(Updates with debt-limit deal, U.K. equity financing, India regulatory policy and African carbon-market rules in Compliance Policy and British Airways in Compliance Action.)
Aug. 1 (Bloomberg) -- The U.S. ‘shadow banking’ system, which had double the liabilities of commercial banking at the end of 2007, is shrinking.
A Bloomberg chart shows that shadow banks had liabilities of $15.9 trillion at the end of 2010, a decrease of 22 percent from 2007, while U.S. commercial banks had liabilities of $12.8 trillion, an increase of 22 percent during the same time period.
The banking and financial crisis that began when credit markets froze in 2007 was due in part to the rise of the shadow banking system, which became larger than commercial banking in 1990.
Lending in the U.S. depends on a complex set of institutions including investment banks, money-market mutual funds, special investment vehicles, collateralized debt obligations and government-sponsored enterprises, such as Fannie Mae and Freddie Mac. While the liabilities of the traditional banks are made up of deposits and inter-bank loans, the liabilities of the shadow banking system include open-market commercial paper, repurchase agreements, GSE liabilities and money-market mutual funds.
Much of the funding in the shadow banking system was short- term, even though the liabilities were used to fund long-term loans like mortgages. This made the system unstable. Even now, the shadow banking system is showing no sign of stabilizing.
Although the Dodd-Frank law calls for regulation of some areas of the shadow banking system, there is a lingering concern that the law did not address the root cause of the crisis: instability in the shadow banking sector, particularly with securitizations.
Debt-Limit Agreement to Get Congress Vote as Soon as Today
Congressional leaders, leaving no extra time before a default threatened for tomorrow, are racing to push through a compromise sealed with President Barack Obama last night to raise the U.S. debt limit by at least $2.1 trillion and slash government spending by $2.4 trillion or more.
The House plans votes today and the Senate may follow suit to consider the agreement reached during a weekend of negotiations that capped a months-long struggle between Obama and Republicans over raising the $14.3 trillion debt ceiling.
Both parties were working to sell the deal to their rank and file -- meeting resistance from social liberals who fault it for failing to increase taxes and from fiscal conservatives who say it’s insufficient to rein in the debt.
The Treasury Department has said it will breach the borrowing limit and run out of options for avoiding default tomorrow without action by Congress to raise the debt ceiling. Congressional leaders expressed optimism they would avoid that risk -- however narrowly.
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For more on the debt debate, see EXT6.
Banks Should Cut ‘Footballer Pay’, Say U.K. Fund Managers
European and British investment banks should slash pay and cut jobs to redress the balance between employees and shareholders, according to three of the U.K.’s largest institutional investors.
Banks such as Barclays Plc, Deutsche Bank AG, UBS AG and Credit Suisse Group AG, which are among the top 10 investment banks in Europe by revenue, raised base salaries and hired more staff following the 2008 credit crisis even as the shares tumbled and the banks cut or halted dividends. Now, shareholders have had enough.
Julian Cane, who helps manage 106 billion pounds ($173 billion) at F&C Asset Management Plc in London, compared investment banks and their shareholders to football clubs and their owners. While football players have fun and make a lot of money, owners of football clubs “rarely make any money,” he said. “It’s better to play for the club than to own it.”
Last year, Barclays paid 22 pounds to employees for every 1 pound paid to its owners, while at Deutsche Bank the ratio was 16 to one. UBS hasn’t paid its investors a cash dividend since 2006, while giving 16.9 billion Swiss francs ($21.1 billion) to its personnel last year.
Barclays handed 11.9 billion pounds over as compensation, against 531 million pounds in dividends, according to filings. Deutsche Bank gave staff 12.7 billion euros ($18.1 billion) in compensation and benefits for 2010, while shareholders got 816.4 million euros in dividends.
Spokesmen for Credit Suisse, UBS and Barclays declined to comment, while a spokeswoman for Deutsche Bank wasn’t immediately able to comment.
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U.K. Brings Forward Move to Ease Small-Company Financing
Treasury Minister Mark Hoban said the U.K. will bring forward the implementation of European rules making it easier for small companies to raise money in equity markets, the latest bid to spur growth as the economy stagnates.
The steps from the European Union Prospectus Directive took effect in Britain yesterday, a year early, Hoban said in a statement released by his office in London. Small companies will be able to raise 5 million euros ($7.1 million) without having to produce a prospectus for investors.
