As outlined in our criteria, we do not consider contingent capital securities to be a form of common equity. We can include them as hybrid equity depending on their exact features. If the conversion trigger is set at a level that we think would lead to a conversion occurring too late, then we will treat the contingent capital security according to its initial format when considering how much “equity credit” to give to the instrument. For example, if a contingent capital security initially takes the form of a nondeferrable subordinated bond, we would treat it as having “Minimal” equity credit according to our criteria. In this case, we would see the conversion as happening too late to give equity credit in our broad measure of capital–adjusted total equity, which includes hybrid capital securities subject to strict limits.
Oops. Read more
Remember how the Fed was testing reverse repos with money market funds as a potential way to drain QE liquidity out of the system further down the line?
Well, some blogosphere talk (Zero Hedge, ahem) appears to suggest the Fed may now be backing away from the idea of using non-traditional participants like money market funds altogether, after a bad experience with its October test. Read more
(A big hat tip to Reuters columnist Rolfe Winkler for spotting the below).
A new question and answer was recently added to FDIC’s FAQ section on its TLGP:
Q: What is the risk weight for risk-based capital purposes for a bank’s holding of bank or bank holding company debt guaranteed by the FDIC under the Temporary Liquidity Guarantee Program (TLGP)? Read more
Does anyone remember Deferred Tax Assets?
Banks like Citi used to be (and in fact, still are) stuffed with them. In fact the assets have become a point of contention over the past year and a half, as regulators, analysts and investors debate the quality of banks’ capital. Tax assets can be included in banks’ Tier 1 regulatory capital, under certain circumstances, and hence we eventually saw a shift in emphasis towards the ‘purer’ tangible common equity, which strips out stuff like DTAs. Read more
And so it began — the Lloyds statement detailing the bank’s plans to raise contingent capital is out.
This is a concept still confusing the market even as it’s gaining increasing prominence with regulators. In simple terms, contingent capital is a kind of convertible bond that becomes equity when a certain trigger is hit. In the Lloyds case, it will be if its core Tier 1 capital ratio falls below 5 per cent. Read more
Take that Mervyn King!
The UK’s Financial Services Authority has just released a discussion paper — the second part of Lord Turner’s banking review — on “systemically important banks”, better known as `too big too fail.’ And while on Tuesday, the Bank of England governor simply wanted to break the big banks up, the FSA has come up with a more
long-winded nuanced approach. Capital and liquidity surcharges, central clearing houses and moderated bonus payments all feature here. Read more
… is something that can be done by buying European banks’ Tier 1 bonds — even hybrid ones — according to Société Générale credit analysts.
The whole thesis is based, firstly, on the idea that under new regulation (the strengthened Basel II, for instance) many banks will need to raise new capital. So far, so standard — but SocGen also thinks the capital raising will coincide with much higher bank profits (about 20 per cent in 2010) , thereby reducing the risk that coupons won’t be paid. Read more
Break out the contingent capital.
Remember the International Accounting Standards Board’s proposed revisions to IAS 39?
The organisation wants to update the accounting standard, which sets out how banks and other companies should value and categorise their financial instruments. It’s essentially another mark-to-market debate, and one which has provoked varying reactions among the financial industry – with many thinking it will increase the amount of stuff banks have to mark to market, a development many of them haven’t exactly been eager for. Read more
The crackdown on hybrid capital begins and the Basel Committee on banking supervision is on the case.
From the FT: Read more
The adventures in banks’ hybrid Tier 1 debt continue apace this Wednesday morning, via Belgium’s KBC.
From a Tuesday press release issued by the partially state-owned bancassurer: Read more
The Federal Deposit Insurance Corporation much-awaited rule changes for private equity firms
FDIC, which insures US banking deposits, voted 4-1 to require private equity buyers of banks to hold higher-than-usual levels of capital. The idea here is that this will ease some of FDIC’s own financial burdens — 81 banks have failed so far this year — while preventing PE-owned banks from running wild. Read more
The market for the hybrid debt of British banks was rather roiled last week
First there was news that Northern Rock would be deferring payment of its suboordinated debt coupons. Then then there was a mass-downgrade of the hybrid debt of banks including Lloyds and RBS, from ratings agency Fitch. In short, things are happening in the market — and they haven’t been all that good. Read more
Amid all the accounting-related chicanery currently taking place, the one below, we think, has been flying rather under the radar.
