In the U.S.: Bank Credit Ratings, Danish ‘Zombie Banks’, PepsiCo Unit Fined: Compliance

9 February 2012

Alternative measures being examined to determine capital adequacy ratios. Ratings-happy culture may be difficult to overcome.

Banks may be forced to strengthen capital buffers if regulators toss out credit ratings now used to calculate how much they need to cover possible trading losses, according to financial industry trade groups.

The American Bankers Association and six industry groups said in a Feb. 7 letter to financial regulators that abandonment of ratings would be “ill-advised and an over-reaction.”

The Dodd-Frank Act of 2010 called for federal agencies to find alternative measures of creditworthiness after lawmakers criticized firms such as Moody’s Corp. (MCO) over bad calls on securitized debt before the 2008 financial crisis. Proposals made by the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency would change valuation methods while maintaining capital ratiosrequired under existing international rules.

If the changes aren’t risk-sensitive and create “uneconomic incentives” for securities decisions, “they risk materially altering, and potentially harming, the systemic liquidity that allows issuers and investors to transact in the capital markets,” said the letter to the three agencies. The letter asks the regulators to rethink and re-propose the rules based on different approaches suggested by the industry.

Other trade groups sending the letter included the Financial Services Roundtable, Securities Industry and Financial Markets Association and The Clearing House.

Compliance Policy

Danish Zombie Banks Fair Game in Regulatory Revamp, FSA Says

Denmark’s financial regulator defended its determination to impose more rigorous bank capital standards amid warnings from industry groups that the measures are depriving firms of credit and stifling growth.

Surprise audits by the Financial Supervisory Authority in Copenhagen, or FSA, last year led to three bank failures after they were found to have understated their bad loans, leaving them in breach of capital rules. The approach is spooking banks and spurring a wave of loan retrenchment that’s left businesses without the funds to grow, according to Karsten Dybvad, the head of the Confederation of Danish Industries. He says Denmark’s $300 billion economy is in the grip of a credit crunch that’s getting worse.

The agency this week proposed tougher rules to force lenders to write down real estate portfolios in line with market losses. The measures follow a requirement that banks adjust their books to reflect lower values on farm land.

Banks at risk of being declared insolvent represent about 3 percent of Denmark’s financial industry, according to the FSA. Still, the fallout of more failures may have ripple effects through the whole sector.

For more, click here.

Senator Toomey Warns SEC He Will Fight Rules for Money Funds

U.S. Senator Pat Toomey, a Pennsylvania Republican, said he wouldn’t rule out proposing legislation to protect money market mutual funds from new rules being planned at the U.S. Securities and Exchange Commission.

The mutual funds industry is fighting new rules being prepared by the SEC staff, saying they would destroy the $2.6 trillion money fund business. Regulators have debated how to make the funds more stable since the September 2008 collapse of the $62.5 billion Reserve Primary Fund (REPXX), which triggered an industrywide run by clients and helped freeze global credit markets.

Toomey echoed an argument made Feb. 7 by the Investment Company Institute, a fund company trade group, that some regulators are out to kill money funds, aiming his comments at the U.S. Federal Reserve.

The first of two SEC proposals would force money funds to abandon their traditional $1 share price, adopting a so-called floating net-asset value. The second plan would require funds to build a capital cushion designed to absorb potential losses and hold back at least 3 percent of client withdrawals for 30 days.

Bank-Debt Limit Sought by EU Lawmakers Following Dexia Breakup

Banks may be forced to limit their borrowing in a bid by European Union lawmakers to strengthen the region’s implementation of Basel capital rules.

Members of the EU’s Parliament will push for the rule that may force banks to hold reserves against possible losses on the region’s sovereign debt, according to two lawmakers on the assembly’s financial affairs committee.

The EU’s effort to implement the Basel rules has been “too conservative,” said Philippe Lamberts, who is leading work on the dossier for the parliament’s Green group. Last year’s failure of Dexia SA (DEXB) showed the need for a borrowing limit to maintain investor confidence in banks, he said in an interview.

