Financial Stability

SEC Chairman Mary Schapiro last week issued a statement indicating that the SEC would not move forward with proposals for structural reform of money market funds. The SEC had been considering requiring funds to maintain minimum capital levels, or alternatively to have a floating net asset value and mark-to-market accounting. In light of the opposition to the proposals of three of the five Commissioners, Chairman Schapiro decided to end her efforts to advance structural reform.

read more

Last week saw a lot of activity relating to so-called legal entity identifiers (LEIs), being developed under the auspices of global financial regulators to help improve the measurement and monitoring of systemic risk.

 

In a major speech, Bank of England Executive Director for Financial Stability Andrew Haldane compared the LEI initiative (and those that will follow) to the development of the bar code for supply chain management and the development of HTML for the Internet. read more

IOSCO has published a consultation paper on exchange traded funds (ETFs). The paper proposes common investor-protection principles or guidelines on ETFs. The report also discusses market structure and financial stability issues. The proposed principles have been developed to provide guidance for markets and market authorities. The paper is in part a response to the "flash crash", a severe drop in financial markets prices on May 6, 2010, including a 5% drop in the S&P 500 index occurring in just a few minutes. ETFs were disproportionately affected by the “flash crash.”

read more

Regulators in the United States are writing rules to implement the Dodd-Frank legislation, including rules that will determine how broadly the law will apply to activity outside the United States. Japanese and other foreign financial institutions should take advantage of this opportunity to influence the regulations, because the consequences will be very important to them, and change will be much easier to accomplish now than it will be in the future.

read more

The U.K. Financial Services Authority has published a report on the failure in 2008 of the Royal Bank of Scotland. The report discusses, among other things,

 

o  The reasons why RBS failed

 

o  The regulatory and supervisory shortcomings that contributed to the failure of RBS

 

o  Why enforcement actions were not brought against former senior management of RBS

read more

National leaders of the 27 members of the European Union (EU) met in Brussels last week to negotiate measures to address the euro crisis. Agreement was reached early Friday morning by the leaders of 23 nations on a new "fiscal compact" that provides for a variety of measures intended to enhance European financial stability, including new requirements for fiscal austerity by the participating nations. While three of the remaining four members also appear to have acceded to the compact, the U.K. leadership clearly rejected it.

read more

The Bank of England may begin pressuring bank groups to use return on assets (ROA) or another asset-based measure, rather than return on equity (ROE), as the measure of profitability for evaluating performance for the purpose of calculating executive incentive compensation. Most banks currently use ROE, targeting returns in the teens, with some targeting returns of 20% or more. However, a Financial Times column notes that "A growing swell of opinion . . . has begun questioning the validity and distortive effects of RoE as a metric." read more

The collapse of Lehman Brothers and its chaotic dismemberment taught policy makers that more effective resolution mechanisms are needed for large financial institutions that fail. In the ensuing three years, an international consensus has been forming on principles for such resolution mechanisms, manifested in a consultation document published by the Financial Stability Board in July this year. Furthermore, national resolution regimes incoporating these principles have been under development in a number of countries. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and related regulations are the manifestation of these principles in the United States. The following is a discussion of resolution planning under the Dodd-Frank regulatory regime. read more

Recently the finance ministers of France and Germany wrote a letter to the EU Commission outlining concrete proposals for a tax on financial transactions. The letter follows delivery of a joint letter by Chancellor Merkel of Germany and President Sarkozy of France in August 2011 to President Van Rompuy of the European Commission in support of such a tax. G20 members are likely to discuss the proposal at the G20 summit in Cannes, France in early November. The idea of a financial transactions tax (FTT) is floated periodically by politicians and other thought leaders. This post discusses the background and policy implications of FTTs. read more

Hurricane Irene presents us with another opportunity to consider financial institution planning for disaster recovery and business continuity, particularly since the hurricane included financial center New York City in its path of destruction. New York has had ample opportunity to consider the issue, of course, in the aftermath of the 9/11 catastrophe. read more

A senior financial economist at the Office of the Comptroller of the Currency has published a paper entitled "U.S. Domestic and International Financial Reform Policy: Are G20 Commitments and the Dodd-Frank Act in Sync?". The paper provides a useful overview of the relationship of these two important financial regulatory reform initiatives, focusing in particular on policies to address risks to the financial system posed by systemically important financial institutions (SIFIs).

 

The paper concludes overall that the SIFI agendas established by the G20 and Dodd-Frank are substantively consistent and complementary. However, they differ in their relative emphasis on the coverage of both banks and nonbanks. The G20 focus is bank-centric compared with Dodd-Frank, which also addresses nonbank financial firms. Second, implementation of Dodd-Frank Act provisions is subject to law requiring public input into the rulemaking process, whereas the G20 process has been less transparent. read more

Bloomberg reports that Landesbank Hessen-Thueringen, a German bank commonly referred to as Helaba, is balking at regulators' plan to publish the results of European bank stress tests, including data for individual banks. The controversy highlights the uncertain authority held by the new European Banking Authority (EBA) established earlier this year, as well as the significance of stress testing as a supervisory tool for regulators. read more