The Federal Reserve sought to bolster confidence in the U.S. banking system as concerns over the European sovereign-debt crisis roil financial markets and pose risks to the economic expansion.
The Fed told the 31 largest U.S. banks Nov. 22 to test their loan portfolios against a deep recession to ensure they have enough capital to withstand losses. Banks with large trading operations will also test against a European market shock. The most severe scenarios outlined by the Fed include an unemployment rate of as much as 13 percent, an 8 percent drop in gross domestic product and a 52 percent plunge in stocks from the third quarter of 2011 to the fourth quarter of 2012.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington regulatory research firm whose clients include the largest banks, described the test as “daunting.”
The tests, which the Fed said don’t represent its outlook for the economy, aim at making banks’ capital adequacy more transparent by demonstrating whether they can handle a deeper downturn and financial market shock. The Fed helped clear away uncertainty surrounding banks in May 2009, when it published stress tests showing that 10 U.S. firms needed to raise a total of $75 billion, giving investors more clarity.
The Fed aims to prevent the kind of capital depletion that occurred before and during the financial crisis, when firms bought back stock and paid dividends even as their loan portfolios soured and the economy deteriorated.
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U.K. Aviation Regulator to Get Powers to License, Fine Airports
Britain’s Civil Aviation Authority will be given new powers to promote passenger interests, including fining airports for poor performance, under proposals published Nov. 23 by Transport Secretary Justine Greening.
The draft Civil Aviation Bill will replace the CAA’s current economic regulation duties, the Department for Transport in London said in an e-mailed statement. The bill includes plans for a new licensing system for larger hubs, with the regulator given the authority to impose penalties of as much as 10 percent of an airport’s annual turnover.
The proposals would replace a system under which the CAA regulates and controls pricing at the biggest London airports, BAA Ltd.’s Heathrow and Stansted and Global Infrastructure Partners Ltd.’s Gatwick, which account for 60 percent of U.K. passengers. Prices and service quality at other terminals are determined by market forces.
House Panel to Vote on Airwaves Sale Sought by AT&T, Verizon
A House subcommittee is to vote Dec. 1 on legislation that would authorize airwave auctions sought by mobile carriers such as AT&T Inc. and Verizon Wireless, according to Representative Greg Walden.
Walden, the Oregon Republican who is chairman of the Subcommittee on Communications and Technology, made the announcement in an e-mail Nov. 23. An auctions bill cleared a Senate committee in June.
The auctions would sell rights to airwaves relinquished voluntarily by television stations to meet growing demand from smartphones that can be used to view Internet pages and video.
President Barack Obama’s administration has called for almost doubling the airwaves available for wireless Internet service.
German Banks Say EBA Criteria Changes Cause Market Uncertainty
Germany’s public and savings banks said the European Banking Authority’s planned changes to criteria in tests for evaluating and bolstering the strength of lenders are causing uncertainty in financial markets.
Hans Reckers, managing director of Germany’s VOeB association of public banks, said in an e-mailed statement Nov. 23 that the change of criteria is “not only unsettling for the banks subject to the stress test but also the markets in what is already a very tense situation.”
The European banking regulator’s methods should be consistent with statements by European leaders that writedowns on Greek debt are an exception, Germany’s DSGV savings banks association said Nov. 23 in an e-mailed statement.
EU Publishes Rules on Volumes for Early Auctions of CO2 Permits
A European Union regulation on early auctions of post-2012 carbon emission permits, which sets the volume of allowances to be sold in advance at 120 million metric tons, comes into force today.
The rule, published yesterday in the official journal, is an amendment to a previously agreed regulation on auctioning allowances in the next phase of the bloc’s emissions trading system. EU member states approved the amendment on July 13.
The official adoption Nov. 23 of the measure by the European Commission, the EU regulatory arm, marked the final step in the legislative process following scrutiny by the European Parliament and national governments.
SEC Examines Internal Watchdog’s Interview With Paid Radio Show
The U.S. Securities and Exchange Commission’s internal watchdog has come under scrutiny for comments he made in a 75-minute videotaped interview about the agency and the stock market to a man who markets a “crash-proof retirement” plan through the Internet and a paid radio program.
SEC Inspector General H. David Kotz has been contacted about the matter by the agency’s general counsel’s office, which also has briefed the SEC’s commissioners over concerns the interview could be construed as investment advice or an endorsement of financial services.
Phillip Cannella III, chief executive officer of First Senior Financial Group in King of Prussia, Pennsylvania, edited the interview he conducted at SEC headquarters in late July into more than a dozen video segments. He posted them on YouTube and his website, http://www.crashproofretirement.com, and plays them on the radio as well as during his seminars about insurance products for retirees.
The SEC doesn’t ban its employees from interviews with people connected to commercial ventures. Kotz said he cleared the matter in advance with the SEC’s internal ethics counsel. He told SEC officials he would ask an outside group, the Council of Inspectors General on Integrity and Efficiency, to look into whether he said or did anything improper in the interview, according to two people briefed on the situation.
The Federal Bureau of Investigation, which oversees the panel within the inspector general’s group that deals with integrity matters, doesn’t comment on its inquiries, said William Carter, an FBI spokesman.
Kotz said in an e-mailed statement to Bloomberg News that he provided “all the appropriate caveats and disclaimers” to Cannella and “specifically stated in the radio interview that I was not in a position to, nor was I, providing investment advice.”
SEC Chairman Mary Schapiro said in a statement that she appreciated that Kotz requested an independent review and described him as an “experienced professional with expertise in the ethics rules” who she believed would not “intentionally create an appearance issue.”
The SEC didn’t say if it was taking further action on the matter. The agency’s ethics counsel, Shira Pavis Minton, didn’t respond to a request for comment.
