Tags: Banks, capital, capital plans, Federal Reserve, stress tests
Today the Fed released a paper making fun of banks for their lame responses to the Fed’s stress tests, both on prudential-regulatory and on literary grounds. For instance, the banks were supposed to come up with their own stress scenario and see how they’d do in that scenario, and a lot of banks apparently phoned in that effort. The Fed was unimpressed:
A BHC [bank holding company] stress scenario that simply features a generic weakening of macroeconomic conditions similar in magnitude to the supervisory severely adverse scenario does not meet [the Fed's] expectations.
BHCs with stronger scenario-design practices clearly and creatively tailored their BHC stress scenarios to their unique business-model features, emphasizing important sources of risk not captured in the supervisory severely adverse scenario. Examples of such risks observed in practice included a significant counterparty default; a natural disaster or other operational-risk event; and a more acute stress on a particular region, industry, and/or asset class as compared to the stress applied to general macroeconomic conditions in the supervisory adverse and severely adverse scenarios.
At the same time, BHC stress scenarios should not feature assumptions that specifically benefit the BHC. For example, some BHCs with weaker scenario-design practices assumed that they would be viewed as strong compared to their competitors in a stress scenario and would therefore experience increased market share.
Oh sure you get points for, I don’t know, having a lot of capital or whatever the ultimate point of all of this is, but what really distinguishes a B+ from an A bank, stress-test-wise, is creative scenario design. Read more »
Tags: Banks, CEOs, humility, self-awareness, well-polished veneers of boringness
Is your bank looking for a new CEO? Are you considering throwing your name in the ring? Do you feel confident you’ve got a pretty good shot? Before you start printing up new business cards, take a moment to make sure you’re not basing your qualifications on outdated ideas re: what search committees value in a Chief Executive Officer.
According to the Wall Street Journal, in a departure from past, banks are now looking for people who won’t embarrass them in public and would have the sense to say, “No, it would not be a good idea for me to send a picture of my bare ass to the chairman of the Federal Reserve with the caption ‘Regulate this’” in response to an announcement about new capital requirements. Read more »
Tags: Banks, earnings, Goldman Sachs, Harvey Schwartz, leverage ratio
GS had earnings today and I guess they weren’t that good but all anyone ever wants to talk about on earnings calls these days is leverage ratios. That I suppose is a sociologically interesting fact: is banking a business of selling stocks and bonds and loans and whatnot, or is it a business of optimizing yourself around regulation? You can tell what the analysts think, though I suppose that’s like a second derivative; they want to add value to whatever was already obvious to the market. The stock price dropped on, like, not selling enough stocks and bonds and whatnot. Or rather: on making too much money from owning stocks and bonds with Goldman’s own capital, and too little on doing more obviously Volcker-compliant-y things. So: still sort of a regulatory question I guess.
But, yeah, all the analysts want to talk about is leverage ratios, and you know who does not want to talk about leverage ratios is Harvey Schwartz. Delightfully someone at Reuters counted the number of times he was asked to quantify Goldman’s leverage ratio (eight1) and the number of times he did (zero). He said he was “comfortable” with it, which presumably means that GS will be above 5% by 2018 assuming some rates – possibly at, above, or below the current rates – of capital generation and capital return. But they haven’t done the math yet.
Which is curious? Read more »
Tags: bank capital, Banks, Basel III, Federal Reserve, leverage ratios, OCC
US banking regulators have released new proposals to require banks to have higher leverage ratios, counterintuitively meaning lower leverage, and you can go read them here, or read about them here or here. Briefly: in addition to regular Basel III risk-based capital requirements, banks are also subject to a backstop equity-divided-by-assets0 leverage test, and internationally the minimum is 3%, but in the US it’ll be 5% for the biggest bank holding companies and 6% for the biggest insured banks. The OCC estimates that the banks are in total about $84 billion or so short of that requirement, though they have five years to get there, so it’s not, like, go sell $84 billion of stock right now or whatever.1
We have talked about leverage ratios to death and now they are dead. Leverage ratios, yaaaay.
But here is a weird thing from the regulators’ joint notice of proposed rulemaking: their estimate that banks’ cost of equity capital is just 0.56% above their cost of debt: Read more »
Tags: bail-ins, Bailouts, Banks, BlueMountain, Bruce Berkowitz, debt, Fairholme Capital Management, Fannie Mae, Freddie Mac, Jes Staley
The basic thing about investing in big banks’ unsecured debt is that once upon a time it was a pseudo-risk-free proposition because, like, it’s a bank, what could possibly go wrong,1 and now it’s like,2 hi, you are buying the mezzanine (call it 10-to-30%-loss3) tranche in an actively traded and extremely opaque CDO full of goofy stuff and, hey, put a price on that.
