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Banking and HR 2847: Hiring Incentives to Restore Employment Act

Posted by Wendell Brock on Thu, Jul 01, 2010

On March 18, 2010, President Obama signed HR 2847, unbeknown to most this law has several banking implacations/regulations and new taxes, even though it is not disclosed by its name: the Hiring Incentives to Restore Employment Act.

Much of the press and commentary about the resolution has centered on the tax benefits it affords to businesses that hire new employees between February 3 of this year and January, 1, 2011.

What has gone mostly unnoticed is how these incentives will be paid for by the Foreign Account Tax Compliance provisions known in Title V of the Act as Offset Provisions.


Part I: Increased Disclosure of Beneficial Owners

Financial institutions that make payments, on behalf of their customers, to Foreign financial and nonfinancial institutions must withhold 30% of payments made to those institutions, unless such institutions agree to disclose the identity of such individuals and report on their bank transactions.

The bank risk for not withholding the 30% is with the financial institution that initiated the transfer of funds – in other words, the bank will be responsible to send to the IRS the 30% it should have withheld. The individual sending the money will be responsible to get a refund from the IRS on their tax return. Also denies a tax deduction for interest on non-registered bonds issued abroad.

Part II: Under Reporting With Respect to Foreign Assets

Anyone with more than $50,000 in a depository or custodial account maintained by a foreign financial institution must report it. Underpayments resulting from undisclosed foreign financial assets will incur an enhanced penalty.

Part III: Other Disclosure Provisions

U.S. shareholders of a foreign investment company must file annual returns.

Part IV: Provisions Related to Foreign Trusts

A foreign trust has a U.S. beneficiary if the beneficiary's interest in the trust is contingent on a future event or such beneficiary directly or indirectly transfers property to such trust or uses trust property without paying compensation to the trust. Owners of foreign trusts must report them in their taxes, and they will be penalized if transfers to and distributions from such trusts aren’t reported.

Part V: Substitute Dividends and Dividend Equivalent Payments Received by Foreign Persons Treated as Dividends

A dividend equivalent payment is considered a dividend from a source within the United States for purposes of taxation of income from foreign sources and tax withholding rules applicable to foreign persons.


Delay in Application of Worldwide Allocation of Interest

Delays until 2021 the application of special rules for the worldwide allocation of interest for purposes of computing the limitation on the foreign tax credit.


Budgetary Provisions

Increases the required estimated tax payments for corporations with assets of not less than $1 billion in specified calendar quarters. Provides criteria for compliance with the Statutory Pay-As-You-Go Act of 2010.


Topics: Banking, Bank Regulation, Bank Risk, Bank Regulations, Foreign Banks

Next-generation Compliance for Banks

Posted by Wendell Brock on Wed, Feb 17, 2010

Compliance. An issue most bankers don't relish. Often times it is explained away as a necessary evil! This approach makes difficult for the bank to stay on top of compliance issues and often leads to problems with examiners. This leads to compliance waves where the compliance officer works to get things ready for an exam or audit then the work load relaxes until the next exam or audit.

Based on the current state of affairs, most banks' find themselves overwhelmed with compliance workloads; they have limited staff and schedules, along with the increase demands from examiners, who want more risk management. Internal audits are conducted by just a few people, typically, they are reactionary, and they utilize outdated technology, if any technology at all. The workload is not slowing down anytime soon-if anything it is increasing.

What we propose is a complete rethinking of compliance-to what is called "Next-generation Compliance"-this is where banks are proactive with compliance rather than reactive. It smoothes out the waves and distributes the work throughout the organization, which makes the compliance load much lighter and much easier to manage. Such a change must happen on three levels: a bank's operational culture, their level of collaboration, and the technology used in audits.

I. Culture

  1. 1. Devise a compliance strategy
  2. Get executives onboard with the strategy
  3. Promote all team members to be proactive
  4. Create metrics to quantify the value of proactive compliance
    • Does compliance result in an increased speed of reporting?
    • Quality compliance management response?
    • The larger scope includes overall compliance simplicity?
    • Money and time saved?

