federal deposit insurance corporation

DealBook: Volcker Rule Banking Revamp Moves Step Closer to Law

October 12, 2011 by NewsMaker Leave a Comment

Chip Somodevilla/Getty ImagesMartin J. Gruenberg, acting chairman of the Federal Deposit Insurance Corporation, on Tuesday, with Mary L. Schapiro, chairwoman of the Securities and Exchange Commission.

Wall Street is bracing for major changes from a new rule that would overhaul how the banking industry conducts its trading.

The Federal Deposit Insurance Corporation unanimously approved on Tuesday an initial version of the regulation, known as the Volcker Rule. Two other regulators followed suit, and the Securities and Exchange Commission is scheduled to vote on Wednesday.

The rule, intended to limit trading when the bank’s money is at risk, a sweet spot for banks, is seen as a centerpiece of the sprawling financial overhaul of the Dodd-Frank Act of 2010. In anticipation, the nation’s biggest banks, like Goldman Sachs and Bank of America, have already shut down their stand-alone proprietary trading desks.

But the proposal on Tuesday included several unfriendly surprises for the banks, including provisions that scrutinize how they generate revenue, award compensation and track their compliance with the Volcker Rule. Such measures, analysts say, could significantly change the way Wall Street does business.

“You’d have to go back to the New Deal for a rule that would have as profound an impact on the financial markets as the Volcker Rule,” said Donald N. Lamson, a former Treasury Department official who helped write the Volcker Rule into Dodd-Frank. “If you add it all together, it’s going to increase costs, decrease revenue and profits and potentially scare off your most productive employees,” said Mr. Lamson, now a lawyer at Shearman Sterling.

With regulators blessing the first draft of the rule — named after Paul A. Volcker, a former Federal Reserve chairman and former adviser to President Obama — the fight over its esoteric details kicks into high gear. The deadline for public comments on the proposal is now Jan. 13; the final version takes effect next July.

“I expect the agencies will move in a careful and deliberative manner in the development of this important rule,” Martin J. Gruenberg, acting chairman of the F.D.I.C., said on Tuesday.

More than a year after Dodd-Frank became law, much is still unknown about the Volcker Rule. The proposal introduced on Tuesday in some ways raises more questions than it answers. In the 298-page document, regulators posed nearly 400 questions for the industry and the public to consider, leaving room for significant changes.

”Unfortunately, the resulting uncertainty will have an enduring and negative impact on the banking industry and the customers we serve,” Frank Keating, president and chief executive of the American Bankers Association, said in a statement.

For now, the rule’s supporters and critics alike are frowning on the proposal that emerged on Tuesday. Consumer groups want to make it tougher. Wall Street has been lobbying furiously to tame the Volcker Rule, holding roughly 40 meetings with various regulators, warning that the changes will eat into profits at a difficult time for banks.

“The banking industry fears the oversized nature and complexity of this proposed rule will make it unworkable and will further inhibit U.S. banks’ ability to serve customers and compete internationally,” Mr. Keating said.

Some aspects of the proposal, financial industry lawyers and lobbyists say, challenge the very nature of Wall Street. For one, the rule would prevent banks from awarding bonuses intended to “encourage or reward proprietary risk-taking.”

The proposal also requires banks to generate revenue primarily from fees and commissions rather than from the fluctuating value of securities they hold. In essence, the move would upend the banking industry’s lucrative, yet risky trading system, forcing powerhouse investment banks to resemble sleepier brokerage firms.

Answers to a fundamental question surrounding the Volcker Rule — namely, how will it be enforced — provided little comfort to Wall Street on Tuesday. The proposal spells out an expansive internal control regimen that banks must adopt, creating layers of expensive and time-consuming compliance. Under the rule, banks must turn over a battery of information to regulators, including a number of metrics to gauge whether a bank is helping clients or trading for its own benefit. The proposal itself, citing survey data, estimates that banks will have to spend more than six million hours putting the rule into effect.

“The onus is absolutely on the banks,” said Kim Olson, a principal with Deloitte Touche who is both a former regulator and banker.

While the proposal stopped short of forcing bank chiefs to certify the legitimacy of their compliance program, regulators asked the public to comment on the possibility of “C.E.O. attestation.”

Regulators also raised the possibility that banks might turn over their data to independent warehouses, where regulators could keep an eye on the trading.

