how to use fines for financial misconduct October 8, 2012
Posted by Bradley in : financial regulation , add a commentThe UK plans to change the rules so that fines for financial misconduct benefit the armed forces through the Armed Forces Covenant:
The additional funding can be made available in 2012-13 due to amendments which will be brought forward to the Financial Services Bill later this year. The amendments will mean that, in future, regulatory fines revenue in excess of enforcement case costs for the year will go to the Exchequer.
And the monies involved include the Barclays Libor fine.
I can understand why the Treasury would think that fines should contribute to the general welfare rater than reducing licensing fees for the financial industry. I don’t see quite why the Treasury wants to link financial misconduct to supporting people who have served their country in this way. Do they think that the financial regulators will act more aggressively in enforcement to benefit veterans? Surely not. And linking help for the armed services to what must be a quantitatively unpredictable source of funds seems odd to me.
new eu consultation on a possible framework for the recovery and resolution of nonbank financial institutions October 5, 2012
Posted by Bradley in : financial regulation , add a commentThe Commission has published a consultation document asking for views on the recovery and resolution of nonbank financial institutions with comments due by December 28th. The target group for the consultation is defined broadly as:
Member State authorities (crisis management, supervisory, judicial), financial industry, their stakeholders (customers, creditors, shareholders, employees), trade associations, academia, citizens.
It’s not entirely clear to me why the target group here (stakeholders) is defined so broadly when the financial indices consultation’s target group was defined in a way that looks (but arguably isn’t really because of the broad scope of the term “users”) narrower. In a context where the underlying problems – issues relating to the manipulation of Libor and other benchmarks- had received a significant amount of news coverage, the Commission defined the target group of the consultation as
Contributors to, providers of and users of indices and benchmarks
I’m not sure what principles (if any) are operating here with respect to stakeholder definition.
high level committee: publication of responses to first consultation, second consultation October 3, 2012
Posted by Bradley in : consultation, financial regulation , add a commentThe responses to the first consultation carried out by the High-level Expert Group on reforming the structure of the EU banking sector are here. And there’s a new consultation based on the High Level Expert Group’s Report. Comments are due November 13th.
high level experts agree on separation of trading from banking October 2, 2012
Posted by Bradley in : financial regulation, transparency , add a commentThe Report of the High-level Expert Group on reforming the structure of the EU banking sector is out. The Report states:
We organised hearings with a large number of stakeholders who represented providers of banking services, consumers of such services, investors in banks, policymakers and academics. The Group has furthermore held a public consultation of stakeholders, the responses to which are published together with this report.
But the report does not give details of any of the hearings. And, as of this morning, responses to the Consultation are still not available at the consultation page, nor is there a link to responses from the press release. There is a long bibliography at the back of the Report and many citations to academic literature throughout.
Here’s the conclusion of the Report:
The Group´s conclusion is that it is necessary to require legal separation of certain particularly risky financial activities from deposit-taking banks within a banking group.
The central objectives of the separation are to make banking groups, especially their socially most vital parts (mainly deposit-taking and providing financial services to the non-financial sectors in the economy), safer and less connected to high-risk trading activities and to limit the implicit or explicit stake of taxpayer in the trading parts of banking groups. The Group’s recommendations regarding separation concern businesses which are considered to represent the riskiest parts of trading activities and where risk positions can change most rapidly.
There are five recommendations: separation of risky business from deposit-taking, a requirement for banks to have effective and realistic recovery and resolution plans, the use of designated bail-in instruments (to be held outside the banking system), more robust risk weights in the determination of minimum capital standards and more consistent treatment of risk in internal models, and corporate governance reforms. There’s some more detail in the report about how to ensure the insulation of the deposit-taking part of a bank from proprietary trading, but there are some questions. For example:
The use of derivatives for own asset and liability management purposes, as well as sales and purchases of assets to manage the assets in the liquidity portfolio, would also be permitted for deposit banks.
The authors of the report are limited in what they can recommend by the need to allow for the continued existence of universal banking in the EU, and by the idea that the proposals had to be sufficiently simple to be able to be implemented throughout the EU. The Group endorses the Commission’s European Banking Union proposals and states that its own proposals for the single market “can help the establishment of a banking union.”
It’s not clear what will happen to the recommendations. They aren’t evidently either very politically nuanced, or drafted with the sort of detail lawyers like (and we know how complicated the details of separating out proprietary trading from banking are in the US (the authors of the Liikanen Report seem to think the Volcker rules are in place as of July 2012 but if this is what they think they are mistaken)).
michel barnier critiques basel peer review October 1, 2012
Posted by Bradley in : financial regulation , add a commentThe Basel Committee has published assessments of the levels of compliance of the EU, Japan, and the US with Basel III. The reports are characterized as preliminary assessments. Nevertheless, Michel Barnier had some problems with the EU report:
In 12 out of 14 areas of the preliminary “Regulatory Consistency Assessment” concerning the EU published by the Basel Committee today, the draft European legislation has been fairly assessed to be “compliant” or “largely compliant”. I have, however, reservations about the preliminary findings in the remaining two areas, which do not appear to be supported by rigorous evidence and a well-defined methodology. I believe that this has led to an apparently significant lack of consistency in the way judgement and gradings have, in this preliminary phase, been applied in those two areas across jurisdictions. The European Commission and the European members of the Basel Committee have provided extensive information and clarifications to the Basel Committee during the process, but unfortunately this has only been partially reflected in this present preliminary report. Here at the Commission, we stand ready to support the further work by the Basel Committee to improve its assessment of standards implementation and are confident that the final report of the Basel Committee will constitute an improvement both in the assessment of the EU and in the coherence across jurisdictions.
