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Fearing a Minsky Moment: The more stable financial markets appear, the more unstable they're becoming. Until a crisis — or Minsky moment — hits, that is, when everyone rushes for the exit simultaneously. Such a moment appears to be on the minds of banking regulators these days. They warned on Thursday about the dangers lurking in the booming market for loans to struggling companies. The controls and quality checks applied by lenders when extending so-called leveraged loans have deteriorated, according to a joint warning issued by the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Regulators questioned whether some banks are doing enough to accurately gauge the risks inherent in such loans. They also declared that they'll closely monitor the underwriting of such credits, which are typically used to finance buyouts or acquisitions, as well as the ability of firms to manage their lending and withstand loan-related losses. Certain debt agreements include features that wind up weakening lender protections by excluding meaningful maintenance covenants (sometimes known as covenant lite), or include features that limit a lenders' ability to take action in the event of a weakened borrower performance. Additionally, regulators characterized as "aggressive" the capital and repayment structures for some transactions. "Financial institutions unprepared for such stressful events and circumstances can suffer acute threats to their financial condition and viability," according to a quote from regulators cited in the Wall Street Journal. The updated guidance covers transactions by borrowers whose leverage exceeds industry norms. It focuses on several areas, including establishing a sound risk management framework; improving underwriting standards; accurate reporting and analytics; and realistic risk-rating of leveraged loans. "It is important that banks provided leveraged financing to creditworthy borrowers in a safe and sound manner," regulators said. The guidance comes amid a broader debate at the Fed over how the financial system is responding to it's efforts to keep interest rates near zero and whether the resulting risk-taking may also threaten financial stability, noted the Journal. It's the sort of question Professor Minsky would have lauded. Wall Street Journal, American Banker

So Sorry: "A humiliating apology" is how the FT characterized a Thursday mea culpa from Standard Chartered Chairman Sir John Peace. The retraction relates to a March 5 press conference during which Sir John stated that StanChart was guilty of "no willful act to avoid sanctions. You know, mistakes are made. Clerical errors." Mistakes were made, Sir John? That characterization did not ring quite true to the U.S. Department of Justice and New York district attorney. Not in the wake of StanChart's earlier acceptance of a deferred prosecution agreement and $667 million payments to settle charges by state and federal officials that it defied U.S. sanctions and laundered hundreds of billions of dollars for customers in Iran, Sudan, Libya and Myanmar between 2001 and 2007. "Standard Chartered was required to retract the statement or be subject to prosecution," the DOJ said. Faced with that prospect, Sir John on Thursday declared his earlier comments "both legally and factually incorrect" and retracted them. "Standard Chartered Bank unequivocally acknowledges and accepts responsibility ... for past knowing and willful criminal conduct in violating US economic sanctions laws and regulations," he said. StanChart's settlements with federal and state regulators require it to detail plans to ensure compliance with U.S. rules governing money laundering and to prevent violations from recurring. Financial Times, American Banker

Cypriots Seek Messiah: Cyprus announced plans on Thursday to overhaul its banking industry and force losses on big depositors, the Financial Times reports. The move comes as the European Central Bank threatened to withdraw crucial funding in the absence of a viable bailout plan. Panicos Demetriades, Central Bank of Cyprus governor, said parliament would be asked to wind up Laiki Bank, the island's second lender, and split it into a "good" and "bad" bank, with larger deposits folded into the latter. "The banking system needs restructuring otherwise it will go bankrupt and it needs to be done immediately," he said. The Cypriot parliament is due to debate a 61-page bill on the banking system on Friday. The government has also tabled seven other bills. The proposals would allow authorities to restrict non-cash transactions, curtail check cashing, limit withdrawals and convert checking accounts into fixed-term deposits at the nation's two large banks, which have been closed since March 16. They would also force big depositors — including wealthy Russians — to swallow big losses on their deposits. The latest plan comes in the wake of failed talks between Cypriot finance minister Michael Sarris and his Russian counterpart, Anton Siluanov, over possible outside support, reports the Financial Times. Also hanging over the island is the European Central Bank's vow to cut off emergency liquidity assistance on Monday if Cyprus fails to come up with a viable plan to raise billions of euros. The emergency funds have been used to shore up the island's two largest financial institiutions, Bank of Cyprus and Laiki. If Cyprus fails to pass a viable plan, it could find itself with little choice but to leave the euro zone, which would open "a Pandora's box that could threaten Spain and Italy," according to the Journal. On the streets of Nicosia, long lines were forming at cash machines. "We are waiting for a messiah to come and save us, and of course, there is none," a Cypriot official told the Financial Times. Elsewhere in Europe, reaction to events in Cyprus were mixed. Spokesman Olli Rehn said the EU was "conditionally satisfied that the bills on bank resolution and restriction of capital movements are moving through the legislative process." Wolfgang Schäuble, German finance minister, was quoted by Bild newspaper as saying that "cosmetic touches alone" would not be enough. Officials at the Frankfurt-based ECB were preparing for possible capital controls and other measures to ring-fence Cyprus's financial sector once banks reopen next Tuesday. This included extending as much liquidity as needed to any solvent banks in the eurozone, including the smaller Cypriot ones. If the ECB is forced to implement such measures, the entire crisis may one day go down as a true tempest brewed in a teapot; the $7.5 billion that Europe is insisting Cyprus extract from bank depositors to head off a full-blow Continental crisis represents about 0.06% of the Eurozone's annual economic output, the FT reports. Financial Times, Wall Street Journal

Wall Street Journal

Attention tax dodgers and drug runners: digital currencies are no safe heaven. That's the message the Journal reports the Treasury is sending in declaring it will apply money-laundering rules to "virtual currencies," amid growing concern that new forms of tender bought on the Internet are being used to fund illicit activities. The move by the Treasury's Financial Crimes Enforcement Network, or FinCen, means firms that exchange dollars for the increasingly popular online currency Bitcoin will be regulated like traditional money-order providers, such as Western Union. That will include new bookkeeping requirements and mandatory reporting for transactions of more than $10,000. Bitcoin, launched in 2009, is one of the fastest-growing alternative online currencies. It is backed by no central bank or controlled by any central administrator. Among legitimate merchants accepting Bitcoins are the website Reddit and the blog service. However, Bitcoin also attracts cybercriminals who want to move or steal funds, and at least one online service takes Bitcoins as payment for illegal drugs, according to a Federal Bureau of Investigation report last year. The new guidance "clarifies definitions and expectations to ensure that businesses…are aware of their regulatory responsibilities," said Jennifer Shasky Calvery, a FinCen director.

New York Times

Speaking of JPM's Whale adventure, the paper had an editorial saying the "subcommittee's findings should steel the resolve of regulators who must complete rules under the Dodd-Frank reform law," and that the "JPMorgan saga is a reminder that big banks are too big to fail, to manage, to regulate and to prosecute. The new rules are the last chance to show that the Dodd-Frank reforms can change those dynamics. ... But if the rules are weak, the solution is to press ahead with the outcome that the Dodd-Frank law was intended to avoid: breaking up the banks."

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