Banking Law Prof Blog

FDIC Proposes Requiring Banks to Prepay Deposit Insurance Premiums through 2012

The FDIC Insurance Fund will be insolvent this week -- but Chairman Sheila Bair has a plan:  Under the pending proposal, FDIC-insured banks would be required to prepay deposit insurance premiums through 2012.  That's enough to wipe out all earnings by the banking industry this year.  Besides that, assessments will increase substantially in 2011. 

Oh, and there's some funny accounting to go with the proposal:  Banks don't have to record the prepayment as an expense until it would have come due originally.  So, for "regulatory accounting purposes" (should still be a bad word from the S&L regulatory forbearance days of the 1980s crisis), these payments will show up on all banks' financial statements as an "asset" called "prepaid expense." 

The deposit insurance fund deficit, caused by the high number of bank failures and bailouts, could have been fixed by:  1. assessing the banks a higher amount right now, 2. getting a loan from some of the biggest banks, or 3. drawing on FDIC's line of credit at Treasury.  FDIC didn't want to choose the third option because it would have looked like another taxpayer bailout -- even though the loan would eventually be repaid through bank assessments.

Link to story: http://www.nytimes.com/2009/09/30/business/economy/30regulate.html?em=&adxnnl=1&adxnnlx=1254348103-/c2jE77CHL9r/1moKKOxnw

(ag) Sept. 30, 2009, in FDIC

What the IMF Says About the Global Financial System

Today, the International Monetary Fund said that "the global economy has turned a corner."  But we still need a thorough restructuring of the international financial system.

According to the IMF, the bank rescues and the stimulus package are workin.  However, problems in commercial real estate could present additional problems.

Link to NY TIMES article on the IMF's "Global Financial Stability Report":  http://www.nytimes.com/2009/10/01/business/global/01imf.html?_r=1

(ag) Sept. 30, 2009, in Economy

Executive Compensation - "Say on Pay"

The September issue of CFO Magazine has an article entitled "The Crackdown Continues" by Josh Hyatt.  It's referring to "say on pay" legislation that could give shareholders a referendum vote on executive compensation. 

I'm quoted!

Link to article:  http://www.cfo.com/article.cfm/14292511

(ag) Sept. 30, 2009, in Executive Compensation

Consumer and Banking Law Professors Support Consumer Financial Protection Agency

On September 30, 2009, the House Financial Services Committee, chaired by Representative Barney Frank, will hold hearings on H. 3126, titled “the Consumer Financial Protection Act” which would create an independent Consumer Financial Protection Agency.

Today more than seventy law scholars who teach in fields related to consumer law and banking law have signed a detailed Statement of Support demonstrating their strong views about the importance of this legislation.

I am one of the signatories to this letter urging Congress to put some teeth into consumer financial protection.

Link to Press Release:  http://law.hofstra.edu/NewsAndEvents/PressReleases/pressreleases_20090928_consumer.html

(ag) Sept. 29, 2009, in Consumer Protection/Financial Regulatory Reform

Systemic Risk Regulation for the EU

The European Union is proposing to establish a new European Systemic Risk Board (ESRB), an independent multi-member board to focus specifically on identifying risk to the stability of the EU financial system as a whole. 

 

This contrasts with proposals currently circulating in the U.S. to concentrate systemic risk regulation in the Federal Reserve, which already has a lot on its plate with regulating monetary policy.  Further, concentrating systemic risk regulation in the hands of one agency forfeits the benefits of different viewpoints and increases the risk that the Fed, acting alone, will miss the mark – as it did on former Federal Reserve Board Chairman Alan Greenspan’s watch when it held interest rates too low for too long, contributing to easy credit which fueled the subprime lending orgy.

