLUMN-Beware the bull market in derivatives: Matthew Goldstein

September 30, 2009

COLUMN-Beware the bull market in derivatives: Matthew Goldstein
Matthew Goldstein-- Matthew Goldstein is a Reuters columnist. The views expressed are his own -- 
   By Matthew Goldstein
   NEW YORK, Sept 29 (Reuters) - The Dow is near 10,000 again. The business press is full of stories about the resurgence in mergers, IPOs and even so-called blank check companies.
   There's one statistic, however, that should give investors pause: the growth in the total dollar value of derivative contracts at the top too-big-to-fail banks in the United States.
   In the second quarter of this year, the notional value of derivatives contracts at JPMorgan Chase <JPM.N>, Goldman Sachs <GS.N>, Bank of America <BAC.N> and Citigroup <C.N> increased by $1.92 trillion, to $191 trillion. Shockingly, Citi is responsible for most of that gain from the end of the first quarter.
   Overall, the total dollar value of outstanding derivatives transactions at the top 25 U.S. commercial banks was $203 trillion, according to the Office of the Comptroller of the Currency, meaning that the nation's four biggest banks account for 94 percent of the industry's total exposure to derivatives.
   Now the concentration of derivatives at a handful of banks isn't new. It's even to be expected, bank regulators say.
   The OCC, in its quarterly derivatives report, routinely notes that the Big Four "have the resources needed to be able to operate this business in a safe and sound manner."
   In other words, the biggest banks are best suited to handle all these derivatives contracts because they've been doing it for so long.
   But it's this regulatory logic that has helped enshrine the too-big-to-fail doctrine. A handful of financial institutions are deemed more indispensable than others because they are too interconnected to fail. It's the large concentration of derivative contracts at a troubled bank like Citigroup that made a big bailout necessary.
   So it's particularly disturbing to find that the total dollar value of outstanding derivatives at Citi rose by $2.3 trillion, to $31.9 trillion in the second quarter. By contrast, the notional value of derivatives transactions at JPMorgan Chase -- the leader in this category -- fell by $1.2 trillion, to $79.9 trillion.
   It's hard to fathom how a bank that has yet to prove it can stand on its own two feet without huge amounts of federal support should be adding to its potential derivatives exposure.
   That's especially so with Citi losing $238 million in trading revenue because of derivatives in the second quarter. Citi managed that feat even as the nation's 25 top commercial banks took in $5.1 billion in derivatives trading revenue in the same time period, according to the OCC.
   This is why, of all the proposals for reforming the financial system, the Obama administration's plan to require that the vast majority of derivatives be traded on well-capitalized exchanges is the most important.
   The president's team needs to keep the pressure on Congress to enact a measure that will ensure there's a way for a trading partner to get paid on a derivatives contract, even if the bank on the other side of that transaction fails.
   And if anyone doubts the need for regulating derivatives and making it easier to unwind a troubled too-big-to-fail bank, Citi should provide all the evidence that's needed.
-- For previous columns, Reuters customers can click on [GOLDSTEIN/] (Editing by Martin Langfield) ((matthew.goldstein@thomsonreuters.com))
 http://blogs.reuters.com/matthew-goldstein/ Keywords: COLUMN DERIVATIVES/
  
Tuesday, 29 September 2009 19:58:35RTRS [nN29159369] {C}ENDS

from Financial Regulatory Forum:

New Jersey man pleads guilty for hiding UBS account

September 25, 2009

LIECHTENSTEIN-TAX/   WASHINGTON, Sept 25 (Reuters) - A New Jersey man pleaded guilty on Friday for failing to report about $6.1 million he had held in a UBS AG <UBSN.VX><UBS.N> Swiss bank account, the latest plea in the U.S. crackdown on tax fraud.
   Juergen Homann agreed to plead guilty to failing to report his UBS account on his U.S. income tax return as well as the income he received from the account, according to the Justice Department.
   Homann worked with a Swiss lawyer to set up the account that held some $6.1 million from 2001 to 2008, the agency said. The lawyer, Matthias Rickenbach, is under federal indictment for helping Americans evade U.S. taxes.
   Homann's guilty plea is the latest in a series of prosecutions as the Obama administration cracks down on Americans, who have hidden funds overseas in a bid to avoid U.S. taxes. An amnesty program is due to expire Oct. 15.
   "Those who think they can 'stay below the radar' face a real risk of prosecution and jail if convicted, and they will still owe the taxes due, together with interest and civil penalties," said John DiCicco, the acting assistant attorney general for the Justice Department's tax division.
   U.S. and Swiss officials signed a pact last month in which the details of 4,450 accounts of Americans from banking giant UBS would be turned over to U.S. authorities. Switzerland also committed to help uncover Americans' hidden accounts at other Swiss banks.
 (Reporting by Jeremy Pelofsky, editing by Lisa Von Ahn, Leslie Gevirtz) ((jeremy.pelofsky@thomsonreuters.com; +1 202 898 8396; jeremy.pelofsky.reuters.com@reuters.net)) Keywords: UBS USA/NEWJERSEY 
  