As Wall Street grumbles over the scope of the Volcker Rule, some Democratic lawmakers and consumer advocates are pushing for even tougher restrictions.

“Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute,” said Marcus Stanley, policy director of American for Financial Reform, an advocacy group.

During the lengthy rules-making process that led to Tuesday’s draft proposal, a number of controversial exemptions emerged.

While the regulation prevents big banks from placing bets on many stocks, corporate bonds and derivatives, it exempts trading in government bonds and foreign currencies.

The proposal also provided a path for getting around the ban, for instance, when banks hedge against risk that comes from carrying out a customer’s trade. Market-making and underwriting are excused, too, though the line is often fuzzy between these pure client activities and proprietary bets.

Proprietary trading, analysts say, often slips into client-focused activity. Banks, as part of routine market-making, can buy securities from one customer with the intent of selling them to another client. The Volcker Rule proponents want to close certain loopholes in the rule, particularly the broad exemption for hedging. The proposal unveiled on Tuesday would allow banks to hedge against theoretical or “anticipatory” risk, rather than just clear-and-present problems.

“The vagueness of the proposal, and the hundreds of questions it includes, also demonstrate that we are still in the middle of this process,” Mr. Stanley said.

Article source: http://feeds.nytimes.com/click.phdo?i=e0bc8702981fd9ebee29fcb7db50848a

First Drop in Number of Problem U.S. Banks Since 2006

August 23, 2011 by NewsMaker Leave a Comment

The number of banks on the government’s list of institutions most at risk for failure fell in the second quarter, the first drop since before the financial crisis began.

Twenty-three lenders came off the list of so-called problem banks during the second quarter, bringing the total to 865, according to data released Tuesday by the Federal Deposit Insurance Corporation. Not all of the troubled lenders will inevitably fail, but the F.D.I.C. considers them most at risk, making the quarterly update one of the clearest measures of the banking industry’s health.

It was the first decrease in the number of problem banks since the third quarter of 2006.

The report also contained other signs of improvement. There were 48 bank failures in the first half of 2011, far fewer than the 86 failures in the first six months of 2010. Last year’s total of 157 collapsed banks was the highest level since the last severe recession in the early 1990s.

And the F.D.I.C. insurance fund that protects the nation’s depositors showed a surplus for the first time in two years. It stood at $3.9 billion, compared to a negative $1 billion balance at the end of the first quarter.

Still, the magnitude of problem banks — roughly one of every nine lenders — remains relatively high. And the number could rise again if the economy suffers another downturn — a prospect that seems increasingly likely amid all the grim data that has surfaced in the weeks since the list was compiled at the end of the June.

Martin J. Gruenberg, the acting F.D.I.C. chairman, played down that risk in some of his first public remarks since being nominated to run the agency in June.

“Banks have continued to make gradual but steady progress from the financial turmoil and severe recession that unfolded from 2007 and 2009,” Mr. Gruenberg said in a statement.

Beyond the drop in problem lenders, there were other signs that the industry is getting back on its feet. The nation’s 7,513 banks and savings institutions reported a total profit of $28.8 billion in the second quarter, up nearly 38 percent from a year ago and the eighth straight quarter that earnings have increased. Bank losses are also easing and loan balances grew for the first time since the second quarter of 2008. Bank losses continued to ease, while loan balances rose — albeit slightly — for the first time since the second quarter of 2008.

Much of the uptick in lending could be attributed to loans made to businesses as well as other financial institutions. Real estate lending continued to be very weak.

Total revenue fell for the second quarter in a row. Fee income declined as a result of more stringent regulations curbing overdraft charges and other penalty fees, while interest income was lower because of an increase of funds in low-yielding accounts at Federal Reserve banks. The pressure on revenue could get ratcheted up in the second half of the year if lending margins collapse in light of Fed’s recent pledge to keep interest rates near zero for the next two years.

Meanwhile, the recent market turbulence stemming from the debt crises in Europe and the United States continues to weigh on the industry. Deposits increased by almost 3 percent during the second quarter, with the bulk of the cash flooding accounts at the nation’s largest banks.

“Recent events have reminded us that the U.S. economy and U.S. banks still face serious challenges ahead,” Mr. Gruenberg said in a statement. “The F.D.I.C. will remain alert to the challenges going forward.”

