The coco bond market has endured its Paradise Lost moment.
The main index has fallen nearly 8 per cent this year after returning 7 per cent in 2015 – practically utopian, in the current rates environment. Some names – Deutsche, UniCredit, Banco Popular – have experienced the distress of trading below 75 cents on the euro.
Let’s briefly set aside these qualms of heart-sick malady. Let’s turn instead to the mostly untold tale of a $2.5bn Credit Suisse 6.25 dollar-denominated AT1 bond. CS 6.25, as we’ll call it. Read more
Claudius was a Roman emperor from AD 41 to 54.
Claudius notes are Tier 1 instruments that were issued by Credit Suisse back in 2010 and which feature a call date that first comes into effect in December 2015. Except, as bank bond investors have experienced from time to time, the issuers of such securities have an unnerving tendency to sometimes behave unexpectedly. Credit Suisse made some noise when it released earnings last week that it may call the Claudius bonds thanks to something known as a “regulatory par call.” Read more
The European asset quality review is on its way! Or at least details of how the ECB plans to run the so-called AQR are due this month. We expect fine tooth combs, desk lamps in faces and penetrating stares.
But, as the Economist explains, it is not a stress test. That would be all about simulating disaster to spot it in advance. Read more
Here’s a list from the Federal Reserve of good and bad practices by bank holding companies tasked with planning how to stay capitalised under its stress tests and big forward-looking capital reviews. (Ergo: “…designing an internal capital planning process that simply seeks to mirror the Federal Reserve’s stress testing is a weak practice“.)
It doesn’t name names. More’s the pity. Read more
Basel catches European bank capital legislation letting big cross-border lenders play a bit too fast and loose with zero risk-weighting of government bonds for its taste, the FT says.
Well, here’s the key para… Read more
The Group of 20 richest nations put the ball firmly in France and Germany’s court at the weekend, the FT reports, saying that by the European summit next Sunday the eurozone should have a comprehensive plan to end the sovereign debt crisis. G20 finance ministers called for the eurozone to have an agreement on the losses the private sector should take on Greek debt; arrange a credible plan for the recapitalisation of Europe’s banks; and install a firewall to protect other countries from Greece’s woes. Having risen sharply last week on expectations that Europe was getting a grip on its problems, financial markets are also nervously awaiting the political decisions to be taken this week. Bloomberg reports that the G20 governments are also considering naming as many as 50 banks as systemically important to the global economy and in need of extra capital, citing two officials from member nations.
New international bank capital rules are “anti-American” and the US should consider pulling out of the Basel group of global regulators, Jamie Dimon, chief executive of JPMorgan Chase, told the FT. Mr Dimon said he was supportive of forcing banks to have more capital but argued that moves to impose an additional charge on the largest global banks went too far, particularly for American banks. “I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” he said. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.” Mr Dimon also criticised global liquidity rules, arguing that regulations that viewed covered bonds – a European market feature – as highly liquid but discounted government-backed mortgage-backed securities in the US were unfair and that other details hit investment banking activity core to US banks hardest.
Britain’s banks will face an annual bill of as much as £6bn ($9.5bn) to comply with the reforms of the Vickers Commission, the FT reports, citing people who have seen the panel’s final report, published on Monday. As foreshadowed, the central recommendation of the Independent Commission on Banking will be that banks’ core operations must be ringfenced from the rest of their businesses. The cost impact of the changes will mainly be the result of higher funding charges for the banks’ operations that are left outside the more highly capitalised ringfenced entity. But in a crucial concession to the wide spread of business models among the banks, the commission will not dictate where each institution must place the ringfence, instead allowing lenders and their customers a degree of choice.
The world’s biggest banks are likely to face graduated capital surcharges that increase progressively based on a lender’s size and connections to other banks, global regulators have told the FT. The proposals would benefit the huge, but domestically focused, Chinese and Japanese banks and second-tier European and US banks. Financial regulators and central bankers from the biggest economies, meeting as the Financial Stability Board, are trying to determine which banks are systemically important financial institutions, or Sifis, and how much additional top-tier capital they must hold against unforeseen losses. Three participants in the process said support has grown for the idea of graduated charges, although some countries are still hoping for a flat requirement. The FSB is due to propose criteria for selecting Sifis in July and formal proposals on the surcharge at the G20 summit in November.
So bad a mess even the hedging looks bust.
Quite apart from threatening to overturn the foundation-stone financial hierarchy of debt over equity… Read more
The sovereign bank cycle in Europe will not die — chart via the Morgan Stanley analysts Huw van Steenis and Alice Timperley:
Citigroup will sell a $12.7bn portfolio of subprime loans, MBS and corporate bonds in order to comply with bank capital rules on risk, reports the FT. The decision, revealed in the bank’s first-quarter results, led to Citi to take a $709m pre-tax charge but enables it to sell the assets into a recovering market for distressed debt and to prepare for Basel III’s phase-in of new risk-weightings for assets. Three-quarters of the portfolio has already been sold at prices above the levels at which Citi valued them on its balance sheet. The move offers a rare public look at bank efforts to shrink their balance sheets, with Barclays also having revealed plans to wind up Protium, a toxic asset portfolio supported by a Barclays loan.
