2013 Millstein Forum: Deconstruction of SIFIs and Capital Allocation

James McRitchie, 09/10/2013 ,

Ira Millstein

The following are cryptic notes and a few photos taken at the 2013 Millstein Forum held June 24 & 25 at Columbia Law School. Be sure to check out the Forum’s photo gallery for more photos, agenda, notes, etc.

Moderator: Ira M. Millstein, Chair, Center for Global Markets and Corporate Ownership at the Columbia Law School; Counsel, Systemic Risk Council; Senior Partner, Weil, Gotshal & Manges. Panelists were as follows:

Heath P. Tarbert, Partner and Head of the Financial Regulatory Reform Working Group, Weil, Gotshal & Manges
Heath Tarbert
Charles Calomiris, Henry Kaufmann Professor of Financial Institutions, Columbia Business School
Jim Millstein, Chairman & CEO, Millstein & Co.; Former Chief Restructuring Officer, U.S. Department of the Treasury
Arthur J Murton, FDIC

Charles Calomiris

Jim Millstein

Background: Almost two years ago, federal agencies proposed two new sets of regulations under the Dodd-Frank Act. The proposals — to implement the Volcker Rule and to create standards to designate certain nonbanks as systematically important financial institutions (SIFIs) — are expected to have profound consequences in the financial sector and on the broader economy. A brief from Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates explores the Volcker Rule and SIFI proposals and their potential implications for participants in the financial services industry.

Author Murton

Update about a year and a half ago from Weil, Gotshal & Manges: On April 3, 2012, the Financial Stability Oversight Council (FSOC) voted to approve its long-awaited Final Rule implementing Section 113 of the Dodd-Frank Act, the controversial provision that directs the federal government to identify systemically important financial institutions (SIFIs) outside the traditional banking sector that could pose a threat to the US financial system. Once designated by a two-thirds majority of the FSOC (including an affirmative vote of the Treasury Secretary), each “nonbank financial company,” often referred to in short-hand as a “nonbank SIFI,” would be placed under Federal Reserve Board (Fed) supervision, as well as become subject to a host of enhanced prudential measures – including capital, liquidity, leverage, stress testing, resolution planning, and risk management requirements. The FSOC’s recent approval of the Final Rule – as well as its accompanying interpretive Guidance – is an important first move toward in the application of enhanced SIFI regulation beyond large bank holding companies with assets of $50 billion or greater.

And an update on international efforts in Compliance Week (Financial Stability Board Could Broaden List of Systemically Important Financial Institutions, 8/28/2013). In July, the FSB added nine major global insurance companies to its list of systemically important financial institutions — Allianz, AIG, Assicurazioni Generali, Aviva, Axa, MetLife, Ping An Insurance (Group) Company of China, Prudential Financial, and Prudential plc. They joined 28 banking groups already identified by the FSB.

From the panel, Dodd-Frank and Basel III focused on systemic risk, not operating efficiencies and shareholder value. There was no consensus on ending too big to fail. Mitigation of system risk. DF allows breakup of large institution if they pose a grave threat to the US. Title 1 makes failure less likely – higher capital requirements, less leverage allowed, resolution planning requirements and indirect measures. Title 2 allows takeover of bank. Volker rule prohibits some hedging activity but it is a far cry from Glass Steagall.

Banks that did badly had most volatile stock returns. Chief risk office / CEO good predictor. No real market for corporate control for big banks since they are so huge and chopping them up might destroy value. See handout Why Not Destroy US Global Universal Banks. (If I once had the handout it is now misplaced, but you can pull up the FT editorial, Split the banks from 7/12/2013.)

Resolution plans, liquidation authority under bankruptcy without systemic effects. Orderly liquidation (Fed reserve, FDIC recommend receivership) No external source of funds contemplated. Parent would go into bankruptcy and a bridge holding company that gets assets but not debt. Operating subsidiaries are kept open.

CoCo incentives could (convertible from debt to equity? convertible debt instrument that must be met… creates a corporate control lever because of threat of dilution). Leverage 12- 40 since 2000. Highly dependent on short-term financing. OK, I got distracted and can’t even understand my own notes at this point.

Supplementary materials

Hu, Henry T.C. Too Complex to Depict? Innovation, ‘Pure Information,’ and the SEC Disclosure Paradigm. Texas Law Review. May 2012. Click here to view.
Cruz, Heather et. al. Dodd-Frank Rulemaking: Volcker Rule and Sifi Proposals. Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates. Nov. 2011. Click here to view.

Not part of the official program but might also be helpful:

De Spiegeleer, Jan and Schoutens, Wim, Multiple Trigger CoCos: Contingent Debt Without Death Spiral Risk (May 2013). Financial Markets, Institutions & Instruments, Vol. 22, Issue 2, pp. 129-141, 2013. Available at SSRN.
Cheridito, Patrick and Xu, Zhikai, A Reduced Form CoCo Model with Deterministic Conversion Intensity (April 20, 2013). Available at SSRN.
Chen, Nan, Glasserman, Paul, Nouri, Behzad and Pelger, Markus, CoCos, Bail-In, and Tail Risk (January 23, 2013). Office of Financial Research Working Paper No. 0004. Available at SSRN.
Herring, Richard J. and Calomiris, Charles W., Why and How to Design a Contingent Convertible Debt Requirement (April 19, 2011). Available at SSRN.

Read all my coverage of the 2013 Millstein Forum:

Arthur J Murton, Charles Calomiris, Dodd-Frank, Heath P. Tarbert, Ira M. Millstein, Jim Millstein, SIFIs, systematically important financial institutions, Volker

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2013 Millstein Forum: Deconstruction of SIFIs and Capital Allocation

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