April 15, 2021

Europe’s Bank Deal Is Seen as Progress With Flaws

It may not be the “revolutionary change in the way banks are treated in the European Union” that the Irish finance minister, Michael Noonan, trumpeted after the late-night session.

The agreement is intended to reduce the chance that a bank crisis will descend into a government debt crisis, as happened in Spain and Ireland when the cost of bank rescues helped undermine public finances.

But because Germany insisted on high hurdles before its taxpayers would be made liable for bank failures in other countries, there remains a risk that weaker countries could still become victims of the failure of a big domestic bank.

“There is not much sharing of the costs across the euro zone,” said Marie Diron, an economist in London who advises the consulting firm Ernst Young. The 60 billion euro, or $78 billion, in euro zone money that has been allocated for bank recapitalization “is nothing,” she said. “It would be exhausted very quickly.”

The deal on banks is aimed at breaking the so-called doom loop, in which struggling governments take their states deeper into debt to save their banking systems, only to face sky-high sovereign borrowing costs.

Analysts were cautious about declaring an end to Europe’s banking woes.

“Is it the best solution to break the doom loop? Of course it’s not,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels.

He said Germany was unlikely to agree to pay for past mistakes by banks or bank regulators in other countries, even after the German national elections in the autumn.

Mr. Véron said he expected the agreement to be modified as it went through the European Parliament, as leaders weigh some of the consequences of forcing creditors and some depositors to help pay for bank rescues.

But as European Union heads of state arrived here on Thursday for a two-day summit meeting, they sought to put the finance ministers’ deal in the best possible light.

François Hollande, the French president, hailed the breakthrough as “extremely useful for protecting savers and to avoid having taxpayers pay for a banking crisis for which they are not responsible.”

The German chancellor, Angela Merkel, speaking to her Parliament in Berlin on Thursday before heading to Brussels, thanked her finance minister, Wolfgang Schäuble, for his efforts on the bank deal. “The priority will be to make the creditors and owners responsible, and we get away from taxpayers always putting up for the banks,” Ms. Merkel said. “This is really necessary.”

The new system is expected to go into full effect in 2018. It specifies the order in which banks’ investors and creditors, and then uninsured depositors, will face losses.

Deposits under 100,000 euros would remain protected. Small businesses and individual savers with more than 100,000 euros would enjoy better protection than other categories of unsecured creditors when losses were imposed.

Such clarity could help prevent a recurrence of the chaos that ensued during the bailout for Cyprus in March, when governments and international lenders initially agreed to penalize small savers because of the lack of a template for imposing losses on the country’s troubled banks.

Ms. Diron, the London economist, warned that the agreement could increase the interest rates banks pay to raise the money they lend to customers.

But that is a necessary adjustment, she said. Rates banks paid in the past were too low, because investors assumed that they would be bailed out by governments.

“Investors will now price in the risk of losing their money,” Ms. Diron added. “But that should have happened already.”

The deal gives countries like Britain some flexibility to choose where losses will fall, as long as bondholders and shareholders representing 8 percent of a failing bank’s total liabilities are wiped out first.

Sweden won leeway for even more flexibility to make exemptions to certain classes of creditors in exchange for other commitments.

Germany was especially wary of endorsing new rules that could eventually mean the use of shared European money to directly inject new capital into other countries’ failing banks. As a concession to German concerns, the ministers agreed to significant measures.

Before using cash directly from the shared European fund, a bank would need to draw the maximum amount permissible from its own government bailout money. Governments then would need to put any initial money drawn from the shared European fund onto their national balance sheets.

After that, a bank would still need to wipe out all of its remaining senior bondholders before, finally, being able to use the shared European fund directly.

The European Union’s governments and members of the European Parliament also confirmed on Thursday that they had finally agreed on a European Union budget through the end of the decade.

That funding amounts to nearly 1 trillion euros for farming, science, infrastructure and overseas aid, as well as money to support the daily business of running the organization.

Article source: http://www.nytimes.com/2013/06/28/business/global/european-banking-deal-is-seen-as-progress-with-flaws.html?partner=rss&emc=rss

Banks Win an Easing of Asset Rules

The rules are meant to make sure banks have enough liquid assets on hand to survive the kind of market chaos that followed the collapse of Lehman Brothers in 2008. Meeting in Basel, Switzerland, the committee, made up of bank regulators from 26 countries, also loosened the definition of liquid assets.

The decision marks the first time regulators have publicly backed away from the strict rules imposed by the Basel Committee in 2010. The easing takes some pressure off banks, which have complained that the new guidelines would throttle lending and hurt economic growth.

Mervyn A. King, governor of the Bank of England and chairman of the group, said there was no intent to go easier on lenders. “Nobody set out to make it stronger or weaker,” he said of the rules in a conference call with reporters, “but to make it more realistic.”

Still, the decision was a public concession from the authors of the so-called Basel III rules that the regulations could hurt growth if applied too rigorously. It was endorsed unanimously by participants, including Ben S. Bernanke, chairman of the Federal Reserve, and Mario Draghi, president of the European Central Bank.

