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3 Out Of 3 Analysts Agree: Basel III Will Guarantee Their Bonuses For 9 Years In A Row, As Banks Win Again
No surprise the reaction across Wall Street is strong to quite strong on the latest regulatory farice out of Europe, especially since our initial read of a 20x leverage cap was in fact low: the 3.5% minimum common equity ratio by 2013 means leverage will be just under 30x, or enough for every bank in the world to pull a Lehman, which blew itself up at roughly the same leverage. All who think European banks will survive through 2019 with this type of leverage should look into investing in these great companies: New Century Financial, Countrywide, and IndyMac.
In the meantime, here is Bank of America, which loves it across the board...
Basel 3 looks bullish for spreads
Yesterday, the Basel Committee on Banking Supervision finally revealed the actual level of minimum capital that banks will be required to adhere to. We think the numbers are in line with prior market expectations and the implementation period long enough and therefore not at all alarming. In fact, our initial read of the impact on banks is positive. Credit investors should look forward to a number of capital raisings from European banks, as looks like is already happening. This should be very bullish for bank spreads, in our view.
7% common equity ratio the norm
The level of common equity rises to 4.5% (from 2%); however, there is an additional ‘capital conservation buffer’ of 2.5% meaning that the minimum level of capital is in effect 7%. The 4.5% level must be achieved by 2015. However, the additional buffer level need be in placed by as late as 1st January 2019, via a transition period which begins in 2016. Perhaps less importantly, the Tier 1 ratio stays – the minimum rises from 4%-6% and can include ‘other qualifying instruments based on stricter criteria’ though of course these are not defined. Therefore, there will be room for non-dilutive T1 instruments in the total capital of the bank. They may account for 25% of total Tier 1. The Committee believes that large banks will require ‘a significant amount of additional capital to meet these new requirements’. Oddly, they think that smaller banks already meet them. We’d not be sure that this is true, at least in Europe. However, it’s clear that the aim here is the larger systemically important banks.
Grandfathering – ends 2013 but amortises
Capital instruments that no longer qualify as non-core Tier 1 capital or Tier 2 capital will be progressively phased out over a 10-year horizon beginning 2013. Their recognition is capped at 90% of their nominal amount as of 1st Jan 2013. Instruments ‘with an incentive to be redeemed will be phased out at their effective maturity date’. Whilst we are not 100% clear what this could mean for perpetuals, it does reinforce the idea that existing T1s, should a new format be decided which is radically different from the one we have now, should become obsolete and therefore should disappear. This looks quite bullish for us for calls of Tier 1s, especially those after 2013. In the meantime, note that we have no concrete agreement on the new format of new bank capital instruments.
This could mean that there is still extension risk in the short term (e.g. for bonds like the ISPIM8.126%) which could affect valuations. It definitely looks bullish though for T1s with calls after (say) 2013, or when there is final agreement on a format of ‘new’ T1 that investors will actually buy.
Note too that Government capital injections, even if they don’t meet the new format, are to be grandfathered to 2018, giving banks plenty of time to adjust. We will publish later our updated valuations of T1s in the light of these potential changes.
The buffers
The idea of the ‘capital conservation buffer’ appears to be that it can be run down in times of stress but we doubt there would be any bank who would want to manage their business that way. If the total core capital ratio dips below the 7%, then banks are potentially subject to limitations on their distributions (e.g. bonuses and dividends). In practice, therefore, we’d be expecting banks to raise levels of core capital a few percentage points above the 7% level (which most banks would probably meet). Buffer capital, according to the release, must also be common equity. It’s not immediately clear to us that contingent capital instruments would necessarily qualify as this buffer capital.
There’s also a ‘countercyclical buffer’ of 0-2.5% which is even sketchier. The countercyclical buffer would kick in where there has been pronounced asset growth – it would have kicked in in Spain, Ireland and the UK by 2007 for example. We had thought that some kind of countercyclical buffer would have been built into provisioning (like in Spain) but it looks like its just being done via higher equity.
