(Updates with FSA collective-investment probe, SEC- American Funds, South Korea traders in Compliance Action; Debelle in Interviews/Speeches; Ingves in Comings and Goings.)
June 28 (Bloomberg) -- Most large U.S. banks that weathered the financial crisis by strengthening the level and quality of their capital should be able to pass future stress tests, said a researcher at the Federal Reserve Bank of San Francisco.
Banks have managed over the past two years to improve their capital ratios, regardless of whether they participated in the stress tests of 2009, Fred Furlong, a group vice president in the San Francisco Fed’s economic research department, said in a paper released yesterday, without identifying the banks. Bank of America Corp. and Citigroup Inc. are among those that took steps to bolster their capital positions in 2009.
Global central bank governors agreed this weekend on extra capital rules for banks whose size or systemic importance means their failure could cause another financial crisis. Regulators agreed that as many as 30 of the world’s largest lenders should face surcharges that range from 1 percentage point to as much as 2.5 percentage points of core capital to prevent them from causing another financial crisis.
The decision to make too-big-to-fail banks primarily use retained earnings and ordinary shares to meet heightened capital requirements was a victory for U.S. regulators over their European counterparts.
The Basel Committee on Banking Supervision largely rejected requests from European countries to use some forms of contingent instruments to satisfy the new capital buffers. Regulators have yet to prove that so-called CoCo bonds, which convert into ordinary shares if a trigger event occurs, can absorb a bank’s losses, a person familiar with the negotiations said.
The decision was part of the Basel Committee’s overhaul this weekend of rules on how much capital the world’s largest and most systemically important banks must hold.
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India Allows Foreign Individuals to Put $10 Billion in Funds
India allowed foreigners to invest up to $10 billion individually in the country’s mutual funds as the government seeks to increase participation in the nation’s stock markets, Asia’s fourth-biggest.
The Securities and Exchange Board of India, the markets regulator, will set rules for the so-called qualified foreign investors by Aug. 1, Thomas Mathew, joint secretary at the finance ministry, told reporters in New Delhi yesterday.
The plan, announced in February by Finance Minister Pranab Mukherjee, may broaden foreign fund flows and make the markets less volatile, said Mathew. Overseas inflows reached a record 1.33 trillion rupees in 2010, making India the best performer among the world’s 10 biggest equity markets. Foreign funds have withdrawn a net 19.3 billion rupees since Jan. 1, pushing down the Bombay Stock Exchange Sensitive Index 10 percent.
Indian mutual funds managed 7.04 trillion rupees ($156 billion) at the end of March, data compiled by Bloomberg show
EU May Propose Financial-Transaction Tax Under 2014-2020 Budget
European Union regulators may propose a levy on financial transactions under the EU budget beginning in 2014 to diversify sources of revenue.
David Boublil, tax spokesman of the European Commission, the 27-nation EU’s regulatory arm in Brussels, yesterday described the levy as an “option,” adding that the matter has not yet been decided.
The commission intends this week to propose the EU’s spending program for the seven years starting in 2014. National governments finance 70 percent of the EU budget, leading the commission to seek ways of diversifying sources of revenue.
Any proposal for a financial-transaction tax in the 2014-2020 budget would need the unanimous support of EU governments, Boublil said.
Blackstone Pressed by SEC for More Disclosure on Compensation
Blackstone Group LP, the world’s largest private-equity firm, was asked by the U.S. Securities and Exchange Commission for more detail about how its top executives are paid, as buyout firms continue to confront the scrutiny that comes with public listings.
The SEC, in a letter dated April 25, asked New York-based Blackstone for further information about compensation for the firm’s so-called named executive officers. The letter, along with the company’s May 9 response, was disclosed in filings yesterday by Blackstone.
The correspondence underscores the additional information required when private partnerships become publicly traded companies. Carlyle Group, the world’s second-largest private- equity company, has selected bankers to lead its own IPO, after competitors such as KKR & Co. and Apollo Global Management LP gained public listings in New York in the past 12 months.
The SEC pressed Blackstone to spell out in future filings how Schwarzman, who has “sole discretion” adjust executives’ compensation and their portion of profits according to the letter, made those determinations.
The SEC’s four-page letter is a response to the firm’s 2010 annual report filed earlier this year. It also asked for more information about a pending class-action lawsuit tied to the firm’s 2007 initial public offering.
