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Vanguard launches active emerging markets stock fund

Vanguard has introduced the Vanguard Emerging Markets Select Stock Fund, an actively managed equity fund that will employ four global advisory firms: M&G Investment Management Limited, Oaktree Capital Management, L.P., Pzena Investment Management, LLC, and Wellington Management Company, LLP. The  two-week subscription period is expected to end on June 27, 2011.

Following the subscription period, fund assets will be allocated equally among the four investment advisors, which have different but complementary investment approaches, Vanguard said in a release.

“Vanguard Emerging Markets Select Stock Fund seeks to provide long-term capital appreciation by investing in equity securities of small-, mid-, and large-capitalization companies located in emerging markets,” the release said. The fund’s expense ratio is 95 basis points, compared to a Lipper average of 168 basis points for emerging market funds. 

The fund, available to individual retail investors, has a $3,000 minimum initial investment. As it does with its other international stock funds, Vanguard will charge a 2% redemption fee on shares held less than 60 days to discourage short-term trading. 

Some 44% ($748 billion) of Vanguard’s assets under management are in 73 actively managed funds, the company said. Fifteen of its 29 actively managed stock funds use a multi-manager approach.

Care for aging parents costs Americans $3 trillion: MetLife  

Americans who take time off to care for aging parents are losing an estimated $3 trillion in wages, pension and Social Security benefits, according to “The MetLife Study of Caregiving Costs to Working Caregivers: Double Jeopardy for Baby Boomers Caring for Their Parents.”

The study, produced by the MetLife Mature Market Institute in conjunction with the National Alliance for Caregiving and the Center for Long Term Care Research and Policy at New York Medical College, reports that individually, average losses equal $324,044 for women and $283,716 for men. The percentage of adults providing care to a parent has tripled since 1994.

The researchers analyzed data from the National Health and Retirement Study (HRS) to determine the extent to which older adult children provide care to their parents. They also studied gender roles, the impact of caregiving on careers and the potential cost to the caregiver in lost wages and future retirement income.

“Nearly 10 million adult children over the age of 50 care for their aging parents,” said Sandra Timmermann, Ed.D., director of the MetLife Mature Market Institute. “Assessing the long-term financial impact of caregiving for aging parents on caregivers themselves, especially those who must curtail their working careers to do so, is especially important, since it can jeopardize their future financial security.”

The study found that:

• Adult children age 50+ who work and provide care to a parent are more likely than those who do not provide care, to report that their health is fair or poor.
• The percentage of adult children providing personal care and/or financial assistance to a parent has more than tripled over the past 15 years and currently represents a quarter of adult children, mainly Baby Boomers. Working and non-working adult children are almost equally likely to provide care to parents in need.
• Overall, caregiving sons and daughters provide comparable care in many respects, but daughters are more likely to provide basic care (i.e., help with dressing, feeding and bathing) and sons are more likely to provide financial assistance defined as providing $500 or more within the past two years. Twenty-eight percent of women provide basic care, compared with 17% of men.
• For women, the total individual amount of lost wages due to leaving the labor force early because of caregiving responsibilities equals $142,693. The estimated impact of caregiving on lost Social Security benefits is $131,351. A very conservative estimated impact on pensions is approximately $50,000. Thus, in total, the cost impact of caregiving on the individual female caregiver in terms of lost wages and Social Security benefits equals $324,044.
• For men, the total individual amount of lost wages due to leaving the labor force early because of caregiving responsibilities equals $89,107. The estimated impact of caregiving on lost Social Security benefits is $144,609. Adding in a conservative estimate of the impact on pensions at $50,000, the total impact equals $283,716 for men, or an average of $303,880 for male or female caregivers age 50+ who care for a parent.

Lincoln Financial Distributors names new head of Institutional Retirement Solutions Distribution

Jim Lyday has joined Lincoln Financial Distributors (LFD), the wholesale distribution subsidiary of Lincoln Financial Group as head of Institutional Retirement Solutions Distribution, the company announced. He will report to Will Fuller, president and CEO of LFD, and will be responsible for growing Lincoln’s Defined Contribution business in the full service mid-to-large employer retirement plan market.

