Under the previous draft, capital requirements could have gone up 74%, so 40% is a real boon. It’s a particular benefit for banks that are big in credit trading and securitization but panic in the equity markets seems to have overwhelmed the news.
Deutsche Bank, which might have needed to add as much as €45bn of risk-weighted assets in the new rules, should have benefited most. The changes should save the bank about €2.5bn in tier one capital. That’s fourth rights issue territory, or two years of dividends.
The Committee also said last week that it would calibrate its new capital rules in 2016 to avoid increasing the amount of capital banks need.
Bankers will surely welcome the commitment, as a sign that the regulatory ratchet is slowing, but it’s an odd way to regulate.
Shouldn’t regulators decide what they need to make the markets safe, then calibrate the capital?
The reversal of the order — decide how much capital banks will have, then declare that figure, whatever it happens to be, to be safe — is a way to gain political cover for a big retreat from the most punishing post-crisis plans.
Although the trading book charges are supposed to be final, the industry has clearly sniffed an advantage, and an opportunity to unwind more of the new rules. Trade groups ISDA, GFMA, and the International Institute of Finance have made a joint call for another impact study.
Basel IV
But the market risk changes were a large, and scary part of the “Basel IV” package, and if the Committee ends up neutering its own capital floor proposals later this year, the banks will be rightly pleased with the results. Morgan Stanley’s bank equities team already see regulatory clarity and reversal as a reason to be cheerful in 2016.
But while the Basel Committee tweaks the rules for 2019, the market is already having to deal with the problems of fixed income trading today. Morgan Stanley’s revamp of the unit now comes with new management (as well as fewer credit traders), as Colm Kelleher, fresh from promotion to undisputed number two at the firm, reworks his top team.
Credit Suisse’s response to capital pressures in fixed income trading also takes effect this week, as the cuts announced at the bank’s strategy day last year flow through to the front line. The ugly figures — 1,800 in London — had already been circulated, while chief executive Tidjane Thiam left markets in no doubt about which business he liked and which were for the chop. But being the notice will be cold comfort for the individuals involved.
At Standard Chartered, the bloodletting has been going on for a few months, in a more piecemeal fashion than at Credit Suisse. In capital markets at least, things might be settling down, with Henrik Raber, now the head of the division, setting out the new structure of the business.
Capital markets at Standard Chartered is now effectively DCM only, with loans shuffled off to corporate finance. But that does mean bigger job titles, and new geographies for bankers who have thrived in the new Stan Chart. Spencer Maclean, for example, is now head of capital markets for Americas and Europe, having been head of syndicate, west, less than a year before.
Other big changes last week include the moves from two big beasts of syndicated loans into coverage jobs. As GlobalCapital was taught many years ago, when you have two instances of something, that’s a trend.
Roland Boehm, who ran Commerzbank’s loans teams, as well as chairing the Loan Market Association, will become head of Mittelstandsbank International (an arm of the corporate bank). He’ll be on the divisional board of the corporate bank, a promotion from his role within CIB. The division’s name though, is somewhat misleading as it also holds Commerzbank’s major relationships outside Germany and the US. Boehm will be covering these clients for all Commerzbank products, not just lending.
Lloyds Bank’s Simon Allocca, head of loan markets, is also switching to a cross-product role, becoming global head of industrials and manufacturing.
Bomnus buyout bummer
Internal moves are one thing, but the traditional flurry of post-bonus hiring could be dampened by the Bank of England. In a drive to punish bad behaviour at banks, UK authorities want to change the buyout rules.
If an old firm finds wrongdoing, it can pass on the info to the new firm which bought out the banker in question. The new firm can then hold back its own bonus payments.
Sound in theory, but fraught with legal difficulty. Firms are strongly incentivised not to tell their peers about investigations, while employees are increasingly willing to resort to the courts to get what they think is theirs, betting that banks will settle rather than be dragged through the mud.
Sometimes, this process takes some chutzpah. The UK High Court advised that a Deutsche trader let go in connection with the Libor settlement didn’t stand much chance of claiming his bonus, but the fact that the case got that far was impressive enough.
Last week also saw the start of reporting season, with JP Morgan kicking it off. The fourth quarter is typically the weakest of the year, and isn’t going to change the miserable picture of 2015 very much. But with lower legal costs, at last, JPM managed to book a tidy 80% increase in profit.
That’s the exact opposite of the process at Goldman, which has so far avoided the worst of the conduct and litigation charges. Sure, it paid $550m in 2010 over the Abacus CDO, in an entertainingly lurid court case, but these days, a sub-billion settlement looks almost quaint.
Last week though, Goldman settled civil claims relating to pre-crisis MBS, meaning the bank will pay $5.1bn, including $1.5bn through the fourth quarter P&L (announced on Tuesday).