ROEs

I like reading banks’ research reports on other banks these days because they give off a certain the-call-is-coming-from-inside-the-house vibe; you imagine the analyst running the numbers, looking them over, and saying “my God, this can’t be right, can it? This seems to say … I’m fired?” JPMorgan’s analysts maybe suffer from this less than most but it still imparts a certain tension to the marvelous, strange, 100-page research note out of J.P. Morgan Cazenove today about global investment banks.* There are two big important points** which are:

(1) European banks are pretty pretty aggressive with how they risk-weight their risk-weighted assets, especially compared to US banks. Basel’s Standards Implementation Group is moving in the direction of requiring convergence on RWA measurement, and JPM thinks that that will lead to the European banks having to revise their RWA measurements – meaning that those banks’ capital positions will look much worse than they do now and they will need to shed RWAs and/or raise capital.

(2) You can quantify the return-on-equity effects of new banking regulation – including Basel RWA convergence, but also things like derivatives clearing, the Volcker Rule, etc. – on the big global banks, and those effects are bad. Bad for shareholders, anyway: per JPMorgan, global-bank average ROE would be 16% in 2013 but for those regulations, while after giving effect to them it will be just 6.3%.

But I presume that like any good utility maximizer you care only about your comp, so the important takesaways are (1) 6.3% is not good enough and (2) it will be remediated out of your pocket. Which leads JPMorgan into the truly chilling: Read more »