You have nothing to lose but your capital requirements.
Some choice excerpts from the Basel Committee’s new report finding that global growth would face relatively few effects from making the world’s biggest banks (“G-SIBs”) hold extra capital: Read more
For now, the European Banking Authority’s 2011 stress tests are a starting point to determine the potential bill for recapitalising euro banks for their sovereign exposure. Most analyst estimates of capital needs — those big juicy €100bn, €200bn numbers that you come across– also tend to work from the EBA numbers.
That’s got us thinking about the test results again. In the first instance, about accounting for sovereign write-downs. And then in the second instance, about the treatment of deferred tax assets. Read more
Wouldn’t it be nice if bank stress tests were, well, stressful?
Too often they look like they’re done by him: Read more
Sweeping regulatory changes proposed for banks and insurance companies could increase borrowing costs for European companies by up to €50bn ($68bn) annually when new rules come fully into effect, according to estimates by Standard & Poor’s. The FT reports Basel III and Solvency II, the proposed new regulatory regimes for global banks and European Union insurers respectively, could change the capital reserves that financial institutions must hold against equity, corporate loans and bonds of varying safety and duration. The revamped rules, if implemented in their proposed form, favour shorter-dated bonds and loans, and increase the reserve requirements for less highly rated companies. S&P argues that European companies will feel the overall effects “more harshly than their US counterparts because they typically rely more heavily on banks for funding relative to capital market sources”. Cost estimates for the new rules vary considerably. Regulators argue that they will favour borrowers overall, while banking lobbying groups say the regulatory changes will have a much harsher effect.
Banks are being discouraged from big project-finance deals by new global capital rules and the eurozone crisis, the FT says, citing market participants who say infrastructure schemes will increasingly be funded by investors. Standards ordered by the Basel committee of international regulators will make large long-term loans harder to hold on banks’ balance sheets, according to several senior bank executives in the US and Europe. Project finance loans to build power stations, wind turbines and bridges are particularly unattractive because of their size, tenor and illiquidity, the executives said. At the same time, troubled European banks, which have dominated the market, are pulling back – shrinking their balance sheets and shying away from new dollar-denominated loans.
The committee behind Basel III is set to press on with introducing extra capital requirements for the world’s 28 biggest banks, countering heavy lobbying in recent months, the WSJ says. Regulators will meet this week to consider comments on the capital surcharge, which would require banks to hold between 1 and 2.5 per cent more capital against risk-weighted assets in addition to a 7 per cent global minimum. US officials have swung behind the surcharge as it becomes clear that the rule will both remain largely the same and become finalised later this year, despite criticism of the capital regime by JPMorgan’s Jamie Dimon.
The end-users, the clients, the buyside. Or in more standard parlance – institutional investors. Not “buyside” like hedge fund — more like your pension fund, insurance companies, reserve managers, sovereign wealth funds, and investment funds more generally.
While chapter one of the IMF’s Global Financial Stability Report covered the €200bn capital hole spillovers, chapter two discusses the characteristics and behaviour of institutional investors. Read more
The Markit iTraxx SovX CEEMEA contains a basket of 15 sovereigns from Central and Eastern Europe as well as the Middle East. Italy’s CDS spread is now wider than all but one of them – Ukraine.
Looking at the Markit CDX.EM, only Argentina, and once again the Ukraine, can offer chunkier spreads. Outer limits, indeed. Read more
Jean-Claude Trichet, the outgoing head of the European Central Bank, hit back Wednesday night at global banking executives who have called for the tough new Basel III bank safety rules to be weakened, the FT reports. Mr Trichet, who forged the global agreement to tighten capital and liquidity rules, slapped down complaints about the package from Jamie Dimon, JPMorgan Chase’s chief executive, and the heads of several European banks. “I see resistance of some in the financial sector against Basel III … For me, it is crystal clear: what has been decided is decided,” Mr Trichet told a gathering of regulators and bankers at the Eurofi conference at Wroclaw in Poland.
Covered bonds are not the universally safe assets that some investors think they are, rating agency Standard & Poor’s has warned in a new report, says the FT. Many investors consider the bonds “super-safe” because, if the underlying assets sour, they also have a claim on the issuing bank. However, in the report, S&P warns that “the common perception of mortgage covered bonds as a homogeneous and universally low-risk product is misleading. In fact, the characteristics of individual mortgage covered bonds are not only diverse, but can change over time.” The bonds are gaining in importance since, for many European banks, they remain the only source of funding amid eurozone turmoil. They have also been boosted by forthcoming regulations such as Basel III.
