Tag: Financial institutions


Fed’s Volcker Relief for Foreign Funds

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

On Friday, June 12, 2015, the Federal Reserve (Fed) began addressing the question of whether foreign funds should be considered “banking entities” under the Bank Holding Company Act (BHCA), and therefore be subject to the Volcker Rule’s proprietary trading restriction. The Fed’s guidance (provided in the form of a “Frequently Asked Question,” or FAQ) clarifies that foreign public funds (e.g., UCITS [1]) will not be considered banking entities merely due to their boards being controlled by an affiliate (i.e., an affiliate within the BHC capable of holding a majority of a fund’s director seats). [2]

However, with only weeks to go before the July 21, 2015 deadline, the FAQ does not resolve two other questions that have vexed foreign banks regarding the application of “banking entity” to foreign funds. First, the board control provision still applies to foreign private funds (i.e., foreign funds that are privately offered to institutional or high net worth investors in a manner similar to US hedge fund offerings). Second, another BHCA provision which establishes control when 25% or more of a fund’s voting shares are owned by an affiliate still applies to foreign private funds, and to a lesser extent to foreign public funds.

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Regulatory Arbitrage and Cross-Border Bank Acquisitions

Alvaro Taboada is an Assistant Professor of Finance at the University of Tennessee, Knoxville. This post is based on an article by Professor Taboada and Andrew Karolyi, Professor of Finance at Cornell University.

In our forthcoming Journal of Finance paper, Regulatory Arbitrage and Cross-Border Bank Acquisitions, we examine how differences in bank regulation influence cross-border bank acquisition flows and share price reactions to cross-border deal announcements. The recent global financial crisis, caused in part by systemic failures in bank regulation, has sparked, among other things, a strong push for both stricter capital requirements and greater international coordination in regulation. For example, seven of the 10 recommendations of the 2011 Report of the Cross-Border Bank Resolution Group of the Basel Committee for Banking Supervision (BCBS) propose greater coordination of national measures to deal with the increasingly important cross-border activities of banks. Some argue this push for tougher regulations and increased restrictions on bank activities may create incentives for “regulatory arbitrage,” whereby banks from countries with strict regulations engage in cross-border activities in countries with weaker regulations. The purpose of the study is to shed light on the motives behind regulatory arbitrage by examining one of the most important types of investment decisions that banks can make—namely, cross-border acquisitions.

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Volcker Rule: Agencies Release New Guidance

Whitney A. Chatterjee is partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication authored by Ms. Chatterjee, C. Andrew Gerlach, Eric M. Diamond, and Ken Li; the complete publication, including Appendix, is available here.

[June 12, 2015], the staffs of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission (collectively, the “Agencies”) provided two important additions to their existing list of Frequently Asked Questions (“FAQs”) addressing the implementation of section 13 of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), commonly known as the “Volcker Rule.”

The Volcker Rule imposes broad prohibitions on proprietary trading and investing in and sponsoring private equity funds, hedge funds and certain other investment vehicles (“covered funds”) by “banking entities” and their affiliates. The Volcker Rule, as implemented by the final rule issued by the Agencies (the “Final Rule”), provides exclusions from the definition of covered fund for certain foreign public funds and joint ventures.

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Structural Corporate Degradation Due to Too-Big-To-Fail Finance

Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. Professor Roe received the European Corporate Governance Institute’s 2015 Allen & Overy Prize for best corporate governance paper. The article, Structural Corporate Degradation Due to Too-Big-To-Fail Finance, appeared in the University of Pennsylvania Law Review, and was discussed on the Forum here as a working paper. In the following summary, Mr. Roe updates the earlier post.

In Structural Corporate Degradation Due to Too-Big-to-Fail Finance, I examined how and why financial conglomerates that have grown too large to be efficient find themselves free from the standard and internal and external corporate structural pressures push to resize the firm. The too-big-to-fail funding boost—from lower financing costs because lenders know that the government is unlikely to let the biggest financial firms fail—shields the financial firm’s management from restructuring pressures. The boost’s shielding properties operate similar to “poison pills” for industrial firms, in shielding managers and boards from restructurings. But unlike the conventional pill, the impact of the too-big-to-fail funding boost reduces the incentives of insiders to restructure the firm, not just outsiders. These weakened restructuring incentives weaken both the largest financial firms and the financial system overall, making it more susceptible to crises. The article predicts that if and when too-big-to-fail subsidies diminish, the largest financial firms will face strong pressures to restructure.