Chancellor of the Exchequer George Osborne is looking at ways to improve conditions for companies so that they can expand more easily even as he attracts criticism from the opposition Labour Party for doing nothing to stimulate demand. The economy expanded 0.2 percent in the three months through June, leaving gross domestic product barely higher than it was in the third quarter of last year.
The measures, which double the level above which companies need to produce a prospectus, will save small and medium-sized businesses in the U.K. about 12 million pounds ($19.5 million) a year, the Treasury said. Companies will be able to raise money from as many as 150 investors, up from 100 under previous rules.
India Shunning ‘Big Bang’ Economic Change Risks Singh’s Legacy
Prime Minister Manmohan Singh’s push to deepen India’s welfare system may divert focus from the investment and regulatory changes needed to sustain an economic transformation that he unleashed two decades ago.
The government is expanding education and rural jobs plans whose costs could swell by almost 2 percentage points of gross domestic product, International Monetary Fund estimates show. Singh also aims to submit a bill in the parliamentary session starting today securing low-cost food for more than 800 million people, more than the combined U.S. and euro-area population.
While embracing such populist measures may help shore up support for a government roiled by corruption charges, it means proposals to boost investment and overhaul tax and land-use laws risk languishing, analysts said. By contrast, Singh as finance minister 20 years ago attacked regulatory burdens that held back private companies, helping propel a 247 percent surge in GDP.
India is losing about 2.5 percentage points in growth a year from regulations and approval requirements that deter investment in roads, ports and power generation, and labor laws that hinder firing, Credit Suisse Group AG estimates.
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African Wind, Cook Stoves May Benefit From New Carbon Rule
Wind turbines, hydroelectric dams and efficient cooking stoves in Africa and other regions may attract as much as $1 billion in investment after the United Nations agreed on new carbon market rules that may grant such projects more emissions credits, according to ClimateCare.
The UN Clean Development Mechanism’s Executive Board, regulator of the world’s second-biggest carbon market by traded volume, agreed this month on new standards for projects in places where basic human needs aren’t met. The new rule melds the CDM’s goal of reducing emissions blamed for global warming with an aspiration to transfer technologies that poor nations need to avoid higher-polluting development paths akin to Europe’s Industrial Revolution.
ClimateCare, based in Oxford, England, is a unit of JPMorgan Chase & Co. that develops emissions-cutting projects.
The so-called “guidelines on the consideration of suppressed demand in CDM methodologies” were approved during the executive board’s meeting in Marrakech, Morocco, that ended July 15. The guidelines include ways to calculate CO2 emission reductions in poor areas against a benchmark that represents so- called minimum service levels for heat, water and light. These levels represent an acceptable standard of living, which many communities haven’t yet achieved.
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‘Big Four’ Accounting Dominance Set for U.K. Regulatory Probe
The “Big Four” accounting firms’ dominance over corporate audits in Britain should be fully investigated by the U.K. Competition Commission, the country’s Office of Fair Trading said.
The OFT made the provisional decision July 29 after concluding the U.K.’s “second-phase” competition regulator has authority to take action against the industry if it finds distortions in the market. The probe targets the largest auditors -- KPMG LLP, Deloitte LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP.
The investigation, which comes as the European Union is debating the same issue, could force changes to the industry. Dominance by the four firms, which audit 99 of the 100 largest U.K. companies, has been under review by the OFT since 2002, while a U.K. government committee investigating the causes of the global financial crisis called for a probe.
The OFT has said the size of the Big Four’s market share is propelled by the cost of switching auditors, the ease of explaining the choice of accounting firms to investors, the extensive international networks held by bigger auditors and the risk associated with auditing larger companies.
China Regulator Said to Tell Banks Loan Provision Inadequate
China’s banking regulator told lenders they haven’t set aside sufficient funds to cover losses on loans to local governments and ordered them to accelerate debt collection, a person with knowledge of the matter said.
The lenders were told last month that they are lagging behind the China Banking Regulatory Commission’s schedule for revising the loan agreements on infrastructure projects, the person said, declining to be named because the information is confidential. The agency had asked banks to collect two repayments a year after construction is completed.
The comments reflect persistent concerns that $1.7 trillion of lending to local governments may spur a wave of bad debts that could lead to the nation’s third banking bailout in less than two decades. As much of 30 percent of the credit may sour, Standard & Poor’s estimates, after a surge in lending that powered China’s recovery from the global financial crisis.
Efforts to curb risks in the loans have achieved “initial results, and the overall risk is controllable,” the regulator said in an e-mailed response to questions from Bloomberg. Going forward, banks should amend debt agreements, get better collateral and refine calculations on capital levels based on risk-weightings assigned to such loans, it said.
