(Reuters) - Regulators around the world have been churning out thousands of pages of rules to make banking safer after the 2007-09 financial crisis – but five years after investment bank Lehman Brothers collapsed, they still haven’t finished.
Many of the ideas drawn up right after the crisis have proven difficult to translate into law, while U.S. regulators have sometimes disagreed or backed down on other rules when faced with intense lobbying from banks.
From the political left, there has been pressure to do more to limit the size of banks and to curb non-financial activities such as the trading of physical commodities.
Below is a selection of the new rules that U.S. regulators will be working on during the rest of the year.
VOLCKER RULE
The rule prohibiting banks from gambling with their own money is the biggest and most controversial piece of legislation yet to be finalized.
The five different agencies working on the rule are now a year behind schedule, but are saying that they will be finished by the end of 2013.
Some of the worst excesses the Volcker rule aims to prohibit have already gone after the heady days of the crisis, and the so-called proprietary trading desks - a sort of mini-hedge fund within a bank - no longer exist.
But there is a vast gray area where banks take risky positions to facilitate trading on behalf of clients. They might for instance hold inventories of securities to quickly execute customers’ buy or sell orders.
Regulators need to make a workable distinction between the latter, known as market-making, and the former, a job that is taking longer than expected and has been the subject of fierce lobbying from banks.
Banks are also worried the rule will make it hard to mitigate - or hedge - risk by taking opposing positions to keep their books neutral. They are eager to hang on to broad, so-called portfolio hedges.
The rule also blocks banks from owning more than 3 percent in hedge funds or private equity funds.
BANK CAPITAL
The U.S. Federal Reserve has come out with a spate of rules requiring banks to strengthen their business with more shareholder capital and less debt. These often go beyond what is required in the global Basel III capital accord. It is still working on the following:
- Foreign banks need to hold enough capital in America to fund their business, which they have to structure as an intermediate holding company. They can no longer rely on capital held abroad, even if it meets U.S. standards.
- The Fed, together with two other banking regulators, has proposed a hard cap on how much banks can borrow to fund their business. They must hold at least 6 percent of shareholder capital, measured against total non-risk weighted assets. At the holding company level, the ratio is 5 percent.
- The Fed will come out with a plan for the combined amount of shareholder capital and long-term debt banks should hold, to make it easier to wind them down if they fail.
- The Fed will also issue a rule for extra capital the world’s largest banks need to hold. These so-called Global Systemically Important Financial Institutions (G-SIFIs) are deemed so large and interconnected that they have the potential to bring down the entire financial system.
- It is also thinking about a rule to wean banks off risky short-term funding, possibly telling those institutions who heavily rely on such funding to hold even more capital.
POSITION LIMITS
To counter speculation, the Dodd-Frank law gave the U.S. swaps regulator far wider powers to impose caps on the positions that any one market party can hold in commodities such as metals, grains and oil.
But a court last year struck out the position limits the Commodity Futures Trading Commission had imposed, saying it had not sufficiently argued why they were needed, after complaints from groups representing Wall Street banks.
The banks’ main qualm was not so much that they could not hold large positions, but rather that they had to aggregate all their holdings, even of businesses in which they held as little as 10 percent. They complained this was costly.
The CFTC has appealed the decision and is simultaneously rewriting the rule. If it wins the appeal before adopting the new rule, the old rule kicks back into force. If it does adopt the new rule, the appeal becomes moot.
Position limits have long existed in commodity markets, but the new rules make a far bigger number of contracts these limits and give the CFTC greater power to impose them.
CREDIT RATING AGENCIES
The Securities and Exchange Commission has to finalize rules that would keep credit rating agencies - widely blamed for failing to sound an early warning about the financial crisis - on a tighter leash. The rules would force more disclosure from the agencies, and address conflicts of interest.
It also must decide whether or not to allow debt issuers to pay for ratings and set up an independent board charged to assign ratings - a provision known as the “Franken amendment,” named after Senator Al Franken, a Democrat.
In addition, all federal financial regulators are still working on a measure that requires them to strip references to ratings from their rules, in an effort to reduce investor reliance on credit ratings.
RESOURCE EXTRACTION
A rule that would require energy and mining companies to disclose payments they make to foreign governments was tossed out by a federal court in July.
The Securities and Exchange Commission has said it will not appeal the court decision but that it will redraft the so-called “resource extraction” rule, another controversial provision in the 2010 Dodd-Frank law.
MARGIN FOR UNCLEARED SWAPS
New rules require market parties entering into a derivative deal to set aside money as a safety buffer - called a margin - in case one of them can no longer pay, to prevent any problems with payments from rapidly spreading to others.
Regulators have already set these buffers for swaps routed through clearing houses - a sort of traffic control center which covers the risk of counterparty default - making this type of swap relatively safe.
The Basel Committee on Banking Supervision has now come out with guidelines for more complex swaps that cannot be cleared, and need even higher safety buffers.
That global agreement will make it a great deal easier for the five U.S. agencies to write a rule for margins on uncleared swaps in the coming months. They had previously issued proposed rules, but still need to finalize them.
MORTGAGE RULES
The mortgage industry breathed a sigh of relief in August when regulators released a proposal for rules to encourage banks to take less risk when providing home loans.
The rules will require banks to retain 5 percent of mortgages on their own books, but widened exemptions far beyond the initial proposals from lawmakers.
Crucially, regulators dropped a plan to require that all exempt loans include a 20 percent down payment. Still, loans must have no risky features such as interest-only payments, or loan terms exceeding 30 years.
The proposal has been issued for a 60-day public comment period. Regulators, including the Securities and Exchange Commission and the Federal Reserve, are expected to finalize the rule before the end of the year.
(Reporting by Douwe Miedema in Washington)
