Here are news stories from the week that were easy to miss, but may have some lasting impact.
1. With Enough Leverage… Bank Capital to Increase
This week, top banking regulators agreed to a hotly debated increase in capital requirements that will be instituted over the course of the next five years. The supervisors also proposed a supplemental leverage ratio for the eight largest U.S. banks—those deemed systemically significant. Going well beyond adopting the Basel Committee 2010-2011 accord (Basel III), regulators are now proposing essentially to double the 3% leverage limits imposed by the accord and require larger banks to hold 6% capital (the holding companies of the larger banks would need to hold 5%). Tougher capital standards are likely to limit the amount that banks can distribute in the form of dividends for the next few years. Rest assured that large banks will be contesting the new rule and smaller banks are relieved that they have dodged this particular bullet. I’ll write more on the subject when I have made my way through the new 983-page rule.
The Office of the Comptroller of the Currency: OCC Approves Final Rule on Regulatory Capital; Proposes Doubling Leverage Ratio for the Largest Banks
2. Get Your Red Hot Hedge Funds Here…Advertising Private Placements
For 80 years it has been a cornerstone of financial regulation that private investment firms could not advertise. The reason was simple. Average folks (read naïve) should not be allowed to invest with firms that don’t go through the arduous listing process required by the SEC. But the JOBS Act, passed last year, overturned this prohibition. Under the new act the SEC must now allow private firms (like hedge funds) seeking to raise capital to advertise under certain constraints. Investors in private placements are still limited to “Accredited Investors.” Those investors are defined as those with annual incomes of $200,000 ($300,000 for a couple) and a net worth of $1 million (excluding primary residence). Today, however, with inflation, the potential pool of investors is 20 times larger than it was 30 years ago when those thresholds were set. That means that there are 20 times as many potentially investors and 20 times more possible lawsuits from disgruntled individuals. The truth is that most hedge funds aren’t likely to advertise in People magazine, but will be speaking more freely at conferences and events.
3. LIBOR…New York Style
It’s like sending a Major League Baseball umpire to officiate a cricket match! Since the LIBOR rate-rigging scandal broke two years ago, the long-term overseer of the index, the British Bankers Association, has sought to correct the problems with the index. This week the Bank of England gave BBA the boot and awarded the contract to administer and improve the benchmark rate to that most American of institutions—the New York Stock Exchange! There are still a number of suits pending regarding LIBOR-related claims, but we hope the New York Stock Exchange can fix the London Inter-Bank Offer Rate dilemma. Did we mention that the new head of the Bank of England is Mark Carney—a Canadian?
The New York Times: NYSE EuroNext to Take Over Administration of Libor
4. When Is a Euro Not a Euro?
In this age of “fiat” currencies, a country’s banknote has value because the government and its central bank say it has value. The euro has value in any of the euro zones because all the countries agree that it does. But what happens when one of the countries says you can’t take the euros from their country to the rest of the eurozone? Cyprus has begun imposing wire restrictions. In fact, the President of Cyprus has said “we are already out of the euro zone.” Brussels may disagree. But what Cyprus has quietly done is create a two-tier system—freely transferable euros and Cyprus euros. Cyprus is a small economy and unlikely to cause major repercussion in the global economy. The precedent however should be worrying for those with euro remittances from countries that might consider imposing transfer constraints. Will major contracts be breached when a counterparty can no longer move his euros offshore? Let me be the first to give such blocked funds their proper designation—Zombie Euros!
The New York Times: Currency Controls in Cyprus Increase Worry About Euro System
5. A Taxing Problem for Credit Unions
It’s not really a case of David versus Goliath—it’s more David getting in a few good blows and Goliath running to their parents for help. Credit unions have always been considered the little guy – not for profit organizations owned by their depositors. For that reason they were exempt from federal taxation. However many in the banking community think it’s time for that advantage to go away. Credit unions have made major gains in the last few years. Some argue that depositors became spooked by the number of bank failures or that the general public is supportive of Occupy’s campaign to close bank accounts and support credit unions. Whatever the reason, credit unions grew by 2.7% in the first quarter of this year. Navy Federal, the nation’s largest credit union grew by 10.2% in the last year. Banks argue that credit unions have become essentially banks offering broader services than originally envisioned. Early to say whether banks win this argument with legislators or whether the credit unions remain the (quickly growing) little guy.
The Los Angeles Times: Banks pushing for repeal of credit unions’ federal tax exemption