Lyday has been a senior manager at Prudential Financial and in the defined contribution businesses at The Principal Financial Group.

eRollover launches marketing and lead-generation program for financial advisors

eRollover, which hosts a website focused on retirement planning, has launched eRollover for Advisors, an online marketing solution aimed at helping financial advisors grow their practices. 

Peter Velardi, eRollover’s president and COO, said eRollover for Advisors addresses such issues as client acquisition and internet marketing/ social media. It also aggregates resources for financial advisors. 

For a monthly fee, advisors can “connect with members from eRollover’s growing consumer community who are seeking access to advice to manage their rollover and planning needs. They will also have the ability to receive additional qualified leads from eRollover properties around the web, and will soon access a webinar system to reach interested consumers directly online,” the company said in a release.

Mr. Velardi said eRollover is offering “an opt-in listing of advisors, not a list scraped off of the internet.  In addition to the consumer match feature, eRollover for Advisors provides “a means for advisors to learn how to market to consumers utilizing an array of proprietary social media training resources, including cheatsheets, webcasts, and the possibility for them to connect with experienced specialists to utilize social media to supplement their practice.”

New York Life has launched a business-to-business print and online advertising campaign, targeting wirehouse financial advisors, that highlights the benefits of using guaranteed income annuities in retirement planning. The print ads are currently running in Registered Rep, Investment News and On Wall Street and online ads are appearing on Ignites, FundFire and Morningstar. 

“The campaign is meant to reinforce the thinking validated by academics, that income annuities are a valuable asset class for retirement portfolios. Our strategy is to extend the reach of New York Life and guaranteed lifetime income in the wirehouses and regional broker dealer firms,” said Steve Fisher, chief marketing officer for Retirement Income Security, New York Life, in a release.  “The ad includes a call to action, suggesting that financial advisors rethink retirement income planning to include a guaranteed lifetime income stream.”

Both the print and online ad banners direct advisors to a splash page where they can request the Financial Research Corporation white paper titled “Income Annuities Improve Portfolio Outcomes in Retirement.”  Partially funded by New York Life, the white paper discusses the benefits of using income annuities as an asset class in a client’s overall portfolio.  

“This new campaign positions lifetime income annuities as an asset class within a portfolio and utilizes common investment concepts and terms to promote annuities,” said Matt Grove, vice president in charge of Guaranteed Lifetime Income. “Including guaranteed income solutions have been shown to help improve outcomes in clients’ retirement portfolios.”

In the fourth consecutive monthly decline since January’s inflows of $29.8 billion, estimated long-term mutual fund flows were $22.6 billion in May, according to Morningstar. U.S. ETFs lost about $3.1 billion to outflows in May, in contrast to inflows of $23.3 billion in April.

Other highlights of Morningstar’s report on mutual fund flows included:

• U.S. stock funds recorded their first significant outflows of the year, as the asset class lost $4.5 billion in May.
• Although inflows have slowed, international-stock funds collected assets of about $1.5 billion during the month. Diversified emerging-markets equity funds accounted for the majority of these inflows.
• For the fifth consecutive month, inflows increased for taxable-bond funds. Investors added $20.8 billion in new money to the asset class in May, but with a slightly diminished taste for credit risk. Flows into municipal-bond funds were flat after six consecutive months of outflows.
• Following a steep drop in silver and other commodity prices, commodities funds fell more than five percent on average and experienced outflows of more than $500 million in May.

Other highlights of Morningstar’s report on ETF flows included:

• Although three U.S. stock ETFs placed in May’s top-five ETFs by inflows, the U.S. stock asset class saw outflows of $2.7 billion during the month.
• Outflows from international-stock ETFs totaled $1.1 billion in May after inflows of $6.8 billion and $7.1 billion in March and April, respectively.
• Commodities ETFs realized the largest outflow of any ETF asset class in May, as investors withdrew $3.7 billion. May’s redemptions also marked the single largest net monthly outflow for commodities ETFs.
• Taxable-bond ETFs made a healthy contribution to overall ETF flows again in May. The asset class’ inflows of $2.1 billion were second only to alternative ETFs, which also saw inflows of about $2.1 billion.  

