PrefBlog

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.

This entry was posted on Wednesday, September 26th, 2012 at 11:06 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.