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CommentP&M Notebook

P&M Notebook: tide of crazy hits bank regulation

What’s happening in Washington DC right now seems bad and dangerous for a bunch of reasons, mostly reasons that GlobalCapital doesn’t claim any expertise in. We are but humble financial scribes, but now the ascendant Republicans are on our turf too.

The cause is a letter from Representative McHenry, vice chairman of the House Financial Services Committee, to Janet Yellen, chair of the Fed. It’s not new that hard right Republicans hate the Fed in general, and Yellen in particular, but McHenry goes further, asking for a hard stop on all international financial regulation cooperation until President Trump has had a chance to see whether international financial standards are “burdening American business”.

It also criticises “the secretive structures of these international forums” (actually the least crazy sentence in the letter) and accuses the Fed of “negotiating international regulatory standards for financial institutions among global bureaucrats in foreign lands without transparency, accountability or the authority to do so”. Worth a read.

McHenry might not speak for the president on this (I don’t recall any stump speeches about the injustices of potential risk weight floors) but he is vice-chair of the House Committee on Financial Services, so it’s worth taking him seriously. Not taking Trump and the hard right seriously in the election and pre-inauguration, after all, doesn’t seem to have been paned out too well so far.

Perhaps showing him a league table or two could help. The US major banks are in rude health, returning capital to shareholders, while the Europeans are, for the most part, still limping along, constrained by solvency worries or burrowing deeper into niche sections of the market.

It’s no surprise that many, from the Bundesbank down, see Basel III and the potential Basel IV as a US stitch-up, a set of capital rules that won’t even be binding on the US firms (the Fed’s CCAR stress tests are far more onerous than Basel’s global minimum) but which will cripple European universal and mortgage banks. McHenry clearly hasn’t spent much time chatting to European bankers about which way the playing field might be tilted.

But no Trump supporter would let the facts get in the way of a good conspiracy. The details of who is advantaged, which regulations were passed and what their effects might be are not the point. The point is that Trump’s America defaults to “out” when it comes to regulatory co-operation, and without the biggest capital market in the world on board, is there any real point in grinding on with Basel or the other workstreams like the Financial Stability Board?

There’s plenty wrong with the Basel accords, as documented at length in GlobalCapital and elsewhere. But the answer is surely to fix those, not to drop out. American exceptionalism has already given foreign banks in the US the joy of intermediate holding companies and trapped capital, and even before Trump, the EU had threatened to match these with its own IHUs (um, intermediate holding units). Then again, if the Trump administration is going to gridlock world trade, maybe gridlocking international finance doesn’t matter?

On that depressing note, let’s turn to the light reading which is Deutsche Bank’s fourth quarter numbers. Good news first. Bank has rather more capital than expected; loss is smaller than last year; non-core unit is closed down. Some of the litigation problems are in the past, starting their 10 year journey through Deutsche’s operational risk buffers, rather than in the future as a bogeyman to scare Deutsche’s shareholders and counterparties.

Rather heroically, John Cryan, the chief executive, put it this way: “the year 2016 was not a bad one for Deutsche Bank. For my Management Board colleagues and me, it was actually very encouraging for two reasons. First, the bank emphatically demonstrated its resilience. After the turbulent weeks in September and October, we managed to change sentiment in some areas in our favour.”

It's true that 2015 was probably worse (bigger loss, loss of management, etc) but a €1.4bn loss is still not to be sneezed at, and, of course, has forced Cryan to gamble on staff loyalty with a big cut to everyone’s bonus.

The deep worry is that all this trouble is hurting Deutsche’s core franchises, not just its reputation. It lost “high teens” proportions of prime brokerage customers, during the worries about the bank’s solvency in September, and the bank itself said that perhaps €600m of the €1.6bn drop in global markets revenues could be put down to Deutsche-specific issues rather than the broader market or closure of specific businesses.

As Cryan himself said, much of rates has got low margin and vanilla, there’s little elasticity of demand in FX, so the question for the bank is — can it extract enough juice from credit, securitization and so on to make up for it?

Analysts seem worried, because it’s a capital consumptive business. It’s hard for Deutsche to still be pushing its markets division into a more capital efficient structure, and also competing effectively at the highest level for lucrative credit solutions work that will pay the bills.

Overhauling the bank’s IT, risk management, booking systems and so forth surely will make it more efficient in the medium term, but decent tech systems are now just the entry fee to be able to compete in global markets — they aren’t going to be differentiating when Deutsche butts heads with JP Morgan and Citi for a slice of the fixed income pie.

While Q4 was disappointing, CFO Marcus Schenck hinted at some fireworks in Q1 2017, pointing to fixed income revenues up 40% in January, strong pipelines in ECM and M&A, and a solid beginning in high yield and leveraged finance.

Good news no doubt, but let’s remember, Q1 2016 saw several weeks of Deutsche-specific panic over AT1 coupons, and primary markets were almost shut at the traditionally busiest time of the year. 40% up sounds like a lot, but actually, that’s just a normal January.

Leaving Deutsche last year, along with a fair few nervous markets clients, was Michael Haize, head of capital markets France and one of the most senior bankers in the “financial solutions group”, the rebadged “capital markets and treasury solutions” business.

Haize was one of five MDs placed at risk at Deutsche in March, but has landed on his feet, joining Natixis last week as global head of DCM.

Natixis hasn’t exactly had someone filling that role since Alain Gallois, who rose up the bank taking on fixed income sales and trading and securitization alongside heading primary markets, before becoming CEO of Asia last year. Gallois had DCM product heads, such as Phillippe Hombert, who ran FIG and SSA DCM, reporting to him, while some of these bankers also had a line into the coverage teams.

The French bank has other changes afoot in origination, with EM DCM head Nabil Menai taking on SSAs as well, gaining the title head of public sector, and Marc Guegen moving seats from origination to syndicate, to be replaced by Xavier Georges, an FX salesman.

The flurry of activity, and the hire of someone like Haize, suggests renewed ambition at Natixis, which has historically stuck to making a success of various niches within broader fixed income. It has pushed (successfully) into RMBS and portfolio financing, winning a role on Project Neptune, and has picked up a few CLO mandates as well. The covered bond business is market-leading, while SSAs and corporates are decent, but distinctly Francophone in inclination, as befits the only institution where the global head of DCM sits in Paris.

The distinctive thing about Deutsche’s financial solutions group, and about Haize’s professional background, is the tight integration between private side derivatives and bond underwriting, a structure which other firms are increasingly adopting. Natixis undoubtedly has the capability for both — and seemingly some hiring budget. Bon chance!

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