The EU is striving to meet a January 2013 deadline to adopt tougher bank rules agreed on by the Basel Committee on Banking Supervision in 2010. Michel Barnier, the EU’s financial services chief, was criticized last year by governments including the U.K. for proposing a law that they claimed would water down what was approved in Basel, including by dropping the debt limit, known as a leverage ratio.

The Basel committee has called for the measure to take effect in 2018. Barnier has said that the leverage ratio is “untested” and needs further study.

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Barnier Pushes EU-Wide Transactions Tax as 9 Nations Support It

European Union Financial Services Commissioner Michel Barnier urged all 27 EU nations to back a financial-transaction tax after nine countries called for speedy approval of a region- wide measure.

He made the remarks at a press conference in Brussels yesterday.

France and eight other EU countries seek to introduce the transaction tax, which will cover shares, derivatives and high- frequency trading, French Budget Minister Valerie Pecresse said at a press conference. The other countries are Germany, Italy, Spain, Belgium, Austria, Finland, Portugal and Greece.

An impact assessment accompanying the EU proposal in September said that the tax plan would erode gross domestic product by 0.5 percent over the “long-run.” This week, a study by Columbia University’s Stephany Griffith-Jones and Avinash Persaud, chairman of Intelligence Capital, said the tax might actually have a positive impact on long-term growth because it would reduce the likelihood of destabilizing financial crises in the future.

France and the other eight nations sent a letter to the Danish government, current holder of the EU’s rotating presidency, pressing for a regionwide transactions tax, the French Finance Ministry in Paris said Feb. 7.

Lawmakers Seek to Stem Potential Conflicts in Swaps Rules

The potential for U.S. and foreign regulations to reach across national borders and create overlapping or conflicting rules is gaining urgency as global authorities seek to complete rules this year to prevent a repeat of the 2008 credit crisis.

The U.S. is facing increasing criticism from Canadian, British and European Union regulators over the possibility that the Volcker rule ban on proprietary trading would restrict foreign sovereign debt markets while exempting U.S. government debt. At the Commodity Futures Trading Commission, meanwhile, regulators are facing pressure from JPMorgan Chase & Co.,Barclays Capital and foreign regulators to limit the international reach of Dodd-Frank Act derivatives regulations.

The House Financial Services Committee held a hearing yesterday on the international reach of the 2010 Dodd-Frank Act. JPMorgan Associate General Counsel Don Thompson told lawmakers that the rule would have a “significant disadvantage” if it affects the bank’s foreign subsidiaries without reaching overseas rivals.

U.S. and foreign regulators, who say they are working to coordinate rules, haven’t reached consensus and in some cases haven’t yet proposed policies to seek public comment before adopting final measures. The Volcker rule begins to take effect in July, while U.S. regulators are already more than eight months past Dodd-Frank’s deadline for new derivatives rules.

Michel Barnier, the European Union’s financial services commissioner, is planning to discuss the reach of the Volcker rule with Treasury Secretary Timothy F. Geithner when he visits the U.S. on Feb. 23, said Chantal Hughes, a spokeswoman for Barnier.

For more, click here.

Germany, Switzerland Should Scrap Unlimited Guarantees, FSB Says

Germany and Switzerland should revoke financial guarantees they gave to some local banks because the measures could lead to “greater risk-taking,” the Financial Stability Board said in a report published on its website.

Such guarantees amount to “unlimited” protection of bank deposits from loss and “should be avoided,” the FSB said in the report, which examines national programs to protect savers.

The unlimited guarantees apply to German cooperative and savings banks and some Swiss cantonal lenders, according to the group, which includes regulators, central bankers and finance ministry officials from the Group of 20 countries.

Nations rushed to guarantee bank deposits in response to the worldwide credit crunch that began in 2007 and prevent bank runs.

Compliance Action

Batelco Exits India After Supreme Court Cancels Phone Licenses

Bahrain Telecommunications Co. (BATELCO) sold its stake in an Indian mobile-phone operator after the nation’s top court last week canceled licenses in a corruption probe.