There is more detail in the press release. As this sort of peer review process is becoming a more visible component of the transnational standards process (I am working on a paper on this topic focusing on the FSB’s peer reviews) the questions Barnier raises about methodology are important.
how to facilitate international co-ordination of financial regulation September 29, 2012
Posted by Bradley in : financial regulation , add a commentFrom a recent speech by Robert Jenkins of the Bank of England’s Financial Policy Committee with the title A debate framed by fallacies:
global regulators would have less to argue about if there were fewer rules to coordinate and fewer regulations to enforce.
bba libor announcement September 25, 2012
Posted by Bradley in : financial regulation , add a commentToday the BBA announced:
The BBA seeks to work with the Wheatley review team as they complete their consultation on the future of LIBOR. If Mr Wheatley’s recommendations include a change of responsibility for LIBOR, the BBA will support that.
Press stories seem to assume that the BBA will be walking away. I am not sure what this would do for all of the transactions where the documentation refers to “BBA Libor” or “British Bankers Association Libor” (such as this one).
financial regulation developments September 19, 2012
Posted by Bradley in : financial regulation , add a commentThe UK Treasury is now consulting on the financial policy committee.
Today, Andrea Enria, Chair of the EBA, speaking to the EU Parliament’s Committee on Economic and Monetary Affairs, commented on the Banking Union proposals, saying the they will require a single rulebook for the EU and “a leap towards truly unified supervisory methodologies” to avoid a polarisation between the euro area and the rest. She also promised that the EBA will be working on consumer issues. Steven Maijur of ESMA also updated the Committee on ESMA’s work. EIOPA does not yet seem to have published its submission on its web page.
Next Monday the Committee on Economic and Monetary Affairs will hold a hearing with the title: “Tackling the culture of market manipulation – Global action post Libor/Euribor” (Gary Gensler will participate).
Update: here is the EIOPA statement.
hector sants letter about fsa, diamond and barclays September 19, 2012
Posted by Bradley in : financial regulation , add a commentWhen the Treasury Select Committee published its preliminary report into Libor last month, Hector Sants wrote a letter to Andrew Tyrie stating that when the FSA approved Diamond’s appointment it did so having considered the fact and implications of the Libor investigation. Today, about a month after the letter was written, the Committee published the letter, a file note supporting the contents of the letter, and Andrew Tyrie’s response. As the Telegraph notes, Tyrie’s response points out that the Sants letter, supported by the file note, contrasts with statements Marcus Agius made to the Committee.
questions about ensuring financial stability September 15, 2012
Posted by Bradley in : financial regulation , add a commentThe GAO raises a number of questions about the effectiveness and accountability of the Financial Stability Oversight Council (FSOC) and Office of Financial Research (OFR) in a report published this week. The report makes a number of observations about transparency gaps in this structure. Financial stability is a context in which the relationship between transparency and policy seems to me to be complicated. The GAO would like to see more transparency, noting in its conslusions:
both FSOC and OFR could be more transparent. For example, FSOC’s minutes contain limited details about the council’s discussion and the amount of detail included in the minutes has declined over time. While some information discussed must remain confidential given potential market sensitivities, legal restrictions on sharing certain information, and the need for members to deliberate, striving to be as transparent as possible given the potential impact of some of its decisions on institutions and markets is important for FSOC. FSOC’s and OFR’s limited transparency has caused some former government officials, industry representatives, and academics to question whether they are making progress. Continued efforts to increase transparency will allow the public and Congress to better understand FSOC’s and OFR’s decision making, activities, and progress.
The report does suggest that the US arrangements for financial stability may be less skewed towards the views of central bankers than those in the EU:
although the United Kingdom (UK) and the European Union (EU) have established or are in the process of establishing councils to oversee systemic risk, in the UK and the EU the central bank has more members or more votes than other entities on these councils. In contrast, in the United States, the central bank-the Federal Reserve-has one member on FSOC and one vote among the 10 voting members. FSOC policy staff and staff at member agencies noted that the diverse perspectives of FSOC members enrich FSOC deliberations.
Whether or not bodies with responsibilities for financial stability would be better served by more or fewer central bankers is an interesting question. But it’s worth noticing in this context that some central bankers are thinking in complicated ways about regulation – and not just focusing on banks. I’m thinking about Andy Haldane in particular (for example this recent speech about the downsides to complexity in financial regulation – titled The Dog and the Frisbee).