We’re completely thrown. Read more
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“One thing that I think would stand you in very good stead is to avoid lobbying – influencing policy is probably a better way to put it. We hear so much about fragmentation, but then the banks and trade associations discuss at great length trying to lower the standards.”
Being cross about the Basel III liquidity ratio is so in season. One just can’t be seen dead smiling about it. It simply won’t do. Much better to join the other banks, and the ECB, in being all pouty about it. We’ll not even have the slightest smirk until the Basel Committee has agreed to loosen the criteria for eligible assets and made the outflow scenarios a lot less Beyond Thunderdome. Read more
Nothing like systemic risk to bring the banks together. The crisis at times left little between them. Eventually though, the market will start to differentiate more. As Huw van Steenis and his colleagues at Morgan Stanley put it in a recent note Read more
What happened with all that European bank deleveraging?
Some of it is over with, says Barclays — leaving, by our estimates of their estimates, about €650bn* of deleveraging yet to be carried out among the major European banks they cover**. Quite big, but much less than the €1.5tn – €2.5tn being discussed late last year. Read more
Oh, those international accounting standard-setters. Such drama queens.
On Wednesday, the International Accounting Standards Board (IASB) and its US counterpart, the Financial Accounting Standards Board (FASB), held a joint meeting to discuss impairment. Read more
Now when and where did that last happen…
In Tuesday’s FT, Brooke Masters reported on a rather novel approach that some banks are trying to take in order to reduce their capital requirements. The trick is to reduce the predicted loss that would be experienced if a borrower were to default. This is effectively done by getting an insurer to guarantee the future value of the collateral held as security for the loan. Read more
So you’re a global systemically important financial institution and, bar a few near global meltdowns, you have a pretty good time of it… but you also know Basel III is fast coming down the tracks and in its attempt to make you better able to stand up to those unexpected shocks that nobody likes, it will force a load of restraining rules upon you.
Fitch has gamely joined the ranks of those trying to put some numbers on the whole thing. The ratings agency had a look at the 29 global systemically important financial institutions (or G-SIFIs, a horrible acronym for banks listed at the bottom of this post), which as a group represent $47tn in total assets, and estimated that they might need to raise roughly $566bn in common equity in order to satisfy the new Basel III capital rules: Read more
On Wednesday, as FT Alphaville has already illustrated, European finance ministers failed to agree legislation that would enshrine Basel III bank capital rules into law. This despite all those involved having already agreed in principle to Basel III back in 2010.
So why the failure to agree? Read more
It went on so long even the translators gave up – there was sure some mud-slinging going on in Brussels on Wednesday as European finance ministers met to try to agree legislation to implement Basel III rules on bank capital.
One could be forgiven for wondering how this is even still a debate at all. Read more
Basel III is looming. There is no escape. Tougher capital requirements for banks are on the way.
But the phase-in doesn’t begin until next year, and the ramp-up process is long. Not until 2019 will Basel III be fully baked in. Read more
FT Alphaville decided earlier this week that we are sick of the term “shadow banking”. We’ve failed to come up with an alternative, however, and in the meantime Edward Kane, a professor at Boston College, has presented a paper entitled “The inevitability of shadowy banking” at the Atlanta Fed-hosted financial markets conference.
Kane’s paper says shadowy banking is basically safety-net arbitrage. He defines it thus: Read more
France and Germany are to call for a relaxation of global bank capital rules to prevent lending to the real economy being choked off, setting them at odds with the UK’s stricter approach to banks. A joint paper by Wolfgang Schäuble, German finance minister, and his French counterpart, François Baroin, will on Monday call for important elements of the Basel III rules to be watered down to mitigate any “negative effect” on growth. A draft of the paper seen by the FT calls for special treatment for banks that own insurance companies – a particular point of friction, as tweaks backed by France and Brussels will boost the capital of Société Générale and Crédit Agricole, which both own insurance companies. The draft also looks set to open a new faultline by suggesting the deadline to publish leverage ratios – the ratio of top-quality capital to total assets – should be pushed back from 2015 to 2018. That contrasts with UK regulators who have proposed that banks disclose the ratio as soon as next year, well in advance of the Basel III timetable requirement.
Deferred tax assets are a favourite of FT Alphaville’s. Some banks made such awful losses during the crisis they opted to store the losses on balance sheets for a sunny day when they started making profits again. Carrying forward the losses in the form of a DTA entry ultimately allowed them to reduce their tax burdens.
