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 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
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. Read more
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. Read more
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2Secret liquidity and Scottish independence
3Spain's awful unemployment
4S&P 2,100, by Goldman Sachs
5Pump up, debase
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7Collateral crunch-counting gets sophisticated
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