Policy Statement On Equity Investments In Banks And Bank Holding Companies: Fill & Download for Free

That's not what happened.They can't squeeze a 110 pages into a half page article. I can't fit it in this answer. I'll put the report in the question line, give you the what and a TLDR- Why:Managing risk, Implement existing law, closing loopholes, preventing another crises andCommodities - to shut down a series of schemes e.g., warehousing aluminum, and trucking it around to keep it out of the market.There's a perpetual arms race between banks and regulators.Volcker Rule - Have a Look ... really.Preamble1 - PDF (891 pages) (December 10, 2013)Text of the Final Common Rules1 - PDF (71 pages) (Dec 10, 2013)Notice of Proposed Rulemaking (November 07, 2011)(CDO's Interim final rule –16 pages - Jan 14, 2014)Recommendations (Fed's recomodations)As noted previously, section 620 of Dodd–Frank requires this report to include recommendations regarding (i) whether each activity or investment has or could have a negative effect on the safety and soundness of the banking entity or the U.S. financial system, (ii) the appropriateness of the conduct of each activity or type of investment by banking entities, and (iii) additional restrictions as may be necessary to address risks to safety and soundness arising from the permissible activities or types of investments of banking entities.The Board is recommending statutory changes that would eliminate special exemptions that permit certain firms to operate free of activities restrictions and/or outside of the prudential framework applicable to other banking entities.103 These changes require congressional action and cannot be accomplished by the Board unilaterally. In particular, the Board recommends that Congress• repeal the authority of FHCs to engage in merchant banking activities;• repeal the grandfather authority for certain FHCs to engage in commodities activities under section 4(o) of the BHC Act;• repeal the exemption that permits corporate owners of industrial loan companies (ILC) to operate outside of the regulatory and supervisory framework applicable to other corporate owners of insured depository institutions; and• repeal the exemption for GUSLHCs from the activities restrictions applicable to all other SLHCs.- - -(Fed is citing FDIC recomodations)RecommendationsAfter a comprehensive review of the activities and investments in which state banks and state savings associations may engage, the FDIC has identified potential for enhancement, reconsideration, and clarification in several areas of the part 362 policy and procedures.Specifically, the FDIC plans to:• review activities related to investments in other financial institutions and other equity investments to evaluate the interaction of existing FDIC regulations and supervisory approvals and conditions under part 362, with other more recent regulatory and statutory rules governing such investments, in order to determine whether changes to part 362 or related procedures with regard to such investments are needed.• determine whether the prudential conditions and standards under which the FDIC will evaluate part 362 filings with respect to mineral rights, commodities, or other non-traditional activities need to be clarified and, if so, consider issuing a statement of policy pursuant to such review.------( Fed is citing OCC )ConclusionThe financial crisis of 2008 showed that certain federal banking entity activities were far more risky than believed. Congress responded by restricting some of these activities and imposing structural reforms that substantially mitigate the risks of other activities. For example, requiring swap margin (whether bilateral or through a central clearinghouse) significantly mitigates the credit risk from swap dealing. Other risks remain, however, which is why the OCC plans to• issue a proposed rule to prohibit federal banking entities from holding asset-backed securitiesthat hold bank-impermissible assets.• address concentrations of mark-to-model assets and liabilities with a rulemaking or guidance.• clarify minimum prudential standards for certain national bank swap dealing activities.• consider providing guidance on clearinghouse memberships.• clarify regulatory limits on physical hedging.• address national banks’ authority to hold and trade copper.• incorporate the Volcker Rule into the OCC’s investment securities regulations. The OCC’s regulatory initiatives therefore build upon the many statutory reforms to enhance federal banking entities’ safety and soundness.[1]Footnotes[1] https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160908a1.pdf

