42. Mergers and Acquisitions in Financial Services Markets. Слияния поглощения на рынках финансовых услуг.

An acquisition or takeover is the purchase of one business or company by another company or other business entity. Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity. Whereas, mergers generally assume mutual exchange of stock or consolidation into a new company. However, there is no straight difference in between the two.

The Main Idea is 1+1=3: this equation is the special alchemy of a merger or an acquisition, called synergy. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Other motives for mergers: economies of scale, greater market share, risk diversification, internalization of transactions, tax advantages etc.

This rationale is particularly attractive to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

The success of a merger or acquisition depends on whether this synergy is achieved. Statistics show that 2/3 of M&As fail. It happens not only due to long-run consequences, but also because of the merger procedure itself. Such transactions are extremely costly for both parties, as the managing bank is involved as an intermediary. Another problem is presented by various approvals. For example, most states of the USA require 90-100% shareholders’ approval. Apart from the internal approvals, some authorities approvals are required as well, e.g. anti-trust approval, approval of the Ministry of specific Industry etc. The number of such requirements varies depending upon the country of M&A. For financial institutions requirements are very tough and authority’s approval is strongly required.

Types of M&As:

• Horizontal merger - Two companies that are in direct competition and share the same product lines and markets;

• Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker;

• Market-extension merger - Two companies that sell the same products in different markets;

• Product-extension merger - Two companies selling different but related products in the same market;

• Conglomeration - Two companies that have no common business areas.

43. International Financial Centers. Международные финансовые центры.

International Financial Center is a city or its district (1) that has a heavy concentration of financial institutions, (2) that offers a highly developed commercial and communications infrastructure, and (3) where a great number of domestic and international trading transactions are conducted. It will usually have at least one major stock market.

In order for a centre to be considered an international financial centre, it must have a concentration of all of the following five banking activities:

• Financing foreign trade, such as issuing credit for import

• Currency exchange, such as foreign exchange (FOREX) trading

• Transferring funds across political boundaries (foreign currency deposits)

• Foreign borrowing and lending

• Foreign investment

International financial centres can be further characterised as follows:

• A city which facilitates domestic capital-flow to the outside world (London, New York City)

• A city, due to its location and facilities, serves as a foreign lending and trading centre for foreign currencies (Hong Kong, Singapore)

• A place, due to its favourable tax laws and banking regulations, acts as a haven for foreign lending and borrowing (Bahamas, Cayman Islands, Channel Islands)

Top IFC according to Global Financial Centers Index (measures competitiveness of the centre): London, New York, Hong Kong, Singapore, etc.

Moscow as the IFC: как сказал Скалкин, чтобы сформировать в Москве МФЦ, следует действовать по примеру ОАЭ: выделить участок земли и объявить, что там будет действовать English law

Meanwhile, in practical terms, Moscow`s position as an international financial center means the attraction of new investments to the city, an increase in the taxable base, and a greater number of jobs for professionals, which is especially important for Moscow, as the city boasts a huge number of universities and other academic institutions. This will also result in an increase in wages of the city`s employees, as well as an improvement in the quality of life of the population and a rise in consumer demand. This progress in the city directly correlates with the capital`s long-term strategic development.

The following conditions are in priority in order to establish FC: 1) economy with high development potential; 2) stable national currency; 3) trade in securities of joint-stock companies on stock exchanges; 4) liberal regulation of the country`s economy.

New York. (home for the New York Stock Exchange, the largest stock exchange in the world by dollar volume. Many of the world's largest corporations are based in the city.) During much of the 20th century, the United States and its financial capital, New York City, were the leaders. New York still has strengths in having a "concentration of finance professionals"—prime brokers, large banks, traders, lawyers, accountants, and private bankers. One analyst suggested the prime factors for success as a financial city were three: 1) a pool of money to lend or invest; 2) a decent legal framework; 3) high-quality human resources

The London Stock Exchange (shares and bonds), Lloyd's of London (insurance) and the Bank of England are all based in the City. Over 500 banks have offices in the City, and the City is an established leader in trading in Eurobonds, foreign exchange, energy futures and global insurance. The Alternative Investment Market, a market for trades in equities of smaller firms, is a recent development. London is the world's greatest foreign exchange market, with much of the trade conducted in the City of London. Of the $3.98 trillion daily global turnover, as measured in 2009, trading in London accounted for around $1.85 trillion, or 46.7% of the total.

44. Global Banking Regulation and Supervision. The Basel Agreement on International Capital Standards Accord: Basel I, II, and III. Глобальное банковское регулирование и надзор. Базельское соглашение I, II и III.

Banking crises, rapid structural change, and the continuing globalization of banking have led national and multilateral policy makers to focus increased attention on the crucial role of banking supervision. Policy discussions specifically focus on several issues that must be addressed in establishing and maintaining effective supervision, including who should supervise banks, i.e., the “structure” of bank supervision. Several issues for policy makers to address with respect to the structure of bank supervision are whether there should be a single bank supervisory authority, or multiple bank supervisors; whether the central bank should play a role in bank supervision.

