UBS, ECB Deal Reaction, Bank of Canada, FDIC: Compliance

UBS AG (UBSN), Switzerland’s biggest bank, may be fined more than $1 billion by U.S. and U.K. regulators for trying to rig global interest rates, more than double the amount levied against Barclays Plc (BARC), according to a person familiar with the probe.

The fines from the U.S. Commodity Futures Trading Commission, the U.K. Financial Services Authority and the U.S. Department of Justice may be announced as early as next week, said the person, who asked not to be identified because the information isn’t public. The final figures are still being negotiated and could change, three people familiar with the probes said.

Global authorities are investigating claims that more than a dozen banks altered submissions used to set benchmarks such as the London interbank offered rate to profit from bets on interest-rate derivatives or make the lenders’ finances appear healthier. Barclays, the U.K.’s second-biggest bank, agreed to pay 290 million pounds ($467.9 million) in June to resolve the U.S. and U.K. Libor probes.

UBS spokeswoman Karina Byrne in New York declined to comment on the potential penalties. Officials from the CFTC, FSA, Swiss regulator Finma and the DOJ also declined to comment.

The fine will probably be the largest levied against any bank by U.S. and U.K. authorities in the Libor probes, the person said. The CFTC’s portion of the fine against UBS may exceed the entire fine against Barclays. The fine, which was expected to be announced this week, has been delayed as the DOJ works out a deferred prosecution agreement, one of the people said.

Finma also may penalize the Zurich-based bank and force it to disgorge profits, one of the people said.

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Special Section: ECB Oversight

EU Said to Set March 2014 Target Start Date for ECB Supervisor

The European Union is considering a March 2014 target start date for a new bank supervisor at the European Central Bank, according to a draft document prepared for finance ministers meeting in Brussels.

The latest proposal also gives the ECB unlimited discretion on whether to delay its oversight duties if it wants more time to prepare, according to documents prepared by the Cypriot presidency and seen by Bloomberg News. The proposals include an option that would allow the new supervisor to be fully operational 12 months after the EU publishes regulations to set it up.

Other changes would allow participating nations to seek mediation if they disagree with an ECB supervisory decision and simplify procedures for objections from non-euro nations that volunteer to join the common oversight regime.

Draghi Faces Recruitment Drive as ECB Takes on Supervision

European Central Bank President Mario Draghi may need to hire hundreds of new staff after governments handed him sweeping powers to supervise the banking industry.

While the ECB will rely on local regulators to oversee the majority of the euro area’s 6,000 banks with total assets of about 33 trillion euros ($43 trillion), it will take on direct supervision of as many as 200 larger lenders and have ultimate responsibility for all banks. Economists said that will require it to significantly expand its fields of expertise by adding to its current full-time staff of around 1,600.

Draghi’s ECB, primarily responsible for ensuring price stability, will take on the oversight duties as part of a so- called European banking union that aims to sever the link between government finances and domestic banking sectors. While Draghi himself won’t chair the new supervisory board, the central bank’s steady accrual of power during the sovereign debt crisis has met with criticism in Germany, where the Bundesbank has warned of a conflict of interest and an erosion of inflation-fighting credibility.

To avoid “potential conflicts of interest,” European leaders agreed that “the ECB’s monetary tasks would be strictly separated from supervisory tasks.”

U.K. Chancellor of the Exchequer George Osborne said yesterday that the deal on bank oversight is a “a significant moment for the EU.” Decisions on Greece and bank supervision have allayed doubts, Luxembourg Prime Minister Jean-Claude Juncker said. French President Francois Hollande welcomed the deal “on oversight for all banks.”

The ECB has until March 1, 2014, to be ready to fully assume its duties, with the legal framework that will underpin the new role scheduled for completion by the end of February next year.

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UniCredit Says EU Bank Accord a ‘Very Important Step’

UniCredit SpA (UCG) General Manager Roberto Nicastro talked about the European Union accord to put the European Central Bank in charge of all euro-area lenders.

He spoke with Bloomberg’s Flavia Rotondi in Rome.

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ECB to Oversee Most French Banks Under Deal, Bruegel Study Says

The European Central Bank will monitor most French banks under thresholds agreed upon early yesterday, according to a study from the Brussels-based Bruegel Research Group.

European Union finance ministers agreed to give the ECB direct oversight of banks whose balance sheets have more than 30 billion euros ($39 billion) in total assets or represent more than 20 percent of their home country’s economy.

Bruegel researchers Guntram Wolff and Carlos De Souza said 91 percent of euro-area banking assets and at least 180 firms would be captured under the terms of the agreement. For most countries in the 17-nation currency bloc, more than 80 percent of banking assets would be covered, Bruegel said.

