Capital raise

By Ben Walsh
April 9, 2014

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US banks need $95 billion more capital by 2018. A new federal rule will raise the leverage ratio – a bank’s capital versus its total assets – to a minimum of 5%, while all FDIC-insured banks will see their ratio rise to 6%.

When the rule takes effect, the US will have a higher capital requirement than theinternational Basel III agreement’s 3%. Dealbook’s Peter Eavis says the leverage ratio is a “more straightforward tool that will be harder to evade and easier to enforce than many of the new regulations covering the sprawling, complex businesses of banking”. The FT’s Gina Chon and Tom Braithwaite point out that the rule “does not allow banks to use their own models” (cough, risk-weighted rules, cough).

Matt Levine digs into the method for calculating leverage ratio and finds it’s actually more than just capital divided by total assets. But he thinks that’s a good thing, because bankers should be continuously confronted and terrified by the inchoate, contingent businesses they are trying to manage.

Tim Pawlenty, head of bank trade group the Financial Services Roundtable, isn’t happyabout new divergence between US and international rules: “This rule puts American financial institutions at a clear disadvantage against overseas competitors”.

Jim Pethokoukis thinks banks and their lobbyists should stop complaining. The rule change, he says, isn’t that drastic – “megabanks could borrow only 95% of money they lend versus 97% under Basel” – and could lead to a virtuous cycle where better-capitalized banks are less risky, less risk leads to lower return expectations from shareholders, and lower return expectations from shareholders makes bank take fewer risks.

Finding more over the next four years probably won’t be too hard, says Matthew Klein. He points out that the banks in question had about $80 billion in profits in 2013. Retaining one out of every four dollars earned between now and 2018 would make up the capital gap without any new equity raises.

Bloomberg View’s editors – approvingly linking to Anat Admati and Martin Hellwig’s call for equity in the range of 20% to 30% of assets – think more equity is good, but even more would have been better: “Erring on the high side would be prudent. The point isn’t that banks should avoid taking risks; taking risks is their business”. When all loans are risky loans, and banks seem to have a problem knowing exactly how risky, having more capital is the most effective way to avoid a blowup. – Ben Walsh

On to today’s links:

The Fed
FOMC meeting minutes from March 18-19th - The Federal Reserve

Alpha
The MLM lobbying fight isn’t one-sided: Herbalife is millions of dollars and years ahead of Ackman - The Verge
Analyst sets new, low bar for bullish anecdotes - BI

Politicking
The political preferences of the rich are 15x more important than average people - The Monkey Cage

Niche Markets
A 50-year history of Slurpee marketing prowess - Priceonomics

Mas Kapital
“The enormous trade deficit makes the U.S. a massive net importer of capital. And the world loves this” - Frances Coppola

Surprisingly Difficult Questions
What is fair? - Josh Hendrickson

Please Update Your Records
London is “a clean, dull city populated by clean, dull rich people and clean, dull old people” - Alex Proud

Housing
“You don’t get 30% of tenants to move out without harassing them and committing some type of fraud” - Mother Jones

Tech
The Secret app as bubble-burster for Silicon Valley positivity - Kevin Roose

Leaders
“Bush painted his portraits from the top search result on Google Images” - Greg Allen

Servicey
This is what an infographic should look like - WaPo

Study Says
Telling workers how much their colleagues make increases productivity by 10% - The Atlantic

Oxpeckers
The Labor Department just got serious about unpaid (media) internships - ProPublica

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