Regulatory round-up — U.S. rules to know in 2012
By Nick Paraskeva
NEW YORK, Dec. 16 (Thomson Reuters Accelus) – Several recently adopted rules in the U.S. are going into effect for specific types of firms in 2012. These rules include ones released by the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Reserve, issued to implement the Dodd-Frank Act and as a response to market developments.
The SEC-adopted rules requiring reporting by advisers to hedge funds and by large traders of securities are explained below. We also cover the CFTC final rules on derivative clearing firms in the swaps market and provide a summary of the Fed’s final rules on living wills for large banks, and non-bank systemically important financial institutions (SIFIs), under the Dodd-Frank Act. (more…)
from Christopher Whalen:
Did the FDIC really kill the repo market?
Back in April 2011, Jim Bianco penned a commentary, “Why The Federal Reserve May Have A Hard Time Raising Rates.” He argued that the increase in the FDIC insurance assessment rate for large banks adds to bank funding costs, and thus offsets the impact of Fed ease. Bianco and others infer a roughly 15bp tax or “wedge” on money market assets is created by the FDIC assessment rule. By way of reference, the Fed’s target band for fed funds is 0 to 25bp but has been at low end of this range for months.
David Kotok of Cumberland Advisors subsequently wrote that the FDIC tax is offsetting the 25 bp paid to banks on Fed reserves and is effectively forcing U.S. banks out of the market. (See my paper published by Networks Financial Institute at ISU, “What is a Core Deposit and Why Does It Matter?”, which goes into the changes to the deposit insurance made by the Dodd-Frank legislation.)
Let’s agree with the central contention of the “Bianco-Kotok Hypothesis” (or BKH), namely that the new FDIC assessment is affecting the money markets. But is this change the most compelling explanation for the alarming exodus of banks from the institutional credit markets? Bianco’s research illustrates the collapse of yields in the securities repurchase (or repo) market since April, when the FDIC implemented the new deposit insurance assessment rules. He talks about the task the Fed faces to raise rates given the FDIC assessment:
“If the Federal Reserve attempts to overcome this FDIC fee by raising [interest earned on excess reserves] IOER from 025% to 0.75% or to 1.00%, will the market understand? More than likely such a move would be seen as an extreme tightening.” Indeed, but would we even be talking about the FDIC assessment if Fed funds were trading at 1%?
The new FDIC assessment regime does not raise much more money than the old rule, but the burden is now carried more proportionately by the big banks. This pound of flesh was extracted from Congress by the community bankers to win approval of Dodd-Frank. The other was a future “special assessment” by FDIC on the largest banks to push the insurance fund well above pre-crisis levels. Stay tuned on that count.
The new FDIC premium assessment regime actually reduces the maximum levy for the weakest banks from 75bp to 45bp, roughly reflecting the proportional increase in the size of the insurance assessment base to include tangible bank assets less capital. Low risk core domestic deposits of all banks, large and small, are taxed in single digits and not more than before Dodd-Frank. But the large banks now must also pay insurance premiums on debt liabilities.
Debt, repo assets and foreign deposits are all now part of the FDIC assessment base, so the broad BKH observation that FDIC is a tax on repo transactions is correct. Banks can reduce the assessment by up to 5bp based on the amount of non-deposit funding, but the assessment is a tax on all liabilities less capital. In the case of repo there is clearly an increased tax vs. nothing before the crisis, but the increase in cost for a top-rated bank is less than 15bp, probably high single digits. Or as one banker told me, the leverage ratio is the constraint -- not the cost of the funding.
Also, these days the bank regulators, by establishing special rules for the G-SIFIs, the globally systemic important financial institutions, and awarding them a formal “too-big-to fail” franchise, priced at a modest 1 to 2.5 percent of capital increase, payable over several years, are de-facto decreeing all other as “global systemic irrelevant financial institutions”, which can only mean that the small banks don’t stand a chance… bye bye!
