Break Up Banks for Investors?

download Break Up Banks for Investors?

of 4

Transcript of Break Up Banks for Investors?

  • 8/22/2019 Break Up Banks for Investors?

    1/4

    HPSinsight.com

    80515thSt.NW,Suite700 Washington,DC20005

    HPSInsight

    July 23, 2012

    HPSInsight

    Investors Dont Need Government to Right-Size BanksIf investors want smaller banks, they will invest in themByTonyFratto,(202)822-1205,[email protected]

    Afterayearofoccupiersbemoaningbigbankprofits,nowthecallsaretobreakup

    bankstounlockvalueforinvestorsthe1%!Thatssometransformation!

    Thetheorygoesthatlargebanksaresomehowholdingbacksmaller,butmore

    valuablebusinessesandthatgovernmentcapsonbanksizewillhelptounleash

    profitsinthesefirms.Investorsshouldthereforejoinwithregulatorsincallingfor

    breakingupthebigbanks.

    TheotherwisebrilliantSebastianMallabyarguedthiscaseinhisrecentFinancial

    Timescolumn[BreakingUpBanksWillWinInvestorApproval],arguingthatthe

    combinationofbigbanksfundingadvantagesinthedebtmarketandfundingdisadvantagesintheequitymarketsuggestthatthecapitaladequacypoliceshould

    capitulateto(presumed)investorssentimentandjustbreakupthebanks.

    Now,letssetasidetherealitythatadvocatingapolicywiththeexpressrationaleof

    elevatingprofitsforbankinvestorswould,onitsown,dropjaws.Anythingsgameif

    wrappedinpopulistbankbust-upgoals.Letsinsteadanalyzethefundamental

    assertions.

    Investorsmarketparticipantsareneithermonolithicnorprescriptiveinpolicy.

    Decisionsaremadeintheaggregate,reflectedinequity(anddebt)pricing.If

    investorsareskepticaloflargebanks,andthecapitaladequacypolicemaintain

    theirholdforclearcapitalrequirements,thenthemarketwillreducethesizeand

    makeupofbanksifwarrantedwithouttheheavyhandofgovernment.

    Thispricingandscalingprocess,bytheway,playsoutinallindustries.Insome

    circumstances,investorswantlarger,diversifiedcompanies,whileinothers,themarketwantssmaller,morenarrowlyfocusedpure-plays.Inacompetitivemarket,

    theresroomforallkinds,withvaryingdegreesofpredictability,cyclicality,riskandpricepremia.Theshort-termburstofspinningoffthemostprofitablepartsofa

    business(asMallabyimplies)doesnotalwaysmakethebestlong-termstrategy.

    Themarkethasthemechanismstodecide.

    Bondmarketadvantage?

  • 8/22/2019 Break Up Banks for Investors?

    2/4

    HPSinsight.com

    80515thSt.NW,Suite700 Washington,DC20005

    HPSInsight

    Advocatesforbreakingupthebanksoftencitethatbigbankscanmorecheaply

    financethemselvesinbondmarketsthansmallbanks.Specifically,Mallabyofferstworeasons:

    First,U.S.taxpolicysubsidizesdebtissuancerelativetoequity.

    Second,marketparticipantsbelievebankswillbebailedoutandthattherefore,

    bondholdersfeelsafe,requiringlessofareturnfortheirinvestment.

    Thefirstpointisentirelyvalid.Governmentpolicydoesinfactsubsidizedebtover

    equityforbanksaswellasforeveryothercompanyinthecountry.Itsatax

    distortionthatshouldbefixed,butitsnotauniquebenefittobanks.

    Thesecondpointmaybevalidaswell,buttheresabsolutelynobasisforsucha

    belief.Unliketheactionstakenduringthefinancialcrisiswhenbondholderswerebailedout(howevernecessaryatthetime),thenewResolutionAuthoritymakesitclearthatbondholdersandothercreditorswilltakelossesifafirmfails.Recent

    ratingsdowngradesonthebigbanksfromthemajorcreditratingsagencieshaveunderscoredthismarketreality.

    Intheabsenceofaclearbondmarketadvantage,letsmoveontoequity,whichhas

    becomemoreexpensiveforbigbanks.

    Equityvaluations

    Therearemanyvariablesaffectingtheprofitabilityofbanksandbankshareprices,andthesevariablesmakepricingbankstocksdifficultintheshort-term.

    Bigbanksfaceaslewofregulatorychallengesandchangesimpactingprofitability

    thehundredsofDodd-FrankreformsincludingtheVolckerRuleprohibitions,

    DurbinAmendmentinterchangefeepricefixing,newFDICinsurancepremiumsfor

    non-depositliabilities,andsignificantlyhighercapitalrequirementsforsystemically

    importantfinancialinstitutionsarebutafewexamples.Inrecentyearsasignificant

    amountofbankcapitalhasalsobeentiedupinprovisioningforhousingrelatedlosses.

