September 26, 2012

I’m all in favour of a cap on leverage at banks … but a leverage cap of 12.5:1 seems quite extreme:

Banks should be required to reduce by half the amount they can borrow against equity to make the financial system safer, according to former Federal Deposit Insurance Corp. Chairman Sheila Bair.

Bair called for a “hard-and-fast” leverage ratio of 8 percent in “Bulls by the Horns,” her memoir of the financial crisis published this month. That’s double the 4 percent ratio U.S. banks must adhere to currently and more than twice the 3 percent called for by new global rules on bank capital.

Lenders could borrow about 13 times their equity, based on Bair’s suggestion, compared with 25 times under existing U.S. rules. Bair, 58, who stepped down from the FDIC last year, was a proponent of the Basel Committee on Banking Supervision introducing a simple leverage ratio, which ignores the riskiness of different loans in setting minimum capital requirements. While the Basel committee agreed on including such a ratio, European countries have balked at implementation.

The Basel committee narrowed the definition of what counts as capital. It also devised a method of tallying assets for calculating leverage ratio that puts aside the different accounting standards used in the U.S. and Europe. The new method would increase the balance sheets of U.S. banks because of differences in how derivatives are treated.

Using Basel’s narrower 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. (JPM) 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.

At some point, we’re going to be so safe that nothing happens. An unchanging world of tick-boxes … the regulators’ dream.

The CDHowe Institute has issued a plea for more RRBs – More RRBs, Please! Why Ottawa Should Issue More Inflation-Indexed Bonds:

This Commentary explores the potential impact of a larger RRB issue over the next five years than Ottawa currently plans. Rather than the $2.4 billion annually now planned, we suggest $7.2 billion annually. We further recommend that two-thirds of the larger RRB issue have 10-year maturities rather than the 30-year maturities exclusively issued to date. A plausible estimate of the net interest savings on federal debt comes to $200 million in 2016/17 and $500 million over the period until then. We canvass a number of ways the federal government can ensure that this higher RRB issue does not hurt the depth and liquidity of the market for its nominal debt.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 18bp, FixedResets down 5bp and DeemedRetractibles gaining 1bp. Volatility was average. Volume was low.

PerpetualDiscounts (all three of them!) now yield 4.91%, equivalent to 6.38% interest. Long corporates now yield about 4.25% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215bp, a sharp increase from the 200bp reported September 19.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.3794 % 2,463.0
FixedFloater 4.46 % 3.83 % 36,644 17.61 1 -0.0469 % 3,571.1
Floater 2.98 % 2.99 % 55,432 19.73 3 0.3794 % 2,659.4
OpRet 4.67 % 3.37 % 53,378 1.45 4 -0.2304 % 2,545.7
SplitShare 5.44 % 4.89 % 71,815 4.56 3 0.1193 % 2,818.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2304 % 2,327.8
Perpetual-Premium 5.28 % 2.44 % 94,811 1.03 28 0.1760 % 2,294.8
Perpetual-Discount 4.91 % 4.91 % 104,855 15.66 3 0.2762 % 2,570.0
FixedReset 4.96 % 3.06 % 177,765 4.25 72 -0.0541 % 2,430.5
Deemed-Retractible 4.94 % 3.65 % 121,261 1.90 46 0.0088 % 2,372.4
Performance Highlights
Issue Index Change Notes
GWO.PR.N FixedReset -2.49 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 3.81 %
IGM.PR.B Perpetual-Premium 1.00 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 26.00
Evaluated at bid price : 26.85
Bid-YTW : 3.92 %
VNR.PR.A FixedReset 1.11 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-10-15
Maturity Price : 25.00
Evaluated at bid price : 26.35
Bid-YTW : 3.49 %
TCA.PR.Y Perpetual-Premium 1.35 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-05
Maturity Price : 50.00
Evaluated at bid price : 51.95
Bid-YTW : 2.44 %
Volume Highlights
Issue Index Shares
Traded
Notes
PWF.PR.P FixedReset 91,570 Scotia crossed blocks of 20,000 and 50,000 at 25.20, and bought 10,000 from TD at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-26
Maturity Price : 23.39
Evaluated at bid price : 25.18
Bid-YTW : 3.02 %
ENB.PR.P FixedReset 56,460 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-26
Maturity Price : 23.12
Evaluated at bid price : 25.08
Bid-YTW : 3.75 %
BNS.PR.X FixedReset 55,650 TD crossed 50,000 at 26.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.82
Bid-YTW : 2.16 %
CM.PR.K FixedReset 49,205 Scotia crossed 40,000 at 26.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 26.10
Bid-YTW : 2.64 %
CM.PR.G Perpetual-Premium 44,687 TD crossed 29,800 at 25.60.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-10-26
Maturity Price : 25.50
Evaluated at bid price : 25.60
Bid-YTW : -5.40 %
RY.PR.X FixedReset 29,950 TD crossed 25,000 at 26.99.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.87
Bid-YTW : 2.54 %
There were 23 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
GWO.PR.N FixedReset Quote: 23.50 – 24.20
Spot Rate : 0.7000
Average : 0.4107

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.50
Bid-YTW : 3.81 %

GWO.PR.I Deemed-Retractible Quote: 23.95 – 24.46
Spot Rate : 0.5100
Average : 0.3335

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.95
Bid-YTW : 5.09 %

PWF.PR.L Perpetual-Premium Quote: 25.48 – 25.85
Spot Rate : 0.3700
Average : 0.2321

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-31
Maturity Price : 25.25
Evaluated at bid price : 25.48
Bid-YTW : 5.01 %

MFC.PR.I FixedReset Quote: 25.42 – 25.74
Spot Rate : 0.3200
Average : 0.1998

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.42
Bid-YTW : 4.07 %

CM.PR.L FixedReset Quote: 26.35 – 26.66
Spot Rate : 0.3100
Average : 0.1941

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.35
Bid-YTW : 2.64 %

RY.PR.C Deemed-Retractible Quote: 25.80 – 26.07
Spot Rate : 0.2700
Average : 0.1715

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-11-24
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 3.68 %

One Response to “September 26, 2012”

  1. […] now yield 4.2% (!) so the pre-tax interest equivalent spread is now about 215bp, unchanged from the September 26 […]

Leave a Reply

You must be logged in to post a comment.