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 Friday, 25 September 2009 18:01:30RTRS [nN25510639] {EN}ENDS

from Financial Regulatory Forum:

US regulators-Banks’ large-loan losses triple to $53bln

September 25, 2009

fed-logo     Sept 25 (Reuters) - U.S. regulators say that the level of losses from syndicated loans facing banks and other financial institutions tripled to $53 billion in 2009, due to poor underwriting standards and the continuing weakness in economic conditions.

from Financial Regulatory Forum:

US regulators propose ban on ‘flash’ trading

September 18, 2009

BRITAIN/   By Karey Wutkowski
   WASHINGTON, Sept 17 (Reuters) - U.S. securities regulators proposed on Thursday a ban on flash orders that stock exchanges send to a select group of traders, fractions of a second before revealing them publicly.
   The Securities and Exchange Commission is seeking to end the practice criticized for giving an unfair advantage to some market participants who have lightning-fast computer trading software.
   Nasdaq OMX's <NDAQ.O> Nasdaq Stock Market and privately-held BATS Exchange recently canceled their flash services that disclosed buy and sell orders to specific trading firms before sending them to the wider market.
   NYSE Euronext's <NYX.N> New York Stock Exchange did not adopt the flashes under scrutiny but major alternative venue Direct Edge still offers flashes.
   The SEC will put its proposal out for public comment for 60 days, and will later schedule a meeting to decide whether to adopt the proposal.
   The agency said it will seek feedback on on the cost and benefits of the proposed ban, and whether the use of flash orders in options markets should be evaluated differently from those in equity markets.
   The agency also tightened rules on credit rating agencies by imposing more disclosure requirements and encouraging unsolicited ratings. Those moves, and others proposed by the SEC, took aim at an industry widely criticized as having fueled the financial crisis through over-generous ratings assigned to toxic mortgage-backed securities. [ID:nN17202110]
  
   BROADER REVIEW
   The proposed ban on flash orders is part of a broader effort by the SEC to crack down on obscure corners of the U.S. stock market.
   SEC Chairman Mary Schapiro said the agency will keep  reviewing trading practices that may give an unfair advantage to some market players. "Other market practices may have similar opaque features," she said.
   Supporters of high-frequency trading practices such as flash trading say they add needed liquidity to the markets, and allowed the markets to function smoothly during the financial crisis.
   But critics, including some lawmakers, say the markets need to be better policed so all investors are operating on an even playing field.
   In July, Senator Charles Schumer, a New York Democrat, told the SEC to curb flash trading and threatened the agency with legislation if it failed to do so.
   Schumer said in a statement on Thursday that flash trading could seriously undermine fairness and transparency in markets.
   "This ban, as proposed, is pretty much water-tight and should not be weakened by the commission as the rule-making process goes forward," he said.
   Joe Mecane, NYSE Euronext's executive vice president of U.S. markets, has said flashes were "a relatively small debate that evolved into a very large debate."
   At most, flashes represented less than 3 percent of U.S. equity trading volume.
   All five SEC commissioners voted to propose the flash trading ban, but some were cautious about overreaching in  reviewing other market practices.
   Troy Paredes, a Republican commissioner, said investors ultimately benefit from regulatory restraint. "Exchanges and other trading venues need flexibility to innovate new products, services and trading opportunities," he said.
   Democratic commissioner Elisse Walter also cautioned against too broad a crackdown and said each trading practice should be examined separately and carefully.
   "They have different potential benefits and different concerns," Walter said. (Reporting by Karey Wutkowski; Editing by Tim Dobbyn) ((Email:karey.wutkowski@thomsonreuters.com +1 202 898 8374)) Keywords: SEC/FLASHTRADING 
  
Friday, 18 September 2009 00:10:07RTRS [nN1778693 ] {C}ENDS