sound regulation November 17, 2008
Posted by Bradley in : financial regulation , add a commentThe G20 declaration contains a call for “sound regulation”:
We pledge to strengthen our regulatory regimes, prudential oversight, and risk management, and ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances. We will exercise strong oversight over credit rating agencies, consistent with the agreed and strengthened international code of conduct. We will also make regulatory regimes more effective over the economic cycle, while ensuring that regulation is efficient, does not stifle innovation, and encourages expanded trade in financial products and services. We commit to transparent assessments of our national regulatory systems.
It remains to be seen whether sound regulation is in fact sound (better regulation pretty clearly wasn’t in fact better).
eu proposed revisions to depositor protection October 16, 2008
Posted by Bradley in : financial regulation , add a commentThe Commission has published proposals to revise the deposit guarantee schemes directive, which are designed to implement the Council’s recent decisions. The document notes that normal processes have been distorted in current emergency conditions:
Due to the urgency of the matter, neither an impact assessment nor a public consultation could be carried out for the current proposal.
Immediately after recognizing this failure to follow normal processes, the Commission points out in the proposal that it has been thinking about deposit guarantee schemes for the last couple of years or so. But that thinking isn’t very relevant, as it seemed to lead in a direction different from the one in which we are now travelling.
In late 2006 the Commission published a Communication which addressed the issue of coinsurance in this way:
At this stage, there would appear to be insufficient support to introduce any short-term change to co-insurance rules. In general, there seems to be no agreement among stakeholders about whether the underlying principle of moral hazard, (i.e. the risk that, because their deposits are insured in any case, depositors choose a bank without first assessing its soundness) justifies its application. Some consider co-insurance an indispensable element in preventing moral hazard, while others, in particular consumer associations, argue that depositors should not be placed in a position whereby they are expected to judge the soundness of the credit institution.
In the light of these dissenting views, the Commission is not convinced that at this stage a change to the co-insurance rules would be justified.
The new proposal addresses the coinsurance issue as follows:
This has proven counterproductive for the confidence of depositors and may have exacerbated the problems. The argument of moral hazard (depositors should be ‘punished’ if they deposit their funds at a bank offering high interest rates but incurring high risks) is not tenable since retail depositors cannot, in general, judge the financial soundness of their bank. Consequently, this option should be discontinued.
competitive depositor protection October 5, 2008
Posted by Bradley in : financial regulation , 3commentsDepositor protection has been a subject of controversy in the EU before now (for example, the negotiations which led to the adoption of the deposit guarantees directive). But no sooner had Peter Mandelson taken the helm of the Department for Business, Enterprise and Regulatory Reform (the “Voice for Business Across Government” - Better Regulation Department) (a very apt appointment, as he has direct, personal, experience of some of the causes of current financial market turmoil - misleading disclosures/non-disclosures to mortgage providers) than Germany announced that it was going to improve protections for depositors with German banks. It’s just not cricket.
regulation and the financial crisis September 23, 2008
Posted by Bradley in : financial regulation , add a commentAlongside the issue of what sort of bailout may be appropriate to stop the financial markets imploding (Richard Epstein argues that bad regulation isn’t the right answer), is the issue of how financial regulation should be amended to prevent such risks of implosion for the future. Dominique Strauss-Kahn of the IMF has written:
There is a deeper structural issue to be resolved. This crisis is the result of regulatory failure to guard against excessive risk-taking in the financial system, especially in the US. We must ensure it does not happen again. Work has started to rebuild the architecture and the leading industrialised countries have already put forward recommendations for better prudential regulation, accounting rules and transparency. The role of credit rating agencies will also need to be rethought, with greater public scrutiny. In a globalised world, these efforts will have to be broad-based if they are to be effective.
But this question of what sort of financial regulation we need is very complex. Part of AIG’s problem (part of the reason for the need to rescue AIG) was its exposure to credit default swaps, some of which were designed to help financial institutions limit their credit risks and reduce their needs for capital. Will we really be better off layering regulation of credit default swaps on top of all of the other regulations financial institutions are subject to, as New York is doing?
ny to regulate credit default swaps September 23, 2008
Posted by Bradley in : financial regulation , add a commentThe Office of the Governor of New York announced yesterday that New York will be regulating credit default swaps which are insurance products (i.e. where the protection buyer owns the underlying asset) from the beginning of next year:
So called “naked swaps” are not insurance and cannot be regulated by the State..
The Circular Letter to which the press release refers is dated September 12.
The move raises the question whether (from a regulatory perspective) it really makes sense to have different treatment of a transaction where the distinguishing criterion is whether it is used as insurance or for speculation.
cesr announcement on short selling regulation September 22, 2008
Posted by Bradley in : financial regulation , add a commentCESR today announced measures taken by various EU securities regulators on short selling. The Euronext regulators are among the most aggressive.
more regulation of short selling September 21, 2008
Posted by Bradley in : financial regulation , add a commentThe SEC published the following announcement today:
The U.S. Securities and Exchange Commission today approved amendments to its emergency order of September 18 (Release No. 58591) requiring that certain institutional money managers report their new short sales of certain publicly traded securities.
The new rules come into force just after midnight on Monday 22 September.
cesr on the commission’s proposals on cras September 19, 2008
Posted by Bradley in : financial regulation , add a commentCESR’s response to the Commissions proposals on how to deal with the regulation of CRAs tracks pretty well the responses of industry groups I have noted (here and here): In particular, CESR says that the consultation period was too short, and criticises the lack of co-ordination with US regulators and IOSCO:
Credit ratings are essentially an international matter, affecting investors all over the world. Hence, there is a strong need for an internationally harmonised set of requirements. The imposition of stricter requirements on a unilateral basis would seriously jeopardise the significance of the ratings, leading to European vs. International ratings. The efforts to harmonise that have been reached at a global level would also be undermined. Therefore the Committee recommends that before imposing different or additional requirements, efforts should be made to reach agreement with the authorities of other major users of credit ratings. Due process and consultation would then be part of the regulatory procedure.
regulators running scared September 18, 2008
Posted by Bradley in : financial regulation , add a commentExtraordinary times produce extraordinary regulatory actions. The FSA announced today that:
The Board of the Financial Services Authority (FSA) today (Thursday 18 September) agreed to introduce new provisions to the Code of Market Conduct to prohibit the active creation or increase of net short positions in publicly quoted financial companies from midnight tonight.
The rules will be reviewed after 30 days and will persist until mid-January. The announcement states that detailed changes to the Code of Market Conduct are to be published before the market opens tomorrow. Thus it seems that the regulation is designed to operate (from midnight) before its details are made public (before the market opens tomorrow). The control will apply to short selling with respect to (a list of) financial companies rather than with respect to issuers in general. And it is justified by reference to the need to avoid disorderly markets.
This action is similar to that taken by the SEC in July, although there the order was dated a few days before it took effect (although only published in the Federal register on the date of effectiveness). The SEC yesterday announced its own new emergency rules which took effect at midnight but which are set to expire on October 1 unless extended.
mutual recognition August 25, 2008
Posted by Bradley in : financial regulation , add a commentThe Australian Government, ASIC and the SEC today announced the signing of a mutual recognition agreement under which each of the two regulators will consider providing exemptions to broker-dealers and exchanges regulated in the other jurisdiction. SIFMA gave the announcement a cautious welcome:
SIFMA will provide more detailed comments on the mutual recognition proposal once the new framework has been analyzed by the industry.
SIFMA has some concern that this initiative might undermine the proposals for a more general relaxation of the conditions under which foreign broker-dealers interact with US persons.