Central bank policies suppress volatility by changing investors’ risk perception and asset returns (incentives). These changes in outlook are steered by pledges of future policy actions via statements and speeches (“policy guidance”) as well as transactions with financial market participants (“open market operations”).Interest rates change market incentivesLevels of interest rates, more commonly referred to as funding costs, can create powerful market incentives. As rates shift, financial institutions’ return maximizing preferences would help central banks achieve policy goals such as volatility suppression.Mutual funds, hedge funds, pensions, and insurance companies are net lenders (investors) that transforms cash into asset holdings, and they hold the “buy-side” designation. These “buy-side” firms play a key role in translating monetary policies into activities - a process known as “policy transmission.”As safe haven interest rates rise (such as higher Treasury yields), buy-side institutions would be able to take less risk to meet their return objectives. If a company sells shares to the public or issues bonds to institutional investors, the company would need to convince buyers that its securities (equities, debt, or private loans) would create value via:Attractive passive income (higher bond yields or dividends) relative to “risk free” safe haven returnsAttractive price appreciation (higher bond and stock prices) relative to safe haven returnsTherefore, safe haven rates such as Treasury yields are “benchmarks” which all other asset returns are measured against. The “buy-side” will decide whether taking on additional risk, such as buying corporate bonds, would be justified by higher returns (hence the term “risk-adjusted returns”):A corporate bond issued by a struggling company with a yield of 9.85% may seem attractive on an “outright” level, but its risk-adjusted return would be poor if a similar maturity Treasury bond (or German bund) return 9.50% per annumSimilarly, a volatile stock expected to appreciate by 15% in a year, at a time when 12-month T-bills trading at 5% will elicit different response to investors with varying risk toleranceThe above examples demonstrate how higher (credit) risk-free rates discourage risk-taking as investors with plentiful choices become more discerning with their investments.Additionally, leveraged investors that use borrowed funds to invest in assets (such as hedge funds) would have to pay higher rates to fund their investments in a high interest rate environment. They too would become more selective, because an asset with an expected 8% return may only generate 3% when funding costs are considered (in a hypothetical environment with 5% funding cost).Conversely, lower interest rates would create the opposite effect:Insurance company will face an uphill battle at meeting future liabilities if bond yields converge toward (and fall below) zeroPension funds that need to provide fixed income for retirees 30 years from now will be hard pressed to create enough returns if 30-year bond returns 235 bps per yearWhen risk-free returns are low, there is only one option for investors: take more risks:Add less liquid assets (real estate) to the portfolio - a strategy generally known as “sell liquidity” (sellers “pay” buyers with a price concession for willing to take on illiquid assets)Add less creditworthy assets; the proliferation of high yield bond funds under a low interest rate regime is the perfect exampleAdd volatile assets; when interest rates are low enough, desperate pension funds and insurance companies would allocate more cash into equities or private equity fundsNote: The effects on banks (intermediaries) are more nuanced - instead of taking greater risk and making more loans, low (and negative) rates compress bank margins and unintentionally fuel contractions in trade financing.In a perverse twist, as more institutional buyers rush into riskier sectors, the ordinarily risky assets would become less volatile as policy-induced demand absorb limited supply; amid a rapid decline in European interest rates during 3Q 2019, Siemens was able to issue corporate bonds with a negative yield. The new issue, as expected, was decidedly oversubscribed. Investors didn’t really have much option, for even 30-year German yields were trading below zero at the time:Former Fed Governor Stein, an outspoken policymaker who mused over unintended costs of low interest rates, described the “reach for yield” effect as central banks’ “recruitment” channel, with willing buy-side firms acting as accomplices of the central bank:The theory we sketch involves a set of "yield-oriented" investors. We assume that these investors allocate their portfolios between short- and long-term Treasury bonds and, in doing so, put some weight not just on expected holding-period returns, but also on current income. This preference for current yield could be due to agency or accounting considerations that lead these investors to care about short-term measures of reported performance. A reduction in short-term nominal rates leads them to rebalance their portfolios toward longer-term bonds in an effort to keep their overall yield from declining too much. This, in turn, creates buying pressure that raises the price of the long-term bonds and hence lowers long-term yields and forward rates.Thus, according to this theory, an