Currently one-third of Federal spending is financed by new borrowing. This is unsustainable. However, with the two parties locked in mortal combat in preparation for the 2012 election it is likely that the changes made as part of the debt limit extension in August will be only a down payment.

More will have to be done in 2013 and our political leaders will have to cut more spending and raise revenue. Due to the unpopularity of raising tax rates this means eliminating or reducing the tax breaks and deductions that are termed “tax expenditures.”

According to the Joint Committee on Taxation these tax expenditures reduce Federal revenue by $1.1 trillion annually. The favorable tax treatment of contributions to retirement savings plans accounts for about 10% of this and is among the biggest of these expenditures.

In a June 8 appearance before The Economic Club of Washington, D.C., Sen. Mark Warner, D-Va., said that the so-called Group of Six, a group of senators trying to convert last year’s presidential deficit commission recommendations into legislation, is embracing the deficit commission’s idea of eliminating or reducing these tax expenditures, nearly all of which are popular with the public.

The Debt Commission proposed two scenarios which affect DC plans. One would reduce the combined DC contribution limit to $20,000 or 20%, whichever is less. The other would eliminate it altogether. A big bulls-eye has been painted on the employer-sponsored defined contribution system.

The 2013 tax debate will be a barroom brawl with supporters of each tax preference engaged in a no holds barred effort to preserve as much of their program as possible. Mix in consideration of the tax rate for of capital gains, dividends and corporations and you may have a situation where virtually everyone will be willing to throw the employer-sponsored defined contribution system under the bus.

It gets worse. Many see this situation as an opportunity to replace the current system with one run by the government and if that doesn’t fly they will propose changes that would alter the current system significantly.

For example, some would replace the current tax deferral with a refundable tax credit. And at the other end of the political spectrum some advocates see any tax preference as a social manipulation preferring no tax preferences whatsoever, including those for retirement savings.
If we are going to preserve the current system in anything resembling its current form with anything close to its current contribution limits, we must begin preparing now. Check back for more information on this subject coming soon.

The Supreme Court’s recent 5-4 ruling in the eight-year-old shareholders’ lawsuit against Janus Capital Group, which tested the precise boundaries of liability for misleading prospectus statements, is “significant and far-reaching,” according to a new Briefing by Wolters Kluwer Law & Business.

The decision in Janus Capital Group, Inc. v. First Derivatives Traders, (U.S. Supreme Court, docket No. 09-525) was seen as a victory for Janus’ investment advisers as well as for independent auditors of public company financial statements. The Court ruled that the adviser did not make any of the statements in the prospectuses, the fund did, and only the fund had the statutory duty to file the prospectuses with the SEC.

The Court stated that any reapportionment of liability in the securities industry in light of the close relationship between investment advisers and mutual funds is properly the responsibility of Congress and not the courts.

“Basically, the Court is saying it will not waver from its previous decision that Rule 10b-5’s implied private right of action does not include actions against aiders and abettors,” said Wolters Kluwer Law & Business principal federal securities law analyst Jim Hamilton.

In that previous decision, the 1994 Central Bank decision, the high court ruled that a mutual fund investment adviser cannot be held liable in a private action under Rule 10b-5 for false statements included in its client mutual funds’ prospectuses

The decision, split on ideological lines, was written by Justice Clarence Thomas. Liberal-leaning Justices Stephen Breyer, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan all dissented.

“The Court emphasized that for the Central Bank rule to have any meaning, there must be some distinction between those who are primarily liable (and may be pursued in private suits) and those who are secondarily liable (and may not be pursued in private suits),” Wolters Kluwer said in a release. “The Court has drawn a clean line between the two – the statement issuer is the person or entity with ultimate authority over that statement and others are not.”

