Tag: Financial Regulation


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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Resolution: Deposit Insurance—Burden Shifts to Bank

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 April 21st, the FDIC proposed new requirements for its largest supervised banks (37 institutions) to improve the record keeping of their deposit accounts. Issued via an Advanced Notice of Proposed Rulemaking (“ANPR”), the proposal shifts the obligation of calculating FDIC deposit insurance payouts from the FDIC to the banks.

The agency has for some time been concerned about its ability to accurately calculate deposit insurance payouts during a short window following the failure of a large bank. These concerns are in part fueled by the current trend of deposit concentration at the largest banks, and the banks’ (and perhaps the FDIC’s) inadequate technological capability to timely process significant volumes of data.

We expect meeting these proposed requirements to be challenging for banks, especially with respect to obtaining necessary account information that is not currently collected. In addition, banks will need to significantly invest in their data systems to be able to maintain and process this (and other) information in a standardized format, and to calculate insurance payouts at the end of each business day.

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Fed Proposes Amended Bank Liquidity Rules

Andrew R. Gladin is a partner in the Financial Services and Corporate and Finance Groups at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication authored by Mr. Gladin, Samuel R. Woodall III, Andrea R. Tokheim, and Lauren A. Wansor.

On Thursday, May 21, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) issued a notice of proposed rulemaking (the “Proposal”) that would amend the final rule implementing a liquidity coverage ratio (“LCR”) requirement (the “Final LCR Rule”), [1] jointly adopted last September by the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”), to treat certain general obligation state and municipal bonds as high-quality liquid assets (“HQLA”). [2] Unlike the Final Rule, the OCC and FDIC did not join the Federal Reserve in issuing the Proposal. Accordingly, the Proposal would apply only to banking institutions regulated by the Federal Reserve that are subject to the LCR, absent further action by the other agencies. [3] The Proposal would allow these entities to treat general obligation securities of a public sector entity (“PSE”) as level 2B liquid assets, provided that the securities generally satisfy the same criteria as corporate debt securities that are classified as level 2B liquid assets, as well as certain other restrictions and limitations applicable only to these assets as described further below. Comments on the Proposal are due by July 24, 2015.

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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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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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A Century of Capital Structure: The Leveraging of Corporate America

The following post comes to us from John Graham, Professor of Finance at Duke University; Mark Leary of the Finance Area at Washington University in St. Louis; and Michael Roberts, Professor of Finance at the University of Pennsylvania.

In our paper, A Century of Capital Structure: The Leveraging of Corporate America, forthcoming in the Journal of Financial Economics, we shed light on the evolution and determination of corporate financial policy by analyzing a unique panel data set containing accounting and financial market information for US nonfinancial publicly traded firms over the last century. Our analysis is organized around three questions. First, how have corporate capital structures changed over the past one hundred years? Second, do existing empirical models of capital structure account for these changes? And, third, if not explained by existing empirical models, what forces are behind variation in financial policy over the last century?

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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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Reasonable Investor(s)

The following post comes to us from Tom C. W. Lin at Temple University Beasley School of Law.

Much of financial regulation for investor protection is built on a convenient fiction. In regulation, all investors are identically reasonable investors. In reality, they are distinctly diverse investors. This fundamental discord has resulted in a modern financial marketplace of mismatched regulations and misplaced expectations—a precarious marketplace that has frustrated investors, regulators, and policymakers.

In a new article, Reasonable Investor(s), published in the Boston University Law Review, I examine this fundamental discord in financial regulation, and seek to make a general positive claim and a specific normative claim. First, the general positive claim contends that a fundamental dissonance between investor heterogeneity in reality and investor homogeneity in regulation has created significant discontent in financial markets for both regulators and investors. Second, the specific normative claim argues that policymakers should formally recognize a new typology of algorithmic investors as an early step towards better acknowledging contemporary investor diversity, so as to forge more effective rules and regulations in a fundamentally changed marketplace. Together, both claims aim to highlight the harms caused by not better recognizing contemporary investor diversity and explain how we can begin to address those harms. Ultimately, the article aspires to create a new and better framework for thinking about investors and investor protection.

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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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