Is Basel III already prompting bank sales?
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.