To be clear, DTAs are an accounting entry indicating that the tax a company has to pay will be lower in the future… as and when they start making taxable profits again. Read more
FT Alphaville has intercepted a recent phone call between banks and their regulators!!!
Regulators: “We’re going to revise the capital adequacy framework and increase transparency in the reporting of risk on bank balance sheets.” Read more
The Federal Reserve is expected to embrace a new global framework that requires giant financial institutions to hold extra capital, the WSJ says, citing people familiar with the situation. The Fed’s embrace of the Basel surcharge is expected to come as part of a draft of new rules for US firms that are considered by regulators to be big enough to pose a risk to the financial system. The proposed rules, required by the Dodd-Frank financial law, are expected to detail how much extra capital these firms must hold as a buffer against losses, the cash they must keep around to reduce their need to tap volatile funding markets, and how much money they can pour into any sort of investment. Fed officials are aiming to release the draft proposal this week, but it may slip into January.
In a note released on Tuesday, GMO, the global asset management firm headed by Jeremy Grantham, writes that ”European banks need tons of money” to correct capital shortfalls. This much, we know.
But the five scenarios used by Richard P. Mattione, the firm’s head of macroeconomic research, for why banks will need to raise much more capital should prove familiar to FT Alphaville readers. Mattione uses data from the July EBA tests and July BIS data, so be warned. In fact, there are a few points here that seem to be behind the results of the latest EBA efforts. Read more
…we don’t like carrying more capital than we need to. You’ve heard me before on the subject of building up war chests and carrying; that’s not the way we would wish to operate at all.
At end-2006 and end-2007 respectively, RBS published tier 1 capital ratios of 7.5% and 7.3% of RWAs, and total capital ratios of 11.7% and 11.2%… Read more
The Basel Committee on Banking Supervision may diminish the central role of government bonds in planned banking rules, reports Bloomberg, citing two people with direct knowledge of the plans. The Basel committee may let banks use equities and more corporate debt, in addition to cash and sovereign bonds, to satisfy new short-term liquidity standards. However regulators face a difficult balancing act between acknowledging investors’ loss of confidence in sovereign bonds, and making changes that could reduce demand for European government securities, adding to the funding stress on some nations. The Basel’s liquidity coverage ratio requires banks to hold enough “high-quality liquid assets” to survive 30 days of stress, and is due to be introduced in 2015. As the rules stand, at least 60 per cent of those assets must be in cash or securities underwritten by governments and central banks.
Teams of global regulators will fan out across the world from next year to ensure that new tougher capital and liquidity standards are enforced correctly, the chairman of the Basel Committee on Banking Supervision said on Wednesday, the FT reports. “The financial crisis resulted in a bold response by the committee,” Stefan Ingves told an audience of North and South American banking supervisors in San Francisco. “However, these efforts will have been in vain if they are not globally implemented on a consistent and timely basis.” The US notably has not yet fully implemented the 2004 Basel II agreement. However, the country hope to have a draft for the implementation of Basel III by the end of the year, according to an earlier report by the FT.
Rabobank is planning the first bank bond to comply with forthcoming European rules, offering a new type of capital as banks across the continent try to fortify their balance sheets, says the FT. The market for so-called hybrid Tier 1 bonds, which possess features of debt and equity, has been closed since February as banks grappled with market uncertainty and incoming regulation. Basel III rules and the European Commission’s capital requirements directive propose a host of new conditions for hybrid debt. The notes from Rabobank, the Dutch co-operative lender, would act exactly like normal bonds unless the bank breached certain capital limits, at which point they would be written down. This write-down feature is important for new types of bank debt as European regulators move increasingly towards incorporating ‘bail-in’ features into bank debt, meaning bondholders will have to share the losses of a failed bank.
Banks are striking deals with private equity groups, hedge funds and insurance companies in an effort to preserve their precious regulatory capital, the FT reports. A growing number of investors is moving to provide beleaguered lenders with special targeted transactions to help them share their risks – for lucrative fees – through a fast developing class of “regulatory capital relief” funds. Interest in such vehicles comes as banks, particularly those in Europe, scramble to develop new funding tools and identify ways of protecting capital, as they grapple with the prospect of sovereign defaults, forced recapitalisations and new Basel III rules. The schemes typically involve writing partial guarantees for the assets sitting on banks’ balance sheets through bespoke securitisations, meaning insurance companies or funds absorb the losses on the riskiest portions of banks’ loans. Such transactions allow banks greatly to decrease the amount of money they must hold in reserve as a backstop for potential losses in their lending books.