 II. Collaboration

  1. 1. Include people from multiple departments in compliance audits
  2. Standardize process across all areas of compliance audits
  3. Be flexible, and have reasonable expectations
  4. Make your auditors business-focused, independent, strategists
    • They shouldn't be on an island
    • Promote productivity
  5. Communication with regulators
    • Involve them in the process early so they understand the improvements from the positive changes

III. Technology

  1. 1.Reassess your current compliance tools
    1. Is technology working efficiently for you?
    2. Break from the spreadsheet! You can't properly collaborate from a spreadsheet - there are easier ways
  2. Increase use of collaboration tools to centralize the compliance audit workflow
    1. With them, everyone can discuss and facilitate improved risk management
  3. Track the use of audit recommendations
    1. What good are recommendations if they aren't used?
    2. Provide continuous up-to-date analysis/status of risk management

Compliance and Banking

Regulators are asking for more risk management and compliance, but banks aren't able to address this increased workflow with more manpower. With tighter operating budgets, the solution is working smarter. Often times when a bank is not able, to deliver properly on compliance issues it results in the issuance of an MOU or a C&D to the bank. Restoration plans and strategies may be implemented and managed through continuous compliance.

If you're buying a bank, the regulatory hurdles are less. But modifying an existing bank's compliance processes requires a team effort; it's all about building a smarter bank!

If you're starting a bank, a culture of compliance can be built from the ground up as your institution evolves. A blank slate is easy to work with. But at the same time, new banks are subject to harsher regulatory scrutiny, which means compliance has to be a priority.

To learn more about Next-generation Compliance, click the link for more information. 

Topics: Buy a bank, Bank Risks, regulators, Bank Regulators, Bank Regulation, Regulations, Bank Policies, Risk Management, Bank Regulations, Building Smarter Banks, Start a bank, Smarter Banks, Restoration Plan, distressed banks, Compliance, Next-generation Compliance

Bair Says More Regulation is Needed

Posted by Wendell Brock on Mon, Nov 02, 2009

Sheila Bair argued to Congress last week that the government should "impose greater market discipline on systemically important institutions." Her rationale for the argument was that those large firms have been funded by the market as if they were too big to fail, while their management teams depended on faulty risk management practices; these circumstances, combined with ineffective regulation, created a the bulk of our current economic problems. Bair's commentary indicates that we will ultimately have much more regulation throughout the financial industry, simply because what happens to large institutions will trickle down to impact the smaller community banks.

Bair went on to say:

In a properly functioning market economy there will be winners and losers, and some firms will fail. Actions that prevent firms from failing ultimately distort market mechanisms, including the market's incentive to monitor the actions of similarly situated firms. The most important challenge now is to find ways to impose greater market discipline on systemically important financial organizations.

Shareholders, creditors to take losses

It is true that we need to create an effective, bailout-free system to unwind large failing institutions - and to do so without creating a financial tsunami that wipes out the rest of the economy. But the reality is that everyone will feel the impact of a large institution's failure. It is impossible that a CitiBank, Wells Fargo, Bank of America or Chase failure could result in only a slight ripple through the economy. Those closest to the institution will feel the pain the most and people on the far fringe, the least -- but it will be felt by all nonetheless. The government needs to stop trying to make our lives pain-free in all aspects of life. We simply cannot be shielded from ALL risks.

In the current meltdown, for example, shareholders felt the brunt of the financial crisis pain. Investing is an inherently risky enterprise, and to devise regulation that would soften the impacts of investment failure runs contrary to the tenants of our economic system. Because shareholders voluntarily took risks with the companies they invested in and supported, they should absorb the repercussions when those firms fail.

Bair agrees with this argument. She advises:

Under the new resolution regime, Congress should raise the bar higher than existing law and eliminate the possibility of open assistance for individual failing entities. The new resolution powers should result in the shareholders and unsecured creditors taking losses.

Bair also addresses the current priority given to secured creditors. Such creditors have, in the past, made credit decisions based on collateral value without thoughtfully considering creditworthiness as well. This puts the creditor at risk of default and forced liquidation, while encouraging lack of discipline in the market. Addressing this issue can help to minimize costs to receivership and spread out losses related to failures more broadly.

Other key points in Blair's testimony included:

  • Resolution of systemically important financial firm failures is currently managed through the bankruptcy process, where there is no protection for public interest.
  • Holding company affiliates are often dependent on the ongoing operations of systemically important firms. Regulation is needed to require these affiliates to have greater autonomy. Holding companies should have wind-down plans.
  • Open company assistance benefitting shareholders and creditors should be banned by Congress.
  • A Financial Company Resolution Fund should be established and pre-funded through assessments against large financial firms.
  • The FDIC should have authority to resolve "systemically important and non-systemically important depository institution holding companies, affiliates and majority-owned subsidiaries." This authority would allow the FDIC to maximize the value of the assets, particularly in cases where certain functions lie outside the FDIC's current authority.
  • The FDIC supports the creation of a powerful Financial Services Oversight Council to monitor and manage system-wide risks. The Council should be given a minimum rulemaking authority "that must be met and could be exceeded." The Council should oversee a group of regulators, but also have its own power to act if the regulators do not.
  • The full text of Sheila Bair's testimony can be found at:

