The Banking and Strategy Initiative

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Fed chooses New Capital rules for its Large Banks | Advantage Banks

Probably assessing their better liquidity position and on lobby pressures, the Fed has agreed to stagger the capital rules to be applicable for $50 bln assets plus Systematically important Financial Institutions. These capital rules include portfolio restrictions against a single exposure (counterparty) and probably investment a s well and can be applied to select non banks, tailored to such at will depending ont he subject balance sheet.

The Fed has proposed a 5% Tier I common standard in Phase I and continued the Dodd Frank requirement for annual stress tests for Capital for these SIFI banks. The liquidity rules will come in later and in 3 years, the SIFI banks would each be asked to ramp up to Basel III standards which the industry was hoping to avoid.

Banks like JP Morgan in the USA also ascrivbe a premium to capital that they churn in the short term inter bank market. In the new Basel III regime however this short term capital loading would engender a higher surcharge of 2.5% for JP Morgan. For banks such as Goldman Sachs, the

English: CEO of JP Morgan

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surcharge is just 1.5%. The range for the Basel II short term capital surcharge is between 1-2.5% , JP Morgan the only US bank paying 2.5% surcharge.

The Basel 3 cap other wise will be the Tier I common of 7% As the additional capital will be 1% for JP Morgan over others as a “complex institution” with short term capital dependencies its $1 Tln balance sheet would need $13-15 bln in additional capital for example based on risk weights, a good reason for Jamie Dimon to take umbrage with regulation. However the other requirements of 7% Tier I common are not a real gap with US SIFI institutions.

US subsidiaries of Foreign banks would have separate regulations which are also expected in the next few days Banks had also been expecting the fed to go for its own regulations ignoring Basel 3 but the fed did not give in to that.

JP Morgan has also been showing up as the debt underwirtier/syndicator/banker to Lehman and MF Global and its demands for complete collateral may have triggered immediate liquidationand malpractices related at these banks while debt teams in general can be seen as myopic in quest for security killing growth. In that regard JP Morgan may end up paying more than the 2.5% surcharge for using interbank money to loan to its clients. It has already raised 30 yr debt twice in this year, yesterdays $1.5 bln even at a record low rate of 5.4%.

The surcharge levels for these banks may be recalibrated based on new composition of capital and liabilities in relation to RWA on understanding such a requirement at the Fed.

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This entry was posted on December 20, 2011 by in Banking, US and tagged , , , , , , , .


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