Bernanke Calls on Regulators to Curb Shadow Banking Risks

[REO 54]

Really? How about more oversight and transparency on FED's "shadowy" operations! Pffffft! The pot calling the kettle black.


Federal Reserve Chairman Ben S. Bernanke called for new steps to curb “shadow banking” operating beyond standard oversight while saying the economy has far to go before fully recovering from the credit crisis.

“The heavy human and economic costs of the crisis underscore the importance of taking all necessary steps to avoid a repeat of the events of the past few years,” Bernanke said yesterday in a speech in Stone Mountain, Georgia.

Bernanke supported efforts to increase the “resiliency” of money market funds, referring to Securities and Exchange Commission proposals to require firms to maintain capital buffers or to redeem shares at the market value of underlying assets rather than at a fixed price of $1. He also called for efforts to monitor financial innovation and backed curbs on intraday credit in tri-party repo markets.

An average of more than $2.8 trillion in securities was financed during the market peak in 2008 through tri-party transactions, many of which had short-term maturities. During the first quarter of 2010, the value of securities financed by tri-party repo had fallen to an average of $1.7 trillion, according to New York Fed calculations based on Bank of New York and JPMorgan Chase & Co. data and cited in a May 2010 Fed paper.

Following the bankruptcy of Lehman Brothers Holdings Inc. in 2008, Bernanke flooded the financial system with liquidity by opening facilities that provided credit to money market funds, primary dealers, commercial paper markets, banks and other borrowers.

Regulatory Overhaul
Congress under a 2010 regulatory overhaul known as Dodd- Frank mandated the Fed to safeguard stability partly by monitoring firms whose collapse may provoke turmoil across financial markets.

“About three and a half years have passed since the darkest days of the financial crisis, but our economy is still far from having fully recovered from its effects,” Bernanke said in his only reference to the economy’s current condition. He didn’t refer to current monetary policy.

U.S. stocks fell yesterday and yields on 10-year Treasuries slipped as job creation in the world’s biggest economy trailed estimates last week. The Standard & Poor’s 500 Index lost 1.1 percent to 1,382.20. The yield on the 10-year Treasury note fell to 2.047 percent from 2.054 percent on April 6.

Risk Taking
Responding to audience questions, Bernanke said a regulation known as the Volcker rule, which bans banks from risking capital by trading for their own accounts, raises a “lot of complexities” and internationally “it is not going to be a completely level playing field in that area.”

The rule, named for its original champion, former Fed Chairman Paul Volcker, is aimed at reducing the odds that banks will make risky investments with their own capital and put depositors’ money at risk. Bernanke said on Feb. 29 that the central bank and other regulators won’t meet the July deadline to complete work on the Volcker rule. The Fed has received over 17,000 comment letters on the proposal.

The Fed will seek an “appropriate balance” between a ban on proprietary trading and a rule that “allows appropriate market making,” Bernanke said.

International capital regulations known as Basel III will lead to “a very substantial increase in capital, and I think that is essential,” he said.

Bank Reserves
The higher level of required bank capital “probably will feed through” at least marginally to “the cost of credit” in the economy, Bernanke said. The costs of higher capital are small compared to the benefits from reducing the odds of a new financial crisis, he said.

“The cost-benefit test is very easily passed,” he said.

Bernanke said the Dodd-Frank Act had removed some of the Fed’s ability to make emergency loans, saying that “we can no longer lend to an individual firm as we did in the crisis.”

“Fortunately, I don’t think that they weaken our ability to provide backstop liquidity where necessary,” Bernanke said. The Fed is still able to lend through the discount window or to a broad class of borrowers in an emergency, he said.

Bernanke said that infrequent use of emergency programs as well as new abilities to supervise different types of firms should help reduce moral hazard, or excessive risking-taking by firms that expect a government bailout. “Anytime you have a safety net” regulators need a mechanism “to minimize moral hazard,” he said.

Big Price Decline
Following the collapse of the housing bubble, regulators will take steps to guard against another large decline in home prices, Bernanke said.

“Obviously, we have already taken steps and the Consumer Financial Protection Bureau will continue to take further steps to provide additional protections and try to avoid any similar event in the future,” Bernanke said.