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Deutsche Boerse-NYSE Rivals Quizzed by EU on Deal Remedies
Deutsche Boerse AG’s and NYSE Euronext’s rivals and customers were asked by European Union regulators whether two concessions offered last week would be sufficient to eliminate antitrust concerns over their deal to create the world’s biggest exchange.
They were asked to give their views on the Nov. 17 offer by Deutsche Boerse and NYSE to divest some European single-equity derivatives units, according to a document obtained by Bloomberg News that was sent by the European Commission Nov. 22. Clients and competitors were also asked for their views on Deutsche Boerse’s proposal to give rivals some access to its clearinghouse, Eurex Clearing, for new products for a limited time.
Most of the EU’s objections focus on “the trading of derivatives on exchange,” EU Competition Commissioner Joaquin Almunia told lawmakers Nov. 22. Regulators told the two companies last month that their deal to create the world’s largest exchange would monopolize derivatives trading in the region. The EU can block a deal or require concessions from companies to eliminate potential antitrust problems.
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Rehn Says Must Complete EFSF Technical Work at Nov. 29 Eurogroup
European Union Economic and Monetary Affairs Commissioner Olli Rehn said the technical work on the European Financial Stability Facility, or EFSF, bailout fund needs to be completed at the eurogroup meeting on Nov. 29.
The EFSF was created in 2010 by European member states to provide financial assistance in the form of loans, intervention in primary and secondary debt markets and provision of precautionary programs, according to a statement on the EFSF website.
Italy Faces EU Suit Over Finmeccanica, Enel Investor Curbs
The European Union said it will sue Italy over rules restricting investment in companies, including Finmeccanica SpA, Enel SpA and Telecom Italia SpA, that allow the government to interfere in management decisions.
The new Italian government, led by Prime Minister Mario Monti, has one month to take action before the European Commission triggers a court case over the matter, the regulator said in an e-mailed statement from Brussels yesterday.
The commission, the 27-nation EU’s executive arm, already sued Italy in 2006 for repeatedly failing to strip the government of its veto power over decisions at companies, including defense company Finmeccanica, Telecom Italia and energy company Enel, that it said were controlled directly or indirectly by the state. The measures violated EU rules on the free movement of capital, including by allowing the Italian state to block mergers, the commission said.
Michel Barnier, the EU’s internal market commissioner, said he’ll discuss the matter with Monti today. Barnier made the comments to reporters in Rome yesterday after a hearing at the country’s Senate.
The EU called in February for Italy to modify its law.
MF Global Customers Missing $1.2 Billion Denied Court Committee
MF Global Inc. brokerage customers, who may be missing more than $1.2 billion from their accounts, won’t be allowed to form a committee to represent their interests in bankruptcy court, a judge ruled.
Customer accounts believed to hold $5.45 billion were frozen Oct. 31, the day after the New York-based company reported a shortfall in funds that are required to be segregated under rules of the U.S. Commodity Futures Trading Commission. A previous estimate of about $600 million in missing funds was raised to $1.2 billion Nov. 21 by James Giddens, the trustee appointed to liquidate the company and distribute refunds to customers.
Judge Martin Glenn, overseeing a hearing Nov. 22 in Manhattan Bankruptcy court, said he will deny commodity customers’ request to form an official committee. He urged the trustee to work closely with commodities customers. Glenn noted that the 38,000 customers need “some agreed organizational structure” that will allow them to be heard by the trustee.’’ He said there were no legal precedents that would let a bankruptcy court grant the official committee.
Separately, a spokesman for Giddens, Kent Jarrell, said the estate, which had previously run out of money to contribute to the 60 percent it plans to distribute to customers, will receive $1.3 billion from Harris Bank in Chicago.
The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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Brown Says Banks Don’t Need to Raise Capital for Tests
Thomas Brown, chief executive officer of Second Curve Capital LLC and a Bloomberg contributing editor, talked about the possible effects of the Federal Reserve’s tougher capital tests for the biggest U.S. banks.
Brown spoke with Betty Liu and Dominic Chu on Bloomberg Television’s “In the Loop.”
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Low Bank Profits Jeopardize Capital Targets, FSA’s Bailey Says
Lower levels of profit may jeopardize lenders’ plans to hit capital targets set by regulators, Andrew Bailey, head of banking supervision at the U.K.’s Financial Services Authority, said in London yesterday.
Supervisors “set quite long deadlines for banks to accumulate the additional core capital needed to meet the Basel III standard,” Bailey said. Reduced profits threaten banks’ ability to meet those deadlines, Bailey said.
EU Should Toughen High-Frequency Trade Plans, Jouyet Says
Jean-Pierre Jouyet, chairman of France’s financial market regulator, yesterday attacked high-frequency trading and “opaque” markets, as part of a call for the European Union to toughen a planned overhaul of financial rules.
Jouyet, of the Autorite des Marches Financiers, described the development of high-frequency trading as excessive and imperiling the functioning of markets. The European Securities and Markets Authority should be empowered to set “precise rules” for such trades, he said in a Paris speech.
Existing EU market rules from 2007 had proved “a complete failure” at pushing traders to use regulated venues, Jouyet said. Proposals presented last month by the European Commission, the 27-nation EU’s executive arm, may lead to further market opacity, and should be amended.
High-frequency traders came under increased regulatory scrutiny following the so-called flash crash in May of last year, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.
Measures contained in the EU proposals include requiring firms that offer high-frequency or algorithmic-trading services to prove they have sufficient risk controls and ensure clients with direct access to the markets are properly qualified.
High-frequency trades “reduced the depth of the market, and also therefore sapped the confidence of investors in quoted prices,” Jouyet told a conference in Paris, according to a copy of his prepared remarks.
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