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BA Confronts Regulator Over Surcharge Fine, Telegraph Says
British Airways is refusing to pay a 121.5 million-pound ($200 million) fine for allegedly fixing fuel surcharges, the Daily Telegraph reported, citing Willie Walsh, the chief executive officer of International Consolidated Airlines Group SA, of which BA is a part.
Walsh said the fine is being withheld after the collapse last year of a criminal cartel prosecution brought by the U.K. Office of Fair Trading, which imposed the penalty in 2007, the newspaper reported.
BA won’t pay the fine unless the regulator provides fresh evidence of wrongdoing, the Telegraph cited Walsh as saying.
Altman Says U.S. Won’t Default If Congress Misses Deadline
Roger Altman, a former U.S. deputy Treasury secretary and the founder of Evercore Partners Inc., said he doesn’t expect the U.S. to default if Congress misses raising the debt ceiling by an Aug. 2 deadline.
“As long as you’re timely on interest payments and on principal payments, then you are not in default under any definition,” Altman said July 29 in an interview with Betty Liu on Bloomberg Television.
The Treasury Department has set the Aug. 2 deadline for raising the $14.3 trillion debt limit to avoid default.
Lloyd’s Levene Touts Spitzer-Like Transparency in Fees
Peter Levene, who is stepping down after nine years as chairman of Lloyd’s of London, said he doesn’t like paying insurance-broker fees once challenged by former New York Attorney General Eliot Spitzer.
He made the remarks in an interview July 29 at Bloomberg headquarters in New York.
Spitzer, who later became New York governor, banned the payments for larger brokers in 2005, arguing that the fees create a conflict of interest and lead to improper business practices. Brokers collect contingent commissions from insurers based on the amount and profitability of policies they arrange. Regulators reversed the fee restrictions in 2010.
Levene said that the 323-year-old insurance market, the world’s oldest, doesn’t like contingent commissions. The fees create problems when policyholders aren’t told about them, he said.
The U.K. introduced an anti-bribery law last month, which makes it illegal for companies to offer bribes in the U.K. or overseas. Lloyd’s said in May contingent commissions “need clearly to be considered on a case-by-case basis by both the insurer and the broker” to see if they contravene the new law.
Comings and Goings
Hong Kong’s SFC to Appoint Herbert Smith’s Alder as Chief
Hong Kong’s Securities and Futures Commission will appoint Ashley Alder, the Asia head of law firm Herbert Smith LLP, as its new chief executive officer.
Alder, an executive director of corporate finance at the regulator from 2001 to 2004, will return to lead the SFC in October, according to a person familiar with the decision who declined to be identified because it isn’t public.
Andrew Tortoishell, Herbert Smith’s Greater China managing partner, confirmed the move and said that Alder’s successor will be finalized “very shortly.”
Patrick Wong, a spokesman for Hong Kong Financial Secretary and chairman of the selection panel, John Tsang, declined to confirm Alder’s appointment. Wong said the government would be making an announcement “quite soon.” The Financial Times earlier reported the appointment.
Alder, 52, will be responsible for maintaining Hong Kong’s regulatory reputation as the city attracts more initial public offerings from overseas, at a time when corporate governance in Chinese companies is being scrutinized by short sellers and regulators in the U.S. and Canada.
The position has been vacant since June 8, when Martin Wheatley left to take over the U.K.’s new Consumer Protection and Markets Authority.
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Italy’s Tremonti Dismisses Calls To Resign, Wants To Keep Post
Italian Finance Minister Giulio Tremonti dismissed calls for his resignation amid a probe into his former aide Marco Milanese, whose arrest is sought by prosecutors in Naples, saying he didn’t commit any “unlawful act.”
He spoke in an interview with Italian national broadcaster RAI SpA.
“I would like to keep doing my job,” Tremonti said, adding that he should have been “more careful” about the use of a Rome apartment provided by Milanese.
--With assistance from Christopher Payne, Julie Hirschfeld Davis and Mike Dorning in Washington; Catherine Airlie, Gonzalo Vina, Alan Purkiss, Kevin Crowley, Erik Larson and Ambereen Choudhury in London; Laura Marcinek, Betty Liu, Brooke Sutherland and Andrew Frye in New York; Joe Brennan in Dublin; Tommaso Ebhardt and Marco Bertacche in Milan; Andrew MacAskill and Unni Krishnan in New Delhi; and Debra Mao in Hong Kong. Editor: Stephen Farr
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