An increasingly vocal chorus of current and former U.S. regulators says the biggest banks still have not provided adequate plans to safely wind down in bankruptcy and may need to be restructured to reduce the risk they pose to the financial system.
Jim Wigand, a Federal Deposit Insurance Corp. official responsible for planning for the failures of big banks such as JPMorgan Chase & Co. (JPM:US), Goldman Sachs Group Inc. (GS:US) and Citigroup Inc. (C:US), said none have yet been able to draw up bankruptcy plans that wouldn’t threaten to detonate the financial system. The plans, known as “living wills,” were a core demand of the 2010 Dodd-Frank Act overhaul of financial oversight, and it gave regulators the authority require systemically risky banks to restructure if their plans aren’t “credible.”
Whether a global financial giant is able to go through an orderly bankruptcy using a living will is still “an open question,” Wigand said in an interview.
The 11 largest banks filed the first draft of their living wills last year. The banks, which included Bank of America Corp (BAC:US)., Barclays Plc (BCS:US) and Deutsche Bank AG (DB:US), are required to file new versions of their living wills on Oct. 1. Another tier of banks with less in U.S. nonbank assets must file their first plans by July 1.
Banking experts and some regulators speak openly about the impossibility of putting a bank such as JPMorgan -- commonly perceived as being “too big to fail” -- into bankruptcy court without destabilizing the rest of the financial system. Some advocate changes to the banks, and others changes to the bankruptcy code to make it easier to resolve large institutions.
For their part, the banks say they are working hard to make the Dodd-Frank resolution process work.
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BOE Orders Review of Risk to Banks From Rate Increases
The Bank of England said lenders are vulnerable to an abrupt increase in long-term interest rates as it warned confidence in the financial system remains fragile.
The central bank yesterday ordered a review of banks’ exposure to interest-rate risk, which it said is not properly understood. The review will be carried out by the Prudential Regulation Authority, which will report back in September.
Global central banks have cut interest rates to record lows and pumped money into their economies to boost growth. Federal Reserve Chairman Ben S. Bernanke said this month that the U.S. central bank may begin tapering its stimulus program later this year, prompting declines in global stock markets as investors speculated the Fed may raise rates faster than they assumed.
The extended period of low interest rates may have led some financial-market participants to become exposed to big increases in interest rates, according to the report. Some investors may also be demanding insufficient compensation for bearing risk. In addition, U.K. households remain “highly indebted” and there is a need to assess the “vulnerability of borrowers,” the central bank said.
In its recommendations published yesterday, the BOE’s Financial Policy Committee said that liquid asset buffers held by U.K. lenders to protect against a credit crunch are above minimum requirements and they have space to reduce holdings by about 70 billion pounds. The Basel Committee on Banking Supervision recommends a liquidity coverage ratio of 100 percent by January 2018 and U.K. banks already meet this, the BOE said.
The central bank, which introduced a program last year to boost lending, said that while the impact of looser liquidity requirements on credit is uncertain, the committee intends to give the banking system more flexibility to lend.
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U.S. Senators Offer Bill Eliminating Fannie Mae, Freddie Mac
A bill to be offered by Senators Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat, reflects a prevailing view among lawmakers that the two government-sponsored enterprises should cease to exist while a federal role in backing mortgage lending should remain.
The senators have revised their proposal from an earlier version, reducing the losses that lenders would take on bad mortgages during a financial crisis, according to a 154-page copy of the final bill.
Under the bill, Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, which package mortgages into securities on which they guarantee 100 percent payment of principal and interest, would be liquidated within five years.
The proposal could restart a stalled debate over the future of the U.S. mortgage-finance system. Congress hadn’t previously proposed a measure to eliminate Fannie and Freddie, nor had President Barack Obama’s administration done so.
The bill was praised by banking and mortgage trade group representatives.
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Taiwan Cuts Capital Gains Tax on Share Sales, Ends Threshold
Taiwan lawmakers voted to roll back provisions of a capital gains tax on certain stock sales and removed an index price threshold that depressed shares and dragged down market trading volume.