Ninety banks and an own-brand core equity requirement of five per cent of risk-weighted assets…
That’s one less bank than last year and a lot of capital questions (The merged cajas of last year have reduced the tally a bit). We already had the methodology on the stress-test scenarios – this release is the pass mark: Read more
JPMorgan Chase’s chief executive Jamie Dimon has warned that new capital rules could be “the nail in our coffin for big American banks”, reports the FT. If requirements were set too high, or allowed foreign banks to count capital differently, US banks would be disadvantaged, Dimon said in remarks to the US Chamber of Commerce. “If you think that’s helping growth, it’s not,” Dimon said, adding that a 7 per cent capital ratio would be adequate. Mr Dimon’s comments come as Wall Street executives and Republican members of Congress are starting to attack regulation as anger at the financial industry subsides.
A House of Representatives bill to create a US covered bond market could endanger the products’ reputation for stability by allowing too wide a range of assets to be included in them, the FT reports. While European banks have used covered bonds’ conservatively managed pools of loans to lower borrowing costs, most loans are high-quality mortgages. US proposals would add student or car loans that could attract different investors drawn to risk rather than stability. More than $30bn of European and Canadian covered bonds were sold to American investors last year. No covered bond has reportedly defaulted, though 19th-century data are sketchy.
Recapitalise, write down, rebuild.
Oops. Hang on. Not sure about this. Read more
A dozen banks. Including eight cajas. And €15.15bn.
From the Bank of Spain on Thursday: Read more
Europe’s second round of stress tests is a Goldilocks exercise, notes FT Alphaville: trying to convince investors of the tests’ rigour, but not scaring them with bank failures, either. The test is accordingly now being eaten by bears. Regulators will rely on each country’s individual definition of bank capital, the WSJ reports. That’s despite similar sops to national regulators failing to register Irish banks’ collapsing balance sheets in 2010′s stress test, says FT Alphaville. Furthermore, simulated haircuts for Greek government debt are lower for 2011′s test than even last year’s very low estimates. The authorities may yet have to go back to the drawing board.
‘In the interests of providing public information…’ Ireland’s central bank just released details on outstanding senior and subordinated debt issued by Irish banks. You know, the stuff in the bail-in firing line (notably the bonds in the third column of this chart):
Big banks on both sides of the Atlantic are weighing whether to follow Barclays as it pushes ahead with a plan to pay bonuses with innovative bonds, dubbed cocos, the FT reports. According to several banks present at last week’s World Economic Forum in Davos, the idea of using contingent convertible notes as a remuneration tool is gaining ground. One senior US executive said: “Regulators in the US haven’t yet said cocos are fantastic. But if that happens, then I do think it could be an interesting idea.” The FDIC and other regulators have until summer 2012 to publish a report on how contingent capital should be used within the US financial system.
How much bank capital is just enough bank capital to survive a crisis?
Reading this Bank of England paper on the issue, you might think the authors are simply arguing that banks ought to be made to hold more loss-absorbing capital (double, actually) than Basel III will be asking. Read more
Now here’s a warning for regulators looking to make banks’ bondholders share the costs of bailouts by converting their debt into equity in a crisis. European banks could lose more than a quarter of their senior bondholders and face significantly higher funding costs if such so-called bail-in plans go ahead in the region, the FT reports from a JPMorgan survey of investors. The survey said that investors would demand on average an extra 87 basis points, or 0.87 of a percentage point, of interest because of the greater risk the bonds carried. FT Alphaville observes that bondholders would be expected to react negatively. Then again, the responses come on top of other problems for the proposed model — for a start, this new type of convertible bond may not be eligible for inclusion in bond indices, and would be difficult for credit agencies to rate.
Worthwhile reading on Tuesday — 22 pages of a Basel Committee on Banking Supervision report to the G20, on its financial reform activity since a 2009 Group summit told it to get cracking.
There are good summaries here of what Basel’s new global capital and liquidity rules will do, the geological-epoch-long transition timetable, and what the Committee is looking at next. Read more
Germany’s largest bank will launch Europe’s biggest rights offer this year to acquire Deutsche Postbank and shore up its capital, Bloomberg reports. The size of the issue is bigger than expected, the FT says. Postbank is one of the better catches in German retail banking, but it’s thinly capitalised — and the strategy for Deutsche Bank is to consolidate its retail offering as it bids to rid itself of low profits caused by a dependence on investment banking. German banks are also still complaining about their ability to meet Basel III’s higher capital standards, the FT adds.
Expect Basel’s new bank capital rules to be one-third tougher once national regulators get their hands on them, the FT reports. The full impact of the new global bank capital rules announced at the weekend is likely to be 30 per cent tougher than the headline ratio suggests, according to regulators and industry participants who have studied private banking data. The data suggest the real impact of the change could be equivalent to raising the minimum capital requirement from 2 per cent to 10 per cent for many banks, once deductions are made by regulators for certain items like tax credits and minority investments.
It’s not the capital, it’s the liquidity. It’s not the Maginot Line; it’s how many Panzers are pummelling through the Ardennes beside it.
And thus it’s not Basel III; it’s what banks will do — and where they will find the liquidity and the counterparties to do so — to get around it. Read more
The FT Alphaville inbox is getting chock-full of analysts reacting to the confirmation of Basel III’s new rules revising bank capital ratios.
So here — in due fashion — is the best of the best for our readers. Read more
It’s here, finally. With a minimum bank capital ratio of 7 per cent.
The world’s central bankers and regulators confirmed new capital and liquidity standards for the banking system on Sunday. Read more