(Bloomberg) — The Securities and Exchange Commission is scrutinizing banks’ efforts to appear safer to regulators and shareholders.
The agency is looking for improper behavior related to how banks value complicated assets and to transactions they use to shift risks to other entities, said Michael Osnato, head of the complex financial instruments group in the SEC’s enforcement division.
In the wake of a financial crisis that forced governments worldwide to bail out banks, global regulators are increasing the amount of capital lenders must hold in relation to their assets, more than doubling the requirements under some measures. As publicly traded banks seek to conform to the new rules, their progress has become a common topic in disclosures to investors and presentations by executives.
While banks are allowed to engage in complicated transactions to help them comply — such as using derivatives including customized credit-default swaps that shift some of the risks of their assets to investors — not all types of the activity can count. Banking regulators make the ultimate determinations, often after deals get struck and on a case-by- case basis.
“We’re paying attention and looking for fact patterns that are suggestive of something short of a real transfer of risk,” Osnato said in a telephone interview. “If you’re going to look for this, you’re more apt to see it with some of the big overseas banks that may not have the same level of pre-trade interaction with their primary bank regulator.”
Inaccurate valuations of traders’ holdings have traditionally been tied to the individuals wanting to improve their desks’ profits, he said. The employees can now also face “immense pressure” to address how much capital they are using, so “you can see people cutting corners,” he said.
A “mismarking fact pattern, with the added gloss of it being done to affect ratios, is a very interesting one to us,” said Osnato, who helped lead an SEC probe into JPMorgan Chase & Co.’s “London Whale” trading losses before taking on his current role last year.
His comments came during an interview in which he also discussed potentially inappropriate practices in the post-crisis trading of mortgage bonds and other complex securities.