Attorneys for the First Derivative Traders were bitter after the decision, which was also seen as a setback for the Obama administration, the Securities and Exchange Commission, and shareholders’ ability to penetrate the corporate veil.

“This is a roadmap for fraud,” said David Frederick, a leading plaintiffs’ advocate at the high court. “That’s what the majority has sanctioned. If the Court allows false statements to issue through intermediaries, it will undoubtedly unleash bad actors.”

TIAA-CREF today announced a new partnership with the Chicago-based Center for Due Diligence (CFDD) and PlanTools to help plan sponsors and participants select an independent advisor to meet their evolving retirement planning needs.

TIAA-CREF has collaborated with the CFDD and PlanTools to create a due diligence standard to qualify advisors to participate in the TIAA-CREF Advisor Network and who can work with plan sponsors and their participants.

An annual fee paid by advisors to the CFDD for managing the program allows advisors to benefit from an increased level of support from TIAA-CREF, including personalized marketing materials, exclusive plan level arrangements, special training sessions, and participation in a new referral program.

The Advisor Network’s minimum standards and advisor review will assist plan sponsors in meeting their fiduciary responsibilities. It will also provide participants with access to a pre-screened network of qualified investment advisors who provide participant level advice at an investment advisory fiduciary standard of care.

“Our experience shows that individuals benefit from retirement planning advice and this Network offers a nice complement to the advice services we offer through our retirement plans,” said Rob Rickey, Head of Advisor Services, TIAA-CREF.

“At the same time, increased focus on plan sponsor’s fiduciary responsibilities has led to greater demand for information and support. Our own experience with both individual and institutional clients has confirmed the growing need to support independent advisors.”

Phil Chiricotti, President, CFDD, said “Participant advice provided by qualified, competent and compliant advisors is a proven path to successful retirement outcomes for participants. TIAA-CREF’s decision to adopt and share the CFDD/Plan Tools documented prudent process for selecting qualified advisors with their clients will accelerate the distribution of meaningful advice to participants in need of expert guidance.”

TIAA-CREF is currently selecting a limited number of advisors for a controlled launch of the Network over the next six months. This group will be the Network’s charter membersand will provide feedback on the minimum standards and process for applying to the Network. The Network will be introduced nationally in early 2012.

Roger Ferguson, TIAA- CREF’s President and CEO, will deliver a keynote session on Positive Outcomes for Retirement Plan Participants: The Power of Advice at the CFDD’s October 17-19, 2011 Advisor Conference at the downtown Chicago Swissotel.

In a May 31 SEC filing, Jackson National Life said that, effective August 29, 2011, it would close the following variable annuity investment options to all separate account investors, but leave them available to Funds of Funds:

• The JNL Institutional Alt 65 Fund will be closed to all investors
• The JNL/Goldman Sachs Emerging Markets Debt Fund
• The JNL/Lazard Emerging Markets Fund
• The JNL/Mellon Capital Management Global Alpha Fund
• The JNL/Red Rocks Listed Private Equity Fund

According to the prospectus:

The JNL Disciplined Moderate Fund, the JNL Disciplined Moderate Growth Fund, and the JNL Disciplined Growth Fund are also referred to in this Prospectus as the JNL Disciplined Funds. The JNL Institutional Alt 20 Fund, the JNL Institutional Alt 35 Fund, the JNL Institutional Alt 50 Fund, the JNL Institutional Alt 65 Fund are also referred to in this Prospectus as the JNL Alt Funds. Also effective August 29, 2011, the JNL/BlackRock Global Allocation Fund no longer utilizes a master-feeder structure.  

Effective August 29, 2011, the JNL/Goldman Sachs Emerging Markets Debt Fund, JNL/Mellon Capital Management Global Alpha Fund, and JNL/Red Rocks Listed Private Equity Fund are only available as underlying funds to the JNL/S&P Funds and JNL Alt Funds.

