Bloomberg News

Shadow Banking, Greek Debt Writedown, Avon Sinks: Compliance

October 28, 2011

(Updates Greek debt and FSA bonus rules in Compliance Policy, Raiffeisen in Compliance Action and Osborne and Lacaille in Interviews/Speeches.)

Oct. 28 (Bloomberg) -- Regulators must find ways to rein in banks that seek to shift risks off their balance sheets and minimize the amount of capital they need to hold, the Financial Stability Board said yesterday.

A report from the FSB, which brings together regulators and finance ministries from the Group of 20 nations, said that “bank-sponsored shadow banking entities” may create “an opportunity for regulatory arbitrage.” The Basel Committee on Banking Supervision, a separate policymaking group of global regulators, will report to the FSB with recommendations by July.

“The key aim is to enhance transparency and to limit the support banks provide to shadow banking entities that are not under appropriate prudential measures,” the FSB said in its report.

The shadow-banking system had liabilities of about $16 trillion in the first quarter of 2010 and has contributed to real estate asset-price bubbles, according to a report by the Federal Reserve Bank of New York last year.

The FSB said that more work needs to be done to regulate repurchase agreements and securities lending within the shadow- banking system and to ensure banks keep hold of some risk when dealing in securitizations.

The board also recommended setting tougher global limits on how much banks can invest in the shadow-banking system, which includes mortgage insurance companies, money market funds and some credit hedge funds.

Compliance Policy

Banks Bow to ‘Last Word’ From Merkel, Sarkozy on Greek Debt

The world’s biggest banks bowed to what German Chancellor Angela Merkel called the “last word,” agreeing to write down their Greek government debt by half in the pivotal piece of the euro area’s bid to stem the financial crisis.

The Institute of International Finance, which represents financial companies, agreed to “develop a concrete voluntary agreement on the firm basis of a nominal discount of 50 percent on notional Greek debt held by private investors,” Managing Director Charles Dallara said in a statement e-mailed at 4:26 a.m. yesterday in Brussels.

Euro-area leaders who called Dallara into a meeting at about midnight yesterday, forcing a break in their 10-hour summit, said that while the bond transaction will be voluntary, the decision resulted from an offer he couldn’t refuse.

Merkel, Sarkozy, Juncker made clear that if a voluntary agreement with the banks was not possible, they “wouldn’t resist one second to move toward a scenario of the total insolvency of Greece,” Luxembourg Prime Minister Jean-Claude Juncker told reporters. That would have “ruined the banks,” he said.

Bondholders who take part in a European debt swap and rescue package for Greece will have much safer investments after the exchange takes place, European Union officials said.

The package, negotiated by the umbrella group for more than 450 financial firms, should set the basis for the decline of the Greek debt to gross domestic product ratio with an objective of reaching 120 percent by 2020, the IIF said.

Owners of Greece’s banks may be wiped out over coming months. For shareholders in Greece’s publicly traded banks, led by National Bank of Greece SA and Alpha Bank SA, there may be little left once the companies end up in government control.

For more, click here, and click here.

EU Banks Must Raise $147 Billion of Extra Capital, EBA Says

Europe’s banks will need to raise 106 billion euros ($149 billion) in fresh capital under tougher rules being introduced in response to the euro area’s sovereign debt crisis, the region’s top banking authority said.

U.K. banks won’t be required to raise extra capital, according to the EBA figures, whereas German banks will have to find 5.2 billion euros.

Seventy banks were tested, the European Banking Authority said late in the day on Oct. 26, with Spanish banks needing 26.2 billion euros and Italian banks 14.8 billion euros in core tier 1 capital. The lenders have until Dec. 25 to submit their plans for raising the money to national supervisors. The extra reserves are needed to meet a temporary requirement for lenders to hold 9 percent in core reserves, after sovereign debt writedowns. The capital buffers will help banks withstand “a range of shocks,” the EBA said in a statement on its website.

The EBA recommended banks withhold bonuses and dividends and go to private markets before seeking government funds to cover any shortfall.

For more, click here.

