The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘capital

Too Big to Fail and How Little the Concept is Misunderstood

Sheila Blair Chair of the American FDIC (retail deposit guarantees) speaks clearly yet with words that are hardly reflective of US policy.

The first task is to scrap the “too big to fail” doctrine. To do this, we need to fix weaknesses in our regulatory system, and achieve global reform for effective resolution processes when large firms fail. With these steps, we can foster real market discipline and make international cooperation more successful.

Co-incidentally I watched the BBC World Debate earlier with an interesting group of contrasts (no video online yet)

BBC World Debate – Global Financial Crisis: Can we Afford the Future? (Opening plenary session of Program of Seminars) Speakers: Dominique Strauss-Kahn, Managing Director, IMF; Niall Ferguson, Professor, Harvard Business School; Christine Lagarde, Minister of Economic Affairs, Industry and Employment, France; Jim O’Neill, Chief Economist, Commodities and Strategy Research, Goldman Sachs; and Güler Sabancı, Chairperson,Sabancı Holding, Turkey

The study in contrast in the hour long debate was at its crispest when the facilitator asked Jim O’Neill no less than three or more times if Goldman was chastened by the whole government support, continued profits, and concern over billion dollar bonus thing, and he awkwardly and steadfastly bypassed the question. to which Niall leaped in to help out with the quote of the debate

Niall Ferguson: “you have got to be kidding … off course they are not chastened … They are absolutley gleeful! Their competitors have been knocked out [by government intervention and forced takeovers]”

It was a classic moment. The earlier context had been what lessons have been learned and does the answer lie in regulation. Ferguson had argued that regulation had created the problem through the creation of the Freddies which facilitated the mortgage crisis while operating as quasi government agencies with implicit 100% government guarantees that have since been exercised. Lets not forget that the Freddies accounted for $5.3 trillion in mortgages. That number is almost 50% of the US economy. This is consequential stuff, so to say more regulation is better is not appropriate. Better regulation at best might be acceptable, but not more.

Meantime back to the TBTF’s as Niall has named them. Just how strong are they after all the dust settles on the forced mergers to date. Here is a selection of the largest in US and UK. When looking at these numbers note that banks focus on capital base and on profits in public announcements. I choose to deliberately go back to basics and the debt to equity view – why? If it were not for the shortcomings in debt to equity, government intervention would not have been required by definition. Government assistance to banks is because they are unable to manage their debts – finance 101.

US $ billions

banks capital 2009

Relevance to Bankwatch:

Clearly I am innately pro-bank, otherwise I would not be bothering with this blog. What is really burning me more than anything though is the obvious refusal by the large banks, Canadian included, to openly recognise the role they play in the world economy, and the fundamental risk that is implicit in the pseudo state guarantee that has been in existence over the last 50 years, and that is now explicit. If I were a bank Chairman, what would keep me awake at night is the concern that the pro-state intervention meme that is exemplified in the benignly charming Christine Lagarde, will tomorrow reduce me to being a $50K per annum bureaucrat.

Going back to my earlier ramblings on the future of banking lying in two camps:

  1. financial utilities
  2. innovators

… I remain even more convinced of this evolution. At the moment, the majority or all of TBTF’s are or will be in the financial utility category based on their fiddle while Rome is burning approach.


Banks as exemplified in the impotent Jim O’Neill at the BBC debate are not displaying the desire and action that suggests they apprehend the severity of the issue. Notwithstanding even Niall indicating that bonuses are symptomatic and not causal, they do reflect strategy. What about dividends? What of a Bank that eliminates dividends for 5 years to boost capital by definition, by 50%? Consider the stock impact on the appreciation of risk that would reflect, especially when we consider the coming credit card problem that few speak of.

For those that disagree with this, consider the size of the liabilities above, and the relative size of the money set aside in the back pocket (equity). Consider Barclays – they have $20 bn in outstanding credit cards. If 12% is bad, that is $2.4 Bn. This equates to 5% of the capital base. Not much in percentage terms, but that is just credit cards. There is the commercial lending portfolio, the investment banking portfolio, all of which are driven off the same retail consumer desire to buy.

It is just not clear at all from Bank announcements in the investor relations sections that they have altered their behaviour one iota to reflect potential economic hiccups going forward, which would affect countries and not just themselves.

Written by Colin Henderson

October 4, 2009 at 16:55

G20 Finance Minister regulation changes will constrain new investment and require a strategy rethink

The G20 Finance Ministers meeting in London concluded some new principles for Bank supervision, that follows the predictable path we have been seeing. Here is a summary from BIS, and some additional analysis from Financial Times.

The key points that will drive banks to seek additional efficiences to compensate, are raised capital and liquidity requirements. Another key one is #4, the countercyclical buffer; in other words during good times put money away for a rainy day. These changes in particular will constrain new investment in lending and in anything that does not drive higher profits.

In any event this will require a serious strategy review, and again, this does not sound like a return to business as usual.

