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DealBook: Rising Bank Profits Tempt a Push for Tougher Rules

April 17, 2013 by Leave a Comment

I hope the regulators move forward with tougher regulations, said Sheila Bair, an ex-chairwoman of the F.D.I.C.Alex Wong/Getty Images“I hope the regulators move forward with tougher regulations,” said Sheila Bair, an ex-chairwoman of the F.D.I.C.

Banks have been reporting steady growth in earnings since soon after the financial crisis. With the latest reports rolling in, analysts think the banks’ first-quarter profits will be their best ever.

But as welcome as such profits are to the banks, they may also become a source of discomfort. The ballooning bottom lines could embolden the lawmakers and regulators who want to introduce additional measures to overhaul the banking system.

After the financial crisis, many officials involved in the regulatory revamp feared that tougher rules, like caps on bank assets, could destabilize the financial system and harm economic growth. It is a view that prominent bankers and lobbyists have also voiced.

Despite industry opposition to new rules, the buoyant bank profits could add to the ammunition that influential figures in Washington are using to advocate for more radical ideas to overhaul the banks.

“I hope the regulators move forward with tougher regulations,” said Sheila C. Bair, a former chairwoman of the Federal Deposit Insurance Corporation, a primary bank regulator, and now a senior adviser at the Pew Charitable Trusts. “This wouldn’t endanger the economic recovery.”

Much has been done to strengthen banks since the financial crisis. The Dodd-Frank legislation, which Congress passed in 2010, and international banking standards known as the Basel III rules are forcing banks to hold safer assets, curtail trading activities and set aside more capital to absorb potential losses.

Even so, there is bipartisan support to do more. Most recently, Senator Sherrod Brown, Democrat of Ohio, and Senator David Vitter, Republican of Louisiana, said that they planned to introduce a bill that would require banks to hold considerably more capital. If passed, such a requirement is likely to prompt the largest banks to shrink in size. While a draft of the legislation does not stipulate a maximum size for banks, it requires financial firms with more than $400 billion of assets to hold additional capital. Big banks like Citigroup and Bank of America well exceed that amount, as do Wall Street firms like Morgan Stanley, but regional lenders would fall under that threshold.

The restlessness over the big banks extends beyond Congress.

Daniel K. Tarullo, the Federal Reserve governor who oversees regulation, floated an idea last year for limiting bank size. And Thomas M. Hoenig, vice chairman at the F.D.I.C., has been pushing the overhaul of large, complex banks as well as more rigorous capital standards.

The banking industry might be able to bear more regulations, given how it has fared under earlier measures. In some ways, the banks have thrived despite the added costs of all the new rules and demands since 2008.

Dick Bove, a bank analyst at Rafferty Capital Markets, estimates that F.D.I.C.-insured banks will earn $39 billion in the first quarter of this year, which would be a record quarterly showing. “No one can argue that banks were hurt from a profit standpoint by regulation,” he said.

The financial overhauls of the last four years don’t appear to have held banks back from indulging in activities that facilitate economic growth. Helped by Wall Street financial firms, American companies have raised huge amounts in capital markets since the crisis. Last year, corporations issued $940 billion of bonds, a record amount, according to Dealogic, a data provider. This has happened even as investment banks scaled back their operations to get ready for regulations they vocally oppose, like the so-called Volcker Rule.

The overhaul doesn’t appear to have hurt the housing market, either. Large lenders like Wells Fargo have profited well from the recent boom in mortgage refinancing. That activity has also helped consumers, through sharply lower borrowing rates for millions of homeowners.

Banks are also making significantly more loans to companies, which bolsters the economy and job growth in many parts of the country. There is even evidence that the overhaul may have helped the banks become better run. Citigroup, which was subject to much regulatory pressure, is more streamlined and reported strong first-quarter earnings this week.

Little of this might have been expected after hearing past warnings from bankers. In 2011, Jamie Dimon, chief executive of JPMorgan Chase, said that the proposed rules to overhaul derivatives, a commonly used financial instrument, “would damage America.” He also said that the Basel rules were “anti-American.” Comment letters filed by lobbyists with regulators used sophisticated-looking models to show how rules could hold back the economy.

“As far as the banks are concerned, there is never a good time to raise capital or increase regulation,” Ms. Bair said. “When times are bad, they say it could hurt things, and when times are good, they say they don’t need it.”

Some analysts, however, caution against reading too much into the banks’ strong profits.

Though banks have been preparing for new rules for months, many of them have not been fully executed, which means the true costs of the measures will not be known until later.

Mr. Bove says that, while bank profits have hardly suffered from new regulation, their customers have. Lenders have simply passed on many of the costs, mostly in the form of new fees, he said. “The government aimed a Stinger missile at the banking industry and missed and hit the consumer instead,” said Mr. Bove, who also notes that loans to small business are still weak.

In addition, bank profits may not be as strong as they look, say some analysts. Earnings appear less impressive when taking into account the new capital that banks have to hold. This can be seen when applying a metric called return on equity, which reflects the extra capital.