FSA to Let Building Societies Report Less Bonus Information

Building societies holding capital from 50 million and 100 million pounds ($161 million) should face fewer rules on reporting banker bonuses, the U.K. Financial Services Authority said.

The watchdog proposed that firms with as much as 100 million pounds of capital should be put in the third tier of its bonus-reporting requirements. Lenders that drop from tier two to tier three won’t have to inform the regulator about their pay structure.

The FSA is clarifying bonus guidelines introduced in December and seeking input on them from financial institutions. The agency applied the guidelines from the European Union to its revised bonus rules and separated financial firms into four groups based on their size.

Compliance Action

Avon Sinks After Saying SEC Probing Contacts With Analysts

Avon Products Inc., the world’s largest door-to-door cosmetics seller, fell the most since 2008 after saying U.S. regulators began a formal probe of its foreign operations and are investigating its dealings with analysts.

The U.S. Securities and Exchange Commission issued a subpoena Oct. 26 seeking information about communications with financial analysts starting last year, New York-based Avon said yesterday in a filing. The SEC also began formally investigating Avon’s international operations. The company said it is cooperating with the investigation.

The disclosures came as Avon reported third-quarter net income that fell more than analysts estimated and said it no longer expects to meet its forecast for sales growth this year. The results marked the fourth time in five quarters profit trailed projections.

Jennifer Vargas, a spokeswoman for Avon, declined to comment beyond the company’s statements yesterday. John Nester, an SEC spokesman, declined to comment on the agency’s subpoena.

Finra Sanctioned by SEC for Altering Records Before Inspection

The U.S. Securities and Exchange Commission ordered the Financial Industry Regulatory Authority to improve its internal procedures after accusing a Finra employee of altering records before an SEC inspection.

The director of Finra’s Kansas City office caused the alteration of three records of staff meeting minutes in 2008 hours before producing them to SEC inspectors, making the documents inaccurate and incomplete, the SEC said yesterday in a statement. Finra, the industry-funded brokerage regulator, was ordered to hire a consultant and undertake steps to improve policies, procedures and training for inspections, the SEC said.

Finra consented to the SEC order without admitting or denying wrongdoing, the SEC said. The production of altered documents cited in yesterday’s order was the third instance in eight years, the SEC said.

Finra Chief Executive Officer Richard Ketchum said in a statement that the agency self-reported the matter to the SEC and has “fully cooperated” with the investigation. Following its own internal review, Finra appointed “new leadership in our Kansas City office,” the agency said in the statement.

The Kansas City office director cited in the SEC order wasn’t identified by either agency.

Bank of America Derivatives Transfer Draws Lawmaker Scrutiny

Congressional Democrats are asking regulators whether they explored possible risks connected to Bank of America Corp.’s moving of derivatives from Merrill Lynch into its deposit-taking unit after a credit downgrade.

Eighteen lawmakers signed onto letters from Representative Brad Miller and Senator Sherrod Brown seeking information about whether agencies consulted on the transfer considered the potential impact on the bank’s health and customer accounts.

“Because of the favored treatment of derivative contracts in receivership, it appears highly likely that losses on derivatives would result in losses to insured deposits ultimately borne by taxpayers,” Miller wrote in his letter, which was signed by eight House Democrats. The transfers were first reported by Bloomberg News on Oct. 18.

Democratic lawmakers, many of whom sought Dodd-Frank Act amendments to wall off banks’ customer deposits from risky businesses such as derivatives trading, are pressing the Financial Stability Oversight Council for information on its role and oversight of the transaction. Bank of America doesn’t believe regulatory approval was needed for the transfer, people with knowledge of the bank’s position said last week.

Jerry Dubrowski, a Bank of America spokesman, had no immediate comment on the letters.

For more, click here.

Facebook Irish Office Probed by Watchdog Over Personal Data Use

Facebook Inc.’s Irish offices became part of an investigation by the national data-protection agency into how the company handles personal data.