The rules were drafted by the Basel Committee on Banking Supervision, named after the Swiss city where many of the discussions have taken place. The Basel rules are not binding on individual countries, but there is substantial international pressure for countries to comply.

Much of the debate so far has focused on increasing the amount of capital that banks hold in reserve to absorb losses. After Lehman’s collapse, trust among financial institutions evaporated and banks refused to lend to one another. Many banks discovered that they did not have enough cash or readily salable assets to meet short-term obligations. In some cases, banks that were otherwise solvent faced collapse.

The rules require banks to have enough cash or liquid assets on hand to survive a 30-day crisis, like a run on deposits or a credit rating downgrade. They will not take full effect on Jan. 1, 2015, as originally planned, but will be phased in more gradually and not take full effect until Jan. 1, 2019.

This so-called liquidity coverage ratio also defines what qualifies as liquid assets: the assets cannot be already pledged as collateral, for example, and they must be under the control of a bank’s central treasury, so it can act quickly to raise cash if needed.

On Sunday the central bankers and regulators broadened the definition of liquid assets. For example, banks will be allowed to use securities backed by mortgages to meet a portion of the requirement.

A large majority of big banks already meet the requirements, but some do not, Mr. King said. The decision reduces pressure on those banks to hold more cash or buy high-quality government bonds to meet the rules on liquid assets.

The panel said it was continuing to discuss another set of regulations aimed at preventing banks from becoming overly dependent on short-term funds. But it did not announce any new decisions Sunday.

Before the Lehman bankruptcy, some institutions made long-term loans using money borrowed for very short periods. The practice is a normal part of banking, but it can, if carried to extremes, make a bank vulnerable to market disruptions.

Depfa, an Irish bank owned by Hypo Real Estate of Germany, issued long-term loans to governments using money it borrowed in short-term money markets. The bank made a profit from the difference between what it could charge for the long-term loans and what it paid to borrow short term. But after Lehman collapsed, Depfa was no longer able to roll over its obligations by borrowing on international money markets. Its parent company required a taxpayer bailout to survive.

The new rules seek to ensure that banks have a variety of fund sources and are not overly dependent on one market or lender.

Although the Basel Committee drafts global banking rules, it is up to individual countries to write them into law. The United States has lagged countries including China, India and Saudi Arabia in putting the rules into force, according to an assessment by the Basel Committee in September. The American delay has led to some grumbling from other members.

Bank industry representatives have argued that stricter capital and liquidity requirements increase banks’ financing costs, which they must pass on to customers. One of the most vocal critics of the new regulations is the Institute of International Finance in Washington, whose members include many large American and European banks, including Goldman Sachs, Morgan Stanley and Deutsche Bank.

In October, the institute issued a report arguing that the rules would make banks less willing to issue longer-term loans or hold debt issued by smaller companies, whose bonds usually have lower credit ratings. The rules would also penalize banks in emerging countries, the institute said, because they have less access to low-risk assets.

Proponents of the new rules argue that banks will be able to raise money more cheaply if they are perceived as being less vulnerable, thus offsetting the cost of the new rules. They point out that American banks have generally recovered from the crisis more quickly than European banks because United States regulators forced them to raise new capital.

Article source: http://www.nytimes.com/2013/01/07/business/global/07iht-banks07.html?partner=rss&emc=rss

Financial Finger-Pointing Turns to Regulators

But a new defense has been mounted by a bank executive: my regulator told me to do it.

This unusual rationale is presented by the bank executive in one of the few fraud suits brought against a mortgage banking official in the aftermath of the financial crisis — the one filed by the Securities and Exchange Commission against Michael W. Perry, former chief executive of IndyMac Bancorp, which failed spectacularly in mid-2008.

After being accused of fraud and misleading investors about his company’s financial health just before it collapsed, Mr. Perry set up a Web site this fall to defend himself.

In a document on the site, he said that a top official at the federal Office of Thrift Supervision, IndyMac’s overseer, directed and approved an action related to the S.E.C.’s allegations.

“It was O.T.S. who had the final say regarding IndyMac Bank’s capital levels,” Mr. Perry wrote.

He went on to say that Darrel W. Dochow, former regional director for the Western region of the agency and a financial regulator for more than 30 years, had “specifically directed” Mr. Perry to backdate IndyMac’s report to regulators to include an $18 million cash infusion that would make it appear well capitalized.

The shift masked IndyMac’s problems for any investors trying to assess its soundness and allowed it to continue attracting large deposits crucial to its operations.

The S.E.C., in its suit against Mr. Perry, contends that more details about the cash infusion should have been disclosed, though the commission did not accuse him of accounting fraud.

Mr. Dochow was not accused of wrongdoing by the commission or any other prosecutor, though his role has been criticized by the inspector general of the Treasury Department, which oversees some bank regulators. It does not appear that Mr. Perry’s argument persuaded the commission to back off. The S.E.C., as is its custom, did not elaborate.

