Financial Firms May Face Curbed Size, Trading Activity
President Barack Obama on Thursday continued to campaign efforts to reform the US financial system and reign in risk-taking by financial institutions. At the same time, regulatory agencies are coordinating efforts to phase the US financial industry into full capital compliance with new accounting rules that bring assets of large investment vehicles onto bank balance sheets. In remarks made Thursday, Obama unveiled two additional proposals he said would help ensure banks don't stray too far from their central mission of serving customers. The proposed initiatives would give regulators say in limiting the size and trading activity of banks. Obama's "Volcker Rule" - named for former Federal Reserve Board chair Paul Volcker - would prohibit banks from owning, investing in or sponsoring hedge funds, private equity funds or proprietary trading operations for their own profit and other reasons unrelated to serving customers. "We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest," Obama said. "And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses." The Administration is also looking to prevent further consolidation of the financial system into a shrinking number of firms that grow so large as to be considered "too big to fail." Obama proposed applying a cap to a range of funding used by financial firms in the same way the deposit cap guards against too much risk concentration in a single bank. A week before, Obama proposed a "responsibility fee" that would essentially tax the largest financial firms until all bailout funds are returned to taxpayers. It marks the latest in a broader movement to make banks and their investment activities more transparent. The Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corp. (FDIC) and Office of Thrift Supervision (OTS) issued a final rule (download here) that establishes a transitional time period for banks to raise their risk-based capital levels after assets in off-balance-sheet transactions are brought on balance sheet. The Financial Accounting Standard Board (FASB) in June 2009 issued financial accounting standards (FAS) 166 and 167, which modify the accounting treatment of certain structured finance transactions involving a special purpose entity. FAS 166 and 167, among other things, bring the assets in special purpose vehicles like securitizations onto bank balance sheets. The institutions affected by the standards will generally be subjected to higher risk-based capital requirements. The industry for months has called for capital requirement relief under the standards, which some of HousingWire's sources have said will make securitization of commercial and residential mortgages too expensive to justify and, by extension, keep new issuance depressed. The Fed, FDIC, OCC and OTS issued a final rule establishing a transition mechanism for the risk-based capital requirements associated with FAS 166 and 167. Under the final rule, institutions have the option to delay the effect of risk-weighted assets on tier 2 capital. For those institutions that elect to delay for two quarters after the implementation of FAS 166 and 167, the final rule also allows an optional phase-in of the effects on capital over the next two quarters. "The effect of the transition mechanism on a banking organization’s risk-based capital ratios would be reflected in the regulatory capital information the organization reports in its regulatory reports for the four calendar quarter-end regulatory report dates following the banking organization’s implementation date," the agencies said in a joint statement. Write to Diana Golobay.