Note too that major systemically important banks will have even higher capital demands than those outlined here but these have yet to be defined. The Committee talks about a combination of ‘capital surcharges, contingent capital and bail-in debt.
Loss absorbency of non-common T1 and T2
Not much new on this: it merely says the Governors and Heads of Supervision ‘endorse the aim of strengthen the loss absorbency of non-common Tier 1 and Tier 2 capital’. We’ll see how far this aim gets, given widespread investor objection to these suggested new formats.
Total capital still at 8%
No change to the overall level of capital, but it’s hard to see anything other than a major de-emphasising of anything that isn’t common – as we were expecting. According to the release: The difference between the total capital requirement of 8% and the Tier 1 requirement can be met with Tier 2 and higher forms of capital. Existing hybrids could potentially easily fill that role then.
Deductions by 2018
Deferred tax assets (for example) will have to be fully deducted from Tier 1 by 2018 and there will be a progressive phasing in of the deductions from 2014.
Credit Sights, which highlights that it is impossible to actually do any practical bank-by-bank analysis due to "the long lead-in period, lack
of disclosure, and the remaining uncertainties over changes to certain risk weightings and allowable capital instruments, while new criteria are still being finalised"
The Basel Committee's oversight body has pronounced on the new minimum capital ratios under "Basel 3"
The numbers had been partially leaked, so there are no great surprises, and the final rules are not harsher than recent expectations have led us to anticipate
Nevertheless, the Committee says that "large banks will need, in the aggregate, a significant amount of additional capital to meet these new requirements"
Existing hybrid Tier 1 instruments, issued before the announcement, will be grandfathered until 2013 but phased out over 10 years from then
Working out the exact impact on individual banks is difficult, because of other pending changes to risk weightings and capital components, along with an extended phase-in period until January 2019
But the latest ratios are at least a starting point: our updated spreadsheet gives a breakdown of major European banks' capital structures and ratios at 30 June 2010, with comparisons against 31 December 2009
Capital ratios are largely unchanged since end-2009, with an average Core Tier 1 and Tier 1 ratio of 8.7% and 10.7% respectively
But this masks some movement in the ratios of a few individual banks, with Deutsche Bank and Allied Irish well below their year-end levels
And last but not least, here is Goldman's exhaustive reaction to Basel III, as well as individual commentary by Dirk Schumacher:
Basel Committee agrees on new rules - long implementation phase implies small macro risks. The Basle committee agreed on new capital requirements for banks this Sunday. As our banking team notes the new rules - which still need to be approved by the G20 summit - are broadly in line with expectations. Banks will be required to hold common equity of 7%, with a 4.5% minimum requirement and 2.5% conservation buffer. On top of this, banks will have to hold a counter-cyclical buffer of up to 2.5%.
There are two crucial questions when trying to assess the macro-economic implications of the new regulatory environment for banks. 1) by how much will banks have to raise their capital on the back of these changes. 2) Will lending become more costly/rationed and what are the growth implications of this. Our banks team estimates that only 4 banks among the 47 European banks covered have a core tier 1 ratio of below 7% by 2012. While this looks reassuring, it is less straightforward, however, to assess what the figure for the whole banking sector - including the non-public parts of the banking sector - looks like. The head of the Dutch central bank Wellink is cited this morning as saying that banks would need "hundreds of billions" to meet new capital requirements, though the economy, according to Wellink, will not be impacted by this. It is not clear where these numbers are coming from and other ECB board members have not mentioned any figures when commenting on the new capital rules.
With respect to the growth implications the BIS found in an impact study that a "1 percentage point increase in the target ratio of tangible common equity to risk-weighted assets is estimated to lead to a decline in the level of GDP by a maximum of about 0.19% after four and a half years". Assuming that the banking sector as a whole would currently show a 4% ratio, as required under the old Basle II regime, the overall growth impact looks manageable.
