Regulators Consider Amending a Provision of the Volcker Rule

Federal regulators on Friday once again tried to quiet the controversy about the potential impact of a provision of the Volcker Rule on hundreds of community banks.

The regulators, facing a lawsuit from a banking trade group, said they were reviewing whether the new regulation required community banks to rid themselves of an obscure and complex security and, in the process, take an immediate hit to their capital levels. The regulators said they expected to decide by Jan. 15.

The statement is the latest attempt by regulators to address concerns from community bankers about the Volcker Rule’s effect on collateralized debt obligations backed by trust-preferred securities, a type of security that many small banks invested in before the financial crisis.

A person briefed on the matter said the joint statement from four regulatory agencies, including the Federal Reserve and the Federal Deposit Insurance Corporation, is intended to assure banks and their auditors that the Volcker Rule could be amended to permit small lenders to continue holding the securities, known as TruPs C.D.O.’s.

If small banks were permitted to continuing holding the securities until they recovered in value, the lenders would not be forced to take write-downs and a corresponding hit to their capital levels.

That would constitute a small, but important, victory for the banking industry, which has been actively lobbying to reshape or water down the Volcker Rule. It could also give the banks a foothold as they fight the federal regulatory agencies over parts of the rule, which was initially intended to stop banks from speculatively trading with their depositors’ money.

The Volcker Rule took nearly three years to draft before it was passed by regulators this month.

The statement from the regulators comes days after the American Bankers Association, an industry trade group, filed a motion in federal court in Washington seeking to quickly suspend the provision of the Volcker Rule that would appear to force small banks to sell the securities. The regulatory agencies have until Monday to respond to the lawsuit, and a court ruling could come soon after.

In the lawsuit, the group said 275 small banks would suffer an imminent $600 million hit to capital, making them less likely to lend to consumers and businesses. The trade group said bank auditors might require the banks to rid themselves of the specialized C.D.O.’s if the provision was kept in place.

Frank Keating, president and chief executive of the American Bankers Association, said in a statement that the group “appreciates the regulators taking this important step, and our experts are studying to see if the affected banks indeed find immediate interim relief from this action.”

The provision came into the spotlight after Zions Bancorporation, a regional lender based in Salt Lake City, said on Dec. 16 that it was taking a fourth-quarter charge of $387 million to write down the value of its portfolio of the securities, and was also reducing its regulatory capital levels after changing its accounting treatment for those securities.

It is not clear if any permanent exemption over the provision would apply to Zions, which has about $55 billion in consolidated assets. The typical community bank has under $15 billion in assets, people briefed on the matter said.

A Zions spokesman declined to comment on the latest statement from regulators.

At Lloyds, a Bank and Its Boss on the Rebound

António Horta-Osório was eight months into his new job as chief executive of the Lloyds Banking Group in 2011, wrestling with a plan to refocus the British lender, when he stopped sleeping.

At the time, the British economy was shrinking, and Lloyds, which had already received a government bailout, was facing serious financing issues. It was then that Mr. Horta-Osório checked himself into a London clinic, suffering from stress and exhaustion.

Since then, Mr. Horta-Osório has rebounded, as has the British economy and the bank itself. After returning to Lloyds, he helped turn the bank into one of the biggest postcrisis success stories in the industry here. Its share price has almost doubled since the beginning of last year, the strongest performance among major British banks.

During a recent interview, Mr. Horta-Osório attributed the bank’s success to its decision to focus almost exclusively on Britain, where the economy is now one of the fastest-growing in Europe.

“Lloyds was incredibly weak two and a half years ago,” he said. “I had to make a choice where to allocate my scarce resources, and I thought it would make most sense to concentrate them all where we could be strongest, which is in the U.K.”

After the industry’s excesses of the last decade, Lloyds sought a 17 billion pound government bailout in 2008, equivalent to $28 billion at current exchange rates. Now, Mr. Horta-Osório is making the 248-year-old bank the largest lender in the country. Lloyds, he said, should become the British version of Wells Fargo, the American bank that avoids risky, Wall Street-style bets and is the biggest mortgage lender in the United States.

So far, the efforts have paid off. In September, Lloyds’ shares became the first of two bailed-out British banks to recover enough for the government to start selling its stake. The government still owns a third of the bank, compared with its 80 percent holding in the other rescued lender, the Royal Bank of Scotland.

But clutching too tightly to a single economy can be risky. Some analysts have warned that Lloyds’ exposure to Britain and its growing mortgage market leaves the bank vulnerable to a possible property bubble. And Lloyds continues to incur its share of fines and penalties from regulators. Britain’s financial regulator fined the bank £28 million this month for encouraging employees to sell unnecessary products to meet sales targets and win bonuses.

