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AFP Reg Report: New Rules for EU, U.S. Banks

  • By Konstantine Kastens, AFP Public Policy Analyst
  • Published: 4/24/2014
Recent regulatory developments relevant to treasury and finance professionals are reviewed in the AFP Reg Report. In this issue: The EU ‘banking union’ package, Basel III, cybersecurity legislation, business tax provisions, and more.

A wave of banking rules moved through the European Parliament in the days leading up to a final recess before May elections.  EU lawmakers overwhelmingly passed a ‘banking union’ package that, amid several reforms, consolidates supervision of the European banking system under the European Central Bank, creates an EU authority to resolve failing banks and requires the EU’s 28 member-states to build a depository insurance system for their respective banks.  A large part of the new rules focus on treatment of debtors and creditors during payment defaults.  Some financial regulatory initiatives sought to be approved before May elections were unsuccessful. In March, a scheduled vote to impose capital buffers on money market funds was tossed out after concerns about investment viability were raised.

The U.S. Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Currency (OCC) adopted leverage-ratio guidelines issued by Basel III on April 8. The finalized rule imposed on the eight largest bank holding companies require that their top-tier capital holdings be boosted to 5 percent and 6 percent in total assets for FDIC-insured banks.  Banks will have to comply with the new ratio by January 1, 2018—which seeks an even stricter level than the 3 percent imposed by Basel III—.  

Two more proposed Basel III guidelines in conjunction with the leverage-ratio are due: the liquidity coverage ratio (LCR) and capital surcharge. The liquidity standard is broken into two divisions. The first part is a net stability ratio, which sets new long-term liquidity risk measurements with greater limitations that lessen reliance on short-term funding. The second part, introduced as a proposed rule last fall, is a short-term liquidity requirement that forces banks to meet liquidity standards under 30-day stress periods.

The Merchants and Financial Services Cybersecurity Partnership, a recently-created bank-retailer coalition, announced plans to release a statement of principles that could help guide efforts on Capitol Hill to reach agreement on cybersecurity legislation.

In early-April, the U.S. Senate Finance Committee, under the new chairmanship of Sen. Ron Wyden (D-OR), cleared a series of business tax provisions totaling $86 billion for two more years. Most of the ‘tax extenders’ marked-up expired last December, while some continue through 2014.  Senate Majority Leader Harry Reid (D-NV) has signaled a possible vote in late-April.

Still, Senate action on tax extenders faces a steep hurdle in the lower chamber, where approval from the U.S. House Ways and Means Committee remains unclear. Rep. Dave Camp (R-MI), chair of the corresponding House tax writing panel, has expressed no immediate urgency to move forward with the vote. Camp released a memo in late-March indicating that he intended to look at each extension individually and only within the scope of comprehensive tax reform.  He added that subsequent hearings would be held focused on specific provisions under consideration. However, with November elections poised to make the Senate majority a toss-up, the Republican-controlled House may see to their advantage waiting on any tax votes until after midterm elections.

In the same vein, comprehensive tax overhaul proposals released in both chambers within the last six months lack the support necessary to be adopted in 2014. Former Senate Finance Chairman Max Baucus (D-MT) had released a three page discussion draft late last year that simplifies and repeals many special tax preferences to offset  an overall corporate tax rate reduction below 30 percent.   House Ways and Means Chairman Camp approached overhaul with a similar tax code restructure, but added revenue tradeoff specifics and a plan to move U.S. international tax treatment toward a territorial system.  Although neither proposal has sufficient support, their specifics will likely serve as a foundation for what ultimately is agreed upon.  

The Coalition for Derivatives End-Users, an advocacy network that includes AFP, released a 2014 survey on the impact of margin requirements on non-financial businesses using over-the-counter derivatives.  Analyzing 43 financial practitioners from various industries that purchase derivatives to hedge against financial risk, more than 67 percent of respondents felt margin requirements would inhibit capital expenditures within their businesses. Almost all respondents agreed posting margin would alter current hedging practices, and many were unsure whether the CFTC-issued exemption from clearing requirements applied to their businesses because their trades were executed through a centralized affiliate platform.

Another recent report issued by the International Swaps and Derivatives Association (ISDA) also surveyed derivatives end-users globally touching more generally on their reaction to structural changes within the financial system.  Of the 245 respondents, most felt that the financial system was indeed on stronger footing than prior to the financial crisis. Although 68 percent agreed that new financial landscape would raise costs, 61 percent still felt that margin requirements were either important or very important to facilitating market safety. Almost half of those surveyed submitted that market fragmentation drawn out geographically was occurring as a result of new regulatory framework imposed in different global regions.
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