 

LInk to Speech by Link to Speech by
Lucas Papademos, Vice-President of the European Central Bank, "Financial Stability and Macro-prudential Supervision: Objectives, Instruments and the Role of the European Central Bank, Address at Center for Financial Studies Conference on the ECB and Its Watchers XI, Goethe University, Frankfurt, Germany (Sept. 4, 2009), http://www.bis.org/review/r090908c.pdf

 

(ag) Sept. 28, 2009, in Financial Regulatory Reform

 

Lessons in Bank Consolidation Issues

From today's CSBS Examiner:

"For every problem, there is a solution that is simple, neat -- and wrong." – H.L. Mencken

"Dateline Perth, Australia - This just in. The continent "down under" has seen such consolidation in its 17-bank financial system that it's now dominated by four big banks. This doesn't sit well with former Prime Minister Paul Keating, who this week publicly chastised his successor for not doing more to preserve competition in the banking sector. According to a report in Perth Now, "Mr. Keating also warns that the growth of the big four banks during the global financial crisis presents a ‘systemic risk’ to the Australian economy."

Sound familiar? A world away, we find ourselves fighting the same "too big to fail" battle but with little evidence of the will in Washington that’s needed to resolve its root causes.    While painful to acknowledge, a handful of the biggest banks and Wall Street firms have become the new GSEs with implicit government backing and are competing against the 8,000 other banks whose lifelines are their own bootstraps.  Let’s hope that the lessons of Fannie and Freddie haven’t been lost in Washington."

(ag) Sept. 25, 2009, in Financial Regulatory Reform

Regulatory Turf Wars Impede Comprehensive Financial Reform

In the wake of the current financial crisis, the U.S. financial regulatory structure needs dramatic overhaul.  Following the Market Crash of 1929, the U.S. adopted many sweeping reforms that worked well for at least half a century.  We stand at another such crossroads.

It would be admirable if current regulators could look at the big picture instead of guarding their own territory.  Shilling for the status quo is not good for the country as a whole.

My review of OCC testimony before the House Financial Services Committee on September 23, 2009, yields stong concerns that the focus at OCC is much too self-centered.

1.  The OCC opposes giving the Fed, as systemic regulator, the power to override OCC.  Wait a minute, we would be talking about a situation that could affect the entire economy.  Why should national banks be exempt from nation-wide systemic regulation? 

2.  The OCC supports the proposed Consumer Financial Protection Agency (CFPA) in principle, but again argues that this new national approach should exempt national banks and allow OCC to enforce consumer protection laws.  The OCC did not have the resources or the will to do this job in the past.  What has changed?

The OCC opposes giving the CFPA any ability to check on compliance with consumer protection rules.  Again, why exempt national banks?  Each federal banking agency now has a special team of examiners who conduct "compliance exams" separate from "safety and soundness exams."  So there is no logical reason to oppose granting the agency responsible for writing all consumer protection regulations the power to examine all financial institutions, including national banks, for compliance with those same regulations.  Discussions about staffing the new agency suggest that the existing compliance examiners from all federal banking agencies, including OCC, would simply move to the new agency.  Why not assume that CFPA would cooperate with state and national agencies responsible for safety-and-soundness?  There is already a well-established, successful model for cooperation between Federal Reserve examinations and state bank examinations.  Surely the national bank regulator, whatever that may look like in the future, could also cooperate with others.     

3.  The OCC opposes any rollback of federal preemption that would allow states to address problems like predatory lending within their borders.  There's no mention of the fact situation in Cuomo v. Clearing House Association, in which national banks and the OCC stonewalled efforts to get more information about apparent racial discrimination in residential loans made by national banks in New York.  There's also no mention of the fact situation in Wachovia v. Watters, in which a nonbank state corporation engaged in mortgage lending purposefully escaped state regulation by becoming a subsidiary of a national bank.  Not a great track record of enforcing any kind of consumer protection or of cooperating with the states.  Absent dramatic changes, the OCC is not the place to lodge any kind of consumer protection powers.  As Congressional testimony indicates, OCC's only concerns focus on the fact that different standards in different states would cut into the profitability of national banks. 

4.  Of course, they support merging OTS into OCC.  Not that reasonable minds differ on this point, but it would be informative for the record to show the rationale, other than enlarging regulatory territory.  This gets one line in OCC's Congressional testimony:  "And we support the proposal to effectively merge the OTS into the OCC."

The purpose of this post is to express concern that all existing regulators should do what is best for the economy and financial institution regulation as a whole instead of shielding their own turf and their own regulated entities at the expense of a comprehensive financial regulatory structure.  No agency and no charter is an island.

