Short life

Any piece of news on Wall street lasts only till the next piece of news arrives. Yes, we know that. But reversing Deutsche Bank from " Overweight"  to "Neutral" in just three weeks!

Well, the Basel Committee is proposing a revision to its rules governing securitized assets, which will cause Deutsche Bank's Tier I capital ratio to drop from 10.2 to 8.6 in 2014!

Deutsche Bank however, has been proactive in raising capital. It just raised Tier 2 capital in the form of $1.5bn 15-year non-call 10 subordinated notes and has set up the scene for another round of Tier 1 capital as well.

More rules, more reserves...it will be an interesting wait and see till all the regulations are finalized.

Reference:
Revisions to the Basel Securitisation Framework

"Capital" gains at Deutsche Bank

Courtesy: Deutsche Bank

After dodging inquisitive analysts for some time now, Deutsche Bank decided to go all out on the Tier 1 Capital adequacy milestones.

Core Basel III Tier 1 Capital Ratio of 8.8%  together with € 103 billion RWA mitigation had taken DB beyond it's self defined target of 8.5% at the end of Q1 2013. CEO Anshu Jain's carefully orchestrated deliberations that raising capital would be the last option,  not withstanding, the market greeted news of  DB raising €2.8 billion in equity capital with exuberance. DB stocks closed about 5% higher.

In addition there is the potential of raising another € 2 billion of subordinated capital over the next twelve months. That will take Deutsche Bank's Core Tier 1 to well over 9% making it the leader in the race to meet the Basel III requirement (6% Core Tier 1 by 2015 + 2.5% Capital conservation buffer by 2019 +0-2.5% counter-cyclical buffer)

It is a new world post financial crisis and post financial regulations. A well capitalized bank is less risky to investors and to the system at large. Dilution, what? And the € 2.4 billion earnings before Income Tax did not hurt.

So would you go to UBS or Chase?

Jamie Dimon Courtesy: Wiki Commons

The Mike Mayo-Jamie Dimon exchange was pretty hilarious.

I don't care how rich Jamie Dimon is, but he dodged a good question pretty well. Did he really have to?

The facts remain that UBS has a higher capital ratio ( ~14%) compared to JP Morgan Chase ( ~10%). Would that cause a rich investor to chose UBS over JPM?

If all else was equal, maybe! But is all else equal?

To start with, JPM has over a 2 trillion asset base, while UBS is less than 50 billion. Does this make JPM too big to fail? Does this mean that UBS has less risk? Which of the two has a more diversified asset base - in terms of quality of assets, types of businesses, geographical spread? Who has a better return on equity?

All else is not equal. Banks will not and should not live by Tier 1 capital ratio alone.

I would like to know which bank actually has a better risk management system in place. Despite Basel III and Dodd Frank and several reams of regulation later, this is one thing that regulators will never be able to tell. And I will go to Chase!

LCR is finally here

At 5 pm Swiss time on Jan 6th, the final draft of the Liquidity Coverage Ration will be unveiled and due for implementation in 2015.

With this, banks will have to hold sufficient liquidity to cover 30 days of acute stress, when value of assets would have shrunk far below normal market value, ability to repo finance would have evaporated and deposits will disappear.

A $40 bn liquidity buffer was not sufficient to hold up Lehman Brothers. How much will be sufficient to hold up the surviving banks? How much money can we leave under the mattress to prepare for a stress scenario? As always the devil will be in the details.

Increased stature of Funds Transfer Pricing

Funds Transfer Pricing did exist all these days. As a loosely put together function,  an after thought after all the important Treasury functions such as Debt Equity management, and Asset and Liability management. But with increase in size of the liquidity coverage buffer, driven by acute stress scenario analysis and regulatory necessity, it is becoming a key tool in accurately pricing business units and assets at the point of trade.

Example:
Desk A has $ 1000 of treasury bonds and Desk B has $ 1000 of MBS

For Treasury Bonds, haircuts range from 2% in a normal market to 5% in a stressed scenario, which implies an unsecured funding requirement of $ 20 and a liquidity coverage reserve of $30 i.e. $ 50

Whereas an MBS, haircuts range from 8% to 65%  implying an unsecured usage of  $ 80 + $580 = $ 650

Does this increased use in Balance Sheet reflect in the prices at the point of trade?
Only a well thought out Transfer Pricing mechanism will ensure that it does. This needs to be the corner stone of any good liquidity management framework.

Level Playing field?

Only 11 countries have published the final set of Basel III regulations to come into effect from 01 Jan 2013, the originally planned start date: Australia, Canada, China, Hong Kong, India, Japan, Mexico, Saudi Arabia, Singapore, South Africa and Switzerland

Others, including the United States and European union either have a draft or are working on it and are on course to missing the deadline.

QE3 vs Basel III

Ben Bernanke pursued an aggressive QE3 especially targeting Mortgage Backed Securities and hoping to stimulate the economy by the effective reduction in  mortgage rates.

On the other hand, Basel III has rigorously targeted securitisations and inter -financial sector exposures for a higher capital requirement - these that once helped fuel the explosive growth of mortgages.

As banks scramble to increase preparedness for the Basel III, they are revisiting their business models to optimize capital usage and almost all re-securitisations will effectively come to an end sooner rather than later.

Following QE3, Ben Bernanke attempts to quell the fears of community banks