Insurer Volatility, FSB and Shadow-Banks, Google: Compliance
To reduce the volatility of their results, “some insurers may consider changes to their current product offerings, moving out of longer-term products with embedded guarantees toward products in which more investment risk is borne by policy holders,” the consulting company said, citing a survey of insurers’ finance personnel and chief financial officers.
The International Accounting Standards Board, the organization that sets accounting standards outside the U.S., and its Norwalk, Connecticut-based equivalent, the Financial Accounting Standards Board, are working together on a new standard to account for insurance contracts named IFRS 4. The London-based IASB aims to complete its draft by June.
Insurers may seek to reduce the expected volatility of their earnings by “changing their asset mix, entering into new reinsurance arrangements and engaging into new hedging strategies,” KPMG said.
Financial Stability Board Targets Shadow-Bank Regulations
Global regulators endorsed plans to supervise so-called shadow banks to stop companies such as hedge funds escaping efforts to prevent another financial crisis.
The Financial Stability Board agreed “to develop recommendations to strengthen the regulation and oversight of the shadow banking system,” by November, the board said in a statement after it met yesterday in Rome.
Authorities have warned that shadow banks such as structured investment vehicles, credit hedge funds and money market mutual funds, could be used to evade attempts by regulators to clamp down on excessive risk-taking in the wake of the crisis. The shadow-banking system had liabilities of about $16 trillion in the first quarter of 2010, the Federal Reserve Bank of New York said in a report last year.
The FSB will “consider initial draft recommendations” in July, before a final version is presented to the Group of 20 nations in November, the board said.
The FSB was founded in 2009. It replaced the Financial Stability Forum, a think tank with no formal role that was created in 1999 after the Asian financial crisis.
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EU Proposes Mandatory Shareholder Voting on Executive Bonuses
Executives at listed companies may be forced to put their bonus packages to shareholder votes under measures proposed yesterday by the European Union.
The European Commission plans to toughen management pay rules, increase the number of female directors and make senior managers responsible for a company’s risk-management strategy. It is seeking outside comment on the proposals. Companies have until July 22 to respond.
Senate Adopts House Offset to Repeal Tax-Compliance Rule
The U.S. Congress voted to repeal a tax-compliance requirement included in last year’s health-care overhaul and pay for the change by curbing subsidies for health insurance.
Yesterday’s 87-12 Senate vote on the measure, passed by the House of Representatives March 3, will send it to President Barack Obama for his signature. After the vote, White House spokesman James Carney said the administration is pleased that Congress moved to repeal the measure.
The administration’s next move remains unclear. The White House has expressed concern about the way in which the bill covers $21.9 billion in forgone revenue resulting from the repeal. Carney hinted at those concerns again yesterday and didn’t say whether the president would sign the legislation.
The White House didn’t say how it would change the bill. The statement stopped short of a veto threat, which could be overridden because both chambers of Congress passed the legislation with veto-proof majorities.
The 1099 provision of the health-care law, named after a tax form, would require businesses starting in 2012 to report more transactions to the Internal Revenue Service to prevent underreporting of income. Repeal of the provision became a top legislative priority for small-business advocates, including the National Federation of Independent Business.
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NY Fed Says Swaps Industry Failed to Meet Clearing Promises
Wall Street’s largest banks and money managers failed to fulfill commitments made a year ago to enable swaps customers to use clearinghouses to back trades, New York Federal Reserve Bank President William Dudley said yesterday in a statement.
The Fed will respond by creating its own group to compel swaps dealers, hedge funds and clearinghouses to meet regulatory goals, Dudley said. In order to make “timely and material progress,” the supervisors will form a working group, he said.
The industry group of banks, including JPMorgan Chase & Co. (JPM) and Barclays Plc (BARC), and investment firms such as BlueMountain Capital Management LLC and Pacific Investment Management Co. said 13 months ago that “substantial work” remained before credit derivatives dealers and their biggest customers can regularly move trades into clearinghouses designed to curb risks to the financial system, according to a statement at the time.
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U.K. Banks May Lose $3 Billion of Revenue, Analysts Say
Britain’s biggest banks, including Lloyds Banking Group Plc (LLOY), may lose a total of about 2 billion pounds ($3.3 billion) of revenue from proposals to enhance competition for consumer current accounts, according to analysts at Societe Generale SA.
