Source: http://economicsofcontempt.blogspot.com/2011/04/
Timestamp: 2019-04-25 03:49:53+00:00

Document:
I think Deutsche Bank's latest reorganization may be too clever by half. Deutsche Bank currently has a US bank holding company (BHC) called Taunus, which houses its US banking unit (Deutsche Bank Trust Corp.), its US broker-dealer (Deutsche Bank Securities, Inc.), and various other US nonbank financial firms. Taunus has a combined $373bn in assets, of which only about $18bn come from its US banking unit. In order to avoid being subject to the Collins Amendment, which requires all US bank holding companies to maintain the same capital ratios as US depository institutions (the horror!), Deutsche Bank is planning to move its US banking unit out of Taunus, and then to deregister Taunus as a BHC.
"Nonbank financial companies supervised by the Board of Governors" are nonbank financial companies that the Financial Stability Oversight Council (FSOC) has deemed "systemically important" under § 113 of Dodd-Frank. So Taunus can only escape the Collins Amendment if it's not a BHC or a "systemically important" nonbank financial company.
The problem is that after deregistering as a BHC, Taunus will almost certainly be deemed "systemically important" by the FSOC. To argue that Deutsche Bank's US broker-dealer — one of the biggest, baddest dealers on the Street, and a major player in the derivatives markets — isn't systemically important would be beyond ridiculous. I simply cannot conceive of a scenario in which the FSOC doesn't designate Taunus systemically important. Thus, deregistering Taunus as a BHC will not allow Taunus to avoid the Collins Amendment.
Now, it's true that § 165 allows the Fed to tailor the capital requirements of systemically important nonbanks (bank-like capital requirements might not be appropriate for certain types of nonbank financial companies). The interaction between § 171 and § 165 is unclear, and is subject to some dispute. However, the most natural reading is that § 171 establishes a floor on the capital requirements for systemically important nonbanks — they have to at least be equal to the capital requirements for US depository institutions — and that § 165 allows the Fed to tailor the capital requirements for nonbank financial companies above that floor.
Deutsche Bank seems to be betting that: (a) § 165 trumps § 171 outright; and (b) the Fed will use its discretion in tailoring the enhanced capital requirements under § 165 to permit Taunus to hold significantly less capital. I think that's a bet they're likely to lose. The view that § 165 trumps § 171 outright rests on a very strained interpretation of the law — the language of § 171 is very explicit. If that is indeed what Deutsche Bank is banking on, then I think they're getting very bad advice.
As I’ve said before, I’ve become a big fan of the “resolution plans” (a.k.a., “living wills”) that Dodd-Frank requires. They’ll be enormously useful in resolving large financial institutions under the new resolution authority, primarily because they’ll ensure that regulators have all the information they need to actually execute a smooth resolution of a major bank (e.g., organizational structure, funding practices, trading systems, major counterparties).
Resolution plans are one of those things that have the potential to be incredibly important, but that you could also see regulators basically ignoring — that is, requiring the minimum amount of information, or allowing banks to include only publicly available information, or something like that. For resolution plans to be as important as I think they can be, the regulators absolutely have to take them seriously.
The Fed and FDIC approved a joint proposed rule on resolution plans earlier this week, and I’m pleased to report that they’re clearly taking resolution plans very seriously — and then some. These are going to be substantial documents. It’s going to require a lot of work for banks to put these resolution plans together. The proposed rule requires a ton of information, covering all major aspects of the whole financial institution, and I haven’t thought of any area that they’ve missed.
The information regarding the Covered Company’s overall organization structure and related information should include a hierarchical list of all material entities, jurisdictional and ownership information. This information should be mapped to core business lines and critical operations. An unconsolidated balance sheet for the Covered Company and a consolidating schedule for all entities that are subject to consolidation should be provided. The Resolution Plan should include information regarding material assets, liabilities, derivatives, hedges, capital and funding sources and major counterparties. Material assets and liabilities should be mapped to material entities along with location information. An analysis of whether the bankruptcy of a major counterparty would likely have an adverse effect on and result in the material financial distress or failure of the Covered Company should also be included. Trading, payment, clearing and settlement systems utilized by the Covered Company should be identified.
