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1、Europe Equity Research 17 February 2010 Global Banks Too Big to Fail? A Review of Regulatory Proposals J.P. Morgan Global Research Nick ODonohoe Global Head of Research J.P. Morgan Securities Ltd. Banks Carla Antunes da SilvaAC (44-20) 7325-8215 carla.antunes- Amit Goel, CFA (44-20) 7325-6924 J.P.
2、 Morgan Securities Ltd. See page 69 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interes
3、t that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Over the last 12 months there has been an avalanche of proposals from a wide range of financial regulators, all of which are directed at putting in p
4、lace a financial architecture that will prevent a reoccurrence of the circumstances that led to the near collapse of the global financial system and the subsequent severe economic recession. This report reviews those proposals. We recognize however that the process of regulation is by no means over.
5、 Regulators and banks will continue their dialogue. Many of the suggested measures here may end up looking substantially different in their final application. 1. Separation of activities. Many politicians, media observers and regulators have advocated addressing the issue of banks that are “too big
6、to fail” by breaking up or restricting the scope of large banks. 2. Increased capital requirements. There is unanimous support within the market and among regulators in all jurisdictions for more and higher quality capital to support the activities of large banks. 3. Increased liquidity requirements
7、. There is widespread support for the idea that a withdrawal of liquidity was a key driver of financial instability especially in the immediate post Lehman period and that this demands a new body of specific regulation. 4. Caps on size/concentration. The belief size in itself is a source of systemic
8、 risk has led to a number of proposals focusing on capping the asset and liability bases of the largest banks. 5. Accounting changes. The timing and the methodology for reporting credit and trading losses has also been widely cited as a contributing factor to recent financial instability. 6. Taxatio
9、n and Stability Fees. Governments and regulators have highlighted the benefit that accrues to systemically important banks and their employees from implicit government guarantees stemming from their status as too big to fail. 7. Recovery and resolution. The credit crisis highlighted the degree to wh
10、ich authorities were unprepared or lacked the legal powers to wind down insolvent institutions in an orderly manner. A number of proposals have been put forward to address this issue. Note that macro prudential measures such as proposals for systemic funds etc are not within the scope of our study.
11、2 Europe Equity Research 17 February 2010 Carla Antunes da Silva (44-20) 7325-8215 carla.antunes- Table of Contents Executive Summary .3 1. Separation of activities6 2. Increasing capital requirements9 3. Increasing liquidity requirements.20 4. Caps on size and concentration25 5. Accounting Changes2
12、6 6. Changes to tax system 33 7. Recovery and Resolution Planning 35 8. Macro-prudential supervision .42 Appendices Appendix I: List of Suggested Further Reading 43 Appendix II: Recap of a Banks Capital Structure .45 Appendix III: A summary of Basel III adjustments applied to regulatory capital46 Ap
13、pendix IV: Recap of Market Risk 48 Appendix V: Recap of Counterparty Risk 54 Appendix VI: Suggestions for Business Information Packs (UK)59 Appendix VII: Wall Street Reform and Consumer Protection Act62 Appendix VIII: FDIC Resolution.65 3 Europe Equity Research 17 February 2010 Carla Antunes da Silv
14、a (44-20) 7325-8215 carla.antunes- Executive Summary This report has been used as the basis for discussion in JPMorgan Global Banks Too Big to Fail? Big Can (also) Be Beautiful, 17th February 2010. It is also the background for quantifying the impact on profitability of each of the measures proposed
15、 on the group of 15 global banks in JPMorgan Global Banks Too Big to Fail? Running the Numbers, 17th February 2010. There have been several ideas discussed by politicians, regulators and market participants to reduce economic risks from the banking industry ranging from specific company proposals to
16、 more sector-wide measures. This report reviews several of the primary proposals coming out of the US, the UK and Europe and focuses on those which appear to be gaining the most traction with regulators. We note that this is not an exhaustive list of measures and that we expect the regulators and th
17、e banks to continue a dialogue and cooperation and hence many of the suggested measures in this report may end up looking substantially different in their final application. The recent crisis has illustrated flaws with the supervision of the financial system and ultimately, the success of these meas
