Otto von Bismarck may have been talking laws when he made his first sausage analogy, but it’s well-suited to the creation of Basel III banking rules. Just think of all the toing and frowing over things like upcoming Liquidity Coverage Ratios (LCRs) and Net Stable Funding Ratios (NSFRs).
It shouldn’t surprise readers that these various acronyms are subject to push and pull.
From CreditSights’ very thorough US banks team:
… Our sense is that banks are likely to continue to lobby for revisions of the key factors that are included in the proposed liquidity ratios to make them more favorable for shareholder interests and their profit model goals. Several banks have emphasized to us that they believe there could be substantive changes in the final rules compared to the current proposals. For instance, both Citigroup and Goldman Sachs have indicated that the NSFR could be substantially re-calibrated before the final rule. Meanwhile, BB&T highlighted to us possible changes in LCR, such as the potential to include [Federal Home Loan Bank] borrowings as a source of liquidity for modeling less deposits run-off. During our discussions with JPMorgan Chase, it indicated to us that some of the proposed run-off factors and calibrations could change meaningfully before final implementation. So, there appears to be a widely held view among many bank/broker players that both of these standards could be altered to their favor before the final rules are in place. Still, as we have seen in the past cycle, it is better as analysts to “plan for the worst and hope for the best”, and not to over-rely on optimistic aspirations promulgated by the banking industry players.
If Basel III-makers don’t play bank ball, there is an armageddon option available for some banks.
Simply stop being a bank.
As CreditSights notes, broker banks could decide to drop their bank holding company status once deposit-guaranteed TLGP issuance rolls off by 2012. They would still probably be classified as ‘systemic financial institutions’ (or the cuddly-sounding, ‘SIFIs’) under new Dodd-Frank rules, but that label doesn’t seem to carry any specific or stringent liquidity ratios. Sure they’d have to give up access to the Federal Reserve’s discount window, but hey — they probably won’t need that again for a while.
Back to CreditSights:
Regarding Morgan Stanley’s banking status, we believe that it is uneconomical for them to build a retail branch deposit footprint whose core deposits would receive favorable Basel 3 liquidity treatment. So, both Morgan Stanley and Goldman Sachs may seek core deposit relief from these unrealistic definitions for their particular capital markets focused business models. Other scenarios include Goldman and Morgan Stanley, seeking to give up their banking status, although they will still most likely be considered SIFIs and could be subject to Basel 3 liquidity. Without banking status, under that scenario, they may be able to wrangle a waiver on the LCR and NSFR calculations in order to recognize their special business models/organizational-balance sheet structures. We will keep on top of these potential developments as the Basel 3 debates continue.
We were here once before — at the start of 2010 — when the idea of Goldman Sachs giving up its bank charter to squidle out of upcoming financial reform was defeated by expectations of an immediate populist uprising. (“Rise up! Goldman Sachs is no longer a bank!” was going to be the call to arms.)
Perhaps times have changed. Or perhaps not.
Related links:
Goldman lobbying hard to weaken Volcker Rule - Reuters
Volcker turns the screw on Goldman – FT Alphaville