easing of monetary policy affects long-term real rates not via the usual expectations channel, but rather via what might be termed a "recruitment" channel--by causing an outward shift in the demand curve of yield-oriented investors, thereby inducing these investors to take on more interest rate risk and to push down term premiums.Central bank’s tools to adjust market incentivesThese market dynamics are well-understood by central bank policymakers, and they would manage both short-term interest rates and long-term interest rates with rate cut (or hikes) and quantitative easing (or tightening), respectively:Short-term policy rate can be “anchored” by imposing the new rate on how much depository institutions (chartered banks, etc) would receive (or have to pay in the scenario of negative rates) by parking excess cash at the central bank. This rate does not always uniformly affect the economy, because many European banks have been reluctant to broadly pass negative rates to their depositors. The Federal Reserve has a similar system, but it is augmented by additional programsQuantitative easing is implemented by creating new money on central banks’ ledgers and use them to transact with financial intermediaries (trading units of investment banks). The more long-term bonds they buy, the less bonds would be available on the secondary market, and longer-term interest rates would fall, assuming markets have not fully price-in the effectForward guidance can be used individually or with quantitative easing. Central banks can pledge future rate cut or future expansion in bond purchases, and markets would immediately price-in probabilities of such future outcomes. This would quickly reduce market volatility and lead to asset price appreciation across asset classes (especially the riskier sectors).Furthermore, central banks can also alter the target of their purchases; in the case of ECB, the program also includes buying corporate bonds; as for Bank of Japan, the program also buys equity ETFs (by mid 2019, Bank of Japan was on track to be the top shareholder of most Japanese stocks). Signals of additional direct risky asset purchases would quickly depress volatility as well.Thus, it is only natural that size of central banks’ balance sheet (where QE purchases are warehoused) are correlated with broader risk sentiment:ConclusionIn conclusion, central banks suppress market volatility by using interest rates to steer market incentives; short-term interest rates can be adjusted by deposit rate or interest on excess reserves (IOER), while longer-term interest rates can be influenced by quantitative easing. Forward guidance can be used in both cases to pledge future policy action and pull forward future market reactions.Finally, central banks can also forgo indirect volatility adjustments via incentives (interest rates) and directly purchase risky assets, such as ECB’s corporate bond QE program, and Bank of Japan’s equity ETF purchases.

Most middle-class people invest in the stock market, whether they know it or not, through pension plans, 401Ks, annuities, life insurance policies, etc. The tax deductible Individual Retirement Account (IRA) is almost always an investment in the stock market by way of mutual funds, exchange traded funds, or simple corporate equity ownership.Middle class retirees depend heavily on Federal Government guaranteed Social Security monthly check (SS), which is a good program less likely to fail than Stock Market investment. However, SS provides bare fraction of working paycheck, so seniors entirely dependent on it may struggle to make ends meet and limited to front porch rocking chair for golden years travel package. Plus, many employers, and many small business retirees, simply don’t make contributions enough to keep retirees sheltered and fed.Many middle-class people build their nest egg by building a portfolio of realestate investments. So, they buy house or apartments, and then rent them to less fortunate, in order to create an income stream, as well as equity base. This is old fashioned way to boost one’s value, and being a landlord is a lot of work, since renters are often a lot of trouble, taxes can be complicated, and liquidating realestate assets for cash is also a lot of work.Most middle-class people start saving, and investing in mutual funds and other investments beginning in their 40’s, but it would be better to start investing earlier. Today’s online brokerage companies like Charles Schwab provide seminars and online data to help retail investors decide how to invest their savings.Here, I won’t even discuss insurance annuities as retirement investment option because frankly they aren’t recommended for most people. Annuities are a black box investment contract where insurance company makes a lot of money over time. If the person is completely unable to manage their own day to day finances, maybe annuities might be an option.Also, I won’t discuss CDs, bonds or commodities. In current marketplace CDs and bonds are generally