RICK L. KNUTH

RLK

RICK L. KNUTH is the keeper of the Banking and Finance Law Spotlight Site.

Rick's practice focuses on assisting institutional and private lenders and borrowers in asset-based loan transactions, real estate financing, accounts receivable and inventory-based financing. He has over 30 years experience in loan documentation, mortgage and trust deed foreclosures, loan participations, credit opinion letters, workouts, and insolvency proceedings of all kinds. He counsels banks large and small in all aspects of their commercial credit relationships.

Look for postings by the other attorneys in our Commercial Lending and Banking Practice Group.

Keven M. Rowe (Group Leader)
Tom Berggren
Rick L. Knuth
Kyle V. Leishman
James W. Peters
Susan B. Peterson
Jacob Redd
George R. Sutton
Glen D. Watkins
Randon W. Wilson

Published Articles

"Fraudulent Checks- the 'Same Wrongdoer' Defense"
by Rick L. Knuth

Originally Published in Utah Banker Magazine Fall 2013.

Important Resources
Another Proposal to Simplify the Volcker Rule
Posted on Sep. 27, 2012

We can only speculate about the real purpose for the Volcker Rule.  It is generally acknowledged that the kinds of proprietary trading targeted by the Rule did not cause or contribute to the Great Recession.  The rationale that banks should not be allowed to use insured deposits to engage in high risk speculative trading is bogus because depository banks were never allowed to do that under laws predating the Volcker Rule by decades.  The real target of the Rule is trading activities of bank affiliates.

Some think the Rule is really intended to make it such a nuisance to be affiliated with a bank that no one but a shell holding company would do it.  The goal is to reverse the erosion of the Bank Holding Company Act and once again legally isolate banks from every other form of commerce. 

This is evidenced by the zealous overreach characterizing the current form of the Rule.  The Rule extends to all affiliates and all investments within a bank’s corporate group regardless of whether they pose any risk to the bank. In fact, many affiliates and investment activities pose no threat to a bank and should be left alone.  Despite that the Rule will impose investment restrictions so extreme that only a bank holding investments in US government securities with a shell holding company could comply.

Liquidity investments provide a good example.  The draft regulation has a provision defining liquidity covered by an exemption as the cash needed to pay short term debts.  It does not extend the exception to excess cash and other assets.  The intent is to ban excess liquidity because it presents an opportunity to engage in speculative high risk trading.  That presumption is truly crazy.  Holding excess liquidity and capital is a good thing.  It makes a bank or other entity stronger and should be encouraged, not banned. 

I think the best case for the Rule is to prevent a bank affiliate from engaging in high risk activities that pose a risk to the bank.  Chase is a case in point.  If the London Whale had made enough bad trades to bankrupt the holding company it could cause a run on the bank, even if the bank is otherwise solvent.  Regulators have a legitimate interest in overseeing investing activities that threaten a bank.

Here are two changes that would accomplish legitimate goals with much less confusion and disruption than the current form of the Rule would cause.

First, acknowledge that not all affiliate investment activities present a risk to the bank and those that do not should not be subject to the Rule.  Many industrial banks are part of much larger and diversified corporate groups that include a multitude of affiliates having nothing to do with the bank except common ownership. A good example of such an affiliate is a Thai based subsidiary of a bank’s parent that makes auto parts.  Another bank affiliate makes light bulbs in Hungary.  Yet another is a technology company that among other things makes small investments in new companies developing related kinds of technology.  These affiliates pose no threat to the bank but would be significantly impacted if subjected to the Rule.

The next step would be identifying the investing activities that pose a risk to the solvency of those affiliates.  Many investments by parent companies pose no threat to the bank.  One example is an investment held by a holding company in a local economic development venture capital fund sponsored by a state government.  It is a small investment posing no risk to the parent or the bank.  What is the rationale for banning this kind of investment? 

The current form of the Rule would also apply to any 10% or more investor in the bank’s parent company.  A mere shareholder in a holding company can fail without impacting the bank.  Imposing the Rule on investors only drives capital away from all but the largest banks where investors never get close to the control threshold.  Cutting access to capital for smaller banks is a good way to ensure that too big to fail banks continue to grow and smaller banks do not.  There is just no valid reason to subject mere investors to the Rule. 

A better approach would be for the bank to do something similar to what it does in connection with Reg O.  Its board should periodically identify all affiliates whose solvency could pose a risk to the bank.  The regulators could then oversee all investment and other activities at those affiliates.  Affiliates and activities that pose no risk to the bank would be left alone.  Regulators would have the authority to make any inquiries they want to ensure that no affiliate is improperly left off the list.

 

This post was written by Attorney George R. Sutton

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PROFESSIONAL AFFILIATIONS

ACMA

Rick Knuth is a member of the American College of Mortgage Attorneys.

George Sutton was recognized in 2012 as Utah Attorney of the Year in Financial Services Regulation Law by Best Lawyers in America.

Rick Knuth was recognized in 2012 as Utah Attorney of the Year in Banking and FinanceLaw by Best Lawyers in America.

All eligible attorneys in this group are ranked AV Preeminent by Martindale-Hubbell.

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