Financial Crisis News Center

CIT Bankruptcy Highlights “Folly” of Making Fed Systemic Risk Regulator

This story appeared in Bank Digest.

Following the Chapter 11 bankruptcy filing by CIT Group, House Financial Service Committee Ranking Member Spencer Bachus, R-Ala., issued a statement highlighting “the folly of a legislative proposal that makes the Federal Reserve the unchallenged arbiter of systemic risk, capital adequacy, and financial stability.”

http://republicans.financialservices.house.gov/index.php?option=com_content&task=view&id=878&Itemid=43

OCC Publishes Working Paper on Credit Risk

This story appeared in Bank Digest.

The Office of the Comptroller of the Currency has released OCC Working Paper 2009-5 “Correlation in Credit Risk", by Xiaoling Pu and Xinlei Zhao which examines the correlation in credit risk using credit default swap (CDS) data. The researchers found that the observable risk factors at the firm, industry, and market levels and the macroeconomic variables cannot fully explain the correlation in CDS spread changes, leaving at least 30 percent of the correlation unaccounted for.

House Committee, Treasury Propose Systemic Risk Bill

By Richard Roth, J.D., Editor, the CCH Federal Banking Law Reporter, CCH Bank Compliance Guide and Bank Digest.

The Treasury Department and the House Financial Services Committee leadership have jointly drafted a bill that is intended to address both systemic risk in the financial system and the problem of institutions that are seen as “too big to fail.” The proposal, designated as a “discussion draft,” is intended to create a way to monitor and reduce the threats posed by systemically risky firms and establish a process for resolving large, financially-troubled non-bank financial institutions in an orderly manner.

Bernanke Sees “Critical” Need for Congress to Close Regulatory Gaps

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter.

Federal Reserve Board Chairman Ben Bernanke said it remains “critical” for Congress to close regulatory gaps and provide supervisors with additional tools for anticipating and managing systemic risks.

Speaking October 23 at a Federal Reserve Bank of Boston conference Bernanke said Congress must ensure that all systemically important firms, including those that do not own a bank, are subject to a robust regime for consolidated prudential supervision. Tougher capital, liquidity and risk-management requirements for such firms are also needed not only to protect the stability of the financial system, but to reduce their incentive to grow large in order to be perceived as too big to fail, Bernanke said.

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.

Chairman Schapiro Remarks on Future of Financial Regulation

By Gregg D. Killoren, J.D., CCH State Banking Law Reporter, Bank Digest and Individual Retirement Plans Guide.

SEC Chairman Mary L. Schapiro, speaking at the University of Rochester's Presidential Symposium on the Future of Financial Regulation on Oct. 10, 2009, commented on gaps in financial regulation that need to be addressed, a constructive approach to systemic risk, and steps being taken by the SEC, apart from legislation, to achieve reform.

SEC Asks for Changes to House Draft Derivatives Legislation to Prevent Regulatory Arbitrage

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

While praising the House Financial Services Committee’s draft legislation to regulate the OTC derivatives markets, the SEC warned that the draft could present opportunities for significant regulatory arbitrage. In testimony before the committee, Henry T.C. Hu, Director of the Risk, Strategy and Financial Innovation Division said that the draft adopts a distinction that is not meaningful between derivatives referencing a single security or a narrow-based index of securities and derivatives referencing a broad-based index of securities. The SEC cautioned that a market participant could use a broad-based swap as part of a strategy to gain highly targeted exposure to a single company or a narrow group of companies.

Fed Governor Tarullo Discusses Challenges in Wake of Financial Crisis

This story appeared in Bank Digest.

“[S]ome rather substantial adjustments will be needed by individuals, financial firms, businesses, regulators, and nations” to address the causes and effects of the financial crisis, Federal Reserve Board Governor Daniel K. Tarullo told the Phoenix Metropolitan Area Community Leaders' Luncheon, Phoenix, Ariz. The Fed Governor called for improved regulation of financial firms as well as the introduction of system-wide regulation. Although there are indications of economic growth and stabilization of financial markets, the employment situation is “dismal,” Tarullo said. He also expressed concern over the slow recovery of the securitization markets.

http://www.federalreserve.gov/newsevents/speech/tarullo20091008a.htm

Chairman Frank Circulates Draft Legislation Regulating OTC Derivatives

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

Rep. Barney Frank, Chair of the Financial Services Committee, has introduced draft legislation regulating the OTC derivatives markets by mandating exchange clearing and trading for the majority of derivatives products while preserving the over-the-counter market for specialized derivatives. The Chair’s draft is designed to implement the broad goals of the Obama Administration to increase transparency and eliminate systemic risk in the OTC derivatives markets while at the same time protecting end users seeking to hedge their risks and preventing much of the U.S. derivatives market from being forced overseas.

Fed Proposes Changes to Valuation of TALF Collateral

This story appeared in Bank Digest.

The Fed has announced two changes to the procedures for evaluating asset-backed securities (ABS) pledged to the Term Asset-Backed Securities Loan Facility (TALF). First, it has proposed a rule that would establish criteria for the Federal Reserve Bank of New York(FRBNY) to determine the Nationally Recognized Statistical Rating Organizations (NRSROs) whose ratings are accepted for determining the eligibility of ABS to be pledged as collateral at the TALF. According to the Fed, the proposed rule, which would require a certain minimum level of experience in rating deals of any particular type, would likely result in an expansion of TALF-eligible NRSROs for ABS. It is intended to promote competition among NRSROs and ensure appropriate protection against credit risk for the U.S. taxpayer.