18、ures will be judged by their ability to be counter cyclical providing adequate resources/system to call upon when necessary and allowing for a build up phase in times of less stress so as to minimize or in the very least significantly avoid, having to call on government intervention like we have see
19、n in the last couple of years. We have focused our discussion on micro-prudential supervision which is looking at individual institutions, the risks they pose and addressing potential issues and note that macro prudential supervision is not in the remit of this report. The list we present is by no m
20、eans an exhaustive list. Other regulatory changes include changes in market structure which will have a particular impact in the derivative markets; additional consumer protection legislation which will impact the consumer activities of the large banks; changes in the securitisation model requiring
21、banks to retain a portion of their transactions. We have focused on the following areas of regulation; 1. Separation of activities. Many politicians, media observers and regulators have advocated addressing the issue of banks that are “too big to fail” by breaking up or restricting the scope of larg
22、e banks. These proposals seek to separate the more risky banking activities typically those associated with proprietary investing and risk taking in capital markets from more socially required banking services such as deposit gathering. The FSA has raised this issue in its October 2009 discussion pa
23、per and the US Treasury has also made proposals in this regard in January 2009. 2. Increased capital requirements. There is unanimous support within the market and among regulators in all jurisdictions for more and higher quality capital to support the activities of large banks. This is the most eas
24、ily quantifiable and, because of the central position that the BIS occupies in this discussion, the furthest along in terms of its recommendations. In this report we review the recent BIS III equity Tier 1 consultation proposals. 4 Europe Equity Research 17 February 2010 Carla Antunes da Silva (44-2
25、0) 7325-8215 carla.antunes- 3. Increased liquidity requirements. There is widespread support for the idea that a withdrawal of liquidity was a key driver of financial instability especially in the immediate post Lehman period and that this demands a new body of specific regulation. We review two new
26、 BIS proposed standards: (i) liquidity coverage ratio designed to provide insurance against a 30 day run on funding; and (ii) net stable funding ratio designed to promote more structural longer term funding. 4. Caps on size and concentration. The belief that size in itself is a source of systemic ri
27、sk has led to a number of proposals focusing on capping the asset or liability bases of the largest banks. These include broader application of leverage ratios heretofore more commonly used in the US and Switzerland. Other proposals also target limits to individual counterparty exposure. In the US t
28、he recent Treasury proposal called for a cap on liabilities for major banks in addition to the existing cap on deposits. 5. Accounting changes. The timing and the methodology for reporting credit and trading losses has also been widely cited as a contributing factor to recent financial instability.
29、The FASB and the IASB have both commented on these issues. Their focus has been on (i) classification and measurement; (ii) dynamic provisioning and (iii) hedge accounting. 6. Taxation and Stability Fees. Governments and regulators have highlighted the benefit that accrues to systemically important
30、banks and their employees from implicit government guarantees stemming from their status as too big to fail. Arguments have been made for a host of new taxes and fees to offset this supposed benefit and to subsidise other programs designed to secure financial stability or to repay taxpayers for loss
31、es policymakers attribute to the original credit crisis. These include transaction taxes such as the Tobin tax, implicit guarantee tax, bonus/windfall taxes as well as the more recent financial crisis responsibility fee. 7. Recovery and resolution. The credit crisis highlighted the degree to which a
32、uthorities were unprepared or lacked the legal powers to wind down insolvent institutions in an orderly manner. A number of proposals have been put forward to address this issue. The most detailed and widely referenced has been that of the FSA and we review its proposal to mandate living wills. 8. M
33、acro prudential regulation. Momentum is growing for an international resolution fund that could be used to handle future bank failures. This is not in the scope of our report as we have focused on the micro prudential measures. Whilst we perform this exercise it is important to bear in mind that it
