Friday, August 22, 2008

SEC IFRS Roadmap Coming Aug. 27; Bernanke on Reducing Systemic Risk; PCAOB Ruled Constitutional - Will Starr's Team Appeal?

The SEC posted a Sunshine Act Notice this afternoon announcing it will consider proposing an IFRS Roadmap at an open commission meeting on Wed. Aug. 27. Specifically, the Notice states:
“The Commission will consider whether to propose a Roadmap for the potential use by U.S. issuers for purposes of their filings with the Commission of financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. As part of the Roadmap, the Commission will also consider whether to propose amendments to various rules and forms that would permit early use of IFRS by a limited number of U.S. issuers.”

Other matters to be addressed at the Aug. 27 SEC open commission meeting include issues relating to foreign private issuers and cross-border business combinations.
Bernanke SpeechSeparately, in a speech earlier today on “
Reducing Systemic Risk” at the Federal Reserve Bank of Kansas City's Annual Economic Symposium in Jackson Hole, Wyoming, Federal Reserve Board Chairman Ben S. Bernanke called for further consideration of systemwide or ‘macroprudential’ oversight.

He drew critical distinctions between oversight focused on the safety and soundness of an individual institution, and oversight of the system as a whole, including:
“During a period of economic weakness, for example, a prudential supervisor concerned only with the safety and soundness of a particular institution will tend to push for very conservative lending policies. In contrast, the macroprudential supervisor would recognize that, for the system as a whole, excessively conservative lending policies could prove counterproductive if they contribute to a weaker economic and credit environment.
“Similarly, risk concentrations that might be acceptable at a single institution in a period of economic expansion could be dangerous if they existed at a large number of institutions simultaneously.
“[F]ormal stress tests, not at the firm level as occurs now, but for a range of firms and markets simultaneously…. might suggest that a sharp change in asset prices would not only affect the value of a particular firm's holdings but also impair liquidity in key markets, with adverse consequences for the ability of the firm to adjust its risk positions or obtain funding." He added, "Systemwide stress tests might also highlight common exposures and "crowded trades" that would not be visible in tests confined to one firm.”

In supporting further consideration of increased systemic oversight, Bernanke cautioned, “[T]his more comprehensive approach would be technically demanding and possibly very costly both for the regulators and the firms they supervise." He added, "the information requirements for conducting truly comprehensive macroprudential surveillance could be daunting indeed."

Additionally, he noted, “the expectations of the public and of financial market participants would have to be managed carefully, as such an approach would never eliminate financial crises entirely. Indeed, an expectation by financial market participants that financial crises will never occur would create its own form of moral hazard and encourage behavior that would make financial crises more, rather than less, likely.”

“With all these caveats,” Bernanke concluded, “I believe that an increased focus on systemwide risks by regulators and supervisors is inevitable and desirable. However, as we proceed in that direction, we would be wise to maintain a realistic appreciation of the difficulties of comprehensive oversight in a financial system as large, diverse, and globalized as ours."

Separately, Bernanke called on Congress to authorize further powers for the Fed, including “granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.”

Bernanke likened the role of settlement and payment mechanisms to that of the ‘hardware’ of the financial system infrastructure. He noted efforts are already underway in which the Fed, the Federal Reserve Bank of New York, and other authorities are working in cooperation with public and private sector entities on such issues as centralizing clearing and settlement of credit default swaps and certain other derivatives.

He also called for strengthening “the associated ‘software’ of the infrastructure, which he said “includ[es] the statutory, regulatory, and contractual frameworks and the business practices that govern the actions and obligations of market participants on both sides of each transaction.”

Noting that, “In the overwhelming majority of cases, the bankruptcy laws and contractual agreements serve this function well,” he observed in certain rare circumstances, “the standard procedures for resolving institutions may be inadequate.” Specifically, “In the Bear Stearns case, the government's response was severely complicated by the lack of a clear statutory framework for dealing with such a situation.”

To mitigate such situations from arising in the future, the Fed chief repeated his call (made previously in a July speech on "Financial Regulation and Financial Stability”) for Congress to consider establishing a statutory framework for resolution of failing nonbank entities. Such an effort, said Bernanke, could potentially be led by the U.S. Treasury Department, “in consultation with the appropriate supervisors, to intervene in cases in which an impending default by a major nonbank financial institution is judged to carry significant systemic risks.” He acknowledged, “The implementation of such a resolution scheme does raise a number of complex issues, however, and further study will be needed to develop specific, workable proposals.”

Bernanke gave a clinical assessment of such a resolution program. “A statutory resolution regime for nonbanks, besides reducing uncertainty, would also limit moral hazard by allowing the government to resolve failing firms in a way that is orderly but also wipes out equity holders and haircuts some creditors, analogous to what happens when a commercial bank fails. “ He added such a regime would mitigate the perception of a nonbank institution being ‘too big to fail.’

Additionally, Bernanke observed that the topic of procyclicality in capital regulations and accounting rules has generated attention among regulators and elsewhere. Additional highlights from Bernanke's speech can be found in this FEI summary. (Summary can only be downloaded by FEI members; see info on FEI membership.)

PCAOB Receives Favorable Court Ruling on Constitutional Challenge
In other news, the
PCAOB issued a statement noting the Court of Appeals ruled today in their favor in a case involving a challenge to the PCAOB’s Constitutionality. The SEC issued a related statement as well.

Washington Post’s David Hilzenrath notes in his article, “
Appeals Court Upholds Sarbanes-Oxley Act,” “The U.S. Court of Appeals for the District of Columbia Circuit rejected a challenge to the heart of the [Sarbanes-Oxley] act, the creation of a nonprofit board to set auditing requirements and police the accounting firms that audit public companies.”Hilzenrath notes, “Today's 2-1 decision by a three-judge panel can be appealed to the full court of appeals or directly to the U.S. Supreme Court, neither of which is obligated to consider the case. “

The case was filed by audit firm Beckstead & Watts in conjunction with the Free Enterprise Fund, and their legal team includes former U.S. solicitor general Kenneth Starr.The 2-1 court ruling, with one judge (Kavanaugh) dissenting, is also discussed in the article, “Sarbanes-Oxley Audit Panel Upheld by Appeals Court,” by Ian Katz and Cara O’Reilly on If you received this blog post from 'a friend' and would like to receive the blog by email, enter your email address here.

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