Also effective August 29, 2011, the JNL/Goldman Sachs Emerging Markets Debt Fund is only available as an underlying fund to the JNL Disciplined Funds, the JNL/AQR Managed Futures Strategy Fund is only available as an underlying fund to the JNL/S&P Funds and the JNL Alt Funds, and the JNL/Mellon Capital Management Emerging Markets Index Fund is only available as an underlying fund to the JNL/S&P Funds and JNL Disciplined Funds.

The new report on government debt by the Peterson Institute for International Economics turns out not to be as alarming as portrayed in a May 28 story in the New York Times entitled, “The U.S. Has Binged. Soon It Will Be Time to Pay the Tab.”

After reading that story, I ordered the 50-page report to find out what it said, and whether I should start panicking.  Personally, I’m against panic. And I think it makes people panicky to compare our national debt to a bar “tab.” It isn’t. It makes people think Uncle Sam is almost “broke.” He isn’t.

In terms of sensationalism, the book, entitled, “The Global Outlook for Government Debt Over the Next 25 Years,” did not match the Times account. For a reality-check, I called the principle author, Joseph E. Gagnon, a Harvard-and-Stanford-trained former Federal Reserve official and senior fellow at the Peterson Institute. Gagnon told me that Morgenstern wrote a good story, but that her headline, with its emphasis on the word “soon,” exaggerated his position.  

“The major problems won’t hit us for another five years, or I’d say five to 10 years. But financial markets are forward looking, and they could get worried. But even financial markets will give us two or three years.

“The situation is alarming in the sense that the problem is very large. [Gretchen Morgenstern] used the word ‘soon,’ but she also said, in quoting me, that we have some time to deal with it.

“I’m not against deficit spending, especially when you have huge unemployment. What we’re doing now is fine. People who are not employed are not being productive, and the cost of that waste is higher than the cost of the deficit.

“Someone has to buy the government debt, but if you’re buying the debt, you’re not building a factory. Yes, the U.S. Treasury has the Federal Reserve to buy its debt, and any country with a central bank can do that. But there are limits to how much you can borrow.”

Gagnon’s booklet doesn’t blame deficits on a “binge.” Here’s what it says: “The financial crisis of 2008 brought about the most rapid increase in global government debt since World War II. The International Monetary Fund projects that, between 2007 and 2011, net general government debt (as a percent of GDP) will rise from 51% to 70% in the euro area, from 42% to 73% in the U.S., from 38% to 74% in the U.K., and from 82% to 130% in Japan.”

Indeed, the deficit spending that caused this “debt explosion” prevented a global depression by filling the vacuum of demand, and that investors fled to government debt because it was safe, Gagnon and co-author Marc Hinterschweiger go on to say.

Here’s what Gagnon writes about the threat from our supposedly impatient Chinese creditors:

“Despite the talk in the U.S. and elsewhere of possible malign motives of Chinese or other debt holders, there is not reason to believe that foreign holders of a country’s debt are more likely to sell in a panic than domestic holders. Were China to sell off some of its U.S. government debt out of pique or for political motivation, such a move would hurt China and its export sector even more than it might hurt the United States.”

The book says that if governments of advanced, demographically-aging countries fail to check their fiscal imbalances in the next 25 years—I would add that if their private sectors don’t invest productively, put people to work and fortify their tax bases—then they’re in for trouble. But the book concludes, “the current weak state of many economies argues against implementing budget cuts in the next couple of years.”

We’re in deep deficit because of a financial crisis, imprudent tax cuts and pointless wars, not because we’ve “binged.” (If we’ve binged, it’s by giving the medical and military industries a blank check for over 40 years). When I hear about government binging, I expect the mailman to whisk through my neighborhood in a tricked-out Hummer. Instead, every morning at 9:30, he arrives at my mailbox in the same battered little white Jeep. It’s noisy, and probably needs a new muffler. 

© 2011 RIJ Publishing LLC. All rights reserved.

In Italy, adults with more years of schooling, who consider themselves in good health, and who have higher incomes are relatively more receptive to purchasing income annuities, according to recent research from the Bank of Italy.