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.
There might be some wiggling about liquidity but the worldwide work of getting banks ready for Basel III goes on. Though there’s been an interesting development in Australia recently.
Australian banks and other savings institutions were this week given some guidance on how they’ll be expected to meet Basel III capital requirements when the Australian Prudential Regulatory Authority (Apra) came out with a discussion paper (PDF) which suggested an accelerated timeline for adopting new rules. Read more
Banks could be given relief from Basel III liquidity requirements, following complaints that they would struggle to find liquid assets sufficient for a key coverage ratio, the FT reports. A growing number of members on the Basel Committee now want to soften key technical definitions in the ratio, including reducing the overall amount of liquidity required, and allowing greater leeway for corporate and covered bonds to be included. European banks had faced a particular earnings threat from the liquidity rules, with seven out of 28 lenders failing the rule in a recent JPMorgan analysis, Bloomberg reports.
Global bank regulators are preparing to ease new rules that would require banks to hold more liquid assets to withstand a funding crunch in a crisis, says the FT, citing people familiar with the discussions among members of the Basel Committee on Banking Supervision. A growing number of members on the committee now want to soften key technical definitions in the “liquidity coverage ratio”. The move follows complaints from banks that the new Basel III standards on liquidity – the first international rules of their kind – would force them to sharply curtail lending to consumers and businesses. US and continental European regulators are expected to push for changes that would ease the impact on their banks, while the UK, which pioneered the first national liquidity rules in 2009, is said to support the status quo. No changes to the ratio have been finalised, and discussions are continuing. The full committee meets later this month.
Solvency II (insurers) and Basel III (banks).
Both add fresh minimum capital requirements to their respective industries. Similarities generally stop there. The very definition of capital is different, so are risk-weighting and accounting regimes… Read more
EU’s internal market commissioner says the EU proposal to harmonise capital rules will still allow the UK to ringfence its retail banks. Michel Barnier told the FT that his proposal would split into two jurisdictions so that the UK, Spain and other countries wishing to impose additional demands on parts of their banking sector would be able to do so. Some investors had interpreted the wording of Mr Barnier’s Capital Requirements Directive 4, which has to be approved by the European Council and Parliament, as effectively barring the UK’s Independent Commission on Banking, chaired by Sir John Vickers, from pursuing its proposals to force banks in Britain to ringfence their retail operations. But Mr Barnier said: “It seems [the Vickers Commission] may be proposing 10 per cent for retail banks. That would be possible in my proposal. We think we have the flexibility we need,” he said. “We do think the [Vickers] proposals can be integrated into our framework.”
Deferred Tax Assets (DTAs) have been mentioned (usually critically) on this blog many times before. Put very simply, they are tax carryforwards that can be included in banks’ Core Tier 1 capital ratios.
Unsurprisingly then, they make quite an appearance in the recent European stress tests. Read more
The CoCo death spiral is the process by which the expectation of a swathe of bank-issued Contingent Convertible (CoCo) debt converting into equity can exacerbate share price declines.
– We constructed a valuation model calibrated on the CoCos of Lloyds and CS. Read more
Bank of America on Tuesday sought to address concerns that it might need to raise capital, providing more information about its plans to meet Basel III capital requirements as the bank revealed a net loss of $8.8bn for the second quarter, reports the FT. Costs of settling cases related to lax real estate lending more than outweighed underlying improvement in credit trends, with the US’s largest bank reporting a net loss of 90 cents a share in the second quarter, compared with net income of 27 cents a share in the same period last year. The results contrasted with the fortunes of Wells Fargo, the US’s fourth-largest lender, which also on Tuesday posted a 29 per cent rise in second-quarter profit to $3.9bn, as write-offs of bad loans fell and the bank drew down $1bn in reserves against future losses. BoA’s results were in line with guidance given in June when the bank announced it had settled claims with investors in mortgage bonds at its Countrywide unit, agreeing to pay $8.5bn to holders of some 530 securities. At the time, it said the quarter would see a further $5.5bn charge to cover other claims.
Global Sifi buffers is both the likely new name of FT Alphaville’s pub trivia team and a hotly followed piece of financial regulation.