The firm said it would detail in future filings how compensation is based on the performance of its funds, the growth in profit and distributable earnings, as well as “Blackstone’s success in achieving strategic objectives which we will outline as applicable in the relevant period.”
U.K. Insurers Investigated on Data Sales After Injury ‘Epidemic’
The U.K.’s Information Commissioner is investigating whether insurers are breaching data protection law by selling details of customers involved in accidents.
Commissioner Christopher Graham has received a report into the practice, which inflates claim costs and customer premiums, from former Home Secretary Jack Straw, spokesman Greg Jones said yesterday. The commissioner, who can impose fines of as much as 500,000 pounds ($800,000), will give his findings in due course, he said.
When a driver has an accident that’s not their fault, insurers frequently sell their details to personal injury lawyers and claims-management firms, who then encourage the victim to make a claim. That causes more frivolous and fraudulent claims and higher legal costs, which are then paid by the at-fault drivers’ insurers, according to the Association of British Insurers.
Higher costs have forced insurers to raise prices. Britons now pay about 900 pounds a year for comprehensive cover, 40 percent more than the previous year, according to the Automobile Association Ltd.’s Shoparound Index, which tracks the cheapest quotes offered by insurers.
Even so, British insurers haven’t made an underwriting profit from motor policies since 1996.
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U.S. 2011 Failed Banks FDIC Cost Rises to $3.83 Billion
Mountain Heritage Bank of Clayton, Georgia, was closed June 24 by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corp. as receiver.
The FDIC entered into a purchase and assumption agreement with First American Bank and Trust Co. of Athens, Georgia, to assume all of the deposits of Mountain Heritage Bank, according to an e-mailed statement from the FDIC.
The closure of Mountain Heritage Bank brings the cost of failed banks to the Deposit Insurance Fund since 1986 to $3.83 billion, according to data provided by the FDIC.
For a table listing banks that have failed since 1934 and their costs in millions since 1986, click here.
Cross Shareholdings Fall to a Record Low in Japan, Nomura Says
Cross shareholdings between Japanese companies fell to a record low at the end of March, according to Nomura Holdings Inc.
Stocks held by corporate allies fell to 11.1 percent of total outstanding shares as of March 31, a 0.4 percentage point decline from a year earlier, the brokerage said in a report yesterday, based on a survey of 3,631 companies. Cross shareholdings, which have declined two years running, fell to the lowest level since Nomura started tracking the figure in 1991.
Cross shareholding occurs when shares of a listed company are held by another listed company.
Companies are trimming their holdings after the International Accounting Standards Board issued guidance in December 2009 that the current market value of shareholdings must be included in financial statements.
FSA Arrests One Over Unauthorized Collective-Investment Scheme
The U.K. Financial Services Authority, working with Dorset Police, arrested a person suspected of involvement in an unauthorized collective-investment scheme. The FSA also executed search warrants on two premises in Poole, the agency said on its website. No charges have been made and the investigation is continuing.
SEC Clears American Funds of Paying Improper Sales Commissions
American Funds, the mutual-fund family run by Los Angeles- based Capital Group Cos., was cleared by the Securities and Exchange Commission on June 24 of paying improper commissions to firms that sold its products.
The ruling by commissioners Kathleen Casey and Troy Paredes overturned decisions by the Financial Industry Regulatory Authority in 2006 and 2008 that imposed and upheld a $5 million fine against the company after a hearing. Commissioner Luis Aguilar dissented, while Chairman Mary Schapiro and Commissioner Elisse Walter didn’t participate, according to the Washington- based agency’s ruling.
Chuck Freadhoff, a Capital Group spokesman, said yesterday in an interview the company is “very pleased” and it was “always unwilling to settle and pay a fine” because it did not believe it did anything wrong.
Finra accused American Funds, the second-largest manager of U.S. stock and bond funds, of directing more than $98 million in brokerage trading commissions from 2001 to 2003 to broker- dealers as a reward for their sales of the company’s mutual funds, a practice known as directed brokerage. The SEC found Finra’s 2004 “anti-reciprocal rule” that prohibited directed brokerage was ambiguous. The commissioners also said Capital Group had disclosed the practice and hadn’t harmed shareholders.
Finra amended the rule in 2006 to more explicitly prohibit directed brokerage.
Nancy Condon, a Finra spokeswoman, declined to comment.