The government-appointed Independent Commission on Banking may make it easier for customers to switch accounts and make product pricing easier to understand, when it publishes its interim report on the banking industry on April 11, wrote James Invine and Philip Richards, London-based analysts at Societe Generale, in a note to investors today.
The commission, led by Chairman John Vickers, former chief economist at the Bank of England, is examining possible measures to improve competition and to make the financial system safer in the event of a banking crisis. It will provide a final report to Chancellor of the Exchequer George Osborne in September.
The commission may also recommend operational subsidiarization, the separation of payment systems and retail deposits from other banking operations, people familiar with the situation said last week.
Basel Develops Method to Identify Banks Posing Systemic Risk
International regulators have agreed on a way to identify banks whose failure would undermine financial stability, said Stefan Walter, secretary general of the Basel Committee on Banking Supervision.
The committee has “developed a methodology that embodies the key components of systemic importance,” Walter said in a speech published on the committee’s website. The method would allow a “differentiated treatment of systemic institutions without needing to specify a fixed list” of lenders.
Deutsche Bank AG (DBK) Chief Executive Officer Josef Ackermann last month criticized efforts to force the world’s biggest lenders to hold extra reserves. The Group of 20 nations has called for capital surcharges for lenders whose collapse would imperil the wider financial system.
The Basel committee was asked by the Financial Stability Board to draft the requirements for systemically important lenders.
Global regulators don’t yet have a list of such banks, FSB Chairman Mario Draghi said after the board’s meeting in Rome yesterday. The FSB will follow an “accelerated timetable” toward agreeing on the rules by a meeting of G-20 leaders in November, the board said.
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U.K.’s FSA, Treasury Publish Review of Covered Bond Regulation
The U.K. Treasury and Financial Services Authority published a review of the nation’s covered bond regulation, proposing measures to make sure U.K. securities are “readily comparable” to those from other countries, the FSA said in a statement on its website.
The authorities said that, to help the covered bond market, in so-called bail ins, “secured creditors’ rights to collateral should not be over-ridden.”
Exchanges Revamp U.S. Curbs to Help Prevent Stock Trading Halts
Concern that halting stocks to limit price volatility did more harm than good spurred the biggest U.S. exchanges to propose modifying the program.
They backed a plan, known as limit-up/limit down, that prevents prices from moving beyond specified bands based on a stock’s average level during the previous five minutes. On Feb. 18, advisers to the Securities and Exchange Commission and the Commodity Futures Trading Commission recommended adopting the technique in lieu of immediately halting shares. The SEC announced the proposal yesterday.
Exchanges implemented single-stock circuit breakers after the 20-minute rout on May 6 erased $862 billion from the value of U.S. shares before prices rebounded. For companies already covered by the circuit breakers adopted last year, trades wouldn’t be able to occur 5 percent higher or lower than the average price over the prior five minutes, the SEC said. For all other securities, the band would be set at 10 percent.
The proposal would affect trading on all exchanges including those run by NYSE Euronext, Nasdaq OMX Group Inc. (NDAQ), Bats Global Markets and Direct Edge Holdings LLC, as well as private venues such as dark pools and brokerages that execute orders within their own walls.
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RBS CEO Says U.K. Stake Sale Depends on Regulatory Clarity
The sale of the U.K. government’s majority stake in Royal Bank of Scotland Group Plc (RBS) will depend on how soon regulators, including the Independent Commission on Banking, decide on the future shape of the industry, Chief Executive Officer Stephen Hester said.
Hester, 50, forecast in March that RBS will return to profit in 2011 after three years of losses. He took over as chief executive in November 2008 from Fred Goodwin, as the lender received a 45.5 billion-pound ($74 billion) taxpayer bailout, the biggest of any bank in the world. Under Hester, RBS cut about 27,000 jobs and reduced assets by 948 billion pounds. The Edinburgh-based lender still needs to sell its insurance operations by 2013 to comply with a European Union state aid ruling.
In May, Hester described the process of shrinking RBS as the most complicated restructuring of any company in history.
Hester declined to comment directly on the Independent Commission on Banking, which is reviewing proposals aimed at securing the financial system against collapse. The panel will publish its interim report on April 11.