I do have two complaints though. Both relate to the other major aspect of the resolution plan — the part where the financial institution describes how it can be resolved in an orderly manner. Now, I already think that this aspect of the resolution plan will be less useful, simply because the structure of every resolution/bankruptcy/restructuring depends critically on the specific circumstances the institution faces at the time. It’s impossible to know who the potential buyers will be, because whether another institution is interested in the acquisition depends on its own health, including how well it could manage the fallout from a major bank being resolved under the resolution authority. And the identity of the acquirer absolutely drives the structure of any deal.
That said, I don’t think this aspect of the resolution plan will be completely useless. Regulators could glean some legitimate insights from the financial institution’s hypothetical plan.
So my first complaint is that the proposed rule requires the financial institutions to describe how they would resolve themselves only under the Bankruptcy Code, and not under the new resolution authority. I understand that the statute requires the regulators to evaluate the resolution plans on whether they would facilitate an orderly resolution under the Bankruptcy Code. But the text of the statute, while confusing, does not require that the financial institutions only describe resolutions under the Bankruptcy Code — or even that they address the Bankruptcy Code at all.
The key provision in Dodd-Frank, § 165(d)(1), simply requires that a financial institution periodically submit “the plan of such company for rapid and orderly resolution in the event of material financial distress or failure.” Notice that it doesn’t say that the “rapid and orderly resolution” has to be under the Bankruptcy Code. This leaves the door open for the regulators to require the financial institutions to describe how they could be smoothly resolved under the new resolution authority as well. Regulators couldn’t deem a bank’s plan “deficient” because of its description of a resolution under the new resolution authority, but who cares? At least the regulators would have the description.
My point is: why not require the financial institutions to describe a resolution under both the Bankruptcy Code and the resolution authority? There are key differences between the two insolvency regimes, so having two separate descriptions would be useful.
My second complaint is that the proposed rule requires the financial institutions to describe a resolution under the Bankruptcy Code that can be accomplished “within a reasonable period of time.” I strongly suggest that this language be changed to something like, “on an expedited basis.” The problem is that a “reasonable period of time” for a resolution under the Bankruptcy Code is much longer than we can afford the resolution of a major financial institution to take. To successfully resolve a major financial institution, the resolution has to be effectively over-and-done-with in a few days — a week, tops. The uncertainty in the Lehman resolution was crippling — it was pure Knightian uncertainty in action, as everyone in the market (and especially Lehman creditors) assumed the worst and panicked.
Resolutions under the Bankruptcy Code often take years. Even “pre-packaged” bankruptcies can take a month. If the next resolution of a major financial institution takes a month, I absolutely guarantee that there won’t be anything “orderly” about it. So please, if you’re going to have the financial institutions describe how they would resolve themselves under the Bankruptcy Code, at least make sure they describe a resolution that would, you know, actually work.
In a surprise move, the Basel Committee indicated this week that they're still open to tweaking ($) the new liquidity requirements.
The liquidity requirements are a massive deal for banks, although you wouldn't know that from reading the financial press, which hardly ever mentions them. The Basel Committee's "quantitative impact study" showed that banks face a shortfall of liquid assets of $2.48 trillion for just one component of the liquidity requirements, which is over three times the size of the banks' capital shortfall under Basel III.
A key element of the rules are its assumptions about the rate at which different bank funding sources run off in a liquidity crisis, but Walter warned that the Basel Committee will not be swayed by observed run-off rates from the stressed conditions of the last few years. "If an institution comes to us and says ‘Here's our experience in terms of outflows during the crisis,' we would point out that those were recorded in the context of massive public support," he said.
The problem with this is that it's a really, umm, stupid argument. Yes, the run-off rates were probably lower during the financial crisis, but there were also massive government bailouts during the financial crisis. After Lehman failed, the market only made it 2 days without a government bailout — the Fed rescued AIG on Tuesday night, and Schumer leaked that the government was planning a system-wide bailout on Thursday. Regulators were kinda-sorta hoping that we could do the next financial crisis without massive government bailouts.
Good to see the Basel Committee giving the banks' argument the treatment it deserves!

References: § 113
 § 165
 § 171
 § 165
 § 171
 § 165
 § 165
 § 171
 § 165
 § 165
 § 171
 § 171
 § 165