    Topics: FDIC, FDIC’s, Bank Regulators, Commercial Banks, Bank Regulation, Bank Regulations, Troubled Banks

    Bank Regulators Propose Liquidity Risk Managements Guidelines

    Posted by Wendell Brock on Wed, Jul 22, 2009

    Bank Regulators Solicit Comments on Proposed Liquidity Risk Managements

    The U.S. federal bank regulators (OCC, FRB, FDIC, OTS) along with the National Credit Union Association (NCUA) have collectively produced a set of guidelines regarding liquidity risk management for financial institutions. The agencies are soliciting public comments on these guidelines through September 4.

    The proposed guidelines define a framework for the identification, measurement and monitoring of funding and liquidity risk; they include specific recommendations for:

    • corporate governance
    • risk mitigation
    • management of intraday liquidity

    The responsibility of board members

    Under the proposed guidelines, an institution's board members are ultimately responsible for managing liquidity risk. The board must therefore establish an appropriate level of risk tolerance for the institution, and then communicate that risk tolerance profile to the internal management team. At least annually, the board should revisit the liquidity strategy to ensure that:

    • current liquidity risks are understood
    • the liquidity policy is still relevant and appropriate
    • the policy is being enforced
    • it is clear internally which senior managers are responsible for making liquidity risk decisions

    Key aspects of an institution's liquidity plan

    The institution's liquidity management plan should:

    • be appropriate given the complexity of the institution's structure and activities
    • identify primary funding sources, both for daily needs and seasonal or cyclical needs
    • define acceptable liquidity strategies, both for expected and unexpected business scenarios
    • address liquidity management in terms of separate currencies and/or business lines, where appropriate
    • address how the liquidity management practices dovetail with broader business strategies and contingency planning

    The plan should establish liquidity projection assumptions and a periodic review process, to ensure that those assumptions continue to be valid over time. Qualitative targets and quantitative objectives should be clearly defined. Examples include:

    • Unpledged liquid asset reserve targets
    • Funding diversification targets
    • Contingent liability exposures
    • Desired asset concentrations
    • Activity exposures
    • Targeted level of unencumbered assets to serve as liquidity cushion

    The guidelines also recommend that senior managers receive liquidity reports at least monthly, or more often when economic conditions are severe. Board members should be evaluating the institution's liquidity position at least quarterly.

    It is also advised that complex institutions make efforts to build liquidity costs into internal product pricing and performance measurement.

    Risk measurement and reporting

    Institutions are expected to measure ongoing liquidity risk with short- and long-term cash flow projections that consider both on- and off-balance sheet items. As part of this process, the institution should have measures in place to ensure the appropriate valuation of assets. Other key components of an appropriate liquidity monitoring strategy include:

    • regular stress testing
    • collateral position management
    • procedures to monitor liquidity across business lines and legal entities
    • procedures to monitor and manage intraday liquidity position

    The report also addresses liquidity risk management practices for holding companies. Read the Proposed Interagency Guidance here and ( ) let us know what you think. Are these recommended procedures detailed enough to head off unexpected liquidity crises when economic conditions sour? Have the agencies overlooked key liquidity management tactics? Or are these guidelines too much?

    Topics: Bank Regulators, Bank Regulation, Regulations, Bank Policies, Bank Regulations, Bank Liquiditity

    What Must Be Done

    Posted by Wendell Brock on Thu, Oct 02, 2008

    With the continuing debate over the health of the U.S. financial system, Wall Street and the economy, everyone's talking about whether taxpayers should be responsible for the bailout. But perhaps the conversation would be more productive if we talked about what else we can do to avoid the bailout and shut down the power-grab that's currently playing out. And, yes I say power-grab because anytime the government gets involved , it takes power away from the people. Period. If our lawmakers give Wall Street the $700 billion, they are taking away the public's power to spend money as we wish-because we have to pay higher taxes to cover those bailout costs. The people who receive the $700 billion will have to untie the knots in the strings attached, just to get to the money. That reduces their freedom to make decisions in this new, less-than-free market.

