Financial Crisis News Center

Senate Restoring American Financial Stability Act Mandates Say on Pay and Strong Compensation Committees

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The Obama Administration and the G-20 have determined that corporate governance failures, including compensation that encouraged short-term risk taking, were significant causes of the financial crisis. Bonuses that rewarded short term profits over the long term health and security of the firm, and other incentive-based compensation for executives to take big risks with excess leverage, threatened the stability of their companies and the economy as a whole. Thus, the draft legislation gives shareholders a say on pay and proxy access, ensures the independence of compensation committees, and requires companies to set clawback policies to take back executive compensation based on inaccurate financial statements as important steps in reining in excessive executive pay and helping shift management’s focus from short-term profits to long-term growth and stability.

Guidelines Considered to Assess Systemically Important Institutions and Markets

John M. Pachkowski, J.D., Editor, CCH Federal Banking Law Reporterand Bank Digest; Author, Anti-Money Laundering and Bank Secrecy: Compliance and the USA PATRIOT Act; Co-Author CCH Financial Privacy Law Guide.

At the request of the G20 Finance Ministers and Governors, the staff of the International Monetary Fund and the Bank for International Settlements and the Secretariat of the Financial Stability Board prepared a report setting forth guidelines that national authorities could use to assess the systemic importance of financial institutions, markets and instruments. The report outlines conceptual and analytical approaches to the assessment of systemic importance and discusses a possible form for general guidelines.

Geithner Highlights Latest G-20 Meeting

This story appeared in Bank Digest.

Following a G-20 meeting of finance ministers and central bank governors in the United Kingdom, Treasury Secretary Timothy Geithner issued a statement regarding the status of the global economic recovery. He also noted that a G-20 statement reflected a very broad consensus that growth remains the dominant policy imperative across our economies.

TG-358 at http://www.ustreas.gov/press/releases/tg358.htm

G-20 Communiqué at http://www.ustreas.gov/press/releases/reports/g20%20st%20andrews%20%20draft%20communique%20071109%20%2015001.pdf

Fed Officials Discuss Responses to Financial Crisis

This story appeared in Bank Digest.

In Oct. 23, 2009, remarks before the Federal Reserve Bank of Boston 54th Economic Conference in Chatham, Mass., Fed Chairman Ben S. Bernanke discussed the Federal Reserve Board’s role regard regarding financial regulation and supervision following the financial crisis. Bernanke noted that “Although the crisis was an extraordinarily complex event with multiple causes, … all financial regulators, including of course the Federal Reserve, must take a hard look at the experience of the past two years, correct identified shortcomings, and improve future performance.” He added that regulators can do a great deal on their own to improve financial regulation and oversight, but Congress also must act since many of the weaknesses and gaps in the regulatory structure can only be addressed by statutory change.

http://www.federalreserve.gov/newsevents/speech/bernanke20091023a.htm

Report on Risk Management Practices Issued

This story appeared in Bank Digest.

Senior financial supervisors from seven countries have issued a report that evaluates how weaknesses in risk management and internal controls contributed to industry distress during the financial crisis. The report, Risk Management Lessons from the Global Banking Crisis of 2008, reviews in detail the funding and liquidity issues central to the recent crisis and explores critical areas of risk management practice in need of improvement across the financial services industry. The report concludes that despite firms' recent progress in improving risk management practices, underlying weaknesses in governance, incentive structures, information technology infrastructure and internal controls require substantial work to address.

IASB Chair Charts Path to New Fair Value Standard; Rejects Interim Adoption of US Standard

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The IASB is on target to replace the fair value accounting standard embodied in IAS 39 with a new standard that will attain broad global acceptance. In remarks before the European Parliament’s Economic and Monetary Affairs Committee, IASB Chair David Tweedie said that the new fair value rules would be adopted after an extensive consultation that will take into account the views of all stakeholders, including the Committee, ECOFIN, central banks and regulators. The comment period on the proposed reform of IAS 39 has ended, said the Chair, and the IASB received letters from more than 200 individuals and organizations. Additional board meetings have already been held, and will continue to be scheduled as required to complete the project in time for the 2009 financial year.

Treasury Official Delivers Statement Before IMF and World Bank Meetings

This story appeared in Bank Digest.

Treasury Acting Assistant Secretary for International Affairs Mark Sobel delivered a statement by Treasury Secretary Timothy F. Geithner to the plenary session of the International Monetary Fund (IMF) and World Bank Annual Meetings supporting international efforts to sustain the economic recovery and help create jobs, strengthen regulatory frameworks, and begin preparing cooperative exit strategies. “Under the new G-20 Framework for Strong, Sustainable and Balanced Growth, the IMF must provide forward-looking analysis of whether the world's major countries are implementing economic policies, including exchange rate policies, which are collectively consistent with G-20 objectives,” Sobel said. “All of our countries developing, emerging, or advanced want to avoid a repeat of the worst economic crisis in decades.”

“Too Big to Fail” Not Necessary for Market Discipline

This story appeared in Bank Digest.

In an Oct. 4, 2009, speech before the Institute of Finance Istanbul, Turkey, Federal Deposit Insurance Corp. Chairman Sheila Bair discussed how to create a more resilient, transparent, and better regulated financial system—one that combines stronger and more effective regulation with market discipline. Bair noted, first and foremost, “scrap the ‘too big to fail’ doctrine. To do this, we need to fix weaknesses in our regulatory system, and achieve global reform for effective resolution processes when large firms fail. With these steps, we can foster real market discipline and make international cooperation more successful.” She also called for a resolution mechanism similar to that used for FDIC-insured banks and that this mechanism would need greater international cooperation.

http://www.fdic.gov/news/news/speeches/chairman/spoct0409.html

Following Crisis, Geithner Highlights Priorities to Move Forward

This story appeared in Bank Digest.

In an Oct. 3, 2009, statement before the IMF/World Bank Annual Meetings in Istanbul, Turkey, Treasury Secretary Timothy Geithner highlighted a few key priorities that will guide a new growth strategy following the financial crisis. He noted that “it is important we sustain support for global demand and growth.” He added, “in order to make sure we have strong growth in the future, we need to pay more attention to where that growth comes from, its composition, and its quality, both within and across countries.” Finally, “we need financial reform so that our global financial system is more stable and more efficient in allocating resources. We want our financial institutions to fund the most productive and innovative investments, not booms in real estate or the modern equivalent of tulips. Growth should be driven by new ideas and inventions, not by distorted incentives that produce financial bubbles.”

TG-307 at http://www.ustreas.gov/press/releases/tg307.htm

Treasury Official Discusses International Regulation

This story appeared in Bank Digest.

Noting that financial regulation is essentially a national activity and that the financial system is global and interconnected, Acting Assistant Secretary for International Affairs Mark Sobel asked “how do we square this circle?” Sobel began his Oct. 5, 2009, remarks in this manner before the Institute of International Bankers Regulatory Breakfast Dialogue in Istanbul, Turkey. He noted “A global regulator surely is not a realistic or feasible answer in the day and age in which we live. Instead, major international financial centers must work together to make national laws and practices more consistent and convergent with high quality standards of regulation across the world.”

TG-309 at http://www.ustreas.gov/press/releases/tg309.htm