Ian Gordon, an analyst at Investec, said Mr. Horta-Osório deserved credit for turning Lloyds around even as other European banks were still struggling.

But before he could fix Lloyds, Mr. Horta-Osório had to fix himself.

When he arrived at Lloyds, Mr. Horta-Osório, a 49-year-old native of Portugal who enjoys scuba diving with sharks, was hailed as a superstar. Mr. Horta-Osório, a former Insead and Harvard Business School student, had just turned the British unit of Santander, a Spanish lender, into one of the biggest retail lenders in Britain and a serious rival to Lloyds.

But he said that he felt increasingly alone in making difficult decisions about Lloyds’s own financing, which was too reliant on short-term funding. He had picked senior managers, some from Santander, to help him but they had not yet arrived.

He kept certain problems, such as the funding issue, to himself because making them public would have been counterproductive. But as a result, “you have to take important, difficult decisions on your own,” he said. “Leadership is a lonely thing.”

“In the end, I couldn’t really sleep for three days,” he said. “You feel like you don’t function anymore because you cannot recharge your batteries.”

With the help of some medication and nine days at the Priory Hospital, a clinic where cellphones are not permitted and former clients include the fashion model Kate Moss and the musician Eric Clapton, he recovered. Since that six-week leave, he sets aside one hour each day to think and deal with any issues that have emerged during the day.

“Maybe the biggest lesson I took is that nobody is a superman,” he said. “We’re all human and we all have our weaknesses.”

When he heard that Hector W. Sants, a former head of Britain’s main financial regulator, took a leave of absence in October from his role as head of compliance and government at Barclays, citing exhaustion, Mr. Horta-Osório called him to offer support. Mr. Sants has since resigned from his post at Barclays.

Mr. Horta-Osório said being open about suffering from such levels of exhaustion should be considered a sign of strength, not weakness.

That he returned to his job and achieved the ensuing results, he said, “speak for themselves.”

Lloyds has exited 21 countries since 2011. Even though the bank never had large trading or investment banking operations, it reduced its less liquid, troubled or nonstrategic assets to about £66 billion from £162 billion two years ago.

Mr. Horta-Osório has been well compensated in return. After forgoing a bonus of as much as £2.4 million for 2011, he earned £3.38 million for 2012, including a bonus of £1.5 million.

Mr. Gordon, the analyst at Investec, praised Mr. Horta-Osório’s timing when it came to selling some of the troubled assets. The sale in May of a portfolio of real estate-backed securities to some American investors, including Goldman Sachs, generated a pretax income of £540 million. After writing down the portfolio’s original value by £3 billion, Lloyds valued it at £2.7 billion and sold it for £3.3 billion.

And Lloyds has been increasing its lending to companies this year, even as lending across Britain continues to decline.

Mr. Horta-Osório was betting that by focusing on Britain and lending to consumers and small businesses, the backbone of the British labor market, the bank would help the economic recovery. In turn, a stronger British economy would help Lloyds’s earnings and share price, while also keeping the government happy. In the third quarter, the bank’s profit surged 83 percent, to £1.5 billion, as it continued to reduce costs and the quality of its loans improved.

George Osborne, the chancellor of the Exchequer, who has publicly chided the Royal Bank of Scotland for sticking to its foreign operations, could not have written a better playbook for Lloyds. Mr. Horta-Osório and Mr. Osborne get along well. Mr. Osborne traveled with him to Lloyds’ offices in Birmingham in September to thank management and staff for their work.

Analysts, including James Chappell at Berenberg Bank, said that Lloyds was likely to remain investors’ favorite British bank as uncertainty about R.B.S. remained and growth expectations for Britain picked up.

But Mr. Horta-Osório is the first to acknowledge that his strategy comes with certain risks. About 95 percent of Lloyds’s assets are now in Britain, where the economy has been improving but growth remains modest. Lloyds has been one of the biggest beneficiaries of government-supported lending programs, and its large mortgage book could sustain losses if home values were to fall.

The bank is also struggling with legacy issues, including wrongly selling a certain insurance product, called payment protection insurance. Lloyds is by far the biggest culprit among the British banks that are being ordered to compensate customers for that product, and analysts expect the £8 billion it has set aside to increase.

But Mr. Horta-Osório said none of that was causing him sleepless nights. “We built a bank that is low on risk and low on costs, focused on retail and small- to medium-sized businesses,” he said. “It’s good for sleeping.”

