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Today's Top News1. Should U.S. banks adhere to even higher capital ratios?
Sheila Bair, the erstwhile former head of the FDIC, thinks that large systemically important banks should be required to hold more capital as a buffer against balance sheet stress--a lot more. In her recent book, she called for a "hard-and-fast" leverage ratio of 8 percent. That compares with the 4 percent ratio that U.S. banks must abide by now and the 3 percent called for by global capital rules, notes Bloomberg. "Lenders could borrow about 13 times their equity, based on Bair's suggestion, compared with 25 times under existing U.S. rules," she writes. Bair also thinks the leverage cap "should apply to any financial institution with assets exceeding $50 billion, including hedge funds, insurance companies and brokerages." Such standards would represent a significant hit to banks. Using Basel's capital definition, "the two largest U.S. banks would have to raise about $100 billion of capital to comply with Bair's leverage recommendation. JPMorgan Chase & Co. would have a leverage ratio of 5.8 percent under the new capital definition, and No. 2 Bank of America Corp.'s would be 5.9 percent. Neither bank has yet reported what their ratios would be under the new Basel method of calculating assets." In the end, it's doubtful Bair's proposed caps will carry the day. Some think that enhanced capital requirements would backfire, as it just might drive business to the biggest banks. It would also certainly prod banks to find ways around the intent of the new ratios, perhaps by somehow housing business in unregulated entities. For more: Read more about: capital ratios, Basel III
2. Whitney: Bank layoffs to be severe
Banks have no choice but to make clear to the market that they are super-serious about expenses, which means making clear that they will not be shy about wielding the ax on jobs. Bank of America made headlines with its Project New BAC second phase goals, and it now seems bent on making sure it hits those headcount goals on schedule or even ahead of schedule, which means the actual layoffs have been accelerated. Announced layoffs and actual layoffs can sometimes end up out of synch. Some think the true picture may not be as bad as the banks would like us to believe. Meredith Whitney is not in that camp. The celebrity analyst thinks that banks collectively have been behind schedule a bit, and the consequences of catch-up will be painful. "The banks have been overstaffed for a really long time. If you think about all of the other industries that have gotten more competitive, more profitable, the banking sector and the insurance sector have been laggards behind it, and they employ a lot of people," Whitney told CNBC. She added that, "The industry is as bad as I've seen it. So it's certainly not a great time to be on Wall Street." Whitney's got a point -- the industry has lost half a million jobs since 2008. For more: Read more about: Layoffs, Banking Jobs 3. Goldman Sachs naming fewer partners
The next round of partner picks at Goldman Sachs will likely produce a smaller class, but that doesn't mean that internal partners are becoming an even more exclusive club. The Financial Times notes that the bank "has historically kept the ratio of partners to its full-time staff at between 1.5 and 2 percent, one senior banker said. The appointment of a smaller class of new partners is expected to tip the ratio from an estimated 1.8 per cent to 1.7 per cent." Given staff reductions, the number of executive who are tapped to become partners will likely "be the lowest since 2008, when upheaval from the financial crisis caused the bank to appoint just 94 new partners. The bank named 115 new partners in 2006 and 99 in 2004. It anointed just 78 back in 2002, after the bursting of the dotcom bubble." In 2010, the last time new partners were chosen, the bank named 110 new partners. The 2012 crop will likely be about 10 percent smaller. In any case, the vetting process is underway now, as the nomination process wrapped up in the summer. The vetting will no doubt be rigorous, along the 360 degree evaluations that seem so in vogue. "The vetting process is known within the bank as 'cross-ruffing,' in reference to a manoeuvre from the card game bridge and typically sees a team of partners deployed to every division to talk to employees who know the candidates." The good news for new partners is that they will ascend to that rank at a good time. The past few years have been hard on partners, some of whom stayed on longer that they would've liked to. Profits were down, as was morale. The PR around the bank was downright nasty. The next few years look much brighter--a good time to be a partner. Most can look forward to around seven great years before they get culled or move on. For more:
Read more about: Goldman Sachs, partners 4. The fight against Basel III steps up
Basel III was a landmark event in the post-financial crisis regulatory response. As things now stand, the new capital standards will be phased in beginning at the end of 2012, which is just around the corner. It has been a long, hard multilateral effort that some see a grand example of international regulatory coordination. The Financial Times notes, however, that the banking industry does not yet see the new requirements as fait accompli. "Some bankers and industry groups are still fighting hard to water down particular portions of the package that they say will hit economic growth.Their efforts have become more sophisticated since 2010, when regulators blithely dismissed bold claims from the big global banks that the reforms would lead to 10m fewer jobs as gross exaggeration. Now industry groups are commissioning – or in some cases carrying out – targeted research projects to show how particular subsections of the new rules could have pernicious effects." The FT also cites one industry-funded study that suggests that less strict capital definitions, which would count securitized holdings to count as capital, would be wise. Another study, by RBS, simulated counterparty difficulties in certain derivatives and concluded that the Basel package "would force banks to hold 3.4 times more capital than necessary." RBS says European banks could use the capital needed to cover this so-called CVA charge to support additional lending. Others argue that Basel II is making the bank recovery that much harder in Europe, and still others say the rules and definitions have become too ornate. The current head of the FDIC, for example, has proposed a radical simplification. "Some concessions to the industry are likely when Basel meets again at the end of the year and when the EU and individual countries enforce the global rules at home." In the end, however, the industry will have to simply live with stepped up capital ratios, and other rules. They are resigned to that much anyway. For more: Read more about: capital ratios, Lobbyists 5. Consumer banking revenue conundrum remains unsolved
It's hardly a surprise that ATM fees continue to rise. Bankrate.com announced that ATM surcharges rose 4 percen, to a record high $2.50, the eighth consecutive annual increase. The fee for using an ATM at another bank rose whopping 11 percent to $1.57. So for many, using an ATM at a bank that isn't their own costs $4.07, an increase of 7 percent and a new record high, as noted by CNNMoney. Consumer banks continue to struggle with fee revenue, in the wake of card reform, notably the Durbin Amendment, and other measures such as Reg E changes. Reflecting the new reality, the percentage of checking accounts that are free has fallen to 39 percent from 45 percent last year and 76 percent in 2009. I've been asking a simple but vexing question about revenue: What's next? In this environment, there are no easy answers, as any new fees run the risk of extreme negative feedback by the public. Some banks are moving into new lines of business, payday checking services and the like. But for the most part, banks are figuring out how to raise existing fees rather than develop revolutionary new services. A great example right now is bank overdraft fees, which, despite earlier reform, are going back up. While banks continue to search for a magic revenue bullet, they have other recourse as well, which they have taken full advantage of. Profit levels are back to 2007 proportions because of rampant cost cutting and headcount reductions. At some point, however, they will need to show revenue growth again. For more: Related articles:
Read more about: banks, Consumer Banking Also Noted
SPOTLIGHT ON... Banks weather cyber attacks Bank of America, JPMorgan Chase, Citigroup, U.S. Bancorp, PNC and just possibly Wells Fargo have seen their web sites slowed by the denial of service attack that many think originated in Iran for essentially political reasons. So far, no sustained damage has been inflicted on a bank. Some think that the DOS attack is a mere diversion for a real attack aimed at monetary gain, but there's no evidence to suggest that such a scenario is playing out. Article
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Friday, September 28, 2012
| 09.28.12 | Whitney: Bank layoffs to be severe
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