Bernanke used his remarks at the 2012 Federal Reserve (FDTR) Bank of Atlanta Financial Markets Conference to summarize the Fed’s progress in implementing the Dodd-Frank Act and to highlight current challenges.

“Additional steps to increase the resiliency of money market funds are important for the overall stability of our financial system and warrant serious consideration,” he said.

The SEC is working on revamping rules for money market funds, as regulators have debated how to make the funds more stable since the 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industrywide run by clients that helped freeze global credit markets.

Enacted Changes
The agency enacted changes two years later in an attempt to prevent runs, including new liquidity requirements, shorter maturity limits and enhanced disclosure mandates. SEC Chairman Mary Schapiro has called for further steps to fix “weaknesses” with the funds.

Bernanke, 58, also called on participants in the tri-party repo market to eliminate intraday credit, something an industry task force supported in 2010, he said.

“Although some progress has been made, securities dealers and clearing banks have yet to fully implement that recommendation,” Bernanke said. “Through supervision and other means, we continue to push the industry toward this critical goal.”

The Fed has been seeking to strengthen the tri-party repurchase agreement market, which almost collapsed in 2008 amid the demise of Bear Stearns Cos. and bankruptcy of Lehman Brothers.

More Oversight
In February, the central bank said it will increase oversight of efforts to protect the market for borrowing and lending securities after an industry group, the Tri-Party Repo Infrastructure Task Force, said more time was needed for it to meet goals for reducing risk.

Repos are transactions used by the Fed’s primary dealers for short-term funding and typically involve the sale of U.S. government securities in exchange for cash, with the debt held as collateral for the loan. Dealers agree to repurchase the securities at a later date, and cash is sent back to the lender, typically a money-market mutual fund.

In a tri-party arrangement, a third party, one of two clearing banks, functions as the agent for the transaction and holds the security as collateral.

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

http://www.bloomberg.com/news/2012-0...-banking.html#

[phideaux]

Why don't the shadow bankers call on regulators to curb Bennie the Bernankie

[TimoneX]

The bernanke is like a comic book character. He's always wrong about everything, yet somehow his alleged "expert" opinion still matters, and still moves markets. Bunch of dumb lemmings following this tool bag's every word.

[phideaux]

The bernanke is like a comic book character. He's always wrong about everything, yet somehow his alleged "expert" opinion still matters, and still moves markets. Bunch of dumb lemmings following this tool bag's every word.

Here's Bennie practicing his Mt. Rushmore pose.

[TimoneX]

Here's Bennie practicing his Mt. Rushmore pose.

What's that yer drinking benji? Hemlock is it? ;p

[REO 54]

related article.........

Shadow Banks on Trial as China’s Rich Sister Faces Death......

When a Chinese court sentenced 28- year-old Wu Ying, known as “Rich Sister,” to death for taking $55.7 million from investors without paying them back, it sparked an unexpected firestorm that has drawn in China’s top leadership.

Her crime involved a common, illegal practice in China: raising money from the public with promises to pay back high interest rates. Known as shadow banking, these underground lending and investing networks are estimated to total $1.3 trillion, according to Ren Xianfang, an economist with IHS Global Insight Ltd. (IHS) in Beijing. That’s the size of the 2011 U.S. government deficit.

Operating outside the banking system or government regulation, the informal networks provide an important source of economic growth, capital for private companies and return for investors seeking to beat inflation. Premier Wen Jiabao, in an unusual move, weighed in on the case at a March 14 news conference. His comments highlighted a public debate over the importance of shadow banking to the Chinese economy, government efforts to bring it under control -- and whether capital punishment is an effective means to do so.

“Chinese companies, especially small ones, need access to funds,” Wen said when asked about Wu’s case. “Banks have yet to be able to meet those companies’ needs, and there is a massive amount of idle private capital. We need to bring private finance out into the open.”

Unfairly Singled Out
Wu’s lawyer says his client, now 30, was unfairly singled out and is no different from the estimated 42 million Chinese business owners who rely on the shadow-banking system for financing when they cannot get loans from state-owned banks. The Supreme People’s Court is reviewing the 2009 verdict and will decide as early as this month whether Wu Ying lives or dies.