Financial companies in the Standard Poor’s 500-stock index had a 7.9 percent return on equity last year, according to data from S. P. That’s below the 10 percent return for utilities last year, also a regulated industry. And the banks’ return is down from the 16 percent return that they achieved in 2006.

That is why some analysts argue that it would be a mistake to force banks to hold even more capital than they already will under Dodd-Frank and Basel III. They argue that it would depress returns on equity and therefore prompt banks to exit certain businesses, reducing credit in the economy. In a research note last week, a Goldman Sachs bank analyst estimated a Brown-Vitter bill could remove $3.8 trillion of credit from the United States banking system.

But considering that past dire forecasts haven’t materialized, advocates for tougher rules may be tempted to press on.

Phillip L. Swagel, a professor at the University of Maryland School of Public Policy, sees risks in adopting higher capital reserves, but he says he thinks the industry’s gloominess can be overdone.

“I do understand the frustration of the bank critics when they see pieces like the one from Goldman Sachs saying that the world will end under Brown-Vitter,” said Professor Swagel, who served as assistant secretary for economic policy under Treasury Secretary Henry M. Paulson Jr.

Despite the sharp debate, he says he thinks there is growing agreement among policy makers, and even banks, that more capital might be needed. “I see consensus on the top-line issue of more capital,” he said.

Article source: http://dealbook.nytimes.com/2013/04/17/rising-bank-profits-tempt-a-push-for-tougher-rules/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Insider Trading Accusations Against Swiss Banking Head

January 5, 2012 by Leave a Comment

The report by Weltwoche, a weekly magazine seen as having ties to the rightist Swiss People’s Party, which has been a critic of Mr. Hildebrand, said that in October he made 75,000 francs, or $79,600, from dollar trades. Mr. Hildebrand, the magazine said, acquired dollars before the Swiss National Bank, the central bank, announced measures in September to check the rise of the franc and protect Swiss exporters. The magazine cited copies of statements provided by an employee of a private bank where Mr. Hildebrand had an account.

Mr. Hildebrand did not immediately respond in detail to the report, but planned to make a statement Thursday.

Late last month the council that oversees the central bank said it had examined “rumors” about transactions made by Mr. Hildebrand or members of his family and found no wrongdoing. A report prepared for the council by PricewaterhouseCoopers, released by the central bank Wednesday, said the transactions — amounting to more than $2 million — were made in connection with family financial transactions like ones involving the purchase of real estate. The Pricewaterhouse Coopers report found no violations of central bank rules.

The accusations came as a shock in Switzerland and in central banking circles worldwide. Mr. Hildebrand is a familiar and respected figure in his home country, though some of his policy moves have drawn intense criticism.

Mr. Hildebrand, who spent part of his career at a New York hedge fund, is known internationally for his work drafting regulations, known as Basel III, that would oblige banks worldwide to limit their use of leverage to strengthen risk management.

The disclosure of the transactions immediately took on political overtones because of the involvement of the Swiss People’s Party in bringing the matter to light. The party, which campaigns on a platform of limiting immigration and keeping Switzerland out of the European Union, has been among Mr. Hildebrand’s most vocal critics.

“There have been disputes about monetary policy, but so far no one has questioned his integrity,” said Daniel Kübler, a professor of political science at the University of Zurich.

Noting that Mr. Hildebrand had pushed for more financial disclosure by top officials of the central bank, Mr. Kübler said he found it difficult to believe that the accusations were true. But he added, “If it is confirmed, then he must resign.”

Accountants from PricewaterhouseCoopers who examined records of the transactions said that some were profitable for Mr. Hildebrand but others lost money. The report did not calculate the total profit or loss, but its findings raise the question of why Mr. Hildebrand, who is wealthy, would risk his reputation for relatively little return.

Mr. Hildebrand has made enemies at home and abroad by pushing to impose rules on the country’s two biggest banks, UBS and Credit Suisse, that were tougher than those in other countries. He has also annoyed his former financial industry colleagues with his criticism of banker compensation and his advocacy of regulations to limit bank risk and prevent future financial crises. The rules have been endorsed by leaders of the Group of 20 largest economies.

In Switzerland, one of Mr. Hildebrand’s most vocal antagonists has been Christoph Blocher, a businessman who is perhaps the best-known figure in the Swiss People’s Party. In the past Mr. Blocher has accused the Swiss National Bank of squandering the country’s wealth with costly currency interventions and has demanded that Mr. Hildebrand resign.

The criticism has been muted since the bank announced in September that it would set a limit on the currency of 1.20 francs to the euro. The policy has been successful in keeping the franc, favored by investors as a haven from global financial turmoil, from rising to levels that would be ruinous for Swiss export companies.

Article source: http://www.nytimes.com/2012/01/05/business/global/05iht-snb05.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Economix: The Big Banks Fight On

June 16, 2011 by Leave a Comment

Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

The bank lobbyists have a problem. Last week, they lost a major battle on Capitol Hill, when Congress was not persuaded to suspend implementation of the new cap on debit card fees. Despite the combined efforts of big and small banks, the proposal attracted only 54 votes of the 60 needed in the Senate.

On debit cards, the retail lobby proved a surprisingly effective counterweight to the financial sector. On the next big issue — capital standards — the bankers have a different problem: this highly technical issue is more within the purview of regulators than legislators and is harder to develop a crusade about, as it’s widely regarded as boring.