not good return, and bonds are technically difficult to study. Commodities such as gold, silver, oil futures, pork bellies, etc are also difficult to follow, and are therefore risky.My own introduction to brokerage investing for publicly owned corporate stocks was pretty typical pattern, although as college educated person living in California, I was fortunate enough to anticipate the phenomenal rise of Apple and Tesla. I began with a bank owned brokerage house, like Wells Fargo, then moved to high flying discount on-line company, whose name I can’t even recall now, that eventually sold itself to a bank, causing loss cost basis data and screwy tax documents. Some of these early problems were also due to early primitive internet. So, over time I moved all my accounts to stable company dedicated to good online brokerage service as primary business, and large enough to not get eaten by a bigger fish. Today’s on-line brokers are as easy to use as an online checking account.Earliest investments were mutual funds, but over time I realized that active manager charge for services, in creating a basket of a hundred or so different stocks, took away average of 2% of my earnings, and this didn’t necessarily mean good things for my portfolio. Often actual value of mutual fund slumped, so I lost a small but significant sum of money. But, overall I could expect to double my money in 10 years, which is a lot better than keeping money in a bank savings account, and maybe better than realestate depending on where you live.So, I sold off most mutual funds and started buying Exchange Traded Funds (ETF), which are similar basket of 100 or so stocks, but have no manager, charge less than 1% management fee, and are traded more like a regular stock. Problem with both ETFs and Mutual Funds is that they are difficult to analyze as investment product, precisely because they are a packaged product made up of 100 or so individual company stock equities. This does provide a more stable investment on a day to day basis though.But, back to the question, YES, middle-class investors who can read and learn about publicly owned corporations can easily improve their earnings over both Mutual Funds and ETFs. I can’t explain everything here but there are four fundamentals I personally use to manage my money:Don’t buy in large purchases one stock. Don’t put all your eggs in one basket. Buy few shares at a time, and plan to have a portfolio of 10–12 different company stocks. I have many more than this, and I’ve heard recommended keep portfolio of as few as 6 company’s. The main idea here is to spread the risk and have a watchful eye on each stock, as if it were your children. You will inevitably make a poor choice investing in a company (I made mistake and bought Kodak), but this loss will be offset by gains in other company stock values. Hopefully, one or more of your tech stocks will grow dramatically (like Apple and Tesla did for me), while the rest will have average annual gain better than 5% within the current marketplace.Buy corporate stock you can understand without getting too technical. Don’t let annual statements and fine print about no guaranteed intimidate you. Buy shares of stock in companies that make a product or service that YOU (not somebody else) understand well, and can follow its fortunes in the daily news or online. There are hundreds of companies listed on Nasdaq and NYSE, and you may already know as a consumer whether they are a loser or not. It’s a good idea to browse online forums even outside your own brokerage house. On day to day basis, follow the fortunes of Disney, Amazon, Facebook, Apple, Google, Walmart, Netflix, and many other companies. Many women can follow cleaning products companies like Clorox, cosmetics companies like Avon, apparel companies like Levi-Strauss. Many men can follow motor industries like Harley-Davidson, GM, or Ford, or construction industries like Home Depot, or GE.Stick to fundamentals. Some stock brokers argue with me about this, but I plan to buy and hold forever. I don’t day trade, I don’t try to time the market and sell for a profit, and I don’t panic and sell when bottom falls out of the marketplace, like it did in 2008 and 2020. If I sell, it’s very often a proven loser. I got tired of seeing Kodak and GE just lose value year after year, so I sold and any losses are an IRS tax write off. Most companies have expanding markets and grow. Keep an eye on them, but don’t sell impulsively.Invest in high profit margin mostly tech industries. This is little difficult to explain why, but most people can appreciate that profit margins for making potato chips is likely less than for making computer chips. Making plastic children’s toys may have thinner margins than video games and cell phones. Look for transformational disruptive technology likely to put other companies out of business in the longer term to make most rapid capital gains. Invest in Tesla not Ford, solar panels producers not coal mining companies, Amazon not Sears.