In an April 2011 paper entitled, “What Determines Annuity Demand at Retirement?” Giuseppe Cappelletti, Giovanni Guazzarotti and Pietro Tommasino based their findings on the 2008 results of the Survey of Household Income and Wealth, the bank’s biennial survey of the Italian population.

Italians are sensitive to the price of annuities, with sensitivity varying by education wealth and financial literacy. In the survey, heads of Italian households were asked: ‘Imagine you are 65-years old and will receive an inflation-adjusted pension of €1,000 a month. Would you give up that half of that pension in exchange for an immediate lump sum of €60,000? Of €80,000? Of €100,000?’

Only 40% of those surveyed said would exchange half the annuity for the lowest lump sum, while 69% would accept the middle sum and 82% would accept the highest sum. Only 64% of those with a primary school education would take the 80,000, while 77% of those with at least a bachelor’s degree would. Of those in  “very good health,” 72% would take 80,000, but only 63% of those in less than good health would.

Among those with a college education, who are also in the highest wealth quartile and evidence the highest level of financial literacy, just 45.3% would give up half the annuity for €100,000, only 17.9% would give it up for €80,000 and a mere 9% would give it up for €60,000.

The Italian market for deferred annuities is strong, but few deferred products are ever annuitized. According to the Bank of Italy, out of 1.94 million deferred annuity products that matured in 2003-2005, only about 11,000 were annuitized. Only about 15,000 annuities were in the payout phase in 2006.

Like many other countries with aging populations, Italy’s public retirement program has undergone significant reform in the past few years. People who have entered the retirement system since 1996 have participated in a mandatory defined contribution workplace programs where each person’s contribution to personal notional account is 33% of pay, with 22% from the employer and 11% from the employee. The account grows at a rate pegged to the Italian GDP and is converted to a pension as early as age 58 (for those with at least 35 years in the system). 

© 2011 RIJ Publishing LLC. All rights reserved.

Russell Investments said announced today that assets in its LifePoints Funds Target Date Series, a set of nine TDFs and an In Retirement Fund, grew 44% in 2010 and surpassed $1 billion.   

The series is available to retirement plans via the firm’s U.S. advisor-sold business, which partners with financial intermediaries and defined contribution record keepers.

The series’ 2055 fund, for instance, has a 10% bond allocation, while the In Retirement Fund maintains a 68% bond allocation throughout retirement.

According to Morningstar, the only categories to exceed target date funds’ percentage gains in 2010 were alternative and commodities funds.

Here’s a high-tech twist on the “more you buy, the more you save” slogan that for decades has helped American shopaholics rationalize their indulgences. 

Putnam Investments has launched the Putnam PriceCheck&Save iPhone application for participants in 401(k) plans to help individuals direct the money they “save” while shopping into long-term tax-deferred savings.   

Mutualfundwire.com wrote that the app “interacts directly with the 401(k) recordkeeping platform that Putnam uses to run the employer’s 401(k) plan. That interaction enables Putnam to make a one-time deferral into the plan for the amount the app user specifies.”

“By using leading mobile technology, we are trying to change behavior from impulse spending to impulse saving – all with a few taps on their iPhone,” Putnam said in a release.

The app enables participants in Putnam 401(k) plans to use their iPhone camera to scan the bar code of most sales items to register price, comparison-shop across other retailers to seek a lower cost, see the potential cost savings in terms of future monthly income in retirement, and immediately direct the price differential to the individual’s 401(k) account.

“Putnam’s PriceCheck&Save app is a powerful new way to demonstrate the eye-opening trade-off between spending today and its future financial impact on an individual’s retirement – translated through the critically-important language of income,” said Edmund F. Murphy, III, Head of Defined Contribution, Putnam Investments. “By using leading mobile technology, we are trying to change behavior from impulse spending to impulse saving – all with a few taps on their iPhone.”

