News
US Banking Regulators Seek Additional Comment on Market Risk Capital Rules
The Fed, the FDIC and the OCC have issued a release seeking additional comment on proposed modifications to the agencies’ market risk capital rules for banks with significant trading activities. This release amends a December 2010 proposal, and includes alternative standards of creditworthiness to be used in place of credit ratings to determine the capital requirements for certain debt and securitization positions covered by the market risk capital rules.
House Subcommittee Approves Legislation Allowing Pension Plans to Use Swaps to Hedge Risks
On November 15, the House Capital Markets Subcommittee approved legislation that would amend the Employee Retirement Income Security Act, the Commodity Exchange Act, and the Securities Exchange Act to ensure that pension plans can use swaps to hedge risks. The Retirement Income Protection Act, HR 3045, sponsored by Rep. Francisco Canseco (R-TX), and co-sponsored by Chairman Scott Garrett (R-NJ), was approved on a partisan vote of 19-14. The purpose of the bill is to address regulatory interpretations of Dodd-Frank Title VII that could potentially prohibit pension plans from using swaps to hedge against market volatility and manage the obligations owed to retirees.
FSB Identifies Five Areas for Detailed Study
The Financial Stability Board announced on September 1 the formation of dedicated work streams to help gauge the case for further regulatory action in five areas associated with shadow banking, notably including securities lending and repos.
FSB Task Force Frames the Regulation of Shadow Banking
The “shadow” banking system played a major role in the financial crisis, but was not a central focus of many countries’ reform legislation and potentially remains largely unregulated. At the November 2010 Seoul Summit, the G20 Leaders heralded the development of new bank capital and liquidity requirements under Basel III. But concerned by the growing importance of the “shadow banking system,” which grew out of the securitization of assets and the integration of banking with capital market developments, the G20 Leaders called on the Financial Stability Board (FSB), in collaboration with other international standard setting bodies, to develop recommendations to strengthen the oversight and regulation of the “shadow banking system” by mid-2011.
FSB Red-flags Securities Lending by ETFs
In a report issued April 12, 2011, the Financial Stability Board (FSB) highlighted a number of practices engaged in by exchange-traded funds that may be sources of risk to financial stability. Calling for greater disclosure and transparency, securities lending was among the practices red-flagged by the FSB.
The FSB warns that in the low margin environment of ETFs, pressures to boost returns may provide undue incentives to aggressively, and potentially unwisely, lend the underlying securities of the ETF.
FSB Task Force Issues Recommendations for Shadow Banking Regulation
At the request of the G20, a Financial Stability Board task force (Task Force) has published recommendations to strengthen the oversight and regulation of the shadow banking system. As we discussed in our April 28, 2011 post, “FSB Task Force Frames the Regulation of Shadow Banking,” the FSB formed a task force (Task Force) whose primary goal is to develop recommendations to strengthen the regulation and oversight of the shadow banking system by mid-2011.
This report follows an April 12, 2011 document, “Shadow Banking: Scoping the Issues,” clarify what is meant by the “shadow banking system” and set the stage for public comment and regulatory tracking.
BOE’s Paul Fisher Examines Tail Risks and Contract Design
In a September 1, 2011 speechat Clare College in Cambridge, Paul Fisher, Executive Director for Markets of the Bank of England, outlined his thoughts on ways risk taking is executed and how contracts between parties assuming these risks can have “a profound impact on systematic stability beyond the normal consideration of formal regulations.”
Taiwan Moves to Discourage Short Selling and Securities Lending
Taiwan has recently taken steps to curb short selling and securities lending to address extreme share price volatility. In an effort to stabilize equity markets, Taiwan’s Financial Supervisory Commission on November 21 set a new daily limit on short selling of stocks. According to the new daily cap, only 20 percent of average trading volume in the last 30 sessions could be used for short-selling. The previous rules permitted short-selling of up to 3 percent of the company’s total outstanding shares.
In addition, regulators called Taiwanese insurance companies and state pension funds directly to urge them to stop lending securities to short sellers and asked securities borrowers to return their loaned shares in a bid to reduce the volume of short selling and prevent further volatility in share prices.
Reinventing the Banking Social Contract
In a June address before the British Bankers’ Association Annual International Banking Conference in London, Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, explained his thoughts on redrawing the social contract between banking and society in light of the contract’s failure leading up to and during the financial crisis. According to Mr. Tucker, the traditional social contract wherein bank regulation is balanced against insulation from certain market risks through industry-wide deposit-insurance programs and state sponsored measures to reduce the probability of unwarranted failure is now deeply fractured.
September 2011 Basel Committee Recap
At its September 28, 2011 meeting, the Basel Committee (the “Committee) approved a range of measures aimed at finalizing the Committee’s July 2011 consultative document, “Global systemically important banks: Assessment methodology and the additional loss absorbency requirement.” The document sets out the Committee’s proposal on the assessment methodology for (1) determining global systemic importance, (2) determining the magnitude of additional loss absorbency that global systemically important banks should have, and (3) proposes the arrangements by which the methodologies will be phased in.