Now indeed we will have a 110% moral hazardous financial system! The safest thing to do might be to take cover… in the shadows!
http://www.youtube.com/watch?v=nA35telp2 kc&feature=player_embedded
ANALYSIS-Deck chairs secure aboard USS Financial Regulation
By Kevin Drawbaugh
WASHINGTON, March 21 (Reuters) – The big U.S. government agencies in charge of policing banks and markets, despite being excoriated over the severe 2008-2009 financial crisis, have successfully dodged a major structural shake-up.
While Congress may yet clamp down on the financial industry from Wall Street to Main Street, a top-to-bottom overhaul of the nation’s regulatory apparatus — which seemed like a certainty a year and a half ago — is not going to happen.
As political reality has tempered reform proposals, plans to reconfigure a patchwork bureaucracy stitched together over decades have faded from view, with just one agency closure still on the negotiating table.
Only the Office of Thrift Supervision — smallest and newest of the big seven agencies — is likely to be closed with regulatory reform bills in both the Senate and the House of Representatives targeting it for shutdown.
Otherwise, thousands of workers will stay in place at the Securities and Exchange Commission, the Federal Reserve, the Office of the Comptroller of the Currency and other agencies ensconced in stately, federal buildings across Washington.
Some of their work assignments may change — if Congress actually produces a bill this year and President Barack Obama signs it.
US FDIC extends protection for securitized assets
By Karey Wutkowski WASHINGTON, March 11 (Reuters) – U.S. bank regulators extended a policy on Thursday that protects securitized assets in the event that a bank fails and is seized by regulators. (more…)
BREAKINGVIEWS-FDIC on defensive thanks to imperfect disclosure
– The author is a Reuters Breakingviews columnist. The opinions expressed are her own –
By Lauren Silva Laughlin
DALLAS, Feb 16 (Reuters Breakingviews) – The Federal Deposit Insurance Corp (FDIC) is on the back foot thanks to imperfect disclosure. A web video critical of the U.S. agency’s sale last year of failed IndyMac Bank has elicited a defensive clarification. FDIC could have been clearer when the deal was done.
When FDIC sold IndyMac to OneWest, a bank owned by private equity investors, it agreed to share losses based on the original face value of the loans — while, as the video pointed out, IndyMac’s buyers bought the loans at a discount. The implication was that this structure meant FDIC would over-compensate the buyers for losses on loans.
The video contained errors, including failing to explain that FDIC is only sharing losses on a fraction of the loans bought by OneWest. Moreover, the buyers also have to lose more than $2.5 billion before the agreement kicks in. So the buyers aren’t getting anything like as sweet a deal as the video implied. And without some loss-sharing arrangement, FDIC might have struggled to sell IndyMac at all.
Still, the video gained such traction on the Internet that FDIC felt the need to respond on Friday. The details it clarified weren’t in the initial press release announcing the sale of IndyMac, nor were they presented clearly as more details of the sale were released.
Of course bank deals are complicated. But had FDIC made more effort to explain fully at the time — at least on a par with the disclosure required of deals between companies with public shareholders — there would have been less fuel for public skepticism now.
Is it true that George Soros is one of the largest investors in the private equity firm that bought Indy mac Bank and continues to be one of the largest shareholerd’s of One West Bank?
EXCLUSIVE-U.S. Fed group eyes insurance fund for key market
By Kristina Cooke and Elinor Comlay
NEW YORK, Feb 8 (Reuters) – Banks, investors and industry groups last week discussed creating a backstop insurance fund to lessen the risk a distressed dealer could trigger a crisis in the world’s largest funding market.
The discussions took place at a New York Federal Reserve sponsored industry workshop last Wednesday, according to presentations obtained by Reuters.
Participants in the tri-party repurchase market — a key funding source for dealers that briefly seized up during the financial crisis — have been tasked by the central bank with coming up with reforms to strengthen the market which, at its peak, financed more than $2.8 trillion in securities per day.
The market has shrunk from that level since there are now fewer participants and dealers, but it is still the critical finance market for the broader financial system.
Repos, or repurchase agreements, are contracts for the sale and future repurchase of a financial asset, most often U.S. Treasuries. In the tri-party repo market, clearing banks JPMorgan Chase & Co and Bank of New York Mellon Corp facilitate trades between counterparties and hold collateral.
