As we noted yesterday, markets were starting the week in “risk on” mode following the release of the new Basel bank capital rules that were widely seen as benign. As such we’re seeing a really big rally in European bank stocks (and a big rally in the euro), and we’ll probably see a similar move in US shares.
Also, as MarkIt notes, bank CDS are tightening.
Mike O’Rourke of BTIG explains the good news:
Today the Basel Committee released the new capital requirements and the explanation of how they will be phased-in over the next 8 years. The most stringent ratio will be the Common Equity Ratio, which will phase-in from 2013-2019, increasing to a 7% minimum requirement consisting of a 4.5% requirement and 2.5% buffer. To put that in perspective, remember in the more adverse scenario of the U.S. stress test U.S. regulators wanted banks to meet a 4% Tier 1 Common requirement. The good thing is the major U.S. banks all currently have a Tier 1 Common ratio of 7% or more. While certain parts of the capital base will go under reclassification, it is good to know that U.S. institutions are 95% of the way to where they need to be in January 2019.
As it stands now, it appears the largest headwind to come out of these new regulations will be delays in the reinstatement of dividends by some institutions. Large institutions like to keep capital in excess of the regulatory minimums, so it will be interesting to see if this results in constraints on lending. Right now, due to the lack of demand for credit, it does not seem to be a problem. Last month, the Basel Committee published “An assessment of the long-term economic impact of stronger capital and liquidity requirements,” which weighed the expected benefits of new standards across a range of options. A footnote in that document implies that we are returning to where we spent much of the past 3 decades. “The average ratio of total capital and reserves to total assets for the 14 largest OECD countries from 1980 to 2007 is 5.3%. Using an average of the conversion tables presented in Annex 5, a TCE/RWA ratio of 7% is equivalent to a 5% ratio of total shareholder equity over total assets.”
Here are some major banks.
Credit Agricole of France: