(Updates with Greek default risk in Compliance Policy; China regulator and Nasdaq in Compliance Action and ex-Credit Suisse broker in Courts.)
June 17 (Bloomberg) -- U.K. Chancellor of the Exchequer George Osborne published draft legislation that will hand powers to the Bank of England to police Britain’s banks in the biggest regulatory overhaul since 1997.
The Financial Regulation Bill, which will now undergo pre- legislative scrutiny, will abolish the Financial Services Authority and transfer most of its responsibilities to the central bank.
The bill is scheduled to be put to Parliament formally later this year and approved by legislators in late 2012. It will pave the way for the central bank’s Financial Policy Committee to begin its work of monitoring risk. The committee -- chaired by Governor Mervyn King -- met informally for the first time yesterday and will get full legal powers just as King’s second five-year term as governor expires.
Yesterday’s paper setting out the details includes new proposals drawn from a consultation process that began in February, the Treasury said. These policies include detailing responsibilities for the insurance sector, an “updated and enhanced” competition regime under the Financial Conduct Authority -- a new body that will seek to protect consumers and police the integrity of markets -- and measures to tackle misselling of financial products.
King and Osborne began work last June, a month after Prime Minister David Cameron’s coalition government took office, on the regulatory overhaul, which will give the Bank of England more power than it has ever had in its 317-year history.
Osborne said in a foreword to the legislation that the new system of regulation will draw on lessons learned in the 2007 financial crisis, which U.K. regulators failed to predict and didn’t “adequately” respond to.
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Special Section: House Oversight Hearings
U.S. Lawmakers Press Regulators on Bank Capital, Derivatives
U.S. financial regulators sought to reassure lawmakers that they can achieve global coordination and maintain industry competitiveness as they implement the biggest rewrite of Wall Street oversight since the Great Depression.
Harmonization has been a top consideration in international talks on capital buffers for the biggest banks and methods for orderly wind-downs of systemically important firms, officials including Federal Reserve Governor Daniel Tarullo and Treasury undersecretary Lael Brainard told the House Financial Services Committee yesterday at a hearing in Washington.
Tarullo said failure to set a capital surcharge above requirements under the Basel III agreement may expose the financial system to excessive risk.
“What is important is not to lose sight of the costs of not acting,” Tarullo testified. The surcharge based on some studies may range as high as 7 percentage points above the Basel capital requirement, Tarullo said, adding that the final figure, now under consideration by regulators, may not be 7 percentage points.
Tarullo said he sees a need to “calibrate” the number based on risks of the assets held by the biggest banks.
Representative Spencer Bachus, the Alabama Republican who leads the Financial Services Committee, conducted the hearing amid complaints from bankers that U.S. regulations being imposed under the Dodd-Frank Act may slow economic recovery from the 2008 financial crisis and drive business overseas. Lawmakers sought assurances that regulators were looking out for U.S. interests in dealing with their international counterparts.
The six regulators who appeared before the panel offered general agreement that maintaining a level playing field in areas such as resolution authority and rules for the $601 trillion global swaps market is essential to creating proper safeguards against a repeat of the market tumult that followed the September 2008 bankruptcy of Lehman Brothers Holdings Inc.
Brainard and Tarullo were joined at the hearing by Federal Deposit Insurance Corp. Chairman Sheila Bair, Securities and Exchange Commission Chairman Mary Schapiro, Commodity Futures Trading Commission Chairman Gary Gensler and acting Comptroller of the Currency John Walsh.
The committee also heard testimony from a second panel including bank executives, academics and industry association representatives.
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For video of the hearings, click here.
House Approves $125 Billion in USDA, FDA, CFTC Spending
The U.S. House of Representatives approved a $125 billion spending bill for the Department of Agriculture, the Food and Drug Administration and the Commodity Futures Trading Commission, $7 billion less than President Barack Obama requested.
Most of the reduction, about $5 billion, is in discretionary programs, which will get about $17 billion under the plan. The measure, approved by a vote of 217-203, covers the 2012 fiscal year, which begins Oct. 1.
Appropriations bills are being constrained by concerns over the federal budget deficit. The plan approved yesterday by the Republican-controlled House includes cuts in requested funding for food safety, nutrition programs for women and children and for the CFTC, which oversees derivatives markets. Payments to growers of wheat, corn, soybeans and other crops were left largely intact.
The Senate, which is controlled by Democrats, has yet to take up companion legislation.
Funding the CFTC with less money than Obama requested will leave markets vulnerable to speculators whose actions will raise consumer prices, said Representative Kathleen Hochul, a New York Democrat who opposed the bill.
