News
Basel Clarifies NSFR Repo Treatment
On February 24, 2017, the Bank for International Settlements (BIS) published a new set of responses to interpretation questions related to the Net Stable Funding Ratio (NSFR)
Fintech Poised to Create a New Financial World
“Fintech,” or financial technology,” is a term that seems to be on everyone’s lips these days, from bankers to global finance ministers. Dramatic advances in computing power, speed, interoperability, and nearly instantaneous internet communication are changing the ways banks, brokers, and other financial institutions relate to their customers, investors, regulators, and each other.
The Overlooked Merits of Bank Disclosure
European bankers are caught up in a debate over whether to disclose their full supervisory capital demands to market participants. That’s an issue because bank supervisors, under Pillar 2 of the Basel III accord, can set a bank’s regulatory capital “guidance” at a level higher than its Pillar 1 “requirements.” Bank analysts and investors can discount the securities of banks with relatively high guidance, assuming that supervisors have learned something negative in their confidential reviews. That’s the essence of Pillar 3: Market Discipline.
Congressional Report Takes on FSOC “Too Big to Fail” Designations
The House Financial Services Committee (“House Committee”) issued a report on February 28, 2017 calling into question the process by which the Financial Stability Oversight Council (FSOC) designates certain non-bank companies as “too big to fail.” Based on subpoenaed documents requested by the House Committee and the sworn testimony of Treasury Department officials, the report concludes that the FSOC is “inconsistent and arbitrary” in exercising its power to designate certain nonbank companies as systemically important. The report echoes criticisms made by government watchdogs and courts of the FSOC’s transparency and its nonbank SIFI designation process.
Basel Sharpens Focus on Banking Supervision
The Basel Committee on Banking Supervision has announced its work program themes for 2017 and 2018 to include a greater focus on strengthening supervision by member jurisdictions.
Treasury Secretary on the State of the Global Financial System
On July 27, 2017, Treasury Secretary Steven Mnuchin delivered the Department of the Treasury’s annual report on the state of the international financial system. Mnuchin’s testimony covered many topics ranging from the Volcker Rule to tax reform and China equity caps. The hearing was sometimes contentious, with Rep. Maxine Waters (D-CA) sparring with Secretary Mnuchin over his apparent failure to respond to letters of inquiry from Waters. Despite the fireworks, Mnuchin laid out some of his thoughts on the state of domestic and global financial markets as well as the Treasury’s plans for recalibration of Dodd-Frank regulatory reforms.
FSB Takes a New Approach to Collateral Re-use and Re-hypothecation
In dual releases published on January 25, 2017, the Financial Stability Board (FSB) expressed concern that reuse of collateral and rehypothecation of client assets may pose financial stability issues. The financial crisis demonstrated that collateral re-use and re-hypothecation can transmit and amplify shocks to financial markets. While regulators have responded and prime brokers and clients have improved their risk management and practices since the crisis, the FSB has formulated recommendations to address residual financial stability risks associated with collateral re-use. In these releases, the FSB finalizes its data collection plans, and also explores whether uniform implementation of its recommendations is truly necessary, or whether a more flexible principles-base approach might be more effective.
ADRs Find Themselves in an Unwelcome Spotlight
American Depositary Receipts are back in the news. The Wall Street Journal reported on November 8, 2016 that the Securities and Exchange Commission has issued subpoenas to four large banks with expansive ADR businesses seeking information about trading of ADRs. Citing unnamed sources “close to the investigation,” the Wall Street Journal article said that the focus of the SEC probe seems to be the “pre-release” of ADRs, where a bank may issue depositary receipts without actually having custody of the underlying shares.
Treasury Nominee Wants Regulation with Limits, Not Repeal
For the most part, Treasury Nominee Steven Mnuchin’s five-hour confirmation hearing on January 19, 2017 focused on responding probing questions about his past associations and financial reporting oversights. Amid the sparring, however, Mnuchin was able to reveal a bit about his plans for Dodd-Frank, the Volcker Rule, and his thoughts on the future of financial regulation. Most notably, the wholesale repeal of Dodd-Frank promised during the election campaign does not appear to be on his agenda. While he believes some aspects of Dodd-Frank regulations have gone too far and are stifling growth, Mr. Mnuchin said that rather than rolling back regulations, he favored placing limits on the existing framework to make it fairer, particularly to smaller financial firms.
Financial CHOICE Act to Take Center Stage
Republican control of Congress and the White House has put financial regulatory reform back on the legislative agenda. As an indication of Republicans’ preliminary plans, the Financial CHOICE Act (H.R. 5983), proposes a regulatory capital “off-ramp” for banks which restrain their leverage and self-insure against losses.[1] The centerpiece of the Financial CHOICE Act is the optional exemption from many Dodd-Frank regulations in exchange for higher capital reserves. The bill achieves this by creating a single leverage limit.