Congress needs to take the difficult but statesman-like path to well-reasoned, comprehensive regulatory reform.  Otherwise, we'll be in the middle of the next financial crisis before we can fully recover from this one.

LInk to Testimony:  http://www.occ.gov/ftp/release/2009-110a.pdf

 (ag) Sept. 25, 2009, in Financial Regulatory Reform

 

Hot Off the Press: FOMC Statement Today

The Federal Reserve's Federal Open Market Committee (FOMC) met today and announced a unanimous vote to keep the target federal funds interest rate where it its:  0% to 1/4%.

The FOMC Statement indicated that economic activity has picked up after the severe downturn. 

The announcement also discussed current steps anticipated with respect to the Fed's assistance to the U.S. housing market through purchasing mortgage-backed securities:

"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009." 

Link to FOMC Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20090923a.htm  

Link to AP Story:  http://news.yahoo.com/s/ap/20090923/ap_on_bi_ge/us_fed_interest_rates

(ag) Sept. 23, 2009, in Economy/Interest Rates

The Bailout Makes a Full Circle? FDIC May Borrow Money from Banks to Stay Afloat

Well, if this doesn't beat all as a proposal!  FDIC needs to replenish the insurance fund it has drained to deal with bank failures.  In the past, FDIC has imposed fees or assessments on the surviving banks in the industry to build the fund back up.  Now, however, the American Bankers Association has endorsed a proposal (not a done deal yet) whereby large banks would loan money to the FDIC -- even though they themselves are still relying on FDIC guarantees and emergency subsidies.  This would allow FDIC to avoid drawing on a line of credit from Treasury and would keep this rebuilding of the insurance fund within the industry rather than tapping taxpayers. 

Link to story:  http://news.yahoo.com/s/ap/20090922/ap_on_bi_ge/us_banks_fdic_bailout

(ag) Sept. 22, 2009, in Economy, FDIC

Bank Overdraft Charges - Called on the Carpet Again

Many banks see overdraft charges as a great souce of fee income now that interest margins are slim.  The positive side of overdraft protection for customers is that they don't have to worry about bouncing the mortgage check.

Many customers, however, are livid about overdraft fees that they don't know they will incur and charges that are outrageously disproportionate to the amount of the overdraft itself.

Congress is sure to take up this hot topic.

Link to story:  http://www.washingtonpost.com/wp-dyn/content/article/2009/09/20/AR2009092002879.html?wpisrc=newsletter&wpisrc=newsletter&wpisrc=newsletter

(ag) Sept. 21, in Banking

Kudos for a New Approach to Global Economic Development

The Washington Post today ran a story about efforts by US AID to promote economic development in Pakistan.  Domestically and internationally, we often focus our study and efforts on hard numbers and big business.  It's refreshing to be reminded that people count, too.  Imbalance between haves and have-nots in our own country and in the world could spur the next global crisis.

Link:  http://www.washingtonpost.com/wp-dyn/content/article/2009/09/21/AR2009092100617.html?wpisrc=newsletter&wpisrc=newsletter&wpisrc=newsletter

(ag) Sept. 21, 2009, in Economy

Symposium: Securities Regulation & the Global Economic Crisis

The Seton Hall Law Review is hosting a symposium on "Securities Regulation and the Global Economic Crisis: What Does the Future Hold?"  on Friday, October 30, 2009, at Seton Hall University School of Law in Newark, NJ. 

The program features both academic presenters and practicing securities lawyers from firms and corporations.  Topics to be discussed include: 

• Risk Management
• Director & Officer Liability
• Shareholder Activism
• Corporate Insolvency
• The Case Against the TARP Bailout
• International Financial Regulation

Link to information about the symposium:  http://law.shu.edu/Students/academics/journals/law-review/symposium/index.cfm

 

The Fed Flexing Its Muscles Over Executive Pay

The Federal Reserve is considering a plan to exercise unprecedented power over bank executive compensation.  The Wall Street Journal reports that the Federal Reserve claims authority to investigate and veto excessive compensation at financial institutions based on its safety-and-soundness regulatory power.

