#CET1

16 10, 2023

Karen Petrou: The Apples-to-Martians Comparison of PE Capital to That Demanded of Banks

2023-11-13T15:47:14-05:00October 16th, 2023|The Vault|

What is capital?  We talk a lot about how much banks should hold and what more bank capital means to whom.  But few have said much about what regulatory capital actually is.  That’s a signal, strategic omission as private-equity firms spin a tale of capital resilience without actually having anything comparable to what banks must raise even as nonbanks take over more and more financial markets key to stability, economic equality, and macroeconomic growth.  Let nonbanks compete wherever they can, but suggestions that private equity hold more capital than banks is a whopper that cannot go unchallenged as lending migrates to these powerful firms.

In a New York Times article over the weekend, Apollo’s chief executive reiterated a point he’s made before:  that his firm’s lending activities are backed by “more Tier 1 capital” than banks are required to hold.  As the Times article then observes, the assets that “constitute” Apollo’s capital and that of other PE firms are low-risk and thus a source of “permanent capital.”  Or so it is said.

But the assets Apollo calls capital are just assets – not capital of any tier – under banking rules.  Assets they also are when one remembers how balance-sheets work.  The billion-dollar balance-sheet question is always what stands between assets and liabilities if asset valuations drop.  For banks and, indeed, anyone else with a balance sheet, that’s capital – not more assets deepening the void between assets and liabilities.

The term “permanent capital” actually derives from insurance regulation.  It …

16 10, 2023

M101623

2023-10-16T09:21:55-04:00October 16th, 2023|6- Client Memo|

The Apples-to-Martians Comparison of PE Capital to That Demanded of Banks

What is capital?  We talk a lot about how much banks should hold and what more bank capital means to whom.  But few have said much about what regulatory capital actually is.  That’s a signal, strategic omission as private-equity firms spin a tale of capital resilience without actually having anything comparable to what banks must raise even as nonbanks take over more and more financial markets key to stability, economic equality, and macroeconomic growth.  Let nonbanks compete wherever they can, but suggestions that private equity hold more capital than banks is a whopper that cannot go unchallenged as lending migrates to these powerful firms.

M101623.pdf

26 09, 2023

DAILY092623

2023-09-26T16:36:09-04:00September 26th, 2023|2- Daily Briefing|

BIS Analysis Blasts Lax Capital Regs, But We See Study Flaws

A new BIS paper uses confidential data to defend tough regulatory capital charges because bank internal measures of expected loss (EL) are “excessively optimistic.”  However, this critique in our view is applicable only to internal models.  It might be said that standardized-approach charges are also unduly optimistic if based on EL, but the entire Basel construct is intended to cover only EL, with loan-loss reserves, capital-conservation-buffers, the leverage ratio, and stress tests supposed to do the rest.

Basel Sees Large Bank Capital Improvements, Slight Liquidity Reductions

The Basel Committee today released the results of its monitoring exercise for the second half of 2022, finding that the largest banks’ capital ratios increased above pre-pandemic levels while liquidity coverage ratios declined.  Under the fully phased-in Basel III framework, the average common equity tier 1 capital ratio increased from 12.5% to 12.7% for Group 1 banks from the first half of 2022 to the end of the year.  Group 1 banks also reported regulatory capital shortfalls of $3.42 billion under this framework as of December 31, 2022, all of which was GSIB Tier II capital.

Daily092623.pdf

13 09, 2023

DAILY091323

2023-09-13T16:46:21-04:00September 13th, 2023|2- Daily Briefing|

GOP Plans Still More Nails in CBDC Congressional Coffin

The memo for tomorrow’s HFSC CBDC hearing leaves no doubt as to continuing staunch GOP opposition, with Majority Whip Emmer (R-MN) reintroducing legislation barring the Fed from issuing a CBDC to individuals or using it to implement monetary policy.