The tax on capital gains from transactions of more than NT$1 billion was reduced to 0.1 percent from 2.25 percent under the original law. Lawmakers also removed an 8,500-point close threshold for the Taiex index before the tax could go into effect. Legislative Yuan President Wang Jin-pyng announced the passage of revisions in a special legislative session June 25.
Before passing the levy last year, Taiwan had exempted securities transactions from capital-gains taxes since 1990, according to the stock exchange’s website.
UBS Unit Fined 10 Million Euros by French Regulator on Controls
UBS AG (UBSN)’s French unit was fined 10 million euros ($13.1 million) by the nation’s banking regulator and reprimanded for a lack of controls that may have enabled some clients in France to dodge taxes.
The unit of Switzerland’s largest bank was alerted to “grave suspicions” by the fall of 2007 on its sales force’s possible involvement in illicit marketing and the covering up of tax fraud, and waited more than 18 months before setting up the necessary controls, the regulator said in a statement yesterday.
The delay was described as an “especially grievous failure” by France’s banking regulator in a report dated yesterday about UBS.
The UBS unit also failed to control its sales force’s potential access to computer files shared with the parent company that could have been used to identify prospective clients for accounts outside France, the regulator said yesterday.
“We disagree with many of the disciplinary commission’s conclusions,” Zurich-based UBS said in an e-mailed statement yesterday, adding that it will consider whether to appeal the decision. “UBS does not tolerate any activities intended to help its clients circumvent their tax obligations.”
UBS and its French unit are under a formal investigation by Paris prosecutors as France steps up efforts to combat tax evasion. French tax investigators last year searched UBS offices in cities including Strasbourg, Lyon and Paris. Three individuals were also put under formal investigation last year.
“This is an issue from the past and we are pleased to note that the disciplinary commission acknowledges in its report that UBS France SA has taken appropriate steps to strengthen its compliance framework since 2009,” UBS said.
Pope Francis Names New Commission to Oversee Vatican Bank
Pope Francis has named a new commission to oversee the operations of the Vatican Bank, in response to calls for the Church’s financial arm to improve efforts to fight money laundering.
The commission will be able to request information about the operations of the bank, formally named the Institute for Works of Religion, or IOR, and will present its findings directly to the pope, the Vatican said on its website.
The decision comes after Moneyval, the Council of Europe’s monitoring body for money laundering and terrorism financing, told the Vatican in July of last year that it needed to improve supervision of transactions and stressed the need for independent supervision of the IOR.
The institution is aiming to overcome three decades of suspicion about its dealings. The Vatican Bank oversees about 7.1 billion euros in assets, largely in bonds and cash.
Russia Tightening State Dividend Rules Before Asset Sales
Russia is making it harder for state companies to sidestep dividend rules as it seeks to boost government revenue and sell assets to bolster the budget.
From next year, the prime minister’s approval will be needed to exempt companies from a payout equivalent to at least 25 percent of profit under international accounting methods, Igor Shuvalov, first deputy prime minister, said in an interview June 21 in St. Petersburg.
Bigger dividends would support companies’ market value as Russia seeks to raise 427 billion rubles ($13 billion) from state asset sales this year, helping the budget after President Vladimir Putin increased spending during his election campaign last year.
Russia required state-backed companies pay at least 25 percent of net income as dividends in November, without specifying whether the payouts should be based on Russian or international accounting rules. The board of natural-gas export monopoly OAO Gazprom recommended a 2012 payout 33 percent less than the previous year as profit slumped. The dividend is equal to 25 percent of net income based on domestic accounting rules and 12 percent under international standards.
Draghi Says ECB Ready to Act, Urges Investment Over Tax
European Central Bank President Mario Draghi spoke to lawmakers in the French National Assembly in Paris about monetary policy, the euro area’s economy and governments’ fiscal policies. During his remarks, Draghi touched upon credit flows and taxation and banking supervision.
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