To be sure there are significant uncertainties involved in estimating the growth impact of the new capital rules. The Basle committee was certainly aware of this and this is reflected in the rather long transition period granted. Implementation will start in 2013 and will have to be finished by 2018. This should give banks sufficient time to adjust, arguing for an overall small macro impact of the new capital regime
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It's only fair. After all, they really are the brightest and most gifted minds in the whole friggin world.
...and feel free to mark those assets at whatever value you think is fair.
And just when that Basque 15-century castle was starting to look affordable. Quelle domage.
None of it matters once the banks cash flow goes negative.
Any chance of that happening before 2019, 'cause I'm not sure my liver can make it until then?
Got milk?
Did you enjoy your weekend off, CD? Sure was busy around the old ZH watering hole.
Got kinda scary there for a while with all the nut jobs and tinfoil hat brigade out in force.
BUY BUY BUY, Bovie Says, Cramer Says, CNBC Says, You Can't beat them. They WIN Again.
Taxpayers Loose, We paid for Lord Blackasses of GS bonus. 100 million Dollar bonus for what. Performance.
Hank Paulson, (X-CEO), and Neel Kashkari, ( X-Vice President), both of Goldman Sachs who got their jobs at the treasury to manipulate public opinion so Goldman could be bailed out. All in 2008. They engineered the bailout structure through AIG, (also bankrupt),(also got 85 Billion), to give another 700 billion to all who lost money. Including foreign banks like LYG, RBS, UBS, BCS, HBC and many others. Goldman was bankrupt. Lloyd Blankfein was CEO of GS when this happened and received record pay bonuses for past performance when they needed bailed out. HUH. Bonuses for what. Another interesting factoid is that John Snow, (former executive of GS), left the Treasury so Hank could also bail out John Snow’s Chrysler Corp. Did Chrysler really need the money or was it just a hand out to old buddies. Goldman are squids sucking the life out of the lower middle class of America. Now Neel Kashkari, (let’s say Goldman), wants to Steal Social Security. They never quit legalized stealing from the poor of America.
Now that's worthy of all of them getting a bigger bonus. Buy the Bank Stocks, they can't loose.
so they get to print money out of thi n air for themselves effectively and we all
grind away oin the hamster wheel for scraps
scum UTTER SCUM
shoul dbe a reward put out for dead banksters
If a Commerical Bank gets "money" from the ECB with some conditions attached (repayment, for example), should they account for it as a Loan Payable (soon to be distributed as bonuses) or as Equity (soon to be distributed as bonuses)?
Chart: ES
You can put a fork in it; it's done.
http://www.screencast.com/t/OWU3YThkOTA
I've had the feeling for over a week that there was a desperation in the air to push the market as high as it could before the next leg down. Low volume gave them that chance. As your chart shows, the channel has not been violated......yet.....and I don't think it will, at least not to the upside.
But who knows when the futures markets are a HFT playground after dark.
So...a 550 point ramp up in 9 trading sessions seems illegit?
Define "legitimate" for me and then I shall answer your question.
Follow-up Chart:
Roof Top with Chimney. Last time I drew this was the prior top; see you all at the bottom.
http://www.screencast.com/t/NmJlM2ExZWI
global hyperinflation?
It just makes you want to crawl into a hole and say no thanks. What is the point of participating in a global ponzi scheme of this size and destructive capability?
Might as well get all the stuff you want now and then retire to the farm with a decent seed bank and few animals. Keep enough money to pay the taxes and accept that this is as good as life will ever be ( and it is a good life).
The bankers have really screwed it up this time and unfortunately, it will continue to unwind. It is incredible just how willing humans are to submit to the stupidity of their leaders. We seem to have no limit on our tolerance of pain and suffering.
Might as well get all the stuff you want now and then retire to the farm with a decent seed bank and few animals.
You and a few dozen reliable friends who are adept at farming, equipment repair, animal husbandry and combat rifle (CQ and long range). Otherwise, you will neither sleep nor hang on to any of it.
