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S&P Puts Too-Big-To-Fail US Banks On Ratings Downgrade Watch, Blames Fed

Tyler Durden's picture




 

Having watched the credit markets grow more and more weary of the major US financials, it should not be total surprise that ratings agency S&P just put all the majors on watch for a rating downgrade:

  • *JPMORGAN, BANK OF AMERICA, WELLS FARGO, CITIGROUP, GOLDMAN SACHS, STATE STREET CORP, MORGAN STANLEY MAY BE CUT BY S&P

Despite all the talking heads' proclamations on higher rates and net interest margins and 'strongest balance sheets' ever, S&P obviously sees something more worrisome looming. S&P blames The Fed's new resolution regime for its shift, implying "extraordinary support" no longer factored in. This comes just hours after Moody's put Bank of Nova Scotia on review also (blaming the move on concerns over increased risk appetite).

The ratings agency cited significant measures taken by Canada's third-largest bank to increase its profitability over the past couple of years, which signal a "fundamental shift" in the bank's risk appetite.

 

Over the past two years, Scotia has accelerated the growth in its credit card and auto finance portfolios "both of which are particularly prone to rapid deterioration during an economic shock and exhibit higher defaults and loss severities than mortgage portfolios," Moody's said in a note late Monday.

 

While the bank's moves are aimed at increasing profitability to counter the lowest domestic net interest margins among Canada's six largest banks, Moody's believes they increase the prospect of future credit losses when the credit cycle turns.

Goldman, Morgan Stanley & Citigroup rated A- with negative outlook, JPM has A rating with negative outlook, State Street rated A+ with negative outlook, according to Bloomberg data

Who could have seen that coming?

 

As Bloomberg noted earlier, The Fed's new proposal for a "final firewall" requiring total loss absorbing capacity (TLAC) buffers at the largest banks may be the driver of S&P's decision...

U.S. banks may collectively need to add $90 billion in debt by Jan. 1, 2022, to help ensure an orderly wind down in case of failure, which may add $680 million to $1.5 billion in annual costs. Eight G-SIBs would hold a minimum of long-term debt (LTD) under the Fed's Oct. 30 TLAC proposal. LTD is meant to address "too-big-to-fail" concerns by having a known quantity of capital to help a bank transition through resolution. The Fed reasons that LTD could be used as a fresh source of capital, unlike existing equity.

 

Companies Impacted: Using 4Q14 figures, the Fed estimates six U.S. G-SIBs collectively face a $120 billion TLAC and LTD shortfall. LTD stand-alone shortfall is approximate $90 billion. Among the eight G-SIBs are JP Morgan, Citigroup, Bank of America, Wells Fargo, Morgan Stanley, State Street and Bank of New York.

All of which have seen risk-weighted assets surge since 2008...

 

Just as we suspected, S&P's decision is based on The Fed's new regime:

  • *S&P CITES FED'S NOTICE OF RULEMAKING FOR ACTIONS ON EIGHT GSIBS
  • *S&P REVIEWS RESOLUTION REGIME FOR U.S. BANKS
  • *S&P SEES EXTRAORDINARY SUPPORT NO LONGER FACTORED IN GSIB RTGS
  • *S&P EXPECT TO RESOLVE CREDITWATCH ON GSIBS BY EARLY DEC.

In other words right before The Fed's rate hike decision.

Charts: Bloomberg

 

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Mon, 11/02/2015 - 20:45 | 6741990 ajkreider
ajkreider's picture

They need to add $90 billion as a groupl in seven years? And this is supposed to be cause for concern?  That's around 5% of Citi's balance sheet.

Mon, 11/02/2015 - 20:46 | 6741998 HedgeAccordingly
Mon, 11/02/2015 - 20:48 | 6742007 knukles
knukles's picture

Hah ha ha ha ha ha ha ha
Where's Timmah when we don't need him?

Mon, 11/02/2015 - 20:58 | 6742051 Paveway IV
Paveway IV's picture

SEC ban on shorting major bank stocks in 3... 2.... 1....

Mon, 11/02/2015 - 22:20 | 6742407 williambanzai7
williambanzai7's picture

He is busy jiggling his piddly in the mens room of the 21 Club

Mon, 11/02/2015 - 20:45 | 6741991 brockhardman
brockhardman's picture

The same rating system that had Lehman Brothers rated as a ...

Mon, 11/02/2015 - 23:47 | 6742749 ShorTed
ShorTed's picture

Excellent point, but they're really serious this time.

Mon, 11/02/2015 - 20:49 | 6742000 buzzsaw99
buzzsaw99's picture

U.S. banks may collectively need to add $90 billion in debt by Jan. 1, 2022...

that's right, may, around twenty fucking twenty two, er, bitchez. let me guess, blankfein and dimon retire in 2021.

Mon, 11/02/2015 - 20:51 | 6742020 knukles
knukles's picture

Like, uh .... whenever....  (twisting blonde hair with finger while looking at iPhone screen and texting with thumb) 
Yeaaaaauh....

Mon, 11/02/2015 - 20:49 | 6742008 pebblewriter
pebblewriter's picture

I used to calculate something I called the wipeout ratio: the percentage decline in a bank's (stated) derivatives portfolio that it would take to wipe out their Tier 1 capital. 

Then I realized that no one cared about it any more -- certainly not S&P, who was almost put out of business over the US downgrade.  And, of course, no one actually marks derivatives to market anymore.