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Basel Committee Said to Weigh Fee to Curb Bank Growth
The Basel Committee on Banking Supervision is considering proposed capital surcharges of as much as 3.5 percentage points that the largest banks may face if they grow any bigger, according to two people familiar with the talks.
Draft plans circulated before a meeting next week would subject banks to a sliding scale depending on their size and links to other lenders, said the people, who declined to be identified because the proposals aren’t public. Banks wouldn’t initially face the highest surcharge, which is intended as a deterrent to expansion, one person said. The largest banks may face a 3 percentage point levy at their current sizes, the person said.
Governments are split over how far to toughen bank capital rules following the worst financial crisis since the Great Depression. The U.S. Federal Reserve could back a surcharge of as high as 3 percentage points, a person familiar with the talks said last week.
The figures will be discussed further at meetings next week in Basel, Switzerland, with some countries pushing for weaker requirements than set out in the draft proposals, the people said. The Basel committee’s press office declined to comment.
Ignoring Greek Default Risk May Make Stress Tests ‘Irrelevant’
European Union stress tests on the region’s banks are becoming “irrelevant” because they ignore the possibility of a default by Greece, said Lex van Dam, fund manager at Hampstead Capital LLP, which oversees about $500 million.
The cost of insuring Greek government debt against the risk of default surged to a record June 15 as concern mounted that policy makers will struggle to stop the crisis. Credit-default swaps indicate an 82 percent chance Greece will fail to meet its commitments within five years, according to CMA prices. The cost of insuring Irish and Portuguese government bonds also reached records this week, driving a gauge of European bank bond risk to the highest level since January.
The European Banking Authority, set up by the European Union last year to oversee the tests, won’t include a Greek default in the scenarios in the second annual assessment of banks’ resilience to economic shocks. European bank stocks have fallen 12 percent since last year’s tests, led by the EBA’s predecessor. Allied Irish Banks Plc, which passed those tests, later required a taxpayer bailout.
“The stress tests have lost all credibility and look like a complete waste of time for all involved,” said Van Dam, who is based in London. “They are totally irrelevant.”
The EBA can’t include a sovereign default in the stress tests because that would lend credence to the possibility of such an event happening and undermine confidence in the region, said Richard Reid, an economist at the London-based International Centre for Financial Regulation.
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Southsea Placed Into Bank Insolvency Procedure, BOE Says
Southsea Mortgage & Investment Co. was placed into a bank insolvency procedure after a decision by the Financial Services Authority and a court application by the Bank of England.
Malcolm Cohen and Mark Shaw, business restructuring partners at BDO LLP, were appointed joint liquidators, the Bank of England said in an e-mailed statement yesterday. Southsea had 250 depositors and retail deposits of 7.4 million pounds ($12 billion) when it failed, the bank said.
Secret Election Financing Evades IRS Scrutiny
At least four nonprofits have reported campaign spending to the Federal Election Commission after declaring to the Internal Revenue Service they weren’t planning political activities, according to documents obtained by Bloomberg News under a Freedom of Information Act request.
The growth of anonymous-donor groups, recent Supreme Court rulings and declining FEC enforcement activity have combined to increase the level of secrecy in financing U.S. elections, Bloomberg’s Megan Hughes reported on Bloomberg Television’s “In the Loop.”
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China Regulator ‘Aware’ of Concerns on Firms’ Accounting
The China Securities Regulatory Commission said it’s “aware” of concerns other regulators have over the financial accounts of some Chinese companies listed overseas and has been in touch with them.
Yao Feng, deputy director general of the CSRC’s department of accounting, made the remarks today while attending a conference held by the Hong Kong Institute of Certified Public Accountants. “We are aware of the concerns.”
The U.S. Securities and Exchange Commission has revoked the registrations of eight China-based companies since December, and more than 24 have disclosed auditor resignations or accounting problems since March, SEC Chairman Mary Schapiro wrote in an April 27 letter. Regulators and investors have increased scrutiny of Chinese companies traded overseas amid accounting allegations against Longtop Financial Technologies Ltd., Chaoda Modern Agriculture (Holdings) Ltd. and Sino-Forest Corp.
The SEC has halted trading in firms such as Guangzhou, China-based Heli Electronics Corp. and Rino International Corp. of Dalian, China, in the past few months.
Nasdaq Seeks Minority Stake in LCH.Clearnet, Greifeld Says
Nasdaq OMX Group Inc. is seeking a minority stake in LCH.Clearnet Group Ltd., Nasdaq Chief Executive Officer Robert Greifeld said.