Portugal, Malta, Greece, Estonia, Slovenia and Slovakia are “notable exceptions,” the Bruegel study said.

Yesterday’s deal says the ECB generally will take on the top three banks in each participating nation. EU Financial Services Commissioner Michel Barnier said he expected the ECB would have day-to-day oversight of about 200 banks once it starts operations in 2014.

Separately, Italy’s borrowing costs dropped at a bond sale, clearing a second market hurdle this week as the ECB’s pledge to buy bonds offsets concern that pending elections may erode the country’s commitment to economic reforms.

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ECB Will Test Banks With EBA Before Taking Over, Nowotny Says

The European Central Bank and the European Banking Authority will hold a joint financial stress test next year before the central bank takes over supervision, Governing Council member Ewald Nowotny told reporters in Vienna today.

Bolstering confidence in the region’s financial industry is a key component of government efforts to defeat the debt crisis that has roiled markets since late 2009. Next year’s joint round of stress tests will gauge banks’ progress toward meeting new capital rules set by the Basel Committee on Banking Supervision before the ECB is set to take over supervision in March 2014.

The decision to hold a joint assessment was made to avoid subjecting lenders to separate tests, Nowotny said after a presentation of the Austrian central bank’s semi-annual financial-stability report. Details of the stress tests are still being determined, he said.

Compliance Policy

BlackRock Favors Withdrawal Fees Over FSOC Money-Fund Plans

BlackRock Inc. (BLK), the world’s largest money manager, criticized draft recommendations for new rules governing money- market mutual funds offered last month by a senior panel of regulators, and reiterated its call for withdrawal restrictions for funds under stress.

Floating the share price of money funds to reflect market prices wouldn’t prevent investor runs, and requiring the funds to hold capital buffers would effectively eliminate the product by driving clients away, the New York-based firm said yesterday in a letter to the Financial Stability Oversight Council in Washington. BlackRock said it favored a plan to impose a 1 percent fee on withdrawals when a fund’s weekly liquidity dropped below half the required level.

Regulators, led by outgoing SEC Chairman Mary Schapiro, have been working to overhaul rules governing the $2.6 trillion money-fund industry since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, triggered by holdings of debt issued by Lehman Brothers Holdings Inc., set off a run by money-fund investors that helped freeze global credit markets.

Schapiro had planned a proposal where money funds would be forced to choose between a floating share value or a combination of capital buffers and withdrawal restrictions. She shelved the proposal when three fellow commissioners didn’t endorse it.

The Financial Stability Oversight Council, known as FSOC, on Nov. 13 began a process by which it will pressure SEC commissioners to reconsider the elements of Schapiro’s plan and a third option that also included a capital buffer. FSOC said it would be open to other proposals offered during a 60-day comment period.

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Banker Bonuses Seen Capped at Twice Salary in EU Compromise

European Union officials reached a tentative deal with lawmakers to ban banker bonuses that are more than double annual salaries.

Negotiators from the European Parliament and Cyprus, which holds the rotating presidency of the EU, brokered the draft agreement during a meeting yesterday, said Sharon Bowles, chairwoman of the assembly’s economic and monetary affairs committee. The deal is contingent on compromises being confirmed on some other parts of an EU law on bank capital.

The accord would cap a banker’s bonus at the same level as fixed salary, while giving room for larger awards with shareholder approval, Bowles said in an e-mail after the meeting in Strasbourg, France. A maximum limit would be set forbidding awards of more than twice fixed pay.

Philippe Lamberts, the lawmaker leading the talks for the parliament’s Green group, said in a telephone interview that the intention is to conclude a deal on the entire bank capital law next week.

Banks are facing a backlash from EU lawmakers determined to cut variable pay as part of a quest to reshape lenders as utilities rather than money-making machines. Public outrage and shareholder rebellions have led some banks to limit payouts. Any accord on bonuses would be part of a larger agreement on issues including voting procedures for introducing a so-called leverage ratio on lenders, Bowles said.

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CFTC Needs Delay in Overseas Rules, Agency Commissioners Say

The main U.S. derivatives regulator came under pressure to limit the cross-border impact of new swaps rules and delay them for six months from overseas regulators as well as Democratic and Republican members of the Commodity Futures Trading Commission.

The Washington-based agency should provide relief from compliance with Dodd-Frank Act rules while U.S. and overseas regulators discuss how to limit oversight gaps, Bart Chilton, one of three Democrats at the CFTC, and Jill E. Sommers, one of two Republicans, told a House Agriculture Committee hearing on the scope of the rules.

