Posts Tagged ‘Liquidity’

Dodd-Frank Enhanced Prudential Standards for Foreign Banks with Limited US Footprints

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday March 26, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Luigi L. De Ghenghi and Andrew S. Fei, attorneys in the Financial Institutions Group at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum; the full publication, including diagrams, tables, and flowcharts, is available here.

The Federal Reserve has issued a final rule adopting a tiered approach for applying Dodd-Frank enhanced prudential standards to foreign banking organizations (“FBOs”). Under the tiered approach the most burdensome requirements (e.g., the requirement to establish a top-tier U.S. intermediate holding company) will only apply to FBOs with large U.S. operations, whereas fewer requirements will apply to FBOs with limited U.S. footprints.

We have summarized below the Dodd-Frank enhanced prudential standards that will apply to the following FBOs with limited U.S. footprints:

…continue reading: Dodd-Frank Enhanced Prudential Standards for Foreign Banks with Limited US Footprints

Final Federal Reserve Rules for Foreign Banking Organizations

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday March 23, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Joseph T. Lynyak, III and Rodney R. Peck, partners in the Financial Services Regulation practice at Pillsbury Winthrop Shaw Pittman LLP and is based on a Pillsbury publication by Messrs. Lynyak and Peck.

This post describes the final regulations issued by the Federal Reserve Board (the “FRB”) on February 18, 2014, that radically modify the former requirements applicable to foreign banking organizations (“FBOs”) pursuant to the FRB’s Regulation K. The final rules (the “Final Rules”) impose various requirements on large FBOs that previously have been applied to large U.S. domestic bank holding companies and banks under the Dodd-Frank Act. In addition, however, the Final Rules also alter many of the former approaches to the regulation of FBOs in general, including the necessity for many FBOs to form “U.S. intermediate holding companies” for their U.S. operations.

Regardless of the category an FBO falls into, the Final Rules present significant additional compliance burdens.

…continue reading: Final Federal Reserve Rules for Foreign Banking Organizations

Enhanced Prudential Standards

Editor’s Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Andrew R. Gladin, Rebecca J. Simmons, Mark J. Welshimer, and Samuel R. Woodall III. The complete publication, including Annexes, is available here.

On February 18, 2014, the Board of Governors of the Federal Reserve System (the “FRB”) approved a final rule (the “Final Rule”) implementing certain of the “enhanced prudential standards” mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”). The Final Rule applies the enhanced prudential standards to (i) U.S. bank holding companies (“U.S. BHCs”) with $50 billion (and in some cases, $10 billion) or more in total consolidated assets and (ii) foreign banking organizations (“FBOs”) with (x) a U.S. banking presence, through branches, agencies or depository institution subsidiaries, and (y) depending on the standard, certain designated amounts of assets worldwide, in the United States or in U.S. non-branch assets. The Final Rule’s provisions are the most significant, detailed and prescriptive for the largest U.S. BHCs and the FBOs with the largest U.S. presence—those with $50 billion or more in total consolidated assets and, in the case of FBOs, particularly (and with increasing stringency) for FBOs with combined U.S. assets of $50 billion or more or U.S. non-branch assets of $50 billion or more.

…continue reading: Enhanced Prudential Standards

Does Stock Liquidity Affect Incentives to Monitor?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 10, 2014 at 8:21 am
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Editor’s Note: The following post comes to us from Peter Roosenboom, Professor of Finance at the Rotterdam School of Management, Erasmus University; Frederik Schlingemann of the Finance Group at the University of Pittsburgh; and Manuel Vasconcelos of Cornerstone Research.

In our paper, Does Stock Liquidity Affect Incentives to Monitor? Evidence from Corporate Takeovers, forthcoming in the Review of Financial Studies, we examine the role of liquidity as a monitoring incentive and its effect on firm value by analyzing the market reaction to takeover announcements. The empirical evidence is consistent with the view that there is a tradeoff between monitoring via institutional intervention and liquidity for takeovers of private targets, but not for takeovers of public targets. This finding may be explained by the increased role of the disciplining effect of the threat of exit in connection to actions that on average destroy shareholder value, such as takeovers of public targets (Admati and Pfleiderer 2009).

…continue reading: Does Stock Liquidity Affect Incentives to Monitor?

Enhanced Prudential Standards “First Take”

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 3, 2014 at 8:59 am
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Editor’s Note: The following post comes to us from Dan Ryan, Chairman of the Financial Services Regulatory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication.

Our observations on the Federal Reserve’s final rule:

1. Delayed effective date and higher threshold: Foreign Banking Organizations (FBOs) eked out several small victories in the final rule—in particular, the July 2015 compliance date has been pushed to July 2016 and smaller FBOs (i.e., those with under $50 billion in US non-branch assets) are no longer required to form an Intermediate Holding Company (IHC). The changes reflect the Federal Reserve’s attempt to respond to FBOs’ concerns, especially that smaller FBOs did not pose as much risk to US financial stability.

