Sheesh. How much money does one bank need?
Out on Wednesday — a £3.25bn rights issue from Standard Chartered.
It’s rather a surprise. StanChart undertook a £1bn share issue, also for capital-raising purposes, just 14 months ago — back in August 2009.
And the international emerging markets bank has been über-keen to trumpet its “strong capital position.” Under the current Basel II regulatory framework, StanChart posted a core Tier 1 capital ratio of 9 per cent at the end of June. The bank was one of the few not to receive government funds or central bank liquidity in the recent financial crisis. It is, by all accounts, one of the strongest banks out there.
The StanChart statement reads like this:
The Board believes that under the current regulatory regime the Group could sustain good growth whilst maintaining capital ratios broadly constant at their current strong levels through internal capital generation. However, the regulatory environment remains in flux and the Board believes that the Group’s principal regulators will raise requirements relating to minimum capital ratio levels, through revised definitions of capital and incorporating further regulatory buffers, and in addition may accelerate the transition timetable announced by the Basel Committee on Banking Supervision (the “BCBS”) on 12 September 2010. To accommodate such increases in effective capital ratios, the Group may have to constrain risk-weighted asset growth, sacrificing attractive growth opportunities, unless new capital is raised.
Risk-weighted assets, or RWAs, have made plenty of headlines recently.
Forthcoming Basel III rules are expected to increase them for most banks. As Tier 1 capital is capital divided by RWAs, any asset-increase will necessitate higher capital too. But raising the numerator (capital) rather than cutting back on the denominator (assets) means StanChart can keep growing at its desired pace.
In the two years to June, the bank’s RWAs grew by 16 per cent to circa $234bn. Adding £3.25bn to the bank’s current Tier 1 capital of £26.25bn, will either raise its Tier 1 ratio to about 12.6 per cent or give it wiggle room to increase its RWAs by about £32bn. StanChart expects Wednesday’s £3.25bn rights issue to up its forecast Core Tier 1 ratio by from 9 to 11 per cent, it doesn’t give forecasts for RWAs.
What’s really interesting here is the effect of StanChart’s move on other banks. Think, for instance, of the capital call competition that emerged amongst US banks back in 2009, just after the American stress tests.
You can see, perhaps, a hint of things to come in the below chart from UBS, whose banking analysts recently estimated that the Basel III rules would lead to a $1,000bn RWA increase for Europe’s banks. Deutsche Bank announced a capital increase of €10.5bn last month — but what of, say, Barclays? RBS? Santander?
Let the pre-emptive capital race begin.