Murphy explained that the larger educational effort motivating the launch of the tool is designed to showcase the connection between thoughtful purchasing and the ability to save for the future, by looking through the lens of retirement income.

“Putnam is hoping to create greater understanding in the marketplace about the critically important relationship between individuals’ spending of current income and saving of current income on their future retirement income. Spending and saving do not need to be mutually exclusive activities,” he noted.

ING Insurance U.S. has appointed Maliz E. Beams as CEO of ING Retirement, overseeing ING’s employer-sponsored retirement plan business, ING Retirement Services, and its retail retirement business, ING Individual Retirement.

Reporting to Rob Leary, president and COO of ING U.S., Beams will be responsible for linking the two units into a single Retirement operation as ING Group prepares for an initial public offering (IPO) of its U.S.-based retirement, insurance and investment management businesses. She will be based in ING’s Windsor, Conn., and Braintree, Mass. offices.

Beams previously served as president and CEO of TIAA-CREF’s Individual and Institutional Services, where she founded the Wealth Management business and re-launched IRAs, Insurance Products and Private Asset Management. She has also held leadership roles at Zurich Scudder Investments, Fleet Financial and American Express.

Beams received a B.A. in English from Boston College and an M.B.A. in marketing and finance from Columbia University. She was named one of “The 25 Most Powerful Women in Finance” in 2008 and 2009 by U.S. Banker magazine, and has been listed on Who’s Who of American Women.

In a speech on June 3, Federal Reserve Board member Daniel K. Tarullo described the ideal characteristics of enhanced capital requirements for large financial institutions and rebutted some of the financial services industries most common objections to those requirements.

Speaking at the Peter G. Peterson Institute for International Economics in Washington, Tarullo offered a report on the progress of the Dodd-Frank legislation toward its January 2012 deadline for reducing the risks of so-called “systemically important financial institutions” or SIFIs.

Tarullo listed five parameters for successful capital requirements:

1. An additional capital requirement should be calculated using a metric based upon the impact of a firm’s failure on the financial system as a whole. Size and interconnectedness of the firm with the rest of the financial system are the most important factors.
2. The metric should be transparent and replicable, reflecting a trade-off between simplicity and nuance.
3. The enhanced capital standards should be progressive in nature, “increasing in stringency” with the systemic footprint of the firm. While Dodd-Frank requires us to apply enhanced capital standards to all bank holding companies with more than $50 billion in assets, but the supplemental capital requirement for a $50 billion firm is likely to be very modest.
4. An enhanced requirement should be met with high-quality capital. Our presumption is that this means common equity, which is clearly the best buffer against loss.
5. U.S. requirements for enhanced capital standards should, to the extent possible, be congruent with international standards.

In other remarks, Tarullo said:

The regulatory structure for SIFIs should discourage systemically consequential growth or mergers unless the benefits to society are clearly significant. There is little evidence that the size, complexity, and reach of some of today’s SIFIs are necessary in order to realize achievable economies of scale and scope.  Some firms may nonetheless believe there are such economies. For them, perhaps, the highest level of an additional SIFI capital charge may be worth absorbing. Others, though, may conclude in light of the progressive form of the capital requirement that changes in the size and structure of their activities would align better with their returns.

The history of financial regulation over the last thirty years suggests that, when certain activities are restricted, firms will look for new areas in which to take more risk in the search for return. Capital regulation is the supplest and most dynamic tool we have to keep pace with the shifting sources of risk taken by financial firms.

The cessation of proprietary trading and the limiting of private equity activities will directly reduce risk-weighted assets and thus capital requirements. Similarly, centrally cleared derivatives will carry lower capital charges.

Moral hazard is already undermining market discipline on firms that are perceived to be too-big-to-fail. Higher capital standards will help offset the existing funding advantage for SIFIs.

There is little if any research showing that firms need to have balance sheets with the size and composition some do in order to achieve genuine economies of scope and scale. The lower leverage that would result from higher capital requirements should lead to at least some reduction in the required return on equity.

 © 2011 RIJ Publishing LLC. All rights reserved.