Tags: Ally Bank, Banks, Citi, Federal Reserve, Goldman Sachs, stress tests, VaR
One of the nice things about last year’s Fed bank stress tests was that they were released, and everyone was like “OMG Citi failed!!,” and then we all calmed down and realized that all that meant was that Citi’s capital return plans had failed, so it couldn’t launch a big share buyback, but it wasn’t going to be smashed into dust as a warning to its compatriots. That turned out to be cold comfort for Vikram Pandit but was soothing for the rest of us. This year, in part to avoid the Vikram thing, the rules have changed: today the straight-up stress test results were released, while the Fed will approve or reject capital return proposals next week, and there’ll be a lot of weird disclosure gamesmanship in the interim. Early signs point to Citi being out of the doghouse, and Goldman possibly being in it.
Also Ally Bank failed, sorry! Legit failed, not failed pro forma for capital return. So, smashed into dust.
Here is a chart you may or may not find amusing:
This chart is intended to answer the question: how many a 1-in-100 terrible days would these banks need to have in order to get the Fed’s estimated trading losses?1 Read more »
Tags: Banks, Goldman Sachs, merchant banking, Private Equity, Volcker Rule
The saddest part of this job is discovering a beautiful thing that someone has created as a way around financial regulation, and then watching philistine regulators destroy it. But the happiest part is dreaming up a come-on-that-could-never-work ploy to get around some financial regulation, and then finding out that someone’s actually doing it. Extra points if the someone is Goldman Sachs.
Two weeks ago I thought I’d concocted a way around the Volcker Rule’s porous and silly restrictions on banks running private equity funds. My solution involved (1) having a merchant banking business that took no outside investors (which the Volcker Rule does not restrict), (2) having a private equity fund that took no bank money (since the Volcker Rule limits banks to owning 3% of such funds), and (3) having your merchant bank and your private equity arm co-invest in deals. Since that doesn’t quite work,1 I later modified it a bit to have the outside investors co-invest directly, rather than through a private equity fund, and give the bank its management fee in the form of better economics to the merchant bank in each investment.
Today Reuters has this: Read more »
Tags: Banks, bonuses, EU
OH GOSH LET’S GET REAL ANGRY ABOUT THE EU BONUS CAP, which is moving forward and would limit bankers’ bonuses to 1x base salary, or 2x with shareholder approval. It is super dumb.1 England hates it, what with having a functioning banking industry and all. Bankers hate it, being bankers.2 This guy thinks it makes total sense, being a Belgian lawmaker for the Green Party:
“If I have to judge from the reaction of the [banking] industry, this will impact them. And this will also impact the overall amount of remuneration,” said Philippe Lamberts, a Belgian lawmaker for the Green Party who was one of the leading negotiators for Parliament. “I think it will really hit them.”
Feel free to vent in the comments, you’ve earned it. But this Lex column strikes me as the only worthwhile thing to say about it: Read more »
Tags: Anat Admati, bank capital, Banks, Loans, Paul Miller
One lazy but fun thing to do as a financial blogger is to find two publications saying the opposite thing on the same day, and then be all “haha, dopes.” Business Loans Flood the Market, the Journal informed us this morning, while Bloomberg tells us that by another measure loans are at a five-year low, though being Bloomberg the way they put it is JPMorgan Leads U.S. Banks Lending Least of Deposits in 5 Years. So is there a flood of loans, or a least of loans? Which is it, guys?
Well, both, obviously; “haha, dopes” would not be fair here. Loans are up, relative to the last couple of years, but loans as a percentage of deposits are at a low – 84% for the top 8 commercial banks, per Bloomberg, as opposed to 101% in 2007. Bloomberg acknowledges this tension:
Falling ratios don’t mean banks have shut the lending spigots. Measured in dollars, total loans rose in the fourth quarter for the biggest eight lenders to $3.9 trillion.
As does the Journal, which notes that “The push comes at a time when many banks have been flooded with deposits as slow economic growth and low interest rates crimp investment.”