The Financial Stability Board is not due to formally announce its capital recommendations until November, but we already have a good idea what to expect. (The Federal Reserve is also still to announce its proposals.) The very biggest banks are expected to be subject to a 250bps tier one capital surcharge, with the threat of an extra 50bps charge left over to disincentivise supersizing. Read more
Just to be totally clear we’re talking plain vanilla derivatives like, say, interest rate swaps a bank might arrange on behalf of a company. But it seems they’ve taken on a more exotic flavour, of late.
From the clever Chris Whittall over at IFR: Read more
UK banks are facing increased pressure from regulators to use strong earnings to build up capital ahead of official requirements rather than paying out most of it to staff and investors, the FT reports. Although Basel III gives banks until 2019 to meet new “core tier one capital” requirements, the Financial Services Authority, which has power to veto bonus plans if it believes they are hindering capital-building, wants banks to outline a “flight plan” which takes into account bonuses, dividends and the potential for another economic downturn. The BoE’s Financial Policy Committee is expected to step up calls for “opportunistic capital building”, and officials have been blunter in private over the need for action.
Central bankers and regulators have agreed to impose an extra capital charge of 1 per cent to 2.5 per cent of risk-adjusted assets on the largest banks in a bid to protect them from the big losses that could trigger another financial meltdown. The FT reports that the deal agreed a smaller increase in capital than central bankers had wanted, in exchange for stricter rules on what can constitute core tier one reserves. About eight banks will have to hold 9.5 per cent of risk-weighted assets as this capital by 2019, while about 20 will have to hold 8 to 9 per cent. The agreement represents a victory for countries like the US and the UK, however Reuters says the deal will disappoint some banks that hoped to use so-called contingent capital or “cocos” to make up the surcharge.
Global regulators are poised to set a new tiered regime of additional capital requirements for about 30 of the world’s biggest banks, in the latest effort to ensure the next financial crisis can be contained, the FT reports. At least eight banks are being targeted for capital surcharges of 2.5 per cent of their assets, adjusted for risk, on top of the ‘Basel III’ minimum of 7 per cent set by global regulators last year. If the ideas are adopted, Citigroup, JPMorgan, Bank of America, Deutsche Bank, HSBC, BNP Paribas, Royal Bank of Scotland and Barclays would have to maintain core tier one capital ratios of 9.5 per cent, according to people familiar. Housing Wire adds that JPMorgan claims the new rules will make the world’s biggest banks overcapitalised. The bank estimates that systematically-important banks would be able to absorb an instantaneous loss equal to two years of their average losses taken during the financial crisis.
JPMorgan Chase will call on Congress on Thursday to block an international deal on new capital requirements as the bank ratchets up its criticism of US regulatory policy, the FT says. Barry Zubrow, chief risk officer, tells lawmakers in prepared testimony to the House financial services committee that banks and Congress have a right to weigh in on a new capital standard “before it is adopted, not after international negotiations have made its adoption a fait accompli”. The Basel committee is negotiating a capital surcharge for the largest banks, such as JPMorgan, which officials say is likely to be 2-3 percentage points on top of a 7 per cent capital ratio, adjusted for risk, which has been agreed for all banks.
Also: why ‘maximum harmonisation’ might end up getting someone’s Vickers in a twist.
An odd bump in Lloyds and Barclays on Monday: Read more
Risk-weightings for bank assets are still relatively new things.
Codified in the Basel II rules first published in 2004, they were meant to shift financials away from set levels of required capital, tailoring them to the perceived amount of risky assets held by banks. Read more
The International Monetary Fund has “strongly” backed efforts by the UK and a number of other European countries to retain their power to impose tighter rules, including higher capital requirements, on their local banks, the FT reports. The European Union is in the midst of drafting legislation that will apply new Basel III bank standards across the 27-nation bloc. But a battle has broken out over whether the legislation will impose the same “maximum” standards on everyone or whether it will simply set minimum requirements which national supervisors could increase if they wished to meet country-specific circumstances. IMF officials said on Monday in the conclusion to a report on the UK that they “strongly supported” the UK authorities’ push for European legislation that would allow them to establish standards that exceeded the Basel III minima and give national authorities the flexibility to address emerging financial and systemic risks. Global regulators hammered out the Basel III guidelines, which seek to improve the stability of the banking system by increasing the amount and quality of the capital that banks have to hold against potential losses. They effectively require all banks to hold top quality “core tier one” capital equal to 7 per cent of their assets, adjusted for risk.