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BIS3: Some reprieve, with US banks OK on capital/liquidityBIS3: US Banks OK given softer standards, longer timeline。
Proposed changes to BIS capital and liquidity standards have been a key sourceof uncertainty for Global Banks. Original proposals were vague but harsh,particularly as it related to liquidity requirements and timeline. BIS has nowpushed back implementation dates for key items and softened some effectsincluding deductions from Tier-1 Common, netting of derivatives, and liquidityrequirements. We believe, US firms appear well armored in terms ofcapital/liquidity, with JPM strongest on relevant metrics. See tables on pg 3 forimpact of key BIS3 capital/liquidity standards on US brokers/money center banks.
JPM, GS, C well positioned for early capital deployment。
Under our base case which assumes 2.5x Market Risk RWA (i.e. trading book)“inflation”, we believe the 4 big US dealers we cover appear sufficientlycapitalized to meet BIS3, with JPM, GS, and C well positioned for early capitaldeployment. Under BIS3 liquidity standards (Net Stable Funding ratio >100%), weestimate C and JPM are already at or above 100% target while GS and MS arecurrently below it - though given the NSF ratio isn’t mandated until 2018, theyhave ample time to reach target. Based on our analysis, C appears most liquid(105%), MS least (86%).
Scenario: Rising RWAs, Core Tier-1 target of 6,7,or 8%。
Impact of RWA “inflation” on BIS3 CT-1 ratio (i.e. adjusted T-1 Common) hard toestimate as capital targets not set and US banks report RWA under BIS1. In ourscenario analysis, we assume: Market Risk RWAs rise 2x-5x; counterparty creditrisk RWAs rise 37.5%; a CT-1 target ratio of 6, 7, or 8%; no increased capitaldeployment; and roll forward RWA & earnings to 2012E. Results show JPM, Cbest positioned to withstand higher multiples of Market Risk RWA. Note though, Cmay face higher RWA “inflation” than peers (see below).
Stressed VaR to drive differences in RWA “inflation”。
Comparing VaR across firms is treacherous given different methods of calculatingit. However, comparing VaR reported at “peak” stress periods to Market RiskRWA, we can estimate how much of a firm’s RWA drives capital to support“normal risk” and how much reflects extra “cushion” for “tail risk”. Firms thatcurrently fail to address “tail risk” face higher RWA “inflation”, we believe. GivenVaR inconsistencies, we run 2 scenarios where we measure “tail risk” as a % ofMarket Risk (trading risk) and as % of combined Market and Credit Risk (cpty.
credit risk). Based on our analysis, C appears weak on both metrics and couldface higher RWA “inflation”. That said, given C’s excess CT-1, per our estimates,we believe it can withstand significant RWA “inflation” and still achieve min. CT-1targets. We also see potential for capital deployment at C, as early as 2011.
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