FSI: Contingent Capital Fails as TLAC

Reinforcing the decision by U.S. agencies not to allow CoCo to serve as TLAC (see FSM Report TLAC9), a new BIS staff brief concludes that the current regulatory framework for Additional Tier 1 (AT1) bonds may not be fit for purpose, encouraging regulators to rethink CoCo as well as to consider heightening disclosure standards.

Gensler Emphasizes Prime Broker, Crypto, AI Risks

SEC Chairman Gensler today highlighted his ongoing worries about prime brokers, reiterating leverage and systemic-risk concerns.

Chopra Suggests Bank Merger Rewrite in Works

CFPB Director Chopra today reiterated the Bureau’s priorities, stating that the current bank merger review process lacks analytical rigor which will soon be addressed in ways he did not specify.

Daily091223.pdf

8 08, 2023

FedFin on: Equity and Securitization Capital Standards

2023-08-08T13:44:33-04:00August 8th, 2023|The Vault|

Based on our analysis of the inter-agency capital proposal’s framework and its credit-risk provisions, FedFin turns now to the proposed approach to equities as well as to that for securitization exposures (i.e., those that are tranched rather than simple secondary-market issuances of packages of loans or other assets backed as needed by a single credit enhancement). The proposal in some cases liberalizes the current, “general” standardized approach (SA), but more often toughens it to account for elimination of the advanced approach…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

8 08, 2023

CAPITAL232

2023-08-08T10:52:38-04:00August 8th, 2023|1- Financial Services Management|

Equity and Securitization Capital Standards

Based on our analysis of the inter-agency capital proposal’s framework and its credit-risk provisions, FedFin turns now to the proposed approach to equities as well as to that for securitization exposures (i.e., those that are tranched rather than simple secondary-market issuances of packages of loans or other assets backed as needed by a single credit enhancement).  The proposal in some cases liberalizes the current, “general” standardized approach (SA), but more often toughens it to account for elimination of the advanced approach.  This will have particular bearing on significant aspects of category III and IV bank activities (e.g., credit-card securitizations, MMF funding), but all covered banking organizations will see significant capital increases as many activities now permitted within the banking book would need to move to the trading book under the new market-risk rules.  Securitization-related capital standards are generally brought closer to those for underlying assets in simple securitizations, giving banks more balance-sheet flexibility and credit-risk mitigation opportunities if investors accept these structures.  The treatment of equity exposures is generally tightened, sometimes so much as to effectively prohibit certain activities – e.g., non-traditional equity investments in covered funds and BHC subsidiaries.  The new treatment of investment funds will also have significant implications for banks that fund themselves through prime MMFs or sponsor investment funds through equity positions.

CAPITAL232.pdf

12 08, 2022

FedFin: Testing for What, Why?

2023-01-04T12:28:53-05:00August 12th, 2022|The Vault|

FHFA, Fannie, and Freddie yesterday released the results of FHFA’s latest stress test, focusing on the severely-adverse scenario in order – or so FHFA says – to push the GSEs to the limit. This the test does insofar as the GSEs’ combined CET1 capital shortfall is as much as $159 billion. However, aspects of FHFA’s test – e.g., falling inflation over 2022 and 2023 and rising house prices – are likely to be more than a bit off….

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

12 08, 2022

GSE-081222

2023-01-04T12:28:23-05:00August 12th, 2022|4- GSE Activity Report|

Testing for What, Why?

FHFA, Fannie, and Freddie yesterday released the results of FHFA’s latest stress test, focusing on the severely-adverse scenario in order – or so FHFA says – to push the GSEs to the limit.  This the test does insofar as the GSEs’ combined CET1 capital shortfall is as much as $159 billion.  However, aspects of FHFA’s test – e.g., falling inflation over 2022 and 2023 and rising house prices – are likely to be more than a bit off.  The conservatorship of course insulates the GSEs from any of the consequences that would befall a big bank with even a fraction of these capital shortfalls, but it does cast doubt on when these conservatorships could end without a large line of Treasury credit still in place to back them up.

GSE-081222.pdf

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