EVERYONE IN AMERICA NEEDS TO START SHOOTING THESE BANKSTERS RIGHT NOW
guns are not available in europe but in the us they are
instead of shooting furry animals get those sights on the banksters
Buy gasoline and foodstuffs now, and be prepared to defend said supplies.
Uh, I don't know about this plan, but if anyone is going to do this, buy some STAY-BIL at your local auto parts place. Untreated regular gas is only good for about 6 months, but diesel can last 2+ years.
john
this could end right now if you went back and killed the gnomes mother
sorry shouldn't say that about any woman the gnome itself as a baby would do
there can only be...oh, shit...twins.
Reality check : zero hedge.
This leaves them vulnerable to a bank run. The funny thing is should the masses want to take a bank out they could. Just withdraw all your money, all at one time.
The banks need us more than we need them, they just don't want anyone to know this.
+ 13 Trillion. If such a run would be coordinated and started, there'd be a police car in front of every bank in America by 10:00 AM, and the coordinators would be rounded up and disappeared as terrorists.
Bank run = revolution. You would have to accept that the purpose is not to get your money out, but to crush the bank.
I mean, these are the same institutions who have made it "normal" to pay money to get your money out -> seems like people should question this
The bank run is a fool's errand. The only members of the herd you can cull will be the weak and unprotected. The systemically important institutions will be governmentally backed no matter what. This line has already been drawn.
The only thing that organizing bank runs will do is kill local and regional banks and ensure they're fed up the food chain. This is an inevitability, but it may in fact hasten the bolstering of the TBTF balance sheets. Further, any system-wide run will only force money into the TBTF banks because this is exactly what happened in 2008 with a system-wide run... the safest harbor is the one you KNOW the government will defend at all costs... the money just funnelled up for a few weeks/months until additional measures were implemented, calming the panic stricken depositors.
In short, you will not stop TBTF with a bank run at the present time. The only way to stop TBTF is to stop the government from doling out money. The only way to do this is tax revolt. Now, if you could get everyone to solely draw money out of the TBTF, then you could increase the cost of the government in bailing them out... which would help speed up the process of bankrupting the government... which would in turn, prohibit them from backing the TBTF...
the rest of the markets might not have a clue what to expect in the future regarding taxes and healthcare and the economy, but to make sure the banking sector knows, let's telegraph our schedule of bailouts so they know what to expect.
we, the central banks of the world promise to buy equities of the banks, but word it that the banks need to raise equity requirements. the giving of free money only to lend it back to us and minimal interest is taking too long and has run it's productive course.
let's get cnbc to paint this as a positive by not forgetting intervene in propping the markets this morning
Just read the BCBS documents...and sitting here laughing my head off...
"Systemically importent"
"A higher form of capital"
T-shirts anyone ?
http://econotwist.wordpress.com/2010/09/13/central-bankers-announces-hig...
(PS: Limited edition)
God given via divine intervention. It's the only answer.
Either that or Newspeak 1984 style. I vote the latter.
My first tought was that it must be a new kind of money - a cross between the lastest invention - hybrid capital - and the more traditional fiat currency: like "HI-FI Money"
But then it suddenly hit me: they're gonna monetize and securitize the air !!!
It's brilliant......
Dear shorts,
The beatings will continue until morale improves.
XOXO,
Your 'owners'
The only long you've got is your portfolio.
I dont believe this theory that 'shorts' are jumping in every day and getting Charlie Browned, its 100% futures pumping on free money vapors.
News Flash!!!
Bankers Pass New Rules on Banking.... Bankers Pleased!
(Is this supposed to be a surprise?)
its ten points away from it being officially game over for the bears
wave count wil be destroyed then
means we are still in wave B IMHO and C hasn't yet started it means higher highs
"just under 30x"
Who needs a margin for error anyways?
Its not like the world is flat and markets are more connected than ever.
Updated DOW weekly chart:
http://stockmarket618.wordpress.com
Basel, Basel, Basel ... Faulty Towers anyone?
Well, since you ask for it.....here you are:
Basel III And The Fawlty Towers
Thank u, i found this for a long time.
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