A representative for Mr. Perry said he did not care to discuss the case further, but his lawyer described the lawsuit in an e-mail as “exceedingly weak, unfair and meritless.” Mr. Dochow, who retired as a regulator in 2009 at age 59, said: “There’s a lot more than what’s been written, but I can’t talk. I could go to jail.”

The IndyMac collapse, with its multibillion-dollar cost to the Federal Deposit Insurance Corporation fund, highlights the role played by federal overseers of financial companies in the years leading up to the crisis. It also raises questions about whether government officials should be held accountable for dubious conduct related to the failure of an institution and whether the government has avoided pursuing some cases because of the roles regulators have played. For years, some bank overseers have maintained cozy ties with the institutions they monitor, treating bankers like clients because of the fees that banks pay to be regulated.

The Justice Department could not cite any regulator that it had named in a prosecution related to the crisis. However, Mr. Dochow’s conduct was referred to Justice for possible criminal charges in 2009, according to Eric Thorson, the inspector general of the Treasury Department. Mr. Thorson said Mr. Dochow’s action “was clearly improper and wrong.” A spokeswoman for the Justice Department in Washington declined to comment on the case and on whether the department investigated regulators for possible wrongdoing.

IndyMac is not the only institution whose questionable accounting was approved by regulators in recent years, though it is by far the largest of several highlighted by the Treasury inspector general.

Even if regulators are involved in wrongdoing, they have some immunity. Internal disciplinary measures are rarely taken against regulators who perform badly in their jobs, say government officials.

Some regulatory shortcomings may be chalked up to innocent mistakes and failures to spot problems. Still, some economists and lawyers would like the government to examine regulatory actions leading up to the financial crisis to determine whether officials actively participated in improper behavior. And, they say, in cases like Mr. Dochow’s, penalties should be levied on overseers who acted improperly.

Isolde Raftery contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=2784acd3f7583f0cafd740ed7413c85c

JPMorgan Pays $211M to Settle Bid-Rigging Charges

WASHINGTON (AP) — JPMorgan Chase Co. has agreed to pay $211 million after admitting one of its divisions rigged dozens of bidding competitions to win business from state and local governments.

J.P. Morgan Securities LLC made at least 93 secret deals with companies that handled the bidding processes in 31 states, the Justice Department and Securities and Exchange Commission said Thursday. Those deals allowed the bank to peek at competitors’ offers.

Banks help municipalities invest the money they raise from bond offerings so that they can earn interest before paying for projects. They compete by submitting to state and local governments the best yield they can offer.

The alleged bid-rigging deprived governments of a true competitive process that would produce the best returns on their investments, Assistant Attorney General Christine Varney said in a statement.

JPMorgan’s settlement covers complaints brought by the SEC, the Internal Revenue Service, bank regulators and 25 state attorneys general. Nearly a quarter of the money will go toward settling civil fraud charges brought by the SEC. A large portion will be divided among states, in part to pay restitution to victims of the fraud.

JPMorgan agreed to cooperate with the Justice Department’s investigation in exchange for not being prosecuted, the agency said.

The company admitted and accepted responsibility for the illegal conduct. It blamed it on former employees of a division that has since been shut down. The company said it “is pleased to have resolved this matter with its regulators.” It said the settlement will not affect its financial performance.

It was the second major federal settlement for the bank in the past month. JPMorgan settled civil fraud charges with the SEC in June. It agreed to pay $154 million for allegedly misleading buyers of complex mortgage investments as the housing market collapsed.

One former executive of the bank’s securities unit, James Hertz, pleaded guilty in December to criminal charges related to the bid-rigging issue. He also is cooperating with authorities.

In all, the Justice probe has resulted in criminal charges against 18 former executives of financial services companies and one corporation. Including Hertz, nine of the executives have pleaded guilty.

Here’s how the money from Thursday’s settlement will be divided:

— The SEC will receive $51 million to settle civil fraud charges.

— JPMorgan will pay the IRS $50 million because its actions violated rules governing municipal bonds, which are tax-exempt.

— The bank’s main regulator, the Office of the Comptroller of the Currency, will receive $35 million.

— The settlement with the states is worth $92 million. That includes half of the $35 million JPMorgan agreed to pay the OCC. The settlements have a face value of $228 million because $17 million is counted twice.

JPMorgan’s agreement includes the District of Columbia and these states: Alabama, California, Colorado, Connecticut, Florida, Idaho, Illinois, Kansas, Maryland, Massachusetts, Michigan, Missouri, Montana, Nevada, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Texas, Tennessee and Wisconsin.

Bank of America and UBS have agreed to settlements based on similar municipal bid-rigging charges brought by federal and state authorities. Bank of America Corp. agreed in December to pay more than $137 million. UBS AG agreed in May to pay more than $160 million.

JPMorgan shares rose 95 cents, or 2 percent, to $41.51 in early-afternoon trading Thursday.

Article source: http://feeds.nytimes.com/click.phdo?i=b7b042bfdde54f17b1988dc64f100096