Posts Tagged ‘Banks’

Banks, Government Bonds, and Default

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 19, 2014 at 9:15 am
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Editor’s Note: The following post comes to us from Nicola Gennaioli, Professor of Finance at Bocconi University; Alberto Martin, Research Fellow at the International Monetary Fund; and Stefano Rossi of the Finance Area at Purdue University.

Recent events in Europe have illustrated how government defaults can jeopardize domestic bank stability. Growing concerns of public insolvency since 2010 caused great stress in the European banking sector, which was loaded with Euro-area debt (Andritzky (2012)). Problems were particularly severe for banks in troubled countries, which entered the crisis holding a sizable share of their assets in their governments’ bonds: roughly 5% in Portugal and Spain, 7% in Italy and 16% in Greece (2010 EU Stress Test). As sovereign spreads rose, moreover, these banks greatly increased their exposure to the bonds of their financially distressed governments (2011 EU Stress Test), leading to even greater fragility. As The Economist put it, “Europe’s troubled banks and broke governments are in a dangerous embrace.” These events are not unique to Europe: a similar relationship between sovereign defaults and the banking system has been at play also in earlier sovereign crises (IMF (2002)).

…continue reading: Banks, Government Bonds, and Default

New Credit Default Swap Terms to Be Implemented in September 2014

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday August 9, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Isabel K.R. Dische and Leigh R. Fraser, partners at Ropes & Gray LLP, and is based on a Ropes & Gray publication by Ms. Dische, Ms. Fraser, and Molly Moore.

Earlier this year, the International Swaps and Derivatives Association Inc. (ISDA) published the 2014 Credit Derivatives Definitions (the 2014 Definitions). The 2014 Definitions introduce a new government bail-in Credit Event trigger for credit default swap (CDS) contracts on financial Reference Entities in non-U.S. jurisdictions and also modify the typical terms of sovereign CDS contracts in light of the Greek debt crisis, by allowing a buyer of protection to deliver upon settlement the assets into which the Reference Obligation has converted even if such assets are not otherwise deliverable. Further, they create a concept of a Standard Reference Obligation, which means that most CDS contracts on a given Reference Entity would have the same Reference Obligation, thereby increasing the fungibility of such CDS contracts.

…continue reading: New Credit Default Swap Terms to Be Implemented in September 2014

US Regulatory Outlook: The Beginning of the End

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday August 4, 2014 at 9:23 am
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Editor’s Note: The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication. The complete publication, including appendix and footnotes, is available here.

Regulatory delay is now the established norm, which continues to leave banks unsure about how to prepare for pending rulemakings and execute on strategic initiatives. With the “Too Big To Fail” (TBTF) debate about to hit the headlines again when the Government Accountability Office releases its long-awaited TBTF report, the rhetoric calling for the completion of these outstanding rules will once more sharpen.

This rhetoric should not be confused with reality, however. At about this time last summer, Treasury Secretary Lew stated that TBTF would be addressed by the end of 2013—a goal that resulted in heightened stress testing expectations and a vague final Volcker Rule in December, but little more. Since then, the slow progress has continued, with only two key rulemakings completed so far this year: the finalization of Enhanced Prudential Standards for large bank holding companies (BHCs) and a heightened supplementary leverage ratio for the eight largest BHCs (i.e., US G-SIBs).

…continue reading: US Regulatory Outlook: The Beginning of the End

Do Banks Always Protect Their Reputation?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday July 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from John Griffin and Richard Lowery, both of the Department of Finance at the University of Texas at Austin, and Alessio Saretto of the Finance Area at the University of Texas at Dallas.

A firm’s reputation is a valuable asset. Arguably, conventional wisdom suggests that a reputable firm will always act in the best interest of their clients to preserve the firm’s reputation. For example, in his testimony/defense of Goldman Sachs before Congress, the Chairman and CEO Lloyd Blankfein states, “We have been a client-centered firm for 140 years and if our clients believe that we don’t deserve their trust, we cannot survive.” In our forthcoming Review of Financial Studies article entitled Complex Securities and Underwriter Reputation: Do Reputable Underwriters Produce Better Securities?, we examine the extent to which this conventional wisdom holds with complex securities.

…continue reading: Do Banks Always Protect Their Reputation?

Dodd-Frank At 4: Where Do We Go From Here?

Editor’s Note: David M. Lynn is a partner and co-chair of the Corporate Finance practice at Morrison & Foerster LLP. The following post is based on a Morrison & Foerster publication; the complete text, including appendix, is available here.

Where do we go from here? As we mark another milestone in regulatory reform with the fourth anniversary of the enactment of the Dodd-Frank Act, it strikes us that although most studies required to be undertaken by the Act have been released and final rules have been promulgated addressing many of the most important regulatory measures, we are still living with a great deal of regulatory uncertainty and extraordinary regulatory complexity.

…continue reading: Dodd-Frank At 4: Where Do We Go From Here?