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Google Said to Be Possible Target of Antitrust Probe by FTC
Google Inc. (GOOG)’s dominance of the Internet-search industry is being considered for a broad antitrust investigation by the U.S. Federal Trade Commission, two people familiar with the matter said.
Before proceeding with any probe, the FTC is awaiting a decision by the Justice Department on whether it will challenge Google’s planned acquisition of ITA Software Inc. as a threat to competition in the travel-information search business, said the people, who spoke on condition of anonymity because the matter is still confidential.
The FTC and Justice Department share responsibility for oversight of antitrust enforcement, and the outcome of the ITA deal may determine whether the two agencies will vie for control of a broader probe of Google, the people said. The Justice Department may soon announce its decision on Google’s purchase of ITA, said the people familiar with the matter.
FTC Commissioner Thomas Rosch said in an interview last month he supported a probe of the dominant players in the Internet-search industry, without specifying which companies. Rosch, one of two Republicans on the five-member commission, is the only commissioner to say publicly that such an investigation is in order.
The people familiar with the matter said any investigation of the search industry should concentrate on Mountain View, California-based Google.
If consumers don’t like what the company is doing, they can switch to another search engine, said Adam Kovacevich, a Google spokesman.
“Since competition is one click away on the Internet, we work hard to put our users’ interests first and give them the best, most relevant answers to their queries,” he said in an e- mail. “We built Google for users, not websites.”
Cecelia Prewett, a spokeswoman at the FTC, and Gina Talamona, a Justice Department spokeswoman, declined to comment.
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FDIC Levy Means Banks Lose Overnight Arbitrage Profits, FT Says
An insurance charge by the U.S. Federal Deposit Insurance Corp. on banks’ overnight borrowing has ruined a lucrative arbitrage opportunity, according to traders, the Financial Times reported.
The charge, introduced on April 1, is based on borrowers’ risk ratings and is about 15 basis points for bigger banks; it’s part of an effort to rebuild the FDIC’s deposit insurance fund after the many bank failures since 2007, the newspaper said.
As a consequence of the charge, banks are abandoning trades in which they borrowed in the overnight Fed funds market and deposited the cash with the Federal Reserve at an overnight rate of 25 basis points, the FT said.
That practice may have brought banks risk-free profits of $200 million since late 2008, the newspaper added.
EU’s Barnier Says Some Bank Bonuses Inexplicable, Unjustifiable
Michel Barnier, the European Union’s financial services commissioner, said he is ready to press for stricter EU rules on bank bonuses. He made the remarks to reporters yesterday in Strasbourg, France.
“We are ready to go further than the current framework,” Barnier said. “My appeals for moderation haven’t been heeded,” he said. “There are bonuses that are inexplicable and unjustifiable.”
Barnier added that he would discuss the possibility of stricter rules with EU finance ministers in the coming months. A proposal from the European Commission, the EU’s executive arm, may then follow, he said.
Scotiabank CEO Warns Against ‘Overly Prescriptive’ Regulation
Financial reforms including ones proposed by the Basel Committee on Banking Supervision may work against countries such as Canada, Bank of Nova Scotia (BNS) Chief Executive Officer Richard Waugh said.
The remarks were part of the text of a speech he was to deliver yesterday at the bank’s 179th annual meeting of shareholders in Halifax, Nova Scotia.
Waugh, head of Canada’s third-largest bank, said many industry reforms are reacting to previous crises rather than preventing new ones. Instead, he recommended banks adopt a “low to moderate risk appetite” while keeping sustainable profit levels.
Canada’s banks didn’t require government bailouts during the financial crisis and have been ranked the world’s soundest for three years by the Geneva-based World Economic Forum.
Fed’s Kocherlakota Calls for Less Government Role in Mortgages
Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the U.S. government should reduce its role in housing finance and consider ways to help people build equity in their homes.
“Heavy reliance on government guarantees is not a sound long-term strategy,” Kocherlakota said yesterday in remarks prepared for a mortgage conference at the Minneapolis Fed.
“Our country needs a mortgage market that returns to greater reliance on private risk-taking and private risk assessment, along with the enhanced regulatory oversight that is already in place,” he said.
The House of Representatives is considering legislation that would reduce the dominance of Fannie Mae and Freddie Mae in U.S. mortgage finance. Legislation from House Republicans would wind down the companies completely over five years.
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