After the 2008 collapse of Bear Stearns, the Fed put in place an emergency lending facility for primary dealers. The facility helped stabilize the repo market but was only a temporary fix. It was authorized under a provision of the Federal Reserve Act that allows such lending only when financial conditions are deemed “unusual and exigent.” The facility expired on Feb. 1.
Bank of England, U.S. FDIC to work closely on banks in distress
LONDON, Jan 22 (Reuters) – The Bank of England said on Friday it had signed an agreement with the U.S. Federal Deposit Insurance Corporation to work more closely when resolving distressed banks with operations in the U.S. and the UK.
U.S. FDIC’s Bair urges banks to take losses on commercial loans
By Karey Wutkowski
WASHINGTON, Jan 20 (Reuters) – A top regulator on Wednesday told banks to stop dragging their feet and recognize losses on commercial real estate loans, a sector that is due to deteriorate in the coming quarters and drive bank failures.
Sheila Bair, chairman of the Federal Deposit Insurance Corp, said banks should try to modify troubled commercial real estate (CRE) loans, but must recognize losses if such a workout does not maximize value.
“The losses need to be recognized,” Bair stressed to a conference of the Commercial Mortgage Securities Association.
Bair, an activist regulator, has been hailed for her early warnings on the dangers of subprime lending and securitizations.
She said on Wednesday that she expects the rates of noncurrent CRE loans to continue to rise “in the coming quarters,” and reiterated her belief that the troubles in the sector will increasingly be a driver of bank failures this year.
Bair said failed banks with high concentrations of CRE may be difficult to sell as a whole bank, meaning the FDIC may save more institutions through securitizations.
BREAKINGVIEWS – Is Conan O’Brien a $40 million bailout recipient?
– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
By Rolfe Winkler
NEW YORK, Jan 19 (Reuters Breakingviews) – Conan O’Brien is expected to receive $40 million for leaving NBC, the media unit of General Electric, itself among the largest recipients of taxpayer help. While it would be a stretch to compare the American late-night talk show host to a Goldman Sachs or Citigroup banker, he’s only a few steps removed.
Though it wasn’t a recipient of direct aid from the Troubled Asset Relief Program, GE availed itself of perhaps an equally important bailout facility, the Temporary Liquidity Guarantee Program overseen by the Federal Deposit Insurance Corp.
Participants in the scheme were able to issue debt with a government guarantee, receiving explicit taxpayer backing in the event of default. Though GE was just one of 88 firms with outstanding Uncle Sam backed debt as of October 31, its $60 billion of issuance accounted for nearly a fifth of the $315 billion total.
Unlike some of the banks that received direct equity injections from the government, GE can argue it is exempt from the same scrutiny over compensation that has bedeviled financial companies including Citigroup, Goldman and American International Group.
But without the FDIC’s largesse, the group’s troubled financial arm, GE Capital, would have struggled to fund its $650 billion balance sheet. That, in turn, could have forced its parent to liquidate assets, starting with NBC. In a truly worst-case scenario, GE might have even had to seek protection from its creditors.
US FDIC floats plan to tie bank pay to fee levels
By Karey Wutkowski
WASHINGTON, Jan 12 (Reuters) – U.S. banks whose compensation plans encourage risk-taking would have to pay more for deposit insurance under a proposal floated by the Federal Deposit Insurance Corp on Tuesday.
The proposal is very preliminary and was contentious even among the members of the FDIC board, which is made up of regulators for different-sized financial firms. The board voted 3-2 to seek public comment on the proposal.
The plan would reward pay structures that tie banker pay to long-term performance and include “clawback” provisions to recoup payments.
Likewise, banks with risky payment schemes, including huge cash components and incentives for short-term results, would have to pay more in insurance premiums.
The proposal, which is not guaranteed to lead to rulemaking, said the FDIC would not seek to impose a specific level of compensation. Also, it would not require banks to provide more than a minimal amount of data, in an attempt to lighten the burden of the proposal.
“We’re not talking about (compensation) levels, notwithstanding my dismay,” FDIC Chairman Sheila Bair said to reporters. “This isn’t about levels, this is about structures.”
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