“Entrepreneurs are paying attention to it because today’s Wu Ying could be any of them tomorrow,” the lawyer, Yang Zhaodong, said in an interview in Beijing last month. “There are so many of them doing the same thing Wu Ying did. This case not only relates to Wu’s life, but to whether China’s legal and judicial system is fair.”

Shadow banking has been fueled by a two-year credit squeeze in China and by large, state-owned banks’ preference for lending to government-run companies rather than small businesses. Private entrepreneurs account for 60 percent of China’s total economic activity and provide jobs for 80 percent of its urban population, according to China’s National Development and Reform Commission.

“Underground banking filled the hole left by China’s state-owned banks, which have this long-term bias toward big enterprises,” said IHS’s Ren. “Even though it is an extremely opaque market and has a lot of hidden problems, the government needs it to meet the basic financing needs of small businesses.”

Meteoric Rise
Wu’s rise and fall have been meteoric. The daughter of a farmer in Zhejiang province, south of Shanghai, Wu dropped out of technical school as a teenager to work at her aunt’s beauty salon and later opened two of her own, according to the state- run Global Times newspaper. She branched out into a foot-massage parlor and bought 10 cars which she rented out. An entertainment center and a boutique featuring Korean clothes followed, as did investments in real estate and copper, the report said.

Wu collected 770 million yuan ($122 million) from private investors between May 2005 and February 2007, according to government prosecutors. She also accumulated more than 100 properties and 40 cars, including a $500,000 Ferrari, the Global Times said.

Knowing the Risks
Wu borrowed money to fund her businesses and didn’t lie to anyone, her lawyer said. She never committed fraud, Yang said, adding that her investors, like anyone who took part in the private-banking business, knew the risks involved.

“Even her biggest creditor who she owed 320 million yuan doesn’t think Wu was lying to her,” said Yang. “These were real projects.”

The court in Wu’s home province of Zhejiang said she “brought huge losses to the nation and people with her severe crimes and should therefore be severely punished” when it upheld her death sentence in January, according to the Xinhua News Agency.

Nicknamed “Fu Jie,” or “Rich Sister,” in the media, Wu and her case were discussed at the annual legislative session in Beijing in March, where delegates debated the larger issues of shadow banking.

“You cannot try to stop this just by killing people,” Wang Yongzheng, a delegate to China’s People’s Political Consultative Conference and owner of a textile company, told a small group session at the meetings.

‘Public Outrage’
In a country where public criticism of government policy is rarely sanctioned, state-run media outlets such as Xinhua and the People’s Daily, both Communist Party mouthpieces, have run stories, editorials and online chat sessions airing public sympathy for Wu.

On Feb. 8, the China Daily newspaper ran an article noting “public outrage” and the “wide sympathy and pleas for the fair-skinned woman with a short haircut.” It quoted a legal expert as saying the government’s seizure and sell-off of her assets was illegal.

As the public outcry surrounding Wu’s case began to swell, court officials and police took the rare step of publicly defending their verdict. The presiding judge in her case, Shen Xiaoming, appeared in a Feb. 7 Internet chat to explain that Wu Ying was sentenced to death because the court found she intended to defraud investors.

“This was more than just illegal fundraising,” Shen said in the chat.

Shadow-Banking System
China’s entire shadow-banking system is bigger than just underground borrowing and lending, totaling about $2.4 trillion, a third the size of China’s official loan market, according to Societe Generale SA economist Yao Wei. In addition to informal lending, it includes the off-balance-sheet activities of banks, trust companies, and businesses lending to each other, Yao said. The amount is almost the size of U.S. consumer debt, which exceeded $2.5 trillion as of January, according to the U.S. Federal Reserve.

Ordinary Chinese savers also fuel the country’s shadow- banking system. They have few legal options if they want to earn a return that beats inflation, which hit 5.4 percent in 2011. The government sets China’s current ceiling for savings account interest rates at 3.5 percent, a figure that has trailed inflation for two straight years as of January. Wu offered interest rates of as much as 0.5 percent a day to attract investors, according to Xinhua.

more here...http://www.bloomberg.com/news/2012-0...ces-death.html