    For those reasons, we should be looking at other alternatives. Here are two things that must be done to alleviate the current situation:

    1. Change how banks account for the assets on their books

     2. Repeal Sarbanes Oxley (SarBox)

    Booked Assets

    Several years ago, politicians determined that banks assets should be marked to the market. This means that the value shown on the books has to be the current market value, or the amount the asset can be sold for at that time. This doesn't work, simply because the underlying value of the asset may not change as fast as the market. For example, say a bank spends $10 million to purchase a mortgage-backed security or MBS (a bond), which holds the mortgages of fifty $200,000 loans at 5 percent. The fifty houses tied to those mortgages have value and that value moves up and down over time. But those value changes won't happen as quickly as the interest rate changes on Wall Street. After all, once the mortgages are turned into a bond, they are traded as other bonds; thus, the value is largely based on market interest rates. Of course, an MBS investor has the added concern of relying on fifty homeowners to make their payments, while a corporate or government bondholder only relies on one entity, the issuer, to make those debt payments. But this is part of the added risk MBS represent-that one or more people will miss a payment, or that a property falls into default and is foreclosed.

    Because these MBS assets are market-traded, their value is constantly changing. And since the assets must be marked to market, their value on the bank's balance sheet should experience the same constant changes. This works out alright, as long as the movements are small. In the current environment, however, the downward pressure has driven the market value of the MBS so low that no one is buying or selling them. The market has essentially stalled. And that means the value of the MBS is close to nothing! Now, the fifty mortgaged homes underlying the MBS still have value, and perhaps all fifty homeowners are still making their mortgage payments as promised. So is the MBS actually worth nothing? No! But accounting rules require that banks reduce the value of these assets to something close to zero, because that is what the market will pay.

    A better option would be to use a three-year rolling average of the value. Doing that would imply a far higher value currently, but it would be a value that is more reflective of the underlying assets (those fifty houses). Even though the homes' values may have fallen 10 or 20 percent, the MBS is still worth something, as long as those homeowners are making their payments. Even in a foreclosure situation, there is still value in the house. The rolling average allows for a smoother change in asset values (up or down) and provides time for banks to work out problem assets.

    In an up-market, the rolling average allows for a slower climb up, which limits growth. This would provide a little distance and help keep values in perspective. Under this system, we most likely would not have seen the crazy growth in asset values that we saw in the past several years. Some people figure this could put $500 billion back on the books of banks!

    The Repeal of SarBox

    Sarbanes Oxley has failed in its purpose. It was passed in reaction to faulty auditing in a few big public companies that failed. This was supposed to help the public see into what is really going on in a company by making the financial statements more transparent. Obviously, this did not work. Fannie Mae and Freddie Mac, AIG and Lehman Brothers were all public companies and they failed, catching many investors off guard.

    SarBox has succeeded in making the process of becoming a public company so onerous and expensive that companies are looking to other methods for capital rather than going public. This creates several relevant consequences for consumers and investors:

    1. The number of available companies to invest in is reduced.

    2. The value of current public companies is inflated.

    3. The ability to bring good ideas to the market place is limited.

    4. The number of people who want to be involved in public companies is reduced.

    The extra regulatory expense of compliance is ranges from $100,000 to $3,000,000 or more annually, per public company. To pay this expense, the companies raise the prices they charge for their goods and services, which places the cost burden on consumers. Higher prices reduce sales and profitability of the companies. It's simple economics.

    Monthly, millions of people invest millions of dollars in the equity market through their retirement plans. If there are no new businesses to invest in, the stock prices of the current businesses rise. Retirement savers are bidding prices up so they can own something, anything in the equity market. For example, say the stock market in 2004 consisted of 5,000 companies, and $100 million of new money poured in every year from retirement plans and investors. If 250 new companies were brought to the public market each year, the stock market today would have 6,000 companies absorbing investments of $400 million. In reality, that has not happened. So if the market stays at 5,000 and the same additional $100 million is invested annually, then the stock prices of those 5,000 companies would go up-simply because more money is being poured into the market. Has there been a change in the true value of these companies? No, the price was simply bid up because there was more money to buy. Many companies are not going public because of the SarBox hassle factor so there are fewer IPO's hitting the street.

    The expense of SarBox also prohibits companies from coming to the market with their good ideas. Many people and their companies have chosen to find other methods of financing to avoid dealing with the added regulation of SarBox. One executive told me that it was just "too much of an expense and headache," because the company "would have to hire a compliance person at $60,000-$100,000 per year along with the added auditing expense of another $100,000 per year and the additional filing expenses another $20,000 or so." And, in the end, this executive didn't figure the expense was worth the problems. SarBox requires the board and management to take personal liability for all the problems of the company. People don't want to do that! Responsibility is critical in any business venture, but no CEO or board member knows every detail of what is going on in any company. And yet, these executives are personally liable for all activities of the company. Many people do not need the increased liability; this is akin to driving without insurance. This again keeps good companies from coming to the marketplace.

