capital

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 »

Barclays today announced a fancy new capital plan that illustrates the subtle cultural differences between US and UK banking. When U.S. regulators want banks to raise more capital, they tell them to do it by 2018, and the banks spend the intervening five years whining about it. When UK regulators want Barclays to raise more capital, they tell them to do it by June 2014, and Barclays goes out and announces a rights offering pronto. A rights offering! That preferred European way of raising capital has a pleasing symbolism; it’s like, okay you equity holders, you let your management get into this mess, and you’re responsible for fixing it, so cough up some more cash or there’ll be consequences. Bail yourselves out.

The mess, in this case, is that newish leverage-ratio rules require European banks to have assets (measured under IFRS, plus some off-balance-sheet stuff) equal to no more than 33.3 times their capital, and Barclays is at a somewhat astounding-sounding 45.9x,1 so it either needs to chuck around a third of its assets or raise about a third again of its capital or some combination thereof.

They elected combination thereof, to wit: Read more »

One way to characterize US regulators’ new leverage ratio rules is that they require big banks to raise some $80-odd billion of capital, but that’s perhaps more alarmist than necessary. The banks don’t have to raise that money in the sense of going out and selling $80bn of stock or whatever. They make money every year, and all they have to do is hang on to a little of it (and not lose money!). DealBook quotes Goldman bank analyst Richard Ramsden saying “I am surprised by the [meh-to-positive] market reaction. It’s a fairly demanding proposal,” but Ramsden’s note today1 says:

While we estimate up to a $66bn capital shortfall today, this is mitigated by 1) prospects for changes in asset calculations in the final rule, 2) potential asset optimization strategies by the banks if not, and 3) a phase-in period through 2018 (with ~$80bn of aggregate annual net earnings).

Even ignoring the potential rule changes and “asset optimization,” $80bn of annual earnings over 5 years = $400bn, of which $66bn, give or take, or 17%, needs to go to increasing capital. You can pay out the rest. It’s not that demanding. We’re not savages here: nobody’s gonna make you raise equity. It’s just a question of how fast you can return equity to shareholders.

Coincidentally today the New York Fed has a blog post about banks’ share repurchases during the financial crisis. The point here is basically that while, yes, banks were embarrassingly continuing their dividends throughout 2008 while also requiring bailouts, more or less funneling money directly from TARP to shareholders,2 they dramatically reduced their share buybacks starting in late 2007, so at least they were funneling less money to shareholders, so yay: Read more »

  • 29 May 2013 at 6:14 PM

Bank Shareholders Are Selfish Jerks

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 »

One reason that a lot of people are enamored with the Brown-Vitter approach to bank regulation is that it’s very simple, and everyone deep down sort of thinks that the simple answer has to be better than the complicated one. “You don’t need risk-based capital or stress tests or liquidity coverage ratios or VaR models or multiple tiers of capital or bail-in debt,” Brown and Vitter promise. “You just need to make sure that big banks don’t have assets of more than ~6x their common equity.”

Some people disagree1 and by all means feel free to question those people’s motives. Certainly some people benefit from complexity, bankers above all but also banking regulators, former regulators, and I suppose me too. Simple banking seems really boring, though maybe Brown-Vitter simple banking wouldn’t be.

Anyway that seems like the background to this interesting speech by Fed governor Daniel Tarullo about financial stability, which you could if you like read as sort of the Fed’s initial response to Brown-Vitter. And it’s not not that; the speech engages with Brown-Vitter on the capital stuff, basically defending the status quo of risk-based regulatory capital while conceding a little to Brown-Vitter’s call for higher capital.2

But he seems at least as focused on another source of systemic risk: not banks but wholesale funding markets, not capital but liquidity. You could see why the Fed might be focused there. Read more »

There are a lot of things you can read about the Brown-Vitter bill recently, though it’s a really nice day out and you probably shouldn’t. It’s not … it’s not like a real thing is it? When the text of the bill, which would raise the equity capital requirements on big banks to ~15% on a non-risk-weighted basis and forbid U.S. regulators from implementing Basel rules, first leaked, I sort of assumed it was a temper tantrum not intended to become law, and the fact that its official title is the “Terminating Bailouts for Taxpayer Fairness (TBTF) (Get It?) (GET IT?) Act of 2013″ doesn’t exactly change my mind.1

I seem to have company in that view. Here you can read Jesse Eisinger (pro-Brown-Vitter) saying it’s a “barbaric yawp” that “probably won’t get passed.” Here you can read Davis Polk (anti) agreeing. Here you can read Matt Taibbi (very pro) saying that it might.2 So you figure it out.

Here’s one thing though, which is:

  • Here you are with $100 in Pretty Safe Assets funded with like $5 of Capital and $95 of Debt.
  • Suddenly you need $15 in Capital.
  • You’re not going to take that lying down.
  • You sell the Pretty Safe Assets to Quintilian Regulatory Fucking-About Partners, a hedge fund, for $100.3
  • You buy a call option on the Pretty Safe Assets from QRFAP, struck at say $70, which has a fair value of about $30 since it’s way way way in the money and the Pretty Safe Assets are, by hypothesis, not that volatile.
  • Your sources and uses are: Read more »

I’m beginning to get the hang of how Deutsche Bank works, which seems to be:

  • When they lose money, that strengthens their capital position, and
  • When they make money, that weakens their capital position, requiring them to sell shares.

Maybe? Three months ago we talked about how … well, I said “Deutsche Bank Improved Its Balance Sheet By Losing A Lot Of Money,” which I guess seemed funnier at the time, but to be fair (1) Bloomberg said “Deutsche Bank ‘took pain’ in the quarter by booking a loss to boost its capital ratio without selling shares,” which is about equally funny or unfunny, and (2) Deutsche did in fact have a 4Q loss of €2.2bn and yet increased its Tier 1 capital ratio by 90bps.

Today, on the other hand, Deutsche pre-announced – good! positive! €1.7bn! – first-quarter earnings and also:

The Management Board of Deutsche Bank AG resolved today, with the approval of the Supervisory Board, to execute a capital increase, which is intended to raise gross proceeds of approximately EUR 2.8 billion. The purpose of the capital increase is to strengthen the equity capitalisation of the bank. Read more »

  • 15 Apr 2013 at 3:23 PM
  • Banks

Mike Corbat Gets An A- For The Quarter From Mike Corbat

Citi announced its quarter this morning and there are various ways to tell that it was good, of which “the stock was up” is probably the main one. A possibly less objective test is that, back in March, Mike Corbat told everyone how he would grade himself, if he was grading himself. As he put it today:

Last month, I presented three targets we aim to reach by the end of 2015. First is achieving an efficiency ratio in Citicorp in the mid 50% range. Second, we want to generate a return on Citigroup’s tangible common equity of over 10%. And third is reaching a return on Citigroup’s assets of between 90 and 110 basis points in a risk-balanced manner.

Today Citi announced $4.0 billion of net income (excluding CVA/DVA), or $1.29 per share, which I work out to around 82bps of ROA, 9.86% ROTCE, and a 55.6% Citicorp efficiency ratio.1 So … pretty good, all in all?

One oddity of Corbat’s three-part plan is that two of the parts sort of collapse into each other. Read more »