Article source: http://www.nytimes.com/2011/08/24/business/first-drop-in-number-of-problem-banks-since-2006.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: downturn, federal deposit insurance corporation, problem banks

Bucks: Credit Card Rules Make Pricing Clearer

June 10, 2011 by NewsMaker Leave a Comment

Daniel Acker/Bloomberg News

New credit card rules meant to protect consumers have made pricing clearer, and haven’t made credit less available, a new study says.

Despite concerns raised by the credit card industry about the Credit Card Act of 2009, direct mail offers keep arriving in consumer mailboxes at a pace “consistent with economic conditions,” says a report from the Center for Responsible Lending. The act took effect in February.

Plus, the difference between the stated rate on credit card offers and the rate consumers actually pay narrowed markedly in the wake of the new law, the report found. From 2004 to 2008, that difference widened to “unprecedented” levels, the study said. But the gap has narrowed considerably since the CARD Act was passed. The current gap is about 0.2 percentage points, down from 2.3 percentage points at its peak.

The actual rates consumers have paid on credit card debt have remained level, once the economic downturn is taken into effect.

The study examined five sets of data, including rate information from the Federal Reserve, which tracks what consumers are actually charged on the average open account, not just what consumers are offered in the mail. It also examined bank call reports filed with the Federal Deposit Insurance Corporation.

“Because price transparency fosters competition,” the report said, “the long-term effect of the CARD Act is likely to be lower costs for consumers.”

Have you noticed any change in the quantity of credit card offers you’re getting in the mail?

Article source: http://feeds.nytimes.com/click.phdo?i=8f46379ffb61987f3d496501b9a29903

Filed Under: Your Money Tagged With: credit card offers, direct mail, federal deposit insurance corporation

Uncertain Leadership Strains Financial Overhaul

May 13, 2011 by NewsMaker Leave a Comment

The Obama administration has not announced nominees for several positions that Congress created last summer, nor has it nominated new heads for three agencies, including for an imminent vacancy at the Federal Deposit Insurance Corporation.

As a result, temporary leaders tapped by the president increasingly are responsible for the vast overhaul of financial regulations, raising concerns that their decisions will prove more vulnerable to political pressure than permanent leaders insulated by Senate confirmation to a fixed term.

“I look back on my last five years and all the tough decisions I had to make, and if I’d been in an acting capacity, it would have been very inhibiting to me in making some of the tough decisions I had to do,” Sheila C. Bair, who in early June will complete her term as chairwoman of the F.D.I.C., told the Senate Banking Committee on Thursday.

The vacancies have accumulated in part because Senate Republicans have blocked votes on nominees for a wide range of positions. The White House, in turn, has not rushed to add names to the list. In one case, it has temporarily circumvented the Senate by giving the Harvard professor Elizabeth Warren acting responsibility for a new agency focused on consumer financial protection.

The White House also appointed an acting director for the Federal Housing Finance Agency, which oversees the mortgage finance giants Fannie Mae and Freddie Mac. The agency has operated without a permanent head since August 2009. And since August, 2010, an acting director also has run the Office of the Comptroller of the Currency, which oversees most of the nation’s largest banks.

A new position on the Federal Reserve Board, vice chairman for supervision, has remained vacant since it was created last summer. So has a seat on the council of regulators designated for someone with insurance expertise.

Amy Brundage, a White House spokeswoman, said that President Obama would announce nominees for the positions “as soon as possible.”

“The president is looking for strong, well-qualified candidates who can lead these institutions to protect American consumers and taxpayers, while ensuring the stability of an American economy emerging from the worst recession since the Great Depression,” she said.

The White House soon plans to nominate a replacement for Ms. Bair at the F.D.I.C., according to people familiar with the matter who spoke on condition of anonymity because no plans had been publicly announced. The front-runner is Martin J. Gruenberg, currently the agency’s vice chairman, who worked for years as a Democratic staff member on the Senate Banking Committee.

A decision also is close on a nominee for comptroller of the currency, those people said.

The lack of permanent leadership is a significant handicap, according to current and former regulators. It is fairly easy to keep doing the same things, but much harder to navigate unexpected difficulties or to consider new ideas.

And agencies are being asked to do both of those things as perhaps never before.

The sweeping overhaul of financial regulations passed into law last year requires agencies to write hundreds of rules, an unprecedented task, even as they grapple with the unfamiliar financial landscape left by the crisis.

John Walsh, the acting comptroller of the currency, said that Treasury Secretary Timothy F. Geithner had encouraged him to do the job as if it were, indeed, his job.

