Tag: Systemic risk


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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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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Remarks at the 4th Annual Fixed Income Conference

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at the University of South Carolina and UNC-Charlotte 4th Annual Fixed Income Conference, available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

This conference is one stop on a bit of a tour I have been on lately, speaking with academics around the country. In each of those conferences, meetings, and other events I have been encouraging increased dialogue between academic researchers and the SEC. Just last month, I spoke to a group of equity market microstructure researchers at the University of Notre Dame, with a message similar to what I intend to share with you today [April 21, 2015]. [1] That message is simple: your work is vital to helping the SEC accomplish its core mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Given the talent and collective focus of the people in this room, I do not need to recite statistics about the size of the fixed income markets, the degree to which issuers rely on bonds for debt financing, or the pervasiveness of fixed income products from the largest institutional investor portfolios to the smallest retail investor accounts. Suffice it to say that well-functioning fixed income markets are a concern of nearly all participants in our securities markets.

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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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Financial Market Utilities: Is the System Safer?

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.

It has been two and a half years since the Financial Stability Oversight Council (FSOC) designated select financial market utilities (FMUs) as “systemically important.” These entities’ respective primary supervisory agencies have since increased scrutiny of these organizations’ operations and issued rules to enhance their resilience.

As a result, systemically important FMUs (SIFMUs) have been challenged by a significant increase in regulatory on-site presence, data requests, and overall supervisory expectations. Further, they are now subject to heightened and often entirely new regulatory requirements. Given the breadth and evolving nature of these requirements, regulators have prioritized compliance with requirements deemed most critical to the safety and soundness of financial markets. These include certain areas within corporate governance and risk management such as liquidity risk management, participant default management, and recovery and wind-down planning.

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Corporate Risk-Taking and the Decline of Personal Blame

Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at Duke University School of Law.

Federal agencies and prosecutors are being criticized for seeking so few indictments against individuals in the wake of the 2008 financial crisis and its resulting banking failures. This article analyzes why—contrary to a longstanding historical trend—personal liability may be on the decline, and whether agencies and prosecutors should be doing more. The analysis confronts fundamental policy questions concerning changing corporate and social norms. The public and the media perceive the crisis’s harm as a “wrong” caused by excessive risk-taking. But that view can be too simplistic, ignoring the reality that firms must take greater risks to try to innovate and create value in the increasingly competitive and complex global economy. This article examines how law should control that risk-taking and internalize its costs without impeding broader economic progress, focusing on two key elements of that inquiry: the extent to which corporate risk-taking should be regarded as excessive, and the extent to which personal liability should be used to control that excessive risk-taking.

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A Smarter Way to Tax Big Banks

Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is based on an op-ed by Professor Roe and Michael Tröge that was published today in The Wall Street Journal, which can be found here.

In conjunction with his State of the Union address, President Obama reanimated the idea of taxing big banks’ debts to help stabilize the banking industry and prevent future financial crises. The administration argues that the new tax would discourage banks from taking on too much risk by making it “more costly for the biggest financial firms to finance their activities with excessive borrowing.”

The president’s bank-tax proposal is unlikely to gain traction in the new Congress, just as similar proposals from the administration in 2010 and, last year from the now retired Rep. David Camp (R., Mich.), did not move forward. But even if it became law, it wouldn’t put a sizable dent in bank debt. The reason is simple: The existing tax system strongly encourages debt finance and the proposed new tax will not fundamentally change this.

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FSOC: Are Asset Managers’ Products and Activities Creating Systemic Risk?

The following post comes to us from Debevoise & Plimpton LLP and is based on a Debevoise & Plimpton Client Update.

In connection with its ongoing evaluation of the asset management industry, the U.S. Financial Stability Oversight Council (the “FSOC”) recently issued a notice seeking public comment (the “Notice”) on whether asset management products and activities may pose potential risks to U.S. financial stability. [1] Specifically, the FSOC seeks comment on the systemic risks posed by: (1) liquidity and redemption practices; (2) use of leverage; (3) operational functions; and (4) resolution, i.e., the extent to which the failure or closure of an asset manager, investment vehicle or an affiliate could have an adverse impact on financial markets or the economy. Comments on the Notice must be submitted by February 23, 2015; and we are working with several clients to prepare and submit such comments. This post summarizes some of the FSOC’s key concerns and questions outlined in the Notice.

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G-SIB Capital: A Look to 2015

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 Dan Ryan, Kevin Clarke, Roozbeh Alavi, and Armen Meyer. The complete publication, including appendix, is available here.

On December 9, 2014, the Federal Reserve Board (FRB) issued a long-awaited proposal to impose additional capital requirements on the US’s global systemically important banks (G-SIBs). The proposal implements the Basel Committee on Banking Supervision’s (BCBS) G-SIB capital surcharge framework that was finalized in 2011, but also proposes changes to BCBS’s calculation methodology resulting in significantly higher surcharges for US G-SIBs compared with their global peers.

The proposal, which we expect will be finalized in 2015, requires US G-SIBs to hold additional capital (Common Equity Tier 1 (CET1) as a percentage of Risk Weighted Assets (RWA)) equal to the greater of the amount calculated under two methods. The first method is consistent with BCBS’s framework, and calculates the amount of extra capital to be held based on the G-SIB’s size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity. The second method is introduced by the US proposal, and uses similar inputs but replaces the substitutability element with a measure based on a G-SIB’s reliance on short-term wholesale funding (STWF).

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