An increasingly vocal chorus of current and former U.S. regulators says the biggest banks still have not provided adequate plans to safely wind down in bankruptcy and may need to be restructured to reduce the risk they pose to the financial system.
Jim Wigand, a Federal Deposit Insurance Corp. official responsible for planning for the failures of big banks such as JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and Citigroup Inc., said none have yet been able to draw up bankruptcy plans that wouldn’t threaten to detonate the financial system. The plans, known as “living wills,” were a core demand of the 2010 Dodd-Frank Act overhaul of financial oversight, and it gave regulators the authority require systemically risky banks to restructure if their plans aren’t “credible.”
Whether a global financial giant is able to go through an orderly bankruptcy using a living will is still “an open question,” Wigand said in an interview.
The 11 largest banks filed the first draft of their living wills last year. The banks, which included Bank of America Corp., Barclays Plc (BCS) and Deutsche Bank AG (DB), are required to file new versions of their living wills on Oct. 1. Another tier of banks with less in U.S. nonbank assets must file their first plans by July 1.
Banking experts and some regulators speak openly about the impossibility of putting a bank such as JPMorgan -- commonly perceived as being “too big to fail” -- into bankruptcy court without destabilizing the rest of the financial system. Some advocate changes to the banks, and others changes to the bankruptcy code to make it easier to resolve large institutions.
For their part, the banks say they are working hard to make the Dodd-Frank resolution process work.
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BOE Orders Review of Risk to Banks From Rate Increases
The Bank of England said lenders are vulnerable to an abrupt increase in long-term interest rates as it warned confidence in the financial system remains fragile.
The central bank yesterday ordered a review of banks’ exposure to interest-rate risk, which it said is not properly understood. The review will be carried out by the Prudential Regulation Authority, which will report back in September.
Global central banks have cut interest rates to record lows and pumped money into their economies to boost growth. Federal Reserve Chairman Ben S. Bernanke said this month that the U.S. central bank may begin tapering its stimulus program later this year, prompting declines in global stock markets as investors speculated the Fed may raise rates faster than they assumed.
The extended period of low interest rates may have led some financial-market participants to become exposed to big increases in interest rates, according to the report. Some investors may also be demanding insufficient compensation for bearing risk. In addition, U.K. households remain “highly indebted” and there is a need to assess the “vulnerability of borrowers,” the central bank said.
In its recommendations published yesterday, the BOE’s Financial Policy Committee said that liquid asset buffers held by U.K. lenders to protect against a credit crunch are above minimum requirements and they have space to reduce holdings by about 70 billion pounds. The Basel Committee on Banking Supervision recommends a liquidity coverage ratio of 100 percent by January 2018 and U.K. banks already meet this, the BOE said.
The central bank, which introduced a program last year to boost lending, said that while the impact of looser liquidity requirements on credit is uncertain, the committee intends to give the banking system more flexibility to lend.
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Libor to Oil Targeted by EU Deal on Tougher Market-Abuse Law
Bankers and traders found guilty of rigging benchmark rates from Libor to oil would face tougher fines and other sanctions in the future under a deal reached by the European Union to overhaul its penalties for market abuse.
Nations clinched a draft accord with European Parliament lawmakers to toughen sanctions against market abuse. The accord sets out minimum penalties available to regulators when they punish perpetrators. As well as rate rigging, the draft law covers other kinds of market manipulation and insider trading.
Arlene McCarthy, the parliament’s lead lawmaker on the proposals, said in an e-mailed statement on the deal that the law “provides for tough minimum sanctions and a permanent ban from working in the industry.”
Michel Barnier, the EU’s financial services commissioner, said the new rules would respond “recent scandals on interest rate, commodity and currency benchmarks.”
He said investors will “be reassured that manipulation of benchmarks is prohibited and subject to strict sanctions.”
Financial Stability Board Chairman Mark Carney, the next Bank of England governor, said this week that global regulators will set up a task force with banks in a bid to repair or replace tarnished benchmarks in the wake of the rate-rigging scandals.
