Is Basel III already prompting bank sales?

By Felix Salmon
June 10, 2010
WSJ cites an interesting reason why BofA sold its stake in Santander Mexico:

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The WSJ cites an interesting reason why BofA sold its stake in Santander Mexico:

People close to the bank say the decision to sell its stake in the business was driven in part by concerns over a proposed rule under the so-called Basel regulatory accord, which would increase the capital requirements associated with holding minority stakes in other institutions. The banking industry is fighting against the proposal, arguing it would make such arrangements prohibitively expensive…

The Santander deal is “a cleanup of minority exposures ahead of the Basel III implementation,” said Joseph Dickerson, an analyst at London brokerage firm Execution Noble Ltd…

The regulatory concerns also played a role in Bank of America’s recent decision to unload its holdings in Brazil’s largest private bank, Itau Unibanco Holding SA, for about $4 billion.

The proposed Basel rule could affect the holdings of many other banks, such as London-based Barclays PLC, whose stakes include 20% in BlackRock Global Investors.

I thought briefly about this possibility yesterday, when I wrote about the deal, but dismissed it. This particular provision of Basel III is still being opposed by a wide group of industry players, and might never make it in to the final rule. And even if it does, it’s going to be telegraphed long in advance: Basel III will be phased in slowly, over many years, giving BofA a lot of time to sell off minority stakes before it’s ever enforced. So the timing seems weird: why sell $6.5 billion of strategic Latin American banking assets just on the off-chance that they might, in future, be treated harshly by the new international capital-adequacy regime?

What’s more, the stated reason for the sale of the Brazil stake made perfect sense on its own:

Bank of America spokesman Jerry Dubrowski said in an email, “In December 2009, in connection with repayment of TARP [the Treasury's Troubled Asset Relief Program], Bank of America committed to increase its Tier 1 common equity by $3 billion through the sale of assets or raising additional common equity.”

BofA’s stake in Itaú Unibanco is a legacy of its expansion-via acquisition strategy: it bought FleetBoston, which in turn was a merger of Fleet with Bank Boston, and Bank Boston was historically an important player in Latin American banking. But at the BofA level, BankBoston’s Latin expertise was never particularly valued, especially after the Argentine crisis essentially destroyed the Argentina subsidiary, which was always BankBoston’s crown jewel. So I don’t buy the story that the Brazil deal came out of Basel III concerns.

Also, why would Basel III rules be problematic with respect to Barclays’ stake in BlackRock? As I understand it, the reasoning behind the new regulations is that if the partially-owned bank gets into trouble, then there’s a good chance that the bank with the minority stake will be pressured to help make up the losses. But that’s not really a problem with BlackRock, which operates with essentially zero leverage. Owning banks is dangerous, because they can lose much more than their entire equity. That’s much less of a problem with owning an institutional investor like BlackRock.

So I wouldn’t read too much into the WSJ story today. Yes, Basel III might have an effect on minority bank stakes in the future. But I don’t think it’s driving large strategic decisions right now.

4 comments

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If Basel II was the complete failure I understand it was, and Basel III (as seems likely) is too lenient, too late, going through the motions in other words, then it would behoove governments to enforce stress-testing of “assets” as they’re being sold off by institutions such as BofA rather than surmise seller motives.

Because later, when it’s too late, we’re likely to be told that “all that could be done” was being done, and the next murky layer of duplicity by the same old offenders who brought us the last crisis “wasn’t illegal at the time”. And that’s the loophole every TBTF banker is most likely to be looking for in an industry as utterly unproductive as today’s investment banking, really, isn’t it?

Posted by HBC | Report as abusive

“We need to destroy this greed”

We can’t. We can only control it. Greed is an integral part of human nature and is essential for survival.

Posted by doctorjay317 | Report as abusive

Slight split of the hair here: owning banks is dangerous mainly if you’re not related to the seller when you find yourself on the receiving end of a spin-off. Caveat emptor!

Posted by HBC | Report as abusive

Leverage and fiat money (as unleashed by Basel II) is the destroyer of our world.

http://gregpytel.blogspot.com/2009/04/la rgest-heist-in-history.html

Read it then send GeeDubYah and Tony B Liar and thank-you card.

Posted by Tiu | Report as abusive