“But the fact is that I have said to him and have said repeatedly that I do think it’s very important for independent supervisory agencies to have nominated and confirmed heads in place,” Mr. Walsh said Thursday at the same Senate hearing. “It’s important for independence and for the perception of independence.”

Senator Sherrod Brown, an Ohio Democrat, said Thursday that the absence of leadership was complicating the work of identifying “systemically important” financial firms that could pose a threat to the broader economy.

“We need strong nominees who will not be afraid to take bold steps to prevent a new financial crisis,” Mr. Brown said. Senators from both parties urged regulators at a hearing Thursday to offer more detailed criteria for designating such firms, which will be subject to stricter regulation.

Bank holding companies with more than $50 billion in assets automatically fall under the designation, according to the Dodd-Frank law approved last year. But there is no clear standard for selecting other kinds of financial firms like insurance companies, hedge funds and investment managers.

Edward Wyatt contributed reporting from Washington.

Article source: http://feeds.nytimes.com/click.phdo?i=ecbe091b07a408b72555ecdfcb38a582

Filed Under: Business News Tagged With: comptroller of the currency, federal deposit insurance corporation, finance giants

F.D.I.C. Closes 5 Banks, Pushing the Total for the Year to 39

April 30, 2011 by NewsMaker Leave a Comment

The Federal Deposit Insurance Corporation seized First National Bank of Central Florida, based in Winter Park, with $352 million in assets, and Cortez Community Bank of Brooksville, Fla., with $70.9 million in assets.

The agency also took over First Choice Community Bank of Dallas, Ga., with $308.5 million in assets; Park Avenue Bank, based in Valdosta, Ga., with $953.3 million in assets; and Community Central Bank in Mount Clemens, Mich., with $476.3 million in assets.

The Miami-based Premier American Bank agreed to assume the assets and deposits of First National Bank of Central Florida and Cortez Community Bank. Bank of the Ozarks, based in Little Rock, Ark., is acquiring the assets and deposits of First Choice Community Bank and Park Avenue Bank. Talmer Bank Trust, based in Troy, Mich., agreed to assume the assets and deposits of Community Central Bank.

In addition, the F.D.I.C. and Premier American Bank agreed to share losses on $270 million of First National Bank of Central Florida’s loans and other assets, and on $51.3 million of Cortez Community Bank’s assets.

The agency and Bank of the Ozarks are sharing losses on $260.7 million of First Choice Community Bank’s assets and $514.1 million of Park Avenue Bank’s assets. Talmer Bank Trust is sharing with the F.D.I.C. $362.4 million of Community Central Bank’s assets.

The failure of First National Bank of Central Florida is expected to cost the deposit insurance fund $42.9 million. The failure of Cortez Community Bank is expected to cost $18.6 million; that of First Choice Community Bank $92.4 million; Park Avenue Bank, $306.1 million; and Community Central Bank, $183.2 million.

Florida and Georgia have been the hardest-hit states for bank failures. Twenty-nine banks were shuttered in Florida last year and 16 in Georgia. Counting the shutdowns on Friday, four Florida banks have been closed this year, and 10 in Georgia.

California and Illinois also have had large numbers of bank failures.

In 2010, authorities seized 157 banks that succumbed to mounting soured loans and the hobbled economy. It was the most in a year since the savings-and-loan crisis two decades ago.

The F.D.I.C. has said that 2010 most likely would be the peak for bank failures.

Article source: http://feeds.nytimes.com/click.phdo?i=f50e9740a677d4a10d1cd6dd3e2c2d75

Filed Under: Business News Tagged With: federal deposit insurance corporation, first national bank of central florida, park avenue bank

Economix: The Myth of Resolution Authority

March 31, 2011 by NewsMaker Leave a Comment

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Andrew Harrer/Bloomberg News Senator Ted Kaufman, Democrat of Delaware, has been highly skeptical about whether the federal government’s power to shut banks can be applied to global megabanks, unless an international accord is reached.

Back when it really mattered – last spring, during the debate over the Dodd-Frank financial regulation – Senator Ted Kaufman, Democrat of Delaware, emphasized repeatedly on the Senate floor that the proposed “resolution authority” (the power to shut banks) was an illusion.

His point was that extending the established Federal Deposit Insurance Corporation powers for “resolving” financial institutions to include global megabanks simply could not work.