From Asset-Backed Alert: Read more
So much for the revived Rock.
From the bank’s just-released interim results: Read more
What’s this? Northern Rock has fallen below its minimum regulatory requirements?
Northern Rock’s capital base has now reduced to a level below its minimum regulatory capital requirement. Northern Rock proposes to address this situation through a legal and capital restructuring of the Company and HM Treasury’s commitment to provide an adequate level of capital for the Company to meet its regulatory capital requirements, once the proposed restructuring is completed and subject to appropriate State Aid clearance being obtained from the European Commission. Read more
The scenarios contained in the US banking stress tests have been much criticised. Now, the type of capital used in the SCAP is coming under scrutiny.
This from RBC Capital Markets’ Gerard Cassidy: Read more
One part of the stress test seems to be a little problematic, for some. While the results revealed a $185bn shortfall in capital amongst the 19 biggest American banks, the SCAP will only need to replenish them with $75bn. Here are the relevant bits from Thursday’s announcement:
The SCAP focused not only on the amount of capital but also on the composition of capital held by each of the 19 BHCs. That is, SCAP assessed the level of the Tier 1 risk?based capital ratio and the proportion of Tier 1 capital that is common equity. The SCAP’s emphasis on what is termed “Tier 1 Common capital” reflects the fact that common equity is the first element of the capital structure to absorb losses, offering protection to more senior parts of the capital structure and lowering the risk of insolvency. All else equal, more Tier 1 Common capital gives a BHC greater permanent loss absorption capacity and a greater ability to conserve resources under stress by changing the amount and timing of dividends and other distributions. … Read more
“Recession’s end“, Bloomberg commentators included in their headlines on Wednesday night, while others noted that inventory reductions indicate that the economy is nearing a bottom. Green shoots, green shoots, green shoots, blah blah blah.
UBS’s senior economic adviser George Magnus is here to put an end to all this talk of plants, taking aim via his weed-whacking financial commentary this morning on banks, capital and what’s really needed to fix the financial system. Here are some excerpts: Read more
“In light of continued stress in financial markets” the Fed is delaying new rules that would have further limited the amount of restricted stuff that can be included in banks’ Tier 1 capital ratios. The new date for implementation is March 2011.
CNBC is running an interesting piece of analysis by Michelle Caruso-Cabrera, titled “The Unintended Consequences of Gov’t Intervention”
Here’s the basic premise. Included in the recent American Recovery and Reinvestment Act of 2009 was this line, intended to help banks speed up payback of Tarp funds: Read more
Further to our Tier 1 vs tangible common equity series, we have this from Dash Riprock, the ex-CDO-underwriter and guest-blogger at Option ARMageddon, with perhaps the best name in the credit markets.
Riprock is using the following example to explain how Tier 1 capital — specifically the risk-adjusted side — works. Read more
Brian Hunter, the trader who was blamed for the collapse of $9bn hedge fund Amaranth Advisors two years ago, has taken advantage of last month’s plunge in commodity prices to help propel the year-to-date return at the fund he now advises to 230%. The Peak Ridge Capital Commodities Volatility fund, which Hunter advises, returned 24% in July as commodities prices fell 10% for the month. Several other hedge funds with short positions in commodities also posted stellar returns – among them, Paul Touradji’s Capital Management fund, which investors say gained 6.5% over the month. But Ospraie Management’s $3bn flagship fund fell 13% to bring year-to-date losses to 15%. The outperformance of Hunter and others came as Morningstar said its 1000 Hedge Fund Index was down more than 3% for July, making it the worst month since Jan 2003.
The private equity division of Capital International, one of the world’s largest money managers, is set to announce it has raised a $2.25bn fund to invest in emerging markets. The fund will rank Capital at the top of the size charts for global EM funds closed this year. About 25% of the new fund’s capital is already committed to six investments, Koenraad Foulon, co-founder of Capital International Private Equity Funds (Cipef), told the FT, including $171m into Russian dairy company Unimilk.