As the bankers busily rallied their forces to fight on debit cards and spent a great deal of time lobbying on Capitol Hill, they were doused with a bucket of cold water by Daniel K. Tarullo, a governor of the Federal Reserve.

In a speech on June 3, Mr. Tarullo implied capital requirements for systemically important financial institutions — a category specified in the sweeping overhaul of financial regulation last year — could be as high as 14 percent, or roughly double what is required for all banks under the Basel III agreement.

Whether the Federal Reserve will go that far is not certain; a capital requirement of an additional 3 percent of equity (on top of Basel’s 7 percent) may be more likely, but that is still 3 percent more than big banks were hoping for. (These percentages are relative to risk-weighted assets.)

The big banks are likely to mount four main arguments as they press their case against the additional capital requirements, Reuters has reported:

1. “Holding capital hostage” will hurt the struggling economy because it will mean fewer loans at a time when lending is already depressed.

2. Establishing “huge” capital buffers is an admission by regulators that last year’s Dodd-Frank financial overhaul does not accomplish its goal of reducing risk.

3. If banks hold onto more capital and make fewer loans, borrowers will turn to the “shadow banking sector” – the so-called special purpose vehicles, for example — which has little or no oversight.

4. Tough standards in the United States would create a competitive disadvantage vis à vis other countries.

Each of the bankers’ arguments is wrong in interesting and informative ways.

First, capital requirements do not hold anyone or anything hostage — they merely require financial institutions to fund themselves more with equity relative to debt. Capital requirements are a restriction on the liability side of the balance sheet — they have nothing to do with the asset side (in what you invest or to whom you lend).

There is a great deal of confusion about this on Capitol Hill, and whenever bankers (or anyone else) talk about holding capital hostage, they reinforce this confusion. This is not about holding anything; it is about funding relatively less with debt and more with loss-absorbing equity. More equity means the banks can absorb more losses before they turn to the taxpayer for help. This is a good thing.

The idea that higher capital requirements will increase costs for banks or cause their balance sheets to shrink or otherwise contract credit is a hoax — and one that has been thoroughly debunked by Anat Admati and her colleagues (as this now-standard reference, which everyone in the banking debate has read, shows us).

Professor Admati is taken very seriously in top policy circles. (Let me note, too, that she is a member of the Federal Deposit Insurance Corporation’s Systemic Resolution Advisory Committee, an unpaid group of 18 experts that meets for the first time next week; I am also a member.)

In a recent public letter to the board of JPMorgan Chase, whose chief executive, Jamie Dimon, is an opponent of higher capital requirements, Professor Admati points out that these requirements would — on top of all the social benefits — be in the interests of his shareholders. The bankers cannot win this argument on its intellectual merits.

The second argument, that establishing “huge” capital buffers is an admission by regulators that last year’s Dodd-Frank financial overhaul does not accomplish its goal of reducing risk, is an attempt to rewrite history.

During the Dodd-Frank debates last year, the Treasury Department and leading voices on Capitol Hill — including bank lobbyists — said it would be a bad idea for Congress to legislate capital requirements and should leave them to be set by regulators after the Basel III negotiations were complete.

Now the time has come to do so, and Mr. Tarullo is the relevant official — he is in charge of this issue within the Federal Reserve and is one of the world’s leading experts on capital requirements.

But the banks now want to say that this is not his job as authorized by Dodd-Frank. This argument will impress only lawmakers looking for any excuse to help the big banks.

The third bankers’ argument, that borrowers will turn to the “shadow banking sector,” contains an important point — but not what the bankers want you to focus on.

The “shadow banking sector” — special purpose vehicles, for example — grew rapidly in large part because it was a popular way for very big banks to evade existing capital requirements before 2008, even though those standards were very low.

They created various kinds of off-balance-sheet entities financed with little equity and a great deal of debt, and they convinced rating agencies and regulators that these were safe structures. Many such funds collapsed in the face of losses on their housing-related assets, which turned out to be very risky — and there was not enough equity to absorb losses.

It would be a disaster if this were to happen again. It is also highly unlikely that Mr. Tarullo and his colleagues will allow these shadows to develop without significant capital requirements.

Sebastian Mallaby, who has carefully studied hedge funds and related entities, asserted correctly last week in The Financial Times that it would be straightforward to extend higher capital requirements to cover shadow banking.

The fourth bankers’ argument, that higher equity requirements in the United States would create a competitive disadvantage vis à vis other countries, is like arguing in favor of the status quo in an industry that emits a great deal of pollution, a point made by Andrew Haldane of the Bank of England.

If China, India or any other country wants to produce electricity using a technology that severely damages local health, why would the United States want to do the same? And if the financial pollution floats from others to the United States through cross-border connections, we should take steps to limit those connections.

The Basel III issues may be boring, but they are important. The incorrect, misleading and generally false arguments of bank lobbyists should be rejected by regulators and legislators alike.

Article source: http://feeds.nytimes.com/click.phdo?i=69b46752fc6c7c7ba9a3019f9f3f3f69

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