The US Federal Reserve recently published the results of its now annual assessment (Comprehensive Capital Analysis and Review, or CCAR) of the capital adequacy of the 31 largest Bank Holding Companies (BHCs) in the US, under its stress and adverse stress scenarios. Interestingly, all the banks involved passed the first, quantitative, stage; but two, the US BHC’s of Deutsche Bank and Banco Santander, failed the second, qualitative one, no doubt leading to further gloom and angst in Frankfurt and Madrid.
Not surprisingly, the Fed is deliberately coy about the criteria it uses to assess compliance with CCAR, thereby causing much pre-announcement nervousness amongst many senior bank executives. Of course, if the details of the qualitative criteria which the Fed uses to make its determinations were public knowledge, those subject to CCAR would doubtless find ways to game the system, using their disproportionate resources to try to overwhelm the regulatory system.
That said, while it may be satisfying to take out the odd bank and metaphorically shoot it pour encourager les autres, the continuing and continuous pressure on banks remains a significant distraction to many of them; and beg the question of how much attention they are really paying to managing their businesses; assessing risks in the real world; and determining how to continue to generate satisfactory risk-adjusted returns.
The arguments about whether fractional reserve banking is a viable business model for the future will, no doubt, continue, as non-banks and alternative financial models continue to be created and expanded. However, it does seem likely that the days of the universal banking model are numbered, as the supposed benefits of “diversity”, capital and “reach” are called into question by falling returns and not infrequent “accidents”, let alone periodic exhibitions of the difficulties of ensuring compliance with appropriate legal and ethical standards. This is likely to lead (pace Mr. Dimon!) to increased demands for simpler structures, legal separation of retail banking and payment systems from, in particular, wholesale and investment banking platforms, and further restrictions on the ways in which a bank is permitted to put its capital at risk- even in the face of the fact that, for the largest US banks, their capital ratios have actually doubled in the past 5 years.
Of course, we are not stating that banks are inherently unstable or necessarily existentially threatened; but it does seem clear to us that, as their model evolves, they remain in need of assistance in managing their capital, assets and liabilities in the most efficient and effective ways, so that they can continue to provide the essential, utility-like services without which no modern economy can function properly.
So, in an environment in which regulatory demands are still rising (CCAR being almost child’s play compared with creating a “living will” that will satisfy a regulator that it can “resolve” a failing bank in a non-disruptive manner), Awbury continues to develop and refine techniques for assisting its banking clients with managing and mitigating the risks to their capital and balance sheet, taking account of the latest regulatory and industry developments, as well as looking forward in an attempt to predict and interpret longer-term trends.
So, give us a call. We can help.
– The Awbury Team