Does anyone else still compute this?  If not, maybe time to update the numbers...

http://pebblewriter.com/the-wipeout-ratio/

 

Mon, 11/02/2015 - 23:19 | 6742662 Osmium
Osmium's picture

Along those lines, I remember on they would post the bank closure list on Fridays.  Do they still post that? 

Tue, 11/03/2015 - 00:14 | 6742814 pebblewriter
pebblewriter's picture

Okay, here you go.  Fresh from the oven with 2015Q2 data as reported by the banks and the OCC...

Between JPM, C, GS and BAC, there's $180 trillion in reported gross derivatives and $456 billion in Tier 1 capital.  That's a derivatives/capital ratio of 395:1. In other words, a 0.25% fluctuation in the value of their derivatives would theoretically wipe out their Tier 1.

More details at:

http://pebblewriter.com/banks-wipeout-ratio-an-update/

Tue, 11/03/2015 - 04:28 | 6743091 Farqued Up
Farqued Up's picture

Maybe yes, maybe no. A group of bright people need to check out the structures of the derivatives. I suspect that many or most of the high risk ones are tranches to allow the banks to dump the losses on the lower pecking order dummies like me.

Mon, 11/02/2015 - 20:51 | 6742019 Yen Cross
Yen Cross's picture

 S&P puts Citadel ? Oh.... You mean S&P puts, as part of a sentence.

Mon, 11/02/2015 - 20:53 | 6742034 ZH FNG
ZH FNG's picture

Don't worry. Jeb will fix it. 

OOPS. Game over Jeb!

Mon, 11/02/2015 - 23:51 | 6742758 ShorTed
ShorTed's picture

That level of stupidity should immediately disqualify Bush for any office higher than dog-catcher.  What's next for that campaign, some JP Morganesque 'Ask Jamie' troll fest?

Tue, 11/03/2015 - 04:30 | 6743094 Farqued Up
Farqued Up's picture

Not so fast, the same buttons also work for creating votes out of thin air.

Mon, 11/02/2015 - 20:54 | 6742036 silverer
silverer's picture
"S&P Puts Too-Big-To-Fail US Banks On Ratings Downgrade Watch", which really means they've put the average US citizen who has to bail them out on a ratings downgrade watch.
Mon, 11/02/2015 - 20:55 | 6742040 RopeADope
RopeADope's picture

Downgrade watch is that thing they do right before the ratings fee agreements are renewed at the new and improved prices.

Mon, 11/02/2015 - 21:00 | 6742057 Badsamm
Badsamm's picture

Today, a Bank of America in San Francisco, is down to 1 teller, no manager, no guard, and an admitted hiring problem but they did have 4 suits sitting at desks talking to themselves  (waiting for chinese home buyers with pockets full of cash i suspect). And then the screaming and yelling started from the 12 customers in line, myself included.

 

A bank with no guard tells you everything you need to know

Mon, 11/02/2015 - 21:08 | 6742084 Dragon HAwk
Dragon HAwk's picture

Be fun to call your bank, branch and request that a guard be present on Monday because you are going to be making a rather large deposit, then go in and drop 20 bucks into your savings..  you know them rent a cops have family to feed too...

 

Mon, 11/02/2015 - 23:12 | 6742645 joego1
joego1's picture

Sounds like you are convincing yourself that you have a loser bank. Wait till this SHTF and there are zero tellers and the ATM's have sad little messages scrolling accross them.

Mon, 11/02/2015 - 21:27 | 6742153 Aquarius
Aquarius's picture

Economics 101 (for Stupid)

Definition by visualization  of exactly what is happening, in Principle, to the USA and the West; mileage will vary. A natural process.

https://www.youtube.com/watch?v=FVmmNJYRF_s

"Stability leads to Instability" said Minsky (paraphrased) but he omitted that 'instability leads to stabilty' (me).

Ooops

http://verbewarp.blogspot.com.au/2011/02/economic-heresy.html

Screams of Laughter

Tue, 11/03/2015 - 00:38 | 6742864 hxc
hxc's picture

Hyman minsky was a crackpot

Mon, 11/02/2015 - 21:51 | 6742285 Niall Of The Ni...
Niall Of The Nine Hostages's picture

S&P are always last to notice anything wrong. When they start noticing the smell of smoke, you'd better be long gone.

Mon, 11/02/2015 - 21:57 | 6742323 Ban KKiller
Ban KKiller's picture

Criminal enterprises have ratings? Well, sure! Guess we want successful criminals! 

Mon, 11/02/2015 - 23:23 | 6742624 teslaberry
teslaberry's picture

this is a joke. please , stop already with this nonsense about 'self regulation'.

 

the s&p is trying to stay relevant by doing anythign that looks meaningful , it is Cover Your Ass. very similar to the fed pretending to ever again be able to raise rates in a meaningful fashion. 

 

Tue, 11/03/2015 - 07:37 | 6743184 SSRI Junkie
SSRI Junkie's picture

calling these entities "banks" since the glass-steagall repeal is a joke. they are pass through market proxies for the private fed banking cartel to launder their money with the largest insurance company in the world covering their losses: .gov.

Tue, 11/03/2015 - 08:26 | 6743261 Wahooo
Wahooo's picture

SKF party. My place. 9:30 am.

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