Link:    http://www.newser.com/story/69721/fed-plans-to-oversee-bankers-pay.html

(ag) Sept. 18, 2009, in Executive Compensation, FRB

Financial Crisis Inquiry Commission Up and Running

Today's Forbes.com article by Anne Flaherty, "Panel begins inquiry into financial meltdown," reports that the 10-member Financial Crisis Inquiry Commission is beginning its investigation of large financial firms involved in the crisis, including Lehman Brothers, Bear Stearns, Citigroup, AIG, Freddie Mac, and Fannie Mae, with a report expected to be issued before year-end. 

Will we see productive analysis or fingerpointing?

Link:  http://www.forbes.com/feeds/ap/2009/09/17/general-financials-us-financial-meltdown-commission_6900070.html

(ag) Sept. 17, 2009, in Economy, Financial Regulatory Reform

Thanks to one of the readers of this blog for pointing out this article!

FDIC Completes First Sale of "Legacy Loans" AKA "Toxic Assets"

Yesterday, FDIC announced the winning bidder and explained the process for the Pilot sale of "legacy loans."  This package of legacy loans involves the unpaid principal balance of $1.3 billion in residential mortgage loans acquired by FDIC through the failure of Franklin Bank, SSB, Houston, Texas.

FDIC's Press Release explains the successful bidder's purchase price and the FDIC guarantee.

Link: http://www.fdic.gov/news/news/press/2009/pr09172.html

(ag)  Sept. 17, 2009, in FDIC

Status Report on Financial Stabilization

The Treasury Department has issued a Status Report on Financial Stabilization Efforts to date.  Treasury Secretary Timothy Geithner described the current state of government intervention as having moved "from crisis response to recovery, from rescuing the economy to repairing and rebuilding the foundation for future growth.  The critical imperative we face as a country is making sure that the same vulnerabilities in our system which gave rise to this recession are not allowed to trigger another. To do that, we must pass comprehensive regulatory reform legislation by the end of the year."

Link:http://www.treasury.gov/press/releases/tg285.htm

(ag) Sept. 16, 2009, in Economy, Financial Regulatory Reform

Recession Over? What Do You Think?

Federal Reserve Chairman Ben Bernanke told an audience at the Brookings Institution today that, "From a technical perspective, the recession is very likely over at this point."  He did acknowledge near-record high unemployment levels may cause some to differ with his conclusion -- especially those who are feeling the pain of unemployment.

LInk:  http://news.yahoo.com/s/ap/20090915/ap_on_bi_ge/us_bernanke

(ag) Sept. 15, 2009, in Economy

New North Carolina Legislation to Protect Consumers from Foreclosure

On September 9, 2009, North Carolina Governor Bev Pedue signed into law The Consumer Protection Act of 2009.  The Clerk of the Court presiding over a foreclosure hearing may continue the hearing for 60 days to allow the borrowers and the lender to work together to avoid foreclosure.

The new law also contains protection from certain types of unfair debt collection.  Debt buyers must now prove their right to collect the debt.  This is to prevent unscrupulous persons from buying old debt and aggressively suing to collect debts that may have been paid or discharged.

Link:  http://www.governor.state.nc.us/NewsItems/PressReleaseDetail.aspx?newsItemID=611

(ag) Sept. 14, 2009, in Consumer Protection

Today's Scary Story Says the Biggest Banks Are Regaining Their Appetite for Risk

AP Reporter Stevenson Jacobs' story entitled "Risk Taking Is Back for Banks One Year After Crisis" provides disturbing data on bank investment activities.  The conclusion is that significant systemic risk remains unaddressed as yet. 

LInk:  http://news.yahoo.com/s/ap/20090913/ap_on_re_us/us_meltdown_same_old_wall_street

(ag) Sept. 13, 2009, in Economy, Financial Regulatory Reform

Higher Fees Proposed for "Systemically Significant" Banks

Top White House economic adviser Lawrence Summers supports higher fees for "systemically significant" banks as part of the regulatory reform package sought as a result of the current economic crisis.  Higher fees would be an incentive not to grow "too big to fail." 

Link to story:  http://www.star-telegram.com/business/story/1607247.html

(ag) Sept. 11, 2009, in Economy, Financial Regulatory Reform