U.S. Senators Offer Bill Eliminating Fannie Mae, Freddie Mac
A bill to be offered by Senators Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat, reflects a prevailing view among lawmakers that the two government-sponsored enterprises should cease to exist while a federal role in backing mortgage lending should remain.
The senators have revised their proposal from an earlier version, reducing the losses that lenders would take on bad mortgages during a financial crisis, according to a 154-page copy of the final bill.
Under the bill, Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, which package mortgages into securities on which they guarantee 100 percent payment of principal and interest, would be liquidated within five years.
The proposal could restart a stalled debate over the future of the U.S. mortgage-finance system. Congress hadn’t previously proposed a measure to eliminate Fannie and Freddie, nor had President Barack Obama’s administration done so.
The bill was praised by banking and mortgage trade group representatives.
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Taiwan Cuts Capital Gains Tax on Share Sales, Ends Threshold
Taiwan lawmakers voted to roll back provisions of a capital gains tax on certain stock sales and removed an index price threshold that depressed shares and dragged down market trading volume.
The tax on capital gains from transactions of more than NT$1 billion was reduced to 0.1 percent from 2.25 percent under the original law. Lawmakers also removed an 8,500-point close threshold for the Taiex index before the tax could go into effect. Legislative Yuan President Wang Jin-pyng announced the passage of revisions in a special legislative session June 25.
Before passing the levy last year, Taiwan had exempted securities transactions from capital-gains taxes since 1990, according to the stock exchange’s website.
EU Finance Chiefs Reach Deal on Handling Failing Banks
German Finance Minister Wolfgang Schaeuble, French Finance Minister Pierre Moscovici, Eurogroup President and Dutch Finance Minister Jeroen Dijsselbloem, Irish Finance Minister Michael Noonan and U.K. Treasury Minister Greg Clark talked about the agreement on how to handle failing banks.
They spoke today after seven hours of emergency negotiations in Brussels.
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European Union finance ministers struggled for consensus this week as they took up an Irish-drafted compromise proposal for assigning losses at failing banks, extending a deadlock that doomed talks leading up to today.
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Global Banks Will Screen for Terrorism Links Under Basel Plan
Global banks will have to vet all customers for terrorism links as part of a crackdown on money laundering and criminal finance.
Terrorist screening “should be carried out irrespective of the risk profile attributed to the customer,” the Basel Committee on Banking Supervision said in proposals published today. Lenders should immediately freeze any assets from clients that fail the test, according to the guidelines.
Regulators, including those in the U.S. and U.K., have cracked down on money laundering after the 2008 financial crisis.
The decision “to enter into or pursue business relationships with higher-risk customers should entail enhanced due diligence measures, such as approval to enter into or continue such relationships, being taken by senior management,” said the committee, which is based in Basel, Switzerland and comprised of global regulators and central bankers.
UBS Unit Fined 10 Million Euros by French Regulator on Controls
UBS AG (UBSN)’s French unit was fined 10 million euros ($13.1 million) by the nation’s banking regulator and reprimanded for a lack of controls that may have enabled some clients in France to dodge taxes.
The unit of Switzerland’s largest bank was alerted to “grave suspicions” by the fall of 2007 on its sales force’s possible involvement in illicit marketing and the covering up of tax fraud, and waited more than 18 months before setting up the necessary controls, the regulator said in a statement yesterday.
The delay was described as an “especially grievous failure” by France’s banking regulator in a report dated yesterday about UBS.
The UBS unit also failed to control its sales force’s potential access to computer files shared with the parent company that could have been used to identify prospective clients for accounts outside France, the regulator said yesterday.
“We disagree with many of the disciplinary commission’s conclusions,” Zurich-based UBS said in an e-mailed statement yesterday, adding that it will consider whether to appeal the decision. “UBS does not tolerate any activities intended to help its clients circumvent their tax obligations.”
UBS and its French unit are under a formal investigation by Paris prosecutors as France steps up efforts to combat tax evasion. French tax investigators last year searched UBS offices in cities including Strasbourg, Lyon and Paris. Three individuals were also put under formal investigation last year.