Perhaps the most strongly emphasized argument in favor of assigning supervisory responsibility to the central bank is that as a bank supervisor, the central bank will have first-hand knowledge of the condition and performance of banks. This in turn can help it identify and respond to the emergence of a systemic problem in a timely manner. Those pointing to the disadvantages of assigning bank supervision to the central bank stress the inherent conflict of interest between supervisory responsibilities and responsibility for monetary policy. The conflict could become particularly acute during an economic downturn, in that the central bank may be tempted to pursue a too-loose monetary policy to avoid adverse effects on bank earnings and credit quality, and/or encourage banks to extend credit more liberally than warranted based on credit quality conditions to complement an expansionary monetary policy. A supervisor with broad scope to cover all financial services is necessary to supervise such entities effectively. The most significant argument against a supervisory authority with broad scope is that it would result in an undue concentration of power that would otherwise be dispersed among several agencies. This could increase the likelihood of regulatory capture and retard financial innovation.

A set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to capital risk, market risk and operational risk. The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

The first Basel Accord, known as Basel I, was issued in 1988 and focuses on the capital adequacy of financial institutions. The capital adequacy risk, (the risk that a financial institution will be hurt by an unexpected loss), categorizes the assets of financial institution into five risk categories (0%, 10%, 20%, 50%, 100%). Banks that operate internationally are required to have a risk weight of 8% or less.

The second Basel Accord, known as Basel II, is to be fully implemented by 2015. It focuses on three main areas, including minimum capital requirements, supervisory review and market discipline, which are known as the three pillars. The focus of this accord is to strengthen international banking requirements as well as to supervise and enforce these requirements.

Basel III - A comprehensive set of reform measures designed to improve the regulation, supervision and risk management within the banking sector. The Basel Committee on Banking Supervision published the first version of Basel III in late 2009, giving banks approximately three years to satisfy all requirements. Largely in response to the credit crisis, banks are required to maintain proper leverage ratios and meet certain capital requirements. Basel III is part of the continuous effort made by the Basel Committee on Banking Supervision to enhance the banking regulatory framework. It seeks to improve the banking sector's ability to deal with financial and economic stress, improve risk management and strengthen the banks' transparency. A focus of Basel III is to foster greater resilience at the individual bank level in order to reduce the risk of system wide shocks.

45. Impact of the US Federal Law « Dodd-Frank Wall-Street Reform and Consumer Protection Act» on Global Financial Markets. The Role and Functions of the International Financial Stability Board. Влияние Федерального Закона США Додда- Франка о реформе Уолл-Стрита и защите потребителей на глобальные финансовые рынки. Роль и функции Международного Совета по финансовой стабильности.

The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Barack Obama on July 21, 2010. Passed as a response to the late-2000s recession.

Changes to regulatory oversight

• Under the act, federal regulators will have new and expanded authority to seize and break up large institutions that were previously deemed “too large to fail.”

• The Office of Thrift Supervision will be eliminated, but the Thrift charter will remain intact.

• A new financial stability council will monitor system-wide risks and have the ability to recommend stricter regulatory capital, leverage and other rules to the Federal Reserve. In extreme cases, the council will even have the power to break up institutions deemed unstable.

• Large hedge and private equity funds will be required to register with the Securities and Exchange Commission as investment advisers and regularly provide reports to aid regulators in monitoring systemic risks.

Derivatives. Most derivative transactions, with the exception of customized swaps, would have to be traded on exchanges and cleared through clearinghouses, thus guaranteeing both liquidity and transparency in the system. This is also expected to increase the reporting and compliance burden. Banks will be further required to transfer their riskiest derivative trading operations into affiliates. They will be able to retain operations in-house for interest-rate, f/x and precious metals swaps. However, trading in commodities derivatives will have to be conducted through affiliates.

Mortgage lending. The act will establish new minimum underwriting standards for home mortgages. Banks will be required to verify a borrower’s income, credit history and employment status. Also, the act will ban commission payments to mortgage brokers that steer borrowers to high-priced loans.

Profit margin decline. One of the effects the act will have on all financial institutions is that profit margins will decline. For example, larger institutions will no longer be able to generate profits from risky bets using their own money and will have to rely more on traditional low-margin banking business.

Smaller banks forced to expand. On the other end of the spectrum, smaller banks will be required to increase staff levels in their credit departments and compliance functions as the rules will apply to the same extent to both large and small institutions.

Credit crunch and scarce loans. With the threat of regulatory scrutiny and monetary penalties over lending decisions, many banks and — in particular — smaller community banks, will think twice before granting new loans. Additionally, stricter capital requirements and increased scrutiny over credit decisions will drain credit available to borrowers. This could have a negative impact on overall growth and hit mid-market companies particularly hard that will have to look for alternative higher-cost financing.

The act is a step in the right direction and should curb the excessive risk taking mentality that some bankers have displayed. It also sends a clear signal that if organizations fail to properly manage finances, they will not be rescued by the taxpayer in the future. The improved risk monitoring and capital requirements also serve to build a cushion and offer assurance that another severe financial crisis may be subdued ahead of time.