Batelco, as the Manama, Bahrain-based company is known, sold its entire 42.7 percent stake in STel Pvt. to Sky City Foundation Ltd. for $174.5 million, it said in a statement Feb. 7. The Middle Eastern phone company and Dubai-based Millennium Private Equity invested $225 million in the Indian venture when they entered the country in January 2009.

Batelco’s exit is the first by a foreign investor after India’s Supreme Court on Feb. 2 canceled wireless permits won by 11 companies including STel in a 2008 sale, which is being probed by federal auditors and investigators. The Supreme Court ruling came 14 months after India’s chief auditor said the sale at “unbelievably low” prices may have cost the exchequer as much as $31 billion.

The court asked the Telecom Regulatory Authority of India to recommend the next course of action, which could include an auction for the permits.

Greece’s Antitrust Regulator Fines PepsiCo 16.2 Million Euros

The Hellenic Competition Commission, Greece’s antitrust regulator, fined PepsiCo (PEP) Inc’s Greek snack unit, Tasty Foods, 16.2 million euros for abusing its dominant position in the market in the period 2000 to 2008.

Nearly 12 million euros of the fine was for abusing its market position while the remainder was for infringements related to restricted agreements, according to a statement on the Athens-based regulator’s website yesterday.

UBS Employee Tax-Evasion Probe Dropped by German Prosecutors

German prosecutors dropped a probe into three employees at UBS AG (UBSN), Switzerland’s biggest bank, over allegations they helped clients evade taxes by hiding money in Switzerland.

A four-year-old investigation that included searches of offices and private property didn’t support allegations initially made in a television-news report, prosecutors in Mannheim said in an e-mailed statement.

The unidentified employees at UBS’s branch in Baden-Baden, Germany, allegedly offered reporters from German television station ZDF, disguised as potential clients, assistance sending funds to Switzerland to hide them from German tax authorities.

UBS was charged in 2009 with aiding tax evasion by U.S. clients. The lender avoided prosecution by paying $780 million, admitting it fostered tax evasion, and giving the authorities data on customer accounts. In the past three years, U.S. prosecutors have filed tax charges against at least 40 U.S. clients of UBS and other lenders.

“UBS was informed that the probe was closed and all allegations dropped,” Serge Steiner, a Zurich-based spokesman for the bank, said by telephone.

SEC Delays Decision on NYSE Proposal to Attract Retail Orders

The U.S. Securities and Exchange Commission extended its review yesterday of the New York Stock Exchange’s proposal to draw more orders from retail brokers.

NYSE and NYSE Amex sought permission in October for a one- year pilot program to attract orders from individual investors by offering them potentially better prices than are publicly available. Postponing a decision isn’t an indication of whether the SEC is likely to approve or reject the rules proposed by the two NYSE Euronext (NYX) stock exchanges.

The programs would require an exemption from a rule that prevents exchanges from accepting orders priced in increments of less than 1 cent, the SEC said. They would also allow a new type of order to be available only to a subset of market participants, it said. Richard Adamonis, a spokesman for NYSE Euronext, said in an e-mail that the exchanges will respond to commentletters it received “in the coming weeks.”


Hester Pledges to Remain at RBS to Defuse ‘Time Bomb’

Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester discussed the challenges facing the lender and his decision to forgo a 963,000-pound ($1.5 million) bonus. Among other topics, he touched on defusing a “time bomb” at the bank, and shaping the institution into a “model” for how banks can serve society.

He spoke with James Naughtie on the Today Programme, BBC Radio 4.

For the audio, click here.

Dannhauser Says EU Bank Recapitalizations Go ‘Too Far’

Jamie Dannhauser, an economist at Lombard Street Research, discussed the impact of the European Central Bank’s longer-term refinancing operation and the outlook for the region’s banks.

He spoke with Mark Barton and David Tweed on Bloomberg Television’s “On the Move.”

For the video, click here.

Comings and Goings

Dubai DFSA Chief Executive Paul Koster to Step Down in September

The Dubai Financial Services Authority, which regulates the tax free business park called the Dubai International Financial Centre, said Chief Executive Officer Paul Koster will step down in September.


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