“This is an issue from the past and we are pleased to note that the disciplinary commission acknowledges in its report that UBS France SA has taken appropriate steps to strengthen its compliance framework since 2009,” UBS said.
Pope Francis Names New Commission to Oversee Vatican Bank
Pope Francis has named a new commission to oversee the operations of the Vatican Bank, in response to calls for the Church’s financial arm to improve efforts to fight money laundering.
The commission will be able to request information about the operations of the bank, formally named the Institute for Works of Religion, or IOR, and will present its findings directly to the pope, the Vatican said on its website.
The decision comes after Moneyval, the Council of Europe’s monitoring body for money laundering and terrorism financing, told the Vatican in July of last year that it needed to improve supervision of transactions and stressed the need for independent supervision of the IOR.
The institution is aiming to overcome three decades of suspicion about its dealings. The Vatican Bank oversees about 7.1 billion euros in assets, largely in bonds and cash.
Russia Tightening State Dividend Rules Before Asset Sales
From next year, the prime minister’s approval will be needed to exempt companies from a payout equivalent to at least 25 percent of profit under international accounting methods, Igor Shuvalov, first deputy prime minister, said in an interview June 21 in St. Petersburg.
Bigger dividends would support companies’ market value as Russia seeks to raise 427 billion rubles ($13 billion) from state asset sales this year, helping the budget after President Vladimir Putin increased spending during his election campaign last year.
Russia required state-backed companies pay at least 25 percent of net income as dividends in November, without specifying whether the payouts should be based on Russian or international accounting rules. The board of natural-gas export monopoly OAO Gazprom recommended a 2012 payout 33 percent less than the previous year as profit slumped. The dividend is equal to 25 percent of net income based on domestic accounting rules and 12 percent under international standards.
Suncorp Group to Improve Compliance Systems, ASIC Says
Suncorp Group (SUN) agreed to implement enhancements to its existing program of compliance system improvement across its life and general insurance businesses, the Australian Securities & Investments Commission said in a statement on website.
This announcement followed an ASIC-requested independent review of those compliance systems. The regulator sought the review following its own examination of “significant number of breaches” reported by the group, according to the statement.
In the period from June 2010 to date, over 849,000 customers have been affected by reported breaches, requiring refunds of about A$23 million, ASIC said in the statement.
“Suncorp acted appropriately in reporting the breaches to ASIC as it identified them, and in acting to remediate affected customers,” said ASIC Deputy Chairman Peter Kell.
Draghi Says ECB Ready to Act, Urges Investment Over Tax
European Central Bank President Mario Draghi spoke to lawmakers in the French National Assembly in Paris about monetary policy, the euro area’s economy and governments’ fiscal policies. During his remarks, Draghi touched upon credit flows and taxation and banking supervision.
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Comings and Goings
Brevan Howard Trader Cecere Resigns From London Hedge-Fund Firm
Christopher Cecere, who Japanese regulators accused of trying to manipulate interest rates when he worked at Citigroup Inc. (C), has resigned from hedge-fund firm Brevan Howard Asset Management LLP.
Cecere, an American who worked in Brevan Howard’s Geneva office, stepped down last week for “personal reasons,” said Max Hilton, a spokesman for the London-based firm at Peregrine Communications. Cecere worked for Citigroup in Tokyo as head of Group of 10 trading and sales for Asia before leaving the New York-based bank in 2010.
Japan’s Financial Services Agency said in a December 2010 administrative case that Cecere and another trader asked bankers to alter data they submitted while setting a benchmark Japanese lending rate. The regulator penalized Citigroup without taking action against the employees. Cecere, in a February 2012 interview, denied wrongdoing, saying regulators never questioned him and that he left Citigroup in good standing.
Cecere didn’t respond to a message left on his mobile phone or an e-mail today. His resignation from Brevan Howard was reported earlier by the Wall Street Journal.
Brevan Howard, with $40.1 billion of assets under management, is Europe’s second-biggest hedge-fund firm after Man Group Plc. (EMG)
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