The international reach of the CFTC’s swap rules has been one of the most controversial elements of the agency’s Dodd- Frank rules and has prompted opposition from financial firms including JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and Barclays Plc. The CFTC has also faced criticism from European and Asian regulators for the reach of a rule requiring trades to be guaranteed at clearinghouses and traded on exchanges or other platforms.

The CFTC needs to “clarify and limit the scope of cross- border applicability,” Samara Cohen, a Goldman Sachs managing director, said in testimony submitted to a House Financial Services subcommittee hearing Dec. 12.

CFTC Chairman Gary Gensler said yesterday that the cross- border reach of some rules is intended to protect taxpayers from overseas risks returning to U.S. markets. During a six-month delay, Chilton said the CFTC should have a narrow, territorial definition of trades with U.S. clients while cross-border negotiations continue.

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Compliance Action

S&P Ordered by Japanese Regulator to Improve Ratings System

Standard & Poor’s Japan unit was ordered by the nation’s financial watchdog to improve its system for verifying and updating credit ratings in the regulator’s first action against a ratings company.

“Significant problems were identified with the company’s business operations from the perspective of the public interest and investor protection,” the Financial Services Agency said in a statement in Tokyo today. The regulator issued the order on Dec. 11 and gave S&P until Jan. 18 to submit its first report.

The rating company’s woes in Japan came to light less than a month after it was found liable by an Australian judge for issuing misleading ratings on securities bought by municipalities ahead of the global financial crisis. S&P failed to properly confirm information that would affect the ratings of synthetic collateralized debt obligations, the FSA said.

The regulator will require S&P to implement preventive measures for the problems its review identified and submit reports within 15 days of the end of each quarter, according to the watchdog’s statement.

“We take this matter very seriously and sincerely apologize to clients and market participants for the issues that led to the recommendation and order,” S&P said in the statement.

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FDIC Guarantee Program Set to Expire as Senate Blocks Extension

A Federal Deposit Insurance Program that expanded safeguards for business bank accounts will likely expire at the end of this year after the U.S. Senate failed to advance a proposal for an extension.

A 50-42 vote on a procedural motion fell 10 short of the 60 needed to move forward on a two-year extension of the Transaction Account Guarantee Program, effectively killing it. The TAG program, introduced in the wake of the 2008 credit crisis, guarantees $1.5 trillion in non-interest bearing accounts above the FDIC’s general limit of $250,000. An initial extension is set to end Dec. 31.

The TAG program, which provided unlimited backing for accounts used for payrolls and other business expenses, was opposed by Republicans as a bailout-era program that shouldn’t be extended. Community bankers sought the extension as a way to keep accounts from being moved to bigger banks or money-market mutual funds.

David Barr, an FDIC spokesman, declined to comment on the Senate’s vote.

Interviews

Canada Shouldn’t Widen Central Bank’s Oversight Power, Crow Says

The Bank of Canada shouldn’t be given broader powers to protect financial stability because that may weaken its current mandate, former Bank of Canada Governor John Crow said.

Crow made the remarks in an interview yesterday, after publishing a paper for the C.D. Howe Institute of Toronto, a non-partisan research group.

The central bank already contributes to stability with advice to government and its main mandate of setting interest rates to meet a 2 percent inflation target, Crow said. New powers shared with regulators such as Finance Minister Jim Flaherty or Julie Dickson of the Office of the Superintendent of Financial Institutions could make responsibilities unclear, which “would not be helpful,” he said.

Current Governor Mark Carney takes over the top job at the Bank of England next year, as that institution is poised to add broad powers over financial stability and bank regulation. The U.K. financial system has been damaged by bank bailouts and allegations that benchmark London interbank offered rates were manipulated, while Canada’s banking system has been ranked the world’s soundest by the World Economic Forum for five straight years.

The success of Canada’s regulations boosts the case for avoiding major changes at its central bank, Crow said.

U.K. Watchdog to Prevent Risky Lending Sprees, FSA’s Bailey Says

The U.K.’s financial watchdog will intervene to prevent sudden surges of risky lending before they happen, the U.K.’s top banking regulator said.

The Prudential Regulatory Authority, which will take over from the Financial Services Authority in April as the U.K.’s banking supervisor, will “keep a very close eye on banks,” and require them “to have very clear lending policies,” Andrew Bailey, head of banking and insurance supervision at the FSA, said in a video interview on the Bank of England’s website.

“If there’s a spree of lending which looks like it’s being done to people or companies that we doubt could repay that lending, we’d aim to stop that before it happens,” said Bailey, who will also lead the new regulator.

To contact the reporter on this story: Carla Main in New York at cmain2@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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