Banks: Parallel Disclosure Universes and Divergent Regulatory Quests

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday July 21, 2014 at 9:10 am
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Editor’s Note: The following post comes to us from Henry T. C. Hu, Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law.

Legal and economic issues involving mandatory public disclosure have centered on the appropriateness of either Securities and Exchange Commission (SEC) rules or the D.C. Circuit review of SEC rule-making. In this longstanding disclosure universe, the focus has been on the ends of investor protection and market efficiency, and implementation by means of annual reports and other SEC-prescribed documents.

In 2013, these common understandings became obsolete when a new system for public disclosure became effective, the first since the SEC’s creation in 1934. Today, major banks must make disclosures mandated not only by the SEC, but also by a new system developed by the Federal Reserve and other bank regulators in the shadow of the Basel Committee on Banking Supervision and the Dodd-Frank Act. This independent, bank regulator-developed system has ends and means that diverge from the SEC system. The bank regulator system is directed not at the ends of investor protection and market efficiency, but instead at the well-being of the bank entities themselves and the minimization of systemic risk. This new system, which stemmed in significant part from a belief that disclosures on the complex risks flowing from modern financial innovation were manifestly inadequate, already dwarfs the SEC system in sophistication on the quantitative aspects of market risk and the impact of economic stress.

…continue reading: Banks: Parallel Disclosure Universes and Divergent Regulatory Quests

Volcker Rule and Covered Bonds

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday July 11, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Jerry Marlatt, Senior Of Counsel at Morrison & Foerster LLP, and is based on a Morrison & Foerster publication by Mr. Marlatt.

The subtler aspects of the Volcker Rule [1] continue to emerge. One of the subtleties is the extraterritorial reach of the Rule in connection with underwriting, investments in, and market making for covered bonds by foreign banks.

Foreign banks that underwrite, invest in, or conduct market making for covered bonds need to review their activity under the Volcker Rule.

…continue reading: Volcker Rule and Covered Bonds

Banking Agencies Release Limited Volcker Rule Guidance

Editor’s Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Robert W. Reeder III, Camille L. Orme, Whitney A. Chatterjee, and C. Andrew Gerlach. The complete publication, including appendix, is available here.

On June 10, 2014, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (collectively, the “Banking Agencies”) and the Securities and Exchange Commission (the “SEC”) released substantially identical Frequently Asked Questions (“FAQs”) addressing six topics regarding the implementation of section 13 of the Bank Holding Company Act of 1956, as amended, commonly known as the “Volcker Rule.”

…continue reading: Banking Agencies Release Limited Volcker Rule Guidance

Volcker Rule: Observations on Interagency FAQs, OCC Interim Examination Guidelines

Editor’s Note: Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. The following post is based on a Davis Polk client memorandum.

More than six months after the release of final Volcker Rule regulations, banking organizations continue to grapple with a long list of interpretive questions and an opaque process for seeking clarity from the Volcker agencies. Regulatory silence broke for a brief moment this past week in the form of a short interagency FAQ and, from the OCC, interim examination guidelines for assessing banking entities’ progress toward Volcker Rule compliance during the conformance period.

Neither document is a significant source of new guidance or interpretive gloss. Nonetheless, the OCC guidelines evidence the staff’s intention to begin detailed inquiries into banks’ conformance efforts to date and suggest a higher standard for interim compliance than many may have expected. It remains to be seen whether the other Volcker agencies take the same approach.

…continue reading: Volcker Rule: Observations on Interagency FAQs, OCC Interim Examination Guidelines

The Fed’s Wake-Up Call to Bank Directors

Posted by Edward D. Herlihy and Lawrence S. Makow, Wachtell, Lipton, Rosen & Katz, on Wednesday June 18, 2014 at 4:00 pm
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Editor’s Note: Edward D. Herlihy and Lawrence S. Makow are partners in the Corporate Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Herlihy and Mr. Makow; the complete publication, including footnotes, is available here.

The Dodd-Frank Act was undoubtedly a thorough re-working of the regulatory paradigm for banks and other financial institutions. But no less resolute are the intentions of U.S. banking regulators to carry regulatory reform further, based in significant part on perceived “macroprudential” authority after Dodd-Frank. The new regulatory paradigm will increasingly leave behind bank regulation’s traditional moorings in the protection of federally insured deposits and safe and sound operation of banking organizations. Instead, “macroprudential” regulation will rest on the goals of protecting U.S. financial stability and reducing systemic risk—broad, malleable concepts that elude precise definition. It will seek to influence activities not just of banking organizations but also activities conducted by non-bank entities not traditionally subject to prudential regulation. And, according to an important speech given last week by Federal Reserve Governor Daniel K. Tarullo, the new regulatory paradigm embraces consideration of a potentially unprecedented expansion of the fiduciary duties of directors of banking institutions. This would give such directors very potent incentives to prioritize supervisory goals—including macroprudential objectives.

…continue reading: The Fed’s Wake-Up Call to Bank Directors

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