Month: September 2008

Regulation

Swiss Bank Regulator to Impose Assets-to-Capital Multiple Cap

Bloomberg has reported:

Switzerland’s Federal Banking Commission will go ahead with a plan to cap the amount of assets that UBS AG and Credit Suisse Group AG can accumulate in relation to their capital, Chairman Eugen Haltiner said.

“We are going ahead with the leverage ratio,” Haltiner said in an interview at a conference in Zurich today. The commission has received the banks’ replies to its proposal and is now discussing details, such as an exact definition of the ratio, he added. “We plan to introduce the new rules by the end of the year at the latest.”

Haltiner declined to say how high the new capital requirement may be. The U.K. Financial Services Authority may also be considering tighter capital requirements for banks, he said.

“We had a good dialogue with the FSA and their first reaction was that capital wasn’t the first priority because the problems of U.K. banks were on the liquidity side,” he said. “In the meantime, the FSA is also reconsidering capital requirements.”

Risk-weighted capital rules “made a mess in the end” because they didn’t require capital to be held against assets such as subprime mortgages, relying purely on bonds’ ratings, Haltiner said. UBS, which took more than $43 billion of subprime- related writedowns, had to raise almost $28 billion of capital from shareholders and investors in Singapore and the Middle East this year.

This is important. As far as I am aware, only Canada and the US currently impose an Assets-to-Capital Multiple Cap (in the US, it’s called the leverage ratio), but it now appears as if this belt-and-suspenders approach to bank regulation is catching on … at least a little bit.

The post Bank Regulation: The Assets to Capital Multiple includes a chart from the IMF showing just how extreme the leverage of UBS and Credit Suisse became.

This is a good policy move. At present there is no official information on the Swiss regulator’s website.

New Issues

New Issue: TD Fixed-Reset 5.00%+196bp

TD Bank has announced:

it has entered into an agreement with a group of underwriters led by TD Securities Inc. for an issue of 8 million non-cumulative 5-Year Rate Reset Class A Preferred Shares, Series AA (the “Series AA Shares”), carrying a face value of $25.00 per share, to raise gross proceeds of $ 200 million.

TDBFG intends to file in Canada a prospectus supplement to its January 11, 2007 base shelf prospectus in respect of this issue.

TDBFG has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series AA Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing. The maximum gross proceeds raised under the offering will be $250 million should this option be exercised in full.

The Series AA Shares will yield 5.00% annually, payable quarterly, as and when declared by the Board of Directors of TDBFG, for the initial period ending January 31, 2014. Thereafter, the dividend rate will reset every five years at a level of 196 basis points over the then five-year Government of Canada bond yield.

Holders of the Series AA Shares will have the right to convert their shares into non-cumulative Floating Rate Class A Preferred Shares, Series AB (the “Series AB Shares”), subject to certain conditions, on January 31, 2014, and on January 31st every five years thereafter. Holders of the Series AA Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of TDBFG, equal to the three-month Government of Canada Treasury Bill yield plus 196 basis points.

The issue is anticipated to qualify as Tier 1 capital for TDBFG and the expected closing date is September 12, 2008.

Issue: Toronto-Dominion Bank (The) Non-Cumulative 5-Year Rate Reset Class A Preferred Shares, Series AA

Size: 8-million shares (=$200-million), greenshoe for another 2-million shares (=$50-million prior to closing.

Ratings: DBRS, Pfd-1; S&P, P-1(Low); Moody’s, Aa2

Dividend: 5.00% p.a., paid quarterly, reset every exchange date to 5-Year Canadas +196bp.

Exchange Dates: January 31, 2014 and every five years thereafter.

Exchange: Exchangeable to and from Series AB, which pays 90-day T-Bills + 196bp, reset quarterly.

Redemption: Series AA (the fixed) are redeemable (at issuer’s option, remember!) every exchange date at $25.00. Series AB (the floater) are redeemable every exchange date at $25.00 and at $25.50 at all other times.

So now there are ten … and I will have to redeem my intention to add these Fixed-Reset thingies to the HIMIPref™ universe … this would have to happen at month-end! I’ll aim for next Monday, the 8th.

Interesting External Papers

BIS releases Quarterly Review

The Bank for International Settlements has released its September 2008 Quarterly Review, filled, as usual, with many fascinating graphs, analysis and informational tidbits.

Unfortunately, this was released at a time when I am buried up to my neck with month-end duties, so I cannot review the articles thoroughly at this time. I have, however, scanned Peter Hördahl’s The inflation risk premium in the term structure of interest rates, as well as The ABX: how do the markets price subprime mortgage risk? by Ingo Fender and Martin Scheicher. Good stuff – I might have time to review them thoroughly next week – I might not – read it yourselves!

Other features, of less personal interest to me are

as well as a review of international banking and financial market developments. In general terms, I heartily recommend reading these reports by international bodies because, unlike absolutely everybody else who will attempt to explain the financial world, these people are not trying to sell you anything – not even a copy of the daily newspaper. What bias they do have is limited to the occasional “regulation = good” reference.