34、not possible, and indeed not necessarily desirable to remove all risk from the system. Every action has a cost as well as a benefit, and the ultimate goal is to find the optimum balance of cost to the consumer and reduce potential risk in the system. 5 Europe Equity Research 17 February 2010 Carla A
35、ntunes da Silva (44-20) 7325-8215 carla.antunes- Figure 1: J.P. Morgan - Micro Prudential Regulation Reviewed Micro Prudential Supervision 1. Narrow Banking 2. Capital Req. 3. Liquidity Req. 5. Accounting6. Taxes 7. Recovery The amount of loss given failure; The revenue needs of the Deposit Insuranc
36、e Fund (DIF). 8 Europe Equity Research 17 February 2010 Carla Antunes da Silva (44-20) 7325-8215 carla.antunes- On the other hand, the system in the UK for deposit fund contributions is not risk based. In order to meet the obligations to the depositors of the failed institutions in the UK in the las
37、t couple of years i.e. both the nationalised banks as well as the Icelandic banks, the Financial Services Compensation Scheme (FSCS) borrowed a certain amount from HM Treasury, on an interest only basis to September 2011. Until then, the members of the scheme (i.e. the banks) have to pay levies cove
38、ring the interest costs. Post that date, if the assets of the failed institutions are insufficient to repay the loans, the deficit will need to be repaid, which will be covered by additional levies. Note the FSCS also ensures deposits at the building societies. In the table below we have summarized
39、the different deposit schemes and highlighted the change on deposits covered before and after the crisis. Table 1: Deposit Insurance Schemes - Pre and post crisis Post Crisis Max deposit guarantee Pre Crisis Max deposit guarantee UK GBP 50,000 UK GBP 35,000 Ireland EUR 100,000 Ireland EUR 20,000 Fra
40、nce EUR 70,000 France EUR 70,000 Spain EUR 100,000 Spain EUR 20,000 Germany EUR unlimited on retail Germany EUR Limited to 90 percent of deposits and the equivalent of 20,000 for each depositor. Italy EUR 100,000 Italy EUR 100,000 Switzerland CHF 100,000 Switzerland CHF 30,000 Denmark DKK unlimited
41、Denmark DKK 300,000 Sweden SEK 500,000 Sweden SEK 250,000 Finland EUR 50,000 Finland EUR 25,000 Norway NOK 2,000,000 Norway NOK 2,000,000 Portugal EUR 100,000 Portugal EUR 20,000 Austria EUR Unlimited Austria EUR Greece EUR 100,000 Greece EUR 20,000 US USD 250,000 US USD 100,000 Source: J.P. Morgan
42、estimates. 9 Europe Equity Research 17 February 2010 Carla Antunes da Silva (44-20) 7325-8215 carla.antunes- 2. Increasing capital requirements A substantial part of recent regulation has focused on increasing capital requirements. Across the globe there have been several initiatives focusing on two
43、 main areas: Increasing the quality of capital Increasing the quantity of regulatory capital The recent crisis has highlighted some of the weaknesses in the current capital framework, especially with regard to the loss absorption properties of non equity components such as preference shares. Under t
44、he current Basel II regulatory regime regulatory capital and the capital structure can be broadly broken down into the categories illustrated below. Figure 3: Current Bank Capital Structure FundingSenior Debt Lower Investor Risk Less Loss Absorption Tier 3 Lower Tier 2 Upper Tier 2 Innovative Tier 1
45、 Preference Shares Ordinary Shareholders Equity Equity Higher Risk Greater Loss Absorption Subordinated Debt Tier 1 Capital Core Tier 1 Capital Source: J.P. Morgan. 10 Europe Equity Research 17 February 2010 Carla Antunes da Silva (44-20) 7325-8215 carla.antunes- The table below illustrates the comp
46、osition of regulatory capital for the global banks as last reported. Figure 4: Global Banks - Composition of Regulatory Capital, Last Reported 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% BoACitiGSMSCSUBSDBBarclays HSBCLloydsRBSSTANBNP Soc GenSanUCG Core tier 1Hybrid tier 1Tier 2Tier 3Deductions/Othe
47、r Source: J.P. Morgan estimates, Company data. Going forwards we expect several changes to both the measurement of capital, and the eligibility criteria of instruments to new capital categories, some of which have been proposed in regulatory papers from the FSA in the UK and the Basel Committee.1 We
48、 see 3 main areas of regulatory change which are likely to gain traction: 1. Basel III proposals; 2. Increasing the loss absorption capacity of other forms of banking capital; 3. Increase in market and counterparty risk weighted assets. We go through each in turn and refer the reader to JPMorgan Glo
49、bal Banks Too Big to Fail? Running the Numbers, 17th February 2010 for the numerical impact on our sample of banks. 1 FSA Consultation Paper 09/29 Strengthening Capital Standards 3 11 Europe Equity Research 17 February 2010 Carla Antunes da Silva (44-20) 7325-8215 carla.antunes- Basel III proposals One of the f