The challenge is make the bank exciting enough for investors to allow the government to continue selling its stake. He is in discussions with regulators to allow the bank to pay a dividend, and he hopes to announce one in February. Some analysts and investors expect the government to continue selling its stake in Lloyds shortly after that.

To reach his goal of increasing Lloyds’s share of small-business lending to 25 percent from 21 percent, the lending unit now reports directly to him instead of to Lloyds’ corporate division head. And he is traveling to a different part of the country every month to visit branches and have breakfast with local business customers.

All that means he is working 12-hour days and has a firm grip on the bank. But he denies being a control freak, a reputation he earned in his early days at Lloyds when he eliminated some management layers and had more people report directly to him.

“As the bank is doing better and better, you will see me become more and more decentralized and more and more relaxed,” he said. “But I want to know the numbers in detail because that’s my obligation, not only as a chief executive but also to avoid problems in the future.”

Julia Werdigier reported from London and Landon Thomas Jr. from New York.

China’s Banks Are on the Rise

China’s banks are racking up foreign assets, driven by trade flows, and the country’s corporate diaspora. Even at the current slow pace, what today looks like “following the client” could soon become “following everyone’s clients.” (See chart.)

In 2013, China’s lenders abroad mostly stuck with what they knew - servicing Chinese companies. But there were firsts. The Agricultural Bank of China started clearing yuan trades in Britain, and the Industrial and Commercial Bank of China issued a yuan-denominated British bond. Those niche markets can still grow fast; the yuan is now the second most-used trade currency after the dollar.

Takeovers are the logical next step. A dream pairing of ICBC and a London-based emerging market lender, Standard Chartered, may be too complex, despite the latter’s sliding valuation. But majority stakes in markets where Chinese companies trade and invest make more immediate sense. The China Construction Bank set the tone by buying a stake in Brazil’s BicBanco in November. Similar deals may occur in Africa and Eastern Europe. Even oil-rich Iran could be a target in a future sanctions-free world.

The challenge is to avoid the same mistakes Japan made in the 1980s. Fueled by an appreciating currency and a restrictive home regulator, Japanese banks started expanding abroad. By 1988, six of the world’s 10 biggest banks were Japanese, according to The Banker. When bad debts rose at home, the lenders retreated, leaving a credit squeeze in their wake.

China’s saving grace may be its banks’ inexperience and government micromanagement. CCB’s BicBanco deal was two years in the making, and ICBC has been haggling over Standard Bank’s London-based commodities desk for over a year. That limits the scope for impulsive and foolish deals. Capital controls also mean China’s banks can’t easily switch their onshore yuan into dollars or euros, limiting their ability to lend abroad.

Still, China is a land of big numbers. The top five banks’ overseas loans totaled $538 billion by the end of June, double the level of 2010 and close to the size of Ireland’s entire domestic loan book. Even if global banks aren’t yet losing business to China’s mega-lenders, 2014 should see them start to take the prospect seriously.

John Foley is Reuters Breakingviews China Editor. For more independent commentary and analysis, visit breakingviews.com.

Brynwood Partners to Sell Maker of Turtles Candy

The owner of Godiva chocolates is dipping deeper into the candy business.

Yildiz Holding, the Istanbul-based food and beverage company that has several brands including Godiva, has agreed to purchase DeMet’s Candy Company, the maker of Turtles chocolates, from the private equity firm Brynwood Partners for $221 million.

DeMet’s operates to manufacturing plants in the United States, and the deal could give Yildiz a stronger foothold here. Yildiz owns the Ulker Group, one of the largest consumer goods companies in the Turkish food industry, which absorbed Godiva after Yildiz purchased it from the Campbell Soup Company in 2007 for $850 million.

“We are delighted to announce the divestiture of DeMet’s Candy,” Hendrik J. Hartong III, a senior managing partner at Brynwood and the chairman of DeMet’s, said in a statement on Friday. “We wish Yildiz success with this outstanding company.”

Brynwood, which also owns the Back to Nature Granola brand and the Pearson’s snack brand, first purchased Flipz, the chocolate-covered pretzels, from Nestlé in 2004. It formed DeMet’s in 2007 with the intention of buying the Turtles chocolate brand from Nestlé. It also purchased Treasures, the milk chocolate caramels, from the food giant.

After the closing, Peter Wilson, DeMet’s chief executive, will join one of Brynwood’s funds.

Houlihan Lokey advised on the transaction, which is expected to close in January.

Representatives for Brynwood, Yildiz and Houlihan Lokey could not be immediately reached for comment.