Political Stress Tests, BNP Probe, FCA Trials: Compliance

Erste Group Bank AG said it will fight a “political” design of European regulators’ bank stress tests, which it said favors southern Europe.

An exam designed by the London-based European Banking Authority this year will test how well banks can withstand the bleakest economic scenarios. The test, for instance, simulates a 10.1 percent gross domestic product decline in the Czech Republic, compared with a 6.1 percent fall in Italy.

As the European Central Bank, led by Italian Mario Draghi, prepares to take over supervision of about 130 euro-area lenders from BNP Paribas SA to National Bank of Greece SA, regulators have sought to compile the toughest stress tests in a bid to repair credibility damaged by assessments in 2010 and 2011 that didn’t uncover weaknesses at banks that later failed.

Compliance Policy

Regulator Seeks to Help Regional Banks Go Global

Japan’s financial regulator is considering ways to get regional banks to boost overseas lending as a falling population at home cuts into earnings.

Loans outside of Japan by regional firms lag the nation’s biggest banks, with those at Shizuoka Bank Ltd. comprising 6 percent of overall lending, while Chiba Bank Ltd.’s portion was 1.4 percent. That compares with the almost 30 percent ratio at the three largest lenders.

Local lenders’ profit may decline 40 percent over the next five years unless there’s consolidation in the industry, according to Nomura Holdings Inc. analyst Masahiko Sato.

The Financial Services Agency has found that the biggest issue regional banks face is a lack of access to dollar funds when they consider making loans abroad, said Toshihide Endo, the deputy director-general of the FSA’s planning and coordination bureau.

The banks’ problems are compounded by lowered living standards seen among an aging population and shrinking rural communities.

While the FSA could let government-backed financial institutions procure the U.S. currency for regional banks, that would risk distorting the market, according to Ryoji Yoshizawa, a director of financial institution ratings at Standard & Poor’s in Tokyo.

Compliance Action

BNP Drops as U.S. Said to Seek $5 Billion in Sanctions Probe

BNP Paribas SA fell to a seven-month low in Paris yesterday on concern U.S. authorities will seek more than $5 billion from the lender to settle a probe into alleged violations of U.S. sanctions.

The amount sought in the probe of the lender’s dealings with countries including Iran and Sudan has escalated, and now far exceeds the $2.6 billion that Credit Suisse AG agreed to pay in a settlement with the U.S. for helping Americans evade taxes. Discussions are continuing and the final number could change, according to a person with knowledge of the matter. Last week, four people said U.S. authorities were asking for at least $3.5 billion to settle the BNP case.

A fine of more than $7 billion would jeopardize BNP’s dividend and could prevent the Paris-based lender from keeping its capital ratio, a measure of financial strength, above 10 percent, according to Alain Tchibozo, an analyst at Mediobanca SpA who has an outperform recommendation on the stock.

The settlement could be announced as soon as next month, said the person, who asked not to be identified because a final decision hasn’t been made.

Spokesmen for the Justice Department and BNP Paribas declined to comment.

Courts

U.K. Regulator Wins Appeal Removing Threat to Libor, Other Cases

The U.K. markets regulator won a ruling allowing a fraud trial halted over public funding cuts to continue, removing a threat to the future of other high-profile criminal cases.

A London appeals court yesterday granted the Financial Conduct Authority the right to prosecute five defendants over a land-banking investment case. It overturned a lower court’s ruling that had paused the proceedings after the men lost their trial lawyers due to legal aid cuts.

The government is cutting public funding for barristers in complex trials known as very-high-cost cases in an effort to reduce the country’s deficit. The land-banking investment case and prosecutions over insider trading and rate manipulation fall into that category.

Some defendants in other VHCC cases, like the FCA’s biggest insider trading case, dubbed Operation Tabernula, and the Serious Fraud Office’s probe into manipulation of the London interbank offered rate, or Libor, have also struggled to find representation because of the cuts.

Interviews/Commentary

CFTC Needs to Recognize Overseas Swaps Rules, O’Malia Says

Additional rules may not help without recognition of overseas swaps regulations, Commodities Futures Trading Commissioner Scott O’Malia said.

His comments were part of prepared remarks for the CFTC’s Global Markets Advisory Committee meeting in Washington to discuss issues related to the agency’s coordination with foreign regulators on oversight of foreign-based swap clearinghouses and foreign swaps execution facilities.

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