I don’t know who’ll be good at putting a price on that but it stands to reason that Jes Staley, the former head of JPMorgan’s investment bank who left for BlueMountain shortly after several billion dollars of JPMorgan’s money made the same voyage, would. He thinks so anyway:
On a panel at the Bloomberg Hedge Funds Summit in New York, Mr. Staley discussed what is known as resolution authority, in which regulators help wind down failing banks. The process of adapting to these new rules, he said, would give banks a “more clearly defined capital structure,” and thereby create opportunities for investors.
“There’s going to be tremendous mis-pricing between the different levels of the capital structure in these banks,” Mr. Staley, who is known as Jes, said on the panel.
One imagines that, if all goes according to plan, then at some point between now and the end of time:
- There will be some bank debt (deposits!) that is bail-outable and more or less government guaranteed;
- There will be some other bank debt (repo!) that is collateralized and more or less money-good, ish;
- There will be some other other bank debt that is bail-inable and more or less clearly mezzaniney and going to be toasted in any bank failure; and
- People will believe that.
Read more »
Tags: Banks, capital, freethinking analyst Mike Mayo, governance, Lloyd Blankfein, Mike Mayo, shareholders
We talked last week about how shareholders are really the last people you’d want running a bank, if you’re the sort of person who doesn’t like banks. Conveniently Jesse Eisinger is that sort of person, and he’s pissed at shareholders for how they’re running banks:
Shareholders can’t be counted on.
That’s the message from the dispiriting shareholder vote on whether to leave Jamie Dimon as both the chief executive and the chairman of JPMorgan Chase, or to split the roles. Even more shareholders backed him in his dual role this year than did last year.
For some time, reformers have hoped that shareholders might ride to the rescue to solve the problem of Bank Gigantism, otherwise known as Too Big to Fail.
Big-bank critics, like the freethinking analyst Mike Mayo, analysts at Wells Fargo, and Sheila Bair, the former head of the Federal Deposit Insurance Corporation — and others, including me — have raised the possibility that shareholders might revolt over banks’ depressed stock valuations and seek breakups. Broken-up banks would be smaller and safer.
No, it’s not going to happen. Shareholders are part of the problem, not the solution.
The problem in this telling is basically the limited liability corporation, which gives shareholders an option on the corporation’s assets; option pricing theory, which informs shareholders that volatility – of earnings, of “high-risk, high-return bets” where shareholders “capture the unlimited upside and their losses are capped” – increases the value of their option; and modern corporate governance, which informs bankers that they work for the shareholders and therefore should be maximizing the value of that option. With the bets and so forth. Read more »
Tags: Banks, Guillermo Ordoñez, papers, Regulation, shadow banking
A simple model of banking regulation and, like, counter-regulation goes something like this:
- Regulators are conservative and dumb, and want to safeguard banks from bad risks even at the cost of preventing good risks,
- Bankers are aggressive and smart, and want to take lots of good risks even at the cost of taking some bad risks, and
- Sometimes bankers can find people to put up with their shit and sometimes they can’t.
“Put up with their shit” is meant in the broadest sense – Can banks defeat Dodd-Frank? Brown-Vitter? Is Lloyd Blankfein a hero or a villain? Jamie Dimon? Etc. – but one particularly interesting question is, if you’re trying to do trades that evade or bend or optimize or whatever regulation, will someone do those trades with you? You could write a history of recent finance with the answer to that question: in 2007 you could chuck all of your mortgage risk off-balance sheet via securitizations, in 2008 you … could not, and in 2013 if you’re looking for someone to provide regulatory capital relief all you have to do is call a Regulatory Capital Relief Fund. Six years peak-to-peak, same as the S&P.
You could probably use words like “bubble” in characterizing that cycle but I prefer the approach taken in this new NBER paper by Guillermo Ordoñez of Penn (free version here), both because it mathematically formalizes that basic model of regulation and counter-regulation in an interesting way, and because it is congenially cynical. As he puts it, “banks can always find ways around regulation when self-regulation becomes feasible, and it is indeed efficient for them to do so.” Bankers, of course, always think that it would be efficient for them to find ways around regulation. They only do so when they can find someone to trade with them. Read more »