Ex-BNP, RBC Traders Face Stock Manipulation Charges, Yonhap Says
South Korean prosecutors charged four former employees of BNP Paribas SA, Royal Bank of Canada and two local brokerages with manipulating prices of stocks linked to derivatives, Yonhap News reported.
The traders intentionally sold stocks to push down prices in order to avoid paying returns to investors who bought derivatives products tied to the equities, the Korean-language news agency said, citing the Seoul Central District Prosecutors’ Office. Calls by Bloomberg to the prosecutors’ office were unanswered.
BNP Paribas said in an e-mail that the company can’t comment on any ongoing proceedings by South Korean authorities. An e-mail sent to Katherine Gay, a spokeswoman for RBC, wasn’t immediately answered outside of business hours.
The two other traders worked for South Korean brokerages Mirae Asset Securities Co. and Daewoo Securities Co., the Yonhap report said. Spokespeople at Daewoo Securities and Mirae Asset declined to comment.
Violent Video Game Limits Rejected by U.S. Supreme Court
The U.S. Supreme Court yesterday struck down a California law prohibiting sales of violent video games to minors, saying the ban is an unconstitutional infringement on speech rights.
Greg Stohr reported about the decision on Bloomberg Television’s “InBusiness with Margaret Brennan.”
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Gleeson Says Banks Set to Shrink After Basel Rule Change
Simon Gleeson, a financial regulation lawyer at Clifford Chance LLP, talked about the potential impact of changes in capital requirements for banks under the Basel III rules.
Gleeson spoke with Andrea Catherwood on Bloomberg Television’s “Last Word.”
For the video, click here.
Brown Says Basel Rules to Affect Growth of Largest Banks
Thomas Brown, chief executive officer of Second Curve Capital LLC and a Bloomberg contributing editor, talked about an agreement by regulators in Basel, Switzerland, that as many as 30 of the world’s largest, or systemically important, banks should hold as much as 9.5 percent in capital reserves.
Brown, who spoke with Betty Liu, Dominic Chu and Jon Erlichman on Bloomberg Television’s “In the Loop,” also discussed investment strategy.
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Bank Assets Key to Gauging Financial Health, RBA’s Debelle Says
Bank asset quality is more important than access to funding when assessing a lender’s financial strength, said Reserve Bank of Australia Assistant Governor Guy Debelle.
Proposed changes by Standard & Poor’s to the way it rates lenders worldwide are evidence of a heavy emphasis on funding in the wake of the global credit crisis which followed the collapse of Lehman Brothers Holdings Inc. in September 2008, Debelle said in prepared remarks to a banking conference in Sydney yesterday. His speech didn’t discuss monetary policy.
“The pendulum has swung too far in focusing on liabilities,” Debelle said. “Asset quality should still be paramount and should be given a far larger weight than liabilities in assessing financial strength.”
Moody’s Investors Service last month cited banks’ reliance on funding themselves through bond markets for downgrading Australia’s four biggest lenders by one level to Aa2. Global regulators led by the Basel Committee on Banking Supervision want to prevent a repeat of the credit freeze by setting higher capital requirements and a minimum amount of stable funds that banks will have to use to finance different types of lending.
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Comings and Goings
Sweden’s Ingves to Head Central Bank a Second Six-Year Term
Sweden’s central bank said Stefan Ingves will continue as governor for a second six-year term after helping to guide the largest Nordic nation out of the financial crisis to become one of Europe’s strongest economies.
The Bank for International Settlement said on June 25 Ingves will also succeed European Central Bank Governing Council member Nout Wellink as the new chairman of the Basel Committee on Banking Supervision. The Riksbank governor, who was a key architect of rebuilding his country’s banking industry after its 1990s meltdown, has said he targets some of the world’s toughest regulatory controls in Sweden. Wellink will step down as the Dutch central bank governor on July 1.
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--With assistance from Kevin Crowley and Christopher Scinta in London; Jason Kelly in New York; Vivek Shankar and Vivien Lou Chen in San Francisco; Alex Tanzi and Meera Louis in Washington; Jonathan Stearns in Brussels; Anto Antony in New Delhi; Santanu Chakraborty in Mumbai; Christopher Condon in Boston; Shinhye Kang and Saeromi Shin in Seoul; Sarah McDonald in Sydney; Kim McLaughlin and Johan Carlstrom in Stockholm; and Toshiro Hasegawa in Tokyo. Editor: Glenn Holdcraft
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