Financial Crisis News Center

FMOC Debates Scope of Fed Asset Program

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

As reported in the Oct. 15, 2009, New York Times, the recently-released minutes of the Sept. 22-23 meeting of the Federal Open Market Committee indicated a debate among FMOC members regarding the Federal Reserve Board’s program to purchase Treasury securities, agency debt and agency mortgage-backed securities (MBS).

According to the minutes, the FOMC members observed that the rate of new purchases could have an effect on asset prices, especially of MBS; and that a gradual reduction in the pace at which the Fed buys agency debt and agency MBS could help promote a smooth transition in markets as the announced asset purchases are completed. Some committee members suggested tapering quickly and completing the purchases by year-end, while a few preferred slowing the rate of purchases over a longer period in order to maintain flexibility regarding the pace and the cumulative amount purchased and thus potentially better calibrate the programs to evolving economic and financial market conditions. Most members, however, supported extending purchases of agency debt and agency MBS through the first quarter of 2010.

International Supervisors Agree on Stronger Regulations

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

The Group of Central Bank Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision have announced that they have agreed to a comprehensive set of measures to strengthen the regulation, supervision and risk management of the banking sector. These measures are intended to substantially reduce the probability and severity of economic and financial stress.

President Jean-Claude Trichet, who chairs the Group, noted that “the agreements reached today among 27 major countries of the world are essential as they set the new standards for banking regulation and supervision at the global level”.

European Union Amends Capital Requirements Directive to Strengthen Securitization

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

The Council of the European Union has amended the Capital Requirements Directive in an effort to enhance the originate and distribute model and strengthen securitization practices. The amendments enhance the due diligence and transparency obligations on the originators of securitization operations and on investors. Under the new regime, investors should be able to assess the risks involved in structured products otherwise than solely by the means of the ratings given by rating agencies. In order to encourage better risk assessment, a "skin in the game" amendment requires originators to retain on their balance sheets 5 % of risks transferred or sold to investors.

Financial Crisis Commission Members Named

This story appeared in Bank Digest.

Democrat and Republican congressional leadership have announced appointments to the 10-member Financial Crisis Inquiry Commission, established by Congress to examine the domestic and global causes of the financial crisis.

The Commission will conduct a comprehensive examination of, and hold hearings on, more than 20 specific areas of inquiry related to the financial crisis including: fraud and abuse in the financial sector; state and federal regulatory enforcement; tax treatment of financial products; credit rating agencies; lending practices and securitization; unregulated financial products and practices; and corporate governance and executive compensation. The Commission will also examine the causes of major financial institutions that failed or were likely to fail had they not received exceptional government assistance. The Commission will provide its findings and conclusions in a final report due to Congress on Dec. 15, 2010.

New White Paper Provides In-Depth Analysis of Financial Reform Proposal

Jim Hamilton, J.D., LL. M., CCH Principal Analyst, has authored an extensive white paper entitled, “The Obama Administration’s Proposal to Reform the U.S. Financial Regulatory System.”

From the Introduction -

“The Obama Administration has proposed to Congress the most sweeping and fundamental regulatory reform of the U.S. financial and securities markets since the New Deal. The proposal’s goals are to regulate systemic risk, enhance transparency and disclosure, delink executive compensation from excessive risk, improve investor protection, and prevent regulatory arbitrage. The Administration has set forth detailed recommendations on the regulation of hedge funds and over-the-counter derivatives, including credit default swaps, as well as draft legislation on a new resolution authority to unwind failing securities and commodities firms. The Administration also recommends major corporate governance reforms, such as shareholder advisory votes on compensation and enhanced compensation committees.”

 Download the White Paper.

Reform Legislation to Follow Two Tracks: Systemic Risk, Investor Protection

Congress plans to complete the reform of regulation of the financial markets this year in two separate steps involving the regulation of systemic risk and restoring investor confidence. In order to enhance investor protection, the powers of the SEC and the CFTC will be strengthened, with a merger of the agencies placed on the back burner. This was the message delivered by Barney Frank, Chair of the House Financial Services Committee. While Congress will coordinate the reform legislation with the European Union and other jurisdictions, said the chair, there is no supranational plan on the agenda and nobody is going to ignore sovereignty. That said, it is also essential to prevent regulatory arbitrage. Thus, for example, there will be cooperation with the EU to produce similar regulation.

UK FSA Chair Outlines Proposal for Broad Regulatory Reform

UK Financial Services Authority Chair Adair Turner laid out a sweeping financial regulatory reform plan centered on a macro-prudential systemic risk regulator and a safer and more transparent securitization process. While rejecting a reimposition of the Glass-Steagall complete separation of commercial and investment banking, he said that a way must be found to restrict the systemic risk taking activities of global complex financial institutions.

Fed Governor Views Enhanced Counterparty Credit Risk Management as Key to Securitization Reform

This article is a selection from Hedge Funds and Private Equity: Risk Management and Regulatory Update.

In the coming reform of securitization, noted Federal Reserve Board Governor Randall S. Kroszner, financial institutions must strengthen their counterparty credit risk management, mainly through more extensive stress testing. In remarks at a seminar in Geneva, he said that in the current crisis risk managers did not fully contemplate the possibility that many participants would need to unwind their positions at the same time, that such actions might present substantial losses for several key counterparties, and that collateral posted as protection for positions would fall in value at the same time.

TALF Terms and Conditions Revised

The Federal Reserve Board has revised the terms and conditions and questions and answers detailing operational aspects of the Term Asset-Backed Securities Loan Facility (TALF), which is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business asset-backed securities (ABS). The terms and conditions were revised after consultation with ABS issuers, investors and dealers and include an extension of the TALF loan maturity from one to three years and additional specification of eligible ABS collateral. In addition, to provide more certain investor access, TALF loans will be provided to all eligible borrowers with eligible collateral rather than distributed through an auction. The documents will be subject to further refinement in coming weeks based on continued market analysis and consultation and on clarification of operational details.

http://www.federalreserve.gov/newsevents/press/monetary/20081219b.htm

Revival of Mortgage Securitization Depends on Greater Transparency

By James Hamilton, J.D., LL.M., Senior Writer Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter; Co-author, Sarbanes-Oxley Manual: A Handbook for the Act and SEC Rules, Dec. 16, 2008.

A recovery in the market for mortgage-backed securities will require greater transparency and less complexity, as well as comprehensive and standardized loan-level data that will allow more independent credit analysis, in the view of Federal Reserve Board Governor Randall Kroszner. In remarks at a Fed seminar on the mortgage markets, he sketched a scenario under which investors may gradually regain confidence in mortgage securitization.