The way I think about banks is that they do two somewhat separate things, which are:
- satisfy some people’s demand for money claims (short-term, safe, exchangeable-for-fixed-amount-of-cash bank liabilities),1 and
- satisfy other people’s demand for loans.
It’s not entirely obvious why those things would move in lockstep: Read more »
Tags: accounting, Banks, covered bonds, GAAP, IFRS, mortgage putbacks
This Bloomberg article about accounting differences between the US and Europe for derivative-y things comes down pretty squarely on the side of Europe, which is to be expected: European (well, IFRS) standards tend to gross up the size of bank balance sheets, compared to US GAAP standards. Grossing up bank balance sheets makes for bigger numbers and scarier banks, and “US banks are scarier than they seem” is more newsworthy than “European banks are less scary than they seem.” Also intuitively truer. As Bloomberg puts it:
U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books. That can underestimate the risks firms face and affect how much capital they need.
Or it can overestimate the risk European firms face. Or any estimating of risks based on any measure of balance-sheet size is necessarily indeterminate. Risk happens tomorrow, not yesterday.
Anyway though some of these accounting differences are puzzling insofar as they are not accounting differences. Here is the mortgage bond one: Read more »
Tags: Banks, Congress, John Campbell, Too Big To Fail
There’s nothing surprising, exactly, about this chart that Fitch sent out today, but it’s still sort of stark:
Once there was a land where bank debt was AA, AAA if it was particularly good or A if it was particularly dicey. Now AA is the new AAA and BBB is commonplace. The idea of risk-free unsecured lending to banks, implicit in things like Libor discounting, is over.
Right? I don’t entirely understand this proposal by House Republican John Campbell to require banks to “hold substantially more capital,” though the gist is basically that there’s a move to require banks to do more of their funding via long-term holdco debt. Here is a puzzling summary: Read more »
Tags: Banca d'Italia, Banks, Euribor, LIBOR, Marco Taboga, papers
The Libor scandal’s little brother, the Euribor scandal, is different from the Libor scandal in one important way. With Libor, banks are asked where they can borrow, and so if they can borrow at 2.5% and submit 2.4% then they’re lying. With Euribor, banks are asked where a prime bank can borrow, and so if they can borrow at 2.5% and submit 2.4% then … I mean, then who knows? Maybe they’re not prime? What’s a prime bank? This imprecision made Euribor impossible to manipulate, for some shady tautological meaning of “impossible to manipulate,” and so everyone felt very clever about avoiding scandals until they didn’t.
So when Libor rates were kept artificially low in 2007-2008, as banks tried to avoid seeming weak by submitting high rates: that was fraud. But when Euribor rates were kept artificially low, that was defensible. The intuition would be “well, last year we could all borrow at 3%, this year most of us can borrow at 4%, but we don’t look as prime as we used to. The best of us can still borrow at 3%, so Euribor = 3%.” That’s the intuition behind this amusing Banca d’Italia working paper by Marco Taboga:
Euribor rates are averages of survey responses by banks that are asked the following question: what is the interest rate that, to the best of your knowledge, a prime bank would charge another prime bank on an unsecured loan? The keyword in this question is “prime bank”. Before the crisis started, the concept of prime bank was probably rather unambiguous: there were dozens of large and internationally active banks that enjoyed AAA ratings and had tiny CDS premia (around or below ten basis points); any one of these banks would be easily recognized as a prime bank. During the crisis, however, most of these banks experienced deteriorations in their credit ratings and surges in their credit spreads. Which of them are still to be considered prime? In the absence of a standard de
finition of prime bank, this is a question that calls for quite a bit of subjective judgement. Therefore, it is conceivable that after 2007 Euribor rates might have been influenced also by changes in the survey respondents’ perception of what a prime bank is. This paper provides empirical evidence in favor of this hypothesis.
The empirical evidence is more suggestive than definitive, and the effects are more visible post-2008 than during the crisis, but still. Here’s the picture: Read more »