Comprehensive response to the global banking crisis | BIS

The Central Bank Governors and Heads of Supervision reached agreement on the following key measures to strengthen the regulation of the banking sector:

  • Raise the quality, consistency and transparency of the Tier 1 capital base. The predominant form of Tier 1 capital must be common shares and retained earnings. Appropriate principles will be developed for non-joint stock companies to ensure they hold comparable levels of high quality Tier 1 capital. Moreover, deductions and prudential filters will be harmonised internationally and generally applied at the level of common equity or its equivalent in the case of non-joint stock companies. Finally, all components of the capital base will be fully disclosed.
  • Introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework with a view to migrating to a Pillar 1 treatment based on appropriate review and calibration. To ensure comparability, the details of the leverage ratio will be harmonised internationally, fully adjusting for differences in accounting.
  • Introduce a minimum global standard for funding liquidity that includes a stressed liquidity coverage ratio requirement, underpinned by a longer-term structural liquidity ratio.
  • Introduce a framework for countercyclical capital buffers above the minimum requirement. The framework will include capital conservation measures such as constraints on capital distributions. The Basel Committee will review an appropriate set of indicators, such as earnings and credit-based variables, as a way to condition the build up and release of capital buffers. In addition, the Committee will promote more forward-looking provisions based on expected losses.
  • Issue recommendations to reduce the systemic risk associated with the resolution of cross-border banks.

The Committee will also assess the need for a capital surcharge to mitigate the risk of systemic banks.

Written by Colin Henderson

September 7, 2009 at 18:09

Posted in Uncategorized

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Bank of America Needs $33.9 Billion | NYT

As predicted yesterday, the amount of capital the banks need is far in excess of the amounts they were negotiating.

This news just in from the NYT confirms what had to be the case.  If we do the math based on project bad debts, it had to be in the $20bn + range for the big banks.  Similar results will apply to Wells, Citi,  PNC and others in the group of 19.  Watch out for the stock market tomorrow.  Reality bites.

Bank of America Needs $33.9 Billion, U.S. Determines

The government has determined that Bank of America will need
$33.9 billion in capital, according to an executive at the

Written by Colin Henderson

May 5, 2009 at 22:32

What does recovery mean for Banks?

Banks are at the centre of the economy.  Business and consumers conduct their day to day business using money and they do this through banks.  Stating the obvious you may say?  This is why I study the economy so closely and try to understand how it will look in the future, because that has a direct relation to how banks will look in that future.

We are in a crisis of debt.  It is a debt crisis because consumers and businesses are over-leveraged.  Their debt is too high relative to todays asset values.  Asset values have decreased by 25 – 60% in the West, whereas debt has reduced only minimally.

So what do we see around us that offer substantive clues to our near term future for banks?

  • US economy reducing at annual rate of 6.1% – this has to be contrasted to growth rates of 2 – 3% pre crisis, so thats an almost 10% shift being experieinced
  • Lithuania today seeing a 12% reduction in its economy
  • Germany seeing 5% – 6% and talk of rioting on the streets, which of course will do no good except create panic
  • Citibank and Bank of America today finally wisening up to the reality that they cannot grow out of their leveraged position – they must contract out of it by selling stuff
  • corporate jets becoming an embarrassment rather than a status symbol
  • Allens & Overy (lawyers in the City) introducing a ‘cull’ of 10%
  • 80 – 100% growth in managerial and professional unemployment (UK)
  • General Motors in Canada cutting dealerships from 794 down to 400 – 400 within one year

These headlines are all point in one direction.  Less is the new reality.  No-one knows precisely where the new balance will level off, but it is certainly going to be at a level less thn we saw at the peak in 2007.

A smaller economic base results in less of many other things that probably still have to happen;  less restaurants, real estate agents, accountants, grocery stores, plumbers, construction workers, and of course bankers and banks.

Relevance to Bankwatch:

Operating in this new environement will require new thinking and recognition of new opportunities.  This will be the time (for banks) to not just accept internet but to insist on internet as a core component of the business to drive efficiencies.  It will require fresh looks at old ideas that were squandered away and hidden by the excesses of the good times, eg:

  • # of branches required?
  • style of branches required- which services will be offerred?
  • what is the the role of tellers in the new operating model?
  • is it time to eliminate cheques ?
  • is it time to bring commercial banking into the and up to the same degree of automation as consumer banking?
  • Why is business banking still being done by cheques and deposit books?
  • What is the role of Head Office?  How many are required to invent bank accounts, mortgages and loans?

In a smaller and more efficient world, new competitors will be prodding away at banks’ business model.  I watched many of the presentations yesterday at FinovateStartup09 and was struck by how they all in some way chipped away a part of banking from banks.  Whether it is Tempo and their de-coupled debit card, or Wesabe and Micronotes pro-actively helping consumers spend wisely, or Prosper and Lending Club introducing “Securitization 2.0′ (online secondary markets with clear line of sight between debtor and creditor),  the coming of Web 3.0 is imminent and in a form that banks may not expect nor be prepared for unless they act now.

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