    Modifying the mark-to-market requirement and repealing SarBox would bring billions back to the books of banks and strengthen their balance sheets. The result would be fewer bank failures, more companies in the marketplace, more choices for investors and, probably, lower prices. These are not the only solutions, but they are a major step in the right direction.

    Topics: Bailout, Commercial Banks, Bank Regulation, Bailout Options

    House Passes Regulatory Relief Bill with Bipartisan Support

    Posted by Wendell Brock on Fri, Jun 27, 2008

    This is important news regarding a new level of opportunity and regulations for all financial instutions, including allowing banks to pay interest on commercial checking accounts.  This will spark a wave of intense comptition for deposits! 

    WASHINGTON - The House passed by voice vote a bill (H.R. 6312) combining a substantially revised credit union bill with regulatory relief for banks and savings associations. ABA and the banking industry opposed the original credit union bill -- the Credit Union Regulatory Relief Act, or CURRA -- because it would have allowed any federal credit union to branch into entire cities and counties by claiming they are underserved. The association successfully worked with Financial Services Committee Chairman Barney Frank (D-Mass.) to address its concerns in a meaningful way, and ABA did not oppose the revised credit union provisions when the House considered the legislation.

    The revised credit union bill, among other things, would narrow the definition of "underserved area" to census tracts that meet a low-income test; eliminate the grandfathering of cities, counties and other areas currently deemed underserved by the National Credit Union Administration; and require the NCUA to publish annual reports on how the credit unions are meeting the needs of those in the underserved areas they enter. The legislation also would limit the kinds of underserved business loans that can be excluded from the credit unions' business lending cap, and limit credit unions' ability to offer short-term payday loans to nonmembers within a credit union's field of membership.

    The final bill includes regulatory relief provisions for banks and savings associations that would provide exceptions to annual privacy notice requirements under the Gramm-Leach-Bliley Act; permission to offer interest on business checking accounts two years after enactment; and increased ability for savings associations to invest in small-business investment companies and make commercial real estate loans, while also removing limits on small-business and auto loans.

    Topics: Commercial Banks, Credit Unions, Bank Regulation

    House Panel Scales Back Credit Union Bill to Address Banker Concerns

    Posted by Wendell Brock on Sat, Jun 21, 2008

    WASHINGTON - A credit union regulatory relief bill that bankers blocked earlier this year has been significantly revised to address ABA's concerns and will come up for a House vote next week. Because ABA's concerns have been addressed in the revised language, the association will not oppose the measure -- which was combined with ABA-backed bank regulatory relief legislation to form a new legislative package (H.R. 6312) that was introduced yesterday.

    The original credit union bill, the Credit Union Regulatory Relief Act (H.R. 5519), would have allowed any federal credit union to branch into entire cities and counties by claiming they are underserved. (Current law allows only multiple-common-bond credit unions to expand into "underserved" areas. When the National Credit Union Administration illegally extended that authority to other credit unions, ABA, the Utah Bankers Association and Utah banks successfully sued.)

    House Financial Services Committee Chairman Barney Frank (D-Mass.) made substantive changes to the bill after bankers strenuously objected to an attempt in April to slip the bill through the House using a parliamentary procedure reserved for noncontroversial bills. The changes respond to the specific concerns ABA's banker leadership had identified with the original bill.  The reworked bill, among other things, would:

    • Narrow the definition of "underserved area" to census tracts that meet a low-income test and in which fewer than 50 percent of the families earn more than $75,000 annually.
    • Eliminate grandfathering of areas currently deemed underserved by the NCUA.
    • Require the NCUA to publish meaningful annual reports assessing how well credit unions are meeting the needs of those in their underserved areas. Such reporting requirements have been a long-time goal for ABA.
    • Limit the kinds of underserved business loans that can be excluded from credit unions' business lending cap.
    • Limit the ability to offer short-term payday loans and prevent the use of this section to expand consumer lending.

    Because many of the bill's provisions go further than current law to ensure credit unions focus on people of modest means, ABA decided not to oppose the legislation. And while Chairman Frank's support for the bill virtually ensures its passage by the House, the prospects in the Senate, where no companion bill exists, are less certain.

    Topics: Credit Unions, Bank Regulation

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