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Shareholders Defeat Mandatory Deferral Proposal

John R. Ellerman is a founding Partner of Pay Governance LCC. The following post is based on a Pay Governance memorandum by Mr. Ellerman, Lane T. Ringlee, and Maggie Choi.

Many large U.S. based multinational banking and financial services corporations have implemented executive compensation clawback policies that require the cancellation and forfeiture of unvested deferred cash awards or performance share unit awards. These policies typically condition the cancellation of deferred compensation if it is determined that an executive engaged in misconduct, including failure to supervise or monitor individuals engaging in inappropriate behaviors that caused harm to the organization’s operations. Policies also apply to unvested deferred awards that could be vested and paid based on inaccurate financial statements. Most of the clawback policies have been implemented in response to the Dodd-Frank financial legislation of 2010 that requires public companies to adopt clawback policies to protect shareholder interests. The Securities and Exchange Commission is expected to release final guidance with respect to clawbacks later this year.

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Fed Supervision: DC in the Driver’s Seat

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Kevin Clarke, Adam Gilbert, and Armen Meyer.

On April 17th, the Board of Governors of the Federal Reserve System (“Fed”) issued a better-late-than-never Supervisory Letter, SR 15-7, describing its governance structure for supervising systemically important financial institutions under its so-called Large Institution Supervision Coordinating Committee (“LISCC”). [1] Though much of the structure has been in place for years, the Fed had not publicly explained in detail its supervisory process, leading some in Congress and elsewhere to criticize its secrecy.

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Volcker Underwriting: It’s Simple … No Need to Overanalyze

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Mr. Ryan, Chris Scarpati, Kevin Pilarski, and Lauren Staudinger. The complete publication, including annex, is available here.

As banks face the July 21, 2015 deadline for proving their trading desk exemptions from the Volcker Rule, they have been focused on estimating the reasonably expected near term demand of customers (“RENTD”) under the market making exemption. [1] However, trading desks intending to take the underwriting exemption (“underwriting desks”) must also estimate RENTD, which is defined differently for underwriting and in our view poses fewer implementation challenges.

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Key Points From the 2015 Comprehensive Capital Analysis and Review (CCAR)

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Mike Alix, Steve Pearson, and Armen Meyer.

The 2015 stress test results published on March 11th as part of the Federal Reserve’s (“Fed”) CCAR follow last week’s release of Dodd-Frank Act Stress Test (“DFAST”) results. [1] CCAR differs from DFAST by incorporating the 31 participating bank holding companies’ (“BHC” or “bank”) proposed capital actions and the Fed’s qualitative assessment of BHCs’ capital planning processes. The Fed objected to two foreign BHCs’ capital plans and one US BHC received a “conditional non-objection,” all due to qualitative issues.

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Agencies Release New Volcker Rule FAQ

The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Whitney A. Chatterjee, H. Rodgin Cohen, C. Andrew Gerlach, and Eric M. Diamond; the complete publication, including footnotes and appendix, is available here.

On February 27, 2015, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission (collectively, the “Agencies”) provided an important addition to their existing list of Frequently Asked Questions (“FAQs”) addressing the implementation of section 13 of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), commonly known as the “Volcker Rule.”

The Volcker Rule imposes broad prohibitions on proprietary trading and investing in and sponsoring private equity funds, hedge funds and certain other investment vehicles (“covered funds”) by “banking entities” and their affiliates. The Volcker Rule, as implemented by the final rule issued by the Agencies (the “Final Rule”), provides an exemption from the covered fund prohibitions for foreign banking entities’ acquisition or retention of an ownership interest in, or sponsorship of, a covered fund “solely outside of the United States” (the “SOTUS covered fund exemption”).

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Enhancing Prudential Standards in Financial Regulations

The following post comes to us from Franklin Allen, Professor of Economics at the University of Pennsylvania and Imperial College London; Itay Goldstein, Professor of Finance at the University of Pennsylvania;
 and Julapa Jagtiani and William Lang, both of the Federal Reserve Bank of Philadelphia.

The recent financial crisis has generated fundamental reforms in the financial regulatory system in the U.S. and internationally. In our paper, Enhancing Prudential Standards in Financial Regulations, which was recently made publicly available on SSRN, we discuss academic research and expert opinions on this vital subject of financial stability and regulatory reforms.

Despite the extensive regulation and supervision of U.S. banking organizations, the U.S. and the world financial systems were shaken by the largest financial crisis since the Great Depression, largely precipitated by events within the U.S. financial system. The new “macroprudential” approach to financial regulations focuses on both the risks arising in financial markets broadly and those risks arising from financial distress at individual financial institutions.

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