…continue reading: Enhanced Prudential Standards “First Take”

Dodd-Frank Enhanced Prudential Standards for U.S. Bank Holding Companies and Foreign Banks

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday February 27, 2014 at 9:20 am
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Editor’s Note: The following post comes to us from Luigi L. De Ghenghi and Andrew S. Fei, and is based on two Davis Polk publications; the full publications, including visuals, tables, flowcharts and timelines, are available here (focusing on U.S. bank holding companies) and here (focusing on foreign banks).

Pursuant to Section 165 of the Dodd-Frank Act, the Federal Reserve has issued a final rule to establish enhanced prudential standards for large U.S. bank holding companies (BHCs) and foreign banking organizations (FBOs).

U.S. BHCs: The final rule represents the latest in a series of U.S. regulations that apply heightened standards to large U.S. BHCs. As the graphic below illustrates, under the emerging post-Dodd-Frank prudential regulatory landscape for U.S. BHCs, the number and stringency of prudential standards generally increase with the size of the banking organization.

…continue reading: Dodd-Frank Enhanced Prudential Standards for U.S. Bank Holding Companies and Foreign Banks

Basel III Framework: Net Stable Funding Ratio (Proposed Standards)

Editor’s Note: Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication. The complete publication, including annex, is available here.

A key new element of the Basel III framework for regulatory capital aims to improve banks’ management of their funding and liquidity profiles. Two new measures are proposed: a “net stable funding ratio”, and a “liquidity coverage ratio”. The net stable funding ratio has received relatively little attention due to its seemingly distant implementation date of 1 January 2018. However, its impact will be immediate and significant for many banking institutions.

…continue reading: Basel III Framework: Net Stable Funding Ratio (Proposed Standards)

Valuing Private Equity

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday January 12, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Morten Sorensen and Neng Wang, both of the Finance and Economics Division at Columbia Business School, and Jinqiang Yang of Shanghai University of Finance and Economics.

In our recent NBER working paper, Valuing Private Equity, to value PE investments, we develop a model of the asset allocation for an institutional investor (LP). The model captures the main institutional features of PE, including: (1) Inability to trade or rebalance the PE investment, and the resulting long-term illiquidity and unspanned risks; (2) GPs creating value and generating alpha by effectively managing the fund’s portfolio companies; (3) GP compensation, including management fees and performance-based carried interest; and (4) leverage and the pricing of the resulting risky debt. The model delivers tractable expressions for the LP’s asset allocation and provides an analytical characterization of the certainty-equivalent valuation of the PE investment.

…continue reading: Valuing Private Equity

Fed Outlines Proposals to Limit Short-Term Wholesale Funding Risks

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday January 3, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Derek M. Bush, partner at Cleary Gottlieb Steen & Hamilton LLP, and is based on a Cleary Gottlieb memorandum by Mr. Bush, Katherine Carroll, Hugh C. Conroy, Jr., Allison H. Breault, and Patrick Fuller.

On November 22, 2013, Federal Reserve Board Governor Daniel Tarullo delivered a speech at the Americans for Financial Reform and Economic Policy Institute outlining a potential regulatory initiative to limit short-term wholesale funding risks. [1] This proposal could increase capital requirements for and apply additional prudential standards to firms dependent on short-term funding, with a focus on securities financing transactions (“SFTs”)—repos, reverse repos, securities borrowing/lending and securities margin lending.

…continue reading: Fed Outlines Proposals to Limit Short-Term Wholesale Funding Risks

Liquidity and Governance

Posted by Alexander Ljungqvist, New York University, on Thursday December 12, 2013 at 9:17 am
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Editor’s Note: Alexander Ljungqvist is Professor of Finance at New York University’s Stern School of Business.

Is greater trading liquidity good or bad for corporate governance? In the paper, Liquidity and Governance, which was recently made publicly available on SSRN, my co-authors (Kerry Back and Tao Li) and I address this question both theoretically and empirically. A liquid secondary market in shares facilitates capital formation but may be deleterious for corporate governance. Bhide (1993) argues that greater liquidity reduces the cost to a blockholder of selling her stake in response to managerial problems (‘taking the Wall Street walk’), resulting in too little monitoring by large shareholders. Bhide’s work has spawned an active literature on the effects of liquidity on governance. The present paper makes two contributions to that literature: (i) we solve a theoretical model consisting of an IPO followed by a dynamic Kyle (1985) market in which the large investor’s private information concerns her own plans for taking an active role in governance and show that greater liquidity leads to lower blockholder activism, and (ii) we verify the negative theoretical relation between liquidity and activism using three distinct natural experiments.

…continue reading: Liquidity and Governance

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