Ireland’s Data Protection Commissioner started the on-site portion of the audit by visiting Facebook’s offices in the country this week. The goal of the audit is to check the company’s compliance with Irish and European Union data- protection rules, said Lisa McGann, a spokeswoman for the commissioner.

“We believe that we are fully compliant with EU data- protection laws and look forward to welcoming the DPA to our EU headquarters in Dublin to demonstrate this,” Facebook said in an e-mailed statement. “The Irish DPA audits several companies each year and we expect the whole process to be complete by January 2012.”

Deutsche Boerse-NYSE Said to Face Monopoly Warning From EU

Deutsche Boerse AG and NYSE Euronext were told by European Union regulators that their deal to create the world’s largest exchange would monopolize derivatives trading in Europe, according to a person familiar with the situation.

The European Commission’s antitrust complaint said that the companies’ trading arms directly compete, rejecting claims by Deutsche Boerse and NYSE Euronext that they aren’t rivals because Eurex specializes in long-term interest rates and NYSE Liffe in short-term rates, said the person who couldn’t be named because the EU’s statement of objections is confidential.

Raiffeisen Disputes EBA Capital Shortfall, Won’t Need Aid

Raiffeisen Bank International AG’s holding company said a capital shortfall of 1.9 billion euros ($2.7 billion) found by regulators was only “notional” and it won’t need help from the Austrian government.

Raiffeisen International’s 79 percent owner, cooperative lender Raiffeisen Zentralbank Oesterreich AG, said that the calculation by the European Banking Authority was too high because it excluded 1 billion euros of Raiffeisen International’s non-voting core capital.

The company said in a statement that it will not need state aid and it will take all steps necessary to fulfill the new requirements.

RZB and Raiffeisen International plan to ask owners of the non-voting capital that was excluded to swap it into funds that are recognized by the EBA, according to a person familiar with the plans, who spoke on condition of anonymity because the plan isn’t public. Raiffeisen declined to comment on how it aims to meet capital requirements.

Raiffeisen International, which is also the third-biggest lender in eastern Europe, has the biggest shortfall among three Austrian banks that require 9 percent core capital in the wake of the EBA’s sovereign-debt writedowns.

For more, click here.

Courts

Citigroup’s $285 Million SEC Settlement Questioned by Judge

Citigroup Inc.’s $285 million settlement with the U.S. Securities and Exchange Commission was questioned by a federal judge who asked both sides to justify the accord as fair.

U.S. District Judge Jed Rakoff, who in 2009 rejected a $33 million settlement between the SEC and Bank of America Corp., set a hearing on the matter for Nov. 9.

Citigroup, the third-biggest U.S. bank, agreed this month to pay the money to resolve SEC claim that the New York-based company misled investors in a $1 billion collateralized debt obligation linked to risky mortgages.

“Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” Rakoff wrote in the first of nine questions he ordered the parties to address in the hearing.

Danielle Romero-Apsilos, a Citigroup spokeswoman, declined to comment on Rakoff’s order.

The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11-cv-7387, U.S. District Court, Southern District of New York (Manhattan).

Interviews/Speeches

U.K. Chancellor of the Exchequer George Osborne spoke to lawmakers in Parliament about European Union proposals for a financial-transaction tax and measures taken by euro-area governments to prevent debt contagion and shore up the region’s banks.

For the video, click here.

Lacaille Says Bank Recapitalization Should Be Quicker

Richard Lacaille, chief investment officer at State Street Global Advisors, talks about corporate earnings and recapitalization of European banks.

He spoke with Maryam Nemazee on Bloomberg Television’s “Last Word.”

For the video, click here.

--With assistance from Ben Moshinsky in London; Aaron Kirchfeld, Rebecca Christie, Aoife White and Jim Brunsden in Brussels; Stephanie Bodoni in Luxembourg; Gregory Mott and Phil Mattingly in Washington; Karin Matussek in Berlin; Elisa Martinuzzi in Milan; Maria Petrakis and Tom Stoukas in Athens; Boris Groendahl in Vienna; and Bob Van Voris, Bob Ivry and Matt Townsend in New York. Editor: Mary Romano.

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.


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