The New York-based exchange is in discussions with LCH.Clearnet as part of a strategy to expand beyond the U.S., Greifeld said in an interview at the Federation of European Securities Exchanges annual convention in Athens. Nasdaq, which dropped a bid for NYSE Euronext, is the majority owner of International Derivatives Clearing Group LLC, opened in January 2009 for interest-rate swap futures.
LCH.Clearnet, the world’s largest swap clearinghouse, said May 28 it has been approached about “some form of possible business combination.” It has also held talks with London Stock Exchange Group Plc, said three people familiar with the matter who declined to be identified because the discussions are private. LSE has said it isn’t holding talks with LCH.Clearnet on a deal.
LCH declined to comment on interest from Nasdaq, said Rachael Harper, a spokeswoman for the London-based company.
NYSE Euronext Chief Executive Officer Duncan Niederauer said June 1 that he is working with Markit Group Ltd. on a bid for LCH.Clearnet, owner of the world’s largest swaps clearinghouse.
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Heineken Wins Cut to EU Beer Cartel Fine in Court Ruling
Heineken NV, the world’s third-largest brewer by volume, and Bavaria NV won bids to reduce antitrust fines levied by the European Union.
The EU General Court cut Heineken’s fine to 198 million euros ($280 million) from 219.3 million euros and Bavaria’s fine to 20.7 million euros from 22.8 million euros. The Luxembourg- based court said the European Commission failed to prove the extent of the cartel.
“The commission has not proved that the infringement concerned the occasional coordination of commercial conditions, other than prices, offered to individual customers in the on- trade segment,” the court said. Handwritten notes on which the commission relied included references that “are sporadic and brief” about which the companies “have put forward a plausible alternative explanation.”
The commission, the EU’s antitrust regulator, fined the two brewers and Dutch rival Royal Grolsch NV in April 2007 for coordinating prices in the Netherlands from at least 1996 to 1999. InBev NV, which has since merged with Anheuser-Busch Cos. to become the world’s largest brewer, escaped a fine after tipping off EU officials.
“We are disappointed that the general court has not accepted all of our arguments, but we appreciate that the court has reduced the amount of the original fine,” Jean-Francois van Boxmeer, chief executive officer of Heineken, said in the statement. The company said it “will consider its options” after it studies the ruling.
The cases are T-235/07, Bavaria v. Commission; T-240/07, Heineken Nederland and Heineken v. Commission.
Ex-Credit Suisse Broker Should Go to Prison Now, U.S. Says
Former Credit Suisse Group AG broker Eric Butler, whose conspiracy conviction for fraudulently selling securities was upheld June 15, should go immediately to prison, the U.S. said.
The U.S. Court of Appeals upheld two conspiracy convictions against Butler. It reversed a securities-fraud conviction, ruling that Brooklyn, New York, was the wrong venue for the trial on the charge.
The appeals court said Butler needs to be resentenced, and U.S. Attorney Loretta Lynch asked for a court date for that “as soon as possible.”
Butler and his partner Julian Tzolov were accused of intentionally misleading clients about securities purchased on their behalf, falsely claiming they were backed by federally guaranteed student loans and were safe alternatives to bank deposits. Victims’ losses were more than $1.1 billion, according to the government.
Butler was sentenced to five years on each count, to be served concurrently. Tzolov, who jumped bail and was later returned to the U.S., was sentenced to four years in prison, with 1 1/2 years of that for bail jumping.
Steven F. Molo, a lawyer for Butler at MoloLamken LLP in Manhattan, didn’t return a call for comment. In a letter to U.S. District Judge Jack B. Weinstein yesterday, Molo and Paul T. Weinstein, another Butler lawyer, opposed Lynch’s request.
The case is U.S. v. Tzolov, 08-cr-370, U.S. District Court, Eastern District of New York (Brooklyn). The appeal is U.S. v. Tzolov, 10-562, Second Circuit U.S. Court of Appeals (Manhattan).
Levitt Says More U.S. Banks Are ‘Too Big to Fail’
Former U.S. Securities and Exchange Commission Chairman Arthur Levitt, said “more and more” U.S. banks are becoming “too big to fail.”
Levitt talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”
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--With assistance from Nandini Sukumar, Gavin Finch, Liam Vaughan, Gonzalo Vina, Thomas Penny and Svenja O’Donnell in London; Alan Bjerga, Jeannine Aversa and Phil Mattingly in Washington; Stephanie Bodoni in Luxembourg; Boris Groendahl in Vienna; Stephanie Tong and Vincent Jiang in Hong Kong; Thom Weidlich in New York; and Jim Brunsden in Brussels. Editor: Stephen Farr
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