At the time, Senator Kaufman’s objections were dismissed by “experts” from both the official sector and the private sector. Now these same people (or their close colleagues) are falling over themselves to argue that resolution cannot work for the country’s giant bank holding companies. The implication, which these officials and bankers still cannot grasp, is that we need much higher capital requirements for systemically important financial institutions.

Writing in the March 29 edition of The National Journal, Michael Hirsch quotes a “senior Federal Reserve Board regulator” as saying: “Citibank is a $1.8 trillion company, in 171 countries with 550 clearance and settlement systems,” and “We think we’re going to effectively resolve that using Dodd-Frank? Good luck!”

The regulator’s point is correct. The F.D.I.C. can close small and medium-size banks in an orderly manner, protecting depositors while imposing losses on shareholders and even senior creditors. But to imagine that it can do the same for a very big bank strains credulity.

And to argue that such a resolution authority can work for any bank with significant cross-border operations is simply at odds with the legal facts. The resolution authority granted under Dodd-Frank is purely domestic; that is, it applies only within the United States.

Congress cannot readily make laws that apply in other countries. A cross-border resolution authority would require either agreement among the various governments involved or some sort of synchronization for the relevant parts of commercial bankruptcy codes and procedures.

There are no indications that such arrangements will be made, or that serious intergovernmental efforts are under way to create any kind of cross-border resolution authority — for example, within the Group of 20.

For more than a decade, the International Monetary Fund has been advising that the euro zone adopt some sort of cross-border resolution mechanism. But European (and other) governments do not want to take this kind of step.

Rightly or wrongly, they do not want to credibly commit to how they would handle large-scale financial failure –- preferring instead to rely on various kinds of ad hoc and spontaneous measures.

I have checked these facts directly and recently with top Wall Street lawyers, with leading thinkers from left and right on financial issues (in the United States, Europe and elsewhere), and with responsible officials from the United States and other countries. That Senator Kaufman was correct is now affirmed on all sides.

Even leading figures within the financial sector now acknowledge this. Mr. Hirsch quotes E. Gerald Corrigan, former president of the Federal Reserve Bank of New York and an executive at Goldman Sachs since the 1990s: “In my judgment, as best as I can recount history, not just the last three years but the history of mankind, I can’t think of a single case where we were able execute the orderly wind-down of a systemically important institution – especially one with an international footprint.”

It is most unfortunate that Mr. Corrigan did not make that point last year – for example, when he (and I) testified before the Senate Banking Committee on the Volcker Rule in February 2010.

In fact, rather tragically in retrospect, Mr. Corrigan was among those arguing most articulately that some form of Enhanced Resolution Authority (as he called it) could actually handle the failure of large integrated financial groups (again, his terminology).

The “resolution authority” approach to dealing with very big banks has, in effect, failed before it even started.

And standard commercial bankruptcy for global megabanks is not an appealing option -– as argued by Anat Admati in The New York Times’ Room for Debate in January.

The only people I have met who are pleased with the Lehman bankruptcy are bankruptcy lawyers. Originally estimated at more than $900 million, bankruptcy fees for Lehman Brothers are now forecast to top $2 billion. (The AmLaw Daily describes this in detail.)

It’s too late to reopen the Dodd-Frank debate –- and a global resolution authority is a chimera in any case. But it’s not too late to affect policies still under development. The lack of a meaningful resolution authority further strengthens the logic of larger capital requirements, as these would provide stronger buffers against bank insolvency.

The Federal Reserve has yet to announce the percentage of equity financing – i.e., capital – that will be required for systemically important financial institutions (the so-called S.I.F.I.’s). Under Basel III, national regulators set an additional S.I.F.I. capital buffer. The Swiss National Bank is requiring 19 percent capital and the Bank of England is moving in the same direction.

Yet there are clear signs that the Fed’s thinking –- both at the policy level and at the technical level –- is falling behind this curve.

This time around, officials should listen to Senator Kaufman. In his capacity this year as chairman of the Congressional Oversight Panel for the Troubled Assets Relief Program (for example, in this hearing), he has been arguing consistently and forcefully for higher capital requirements.

Article source: http://feeds.nytimes.com/click.phdo?i=62590797b842a39b5e9e8fba0711dba7

Filed Under: Economy News Tagged With: federal deposit insurance, federal deposit insurance corporation, senate floor