    Bankvaluationsmayalsobedepressedduetothedilutionofshareholdersas

    banksraiseTier-1equityand,insomecases,havebeenblockedbygovernments

    frombuyingsharesbackorpayingdividends.Governmentpolicyseekingtominimizetradingandnewcounterpartyriskregulationsareprobablyimpacting

    profitabilityaswell.

  • 8/22/2019 Break Up Banks for Investors?

    3/4

    HPSinsight.com

    80515thSt.NW,Suite700 Washington,DC20005

    HPSInsight

    Allofthesevariablesarerealandobservable,impactingtopandbottomlinesofthe

    bankbusiness,whilethebankbreak-upvaluetheoryrestsinsteadonephemeralmoralhazardpricing.

    Mallabyrightlyarguesthatequityinvestorsarewaryofbeingwipedoutinthe

    eventofabankfailure.Afterall,Dodd-FrankResolutionAuthoritygivestheFDIC

    thetoolstowinddownalargeinstitution,wipeoutitscreditors,sellassets,and,if

    thereisenoughmoneyleftoverafterTreasuryisrepaid,totrickledownto

    bondholders.InMallabyspresentation,theregulatorsselectiveconcernwith

    moralhazardisdrivingupthecostofequity.

    Buttheresnothingselectiveaboutit.WhatMallabydescribesisthebasiccapital

    structureofanypubliclytradedcompanyandnormalresolutionthrough

    bankruptcy.Inbankruptcy,bondholdersareseniortoequityshareholders.

    Shareholdersbenefitfromupsiderisk,butsitinafirst-losspositionifafirmfails.Thisisnodifferentthaninanybankruptcy:shareholdersareintheexactpositionof,sayStarbucksshareholdersintheeventofabankruptcy.

    Market-determinedbanksize

    Moretothepointwiththeseinvestorvaluetheories,themarkethasallthetoolsit

    needstoreducebanksizeifwarranted.Evenifitwereappropriate,themarket

    hardlyneedsgovernmenttohelpinvestors.Marketparticipantsarefreetotaketheirinvestmentstosmallerbanks.

    Meanwhile,regulatoryrequirementsunderBaselIIIrequirebigbankstoraiseequitytobufferagainstpotentialfuturelosses.Thisleavesbankswithtwochoices:

    facehighercostsforequity,orreduceassetsgetsmaller.

    Thisisthemarketworking.TheoutcomeMallabyseeksdoesntrequiretheheavy

    handofgovernment,justtheenforcementofcapitalrequirements.Currently,

    Americasfourbiggestbankshaveraisedtheircommonequitytoassets(notrisk-

    weighted,nogames)ratiosignificantlysincethecrisis(Exhibit1).

  • 8/22/2019 Break Up Banks for Investors?

    4/4

    HPSinsight.com

    80515thSt.NW,Suite700 Washington,DC20005

    HPSInsight

    Exhibit!1 !ON AVERAGE, THE 4 LARGEST U.S. BANKS HAVE INCREASED

    THEIR EQUITY RATIO TO ALL-TIME HIGHS!

    Source: SNL, 4 banks are JP Morgan, Citi, Bank of America, Wells Fargo!

    Common Equity And Common Equity/Assets For Top 4 Largest BHCs !

    C

    ommonEquity/Assets(%)

    10!

    9!

    8!100!120!

    5!

    6!

    7!

    160!140!

    180!

    2007Q1

    2006Q1

    2005Q1

    2004Q1

    2003Q1

    60!80!

    40!

    2012Q1

    2011Q1

    2010Q1

    2009Q1

    CommonEquity($)

    2008Q1

    Comon Equity/Assets (%)!Common Equity ($)!

    Indeed,fromthestrategicpointofviewofmanagement,therearecompelling

    argumentstobeinglarge,globalanddiversifiedinsomecases,andcompelling

    argumentstobeingsmall,localandmorenarrowlyfocusedinothers.Inthelong-

    term,businessdiversificationspreadsrisk,lowersvolatilityandlowerstheeffects

    ofcyclicality.Therealsoexisteconomiesofscalethatsizeanddiversificationcangenerate.

    Tomaximizeshareholdervalue,somebanksmaydecidetogetsmaller,whileothers

    mayviewtheeconomiesofscaleanddiversificationofaglobaluniversalbankas

    vitaltotheirsuccessandresponsivetotheircustomers.Eitherway,investorsarefreetochoose.

    Buttheresnousefulprinciplewheregovernmentshouldfavorshort-termprofits

    forsomeequityinvestorswhileignoringtheneedsofindividualsandcompanies

    whorelyonbigbanksscale,reachandexpertisetooperateinrapidlygrowing

    globalmarkets.

    Bankscancompeteandservecustomersatthegloballevelwhilemaintaining

    adequatecapital,liquidityandtransparency.Andleavebanksizetothemarketand

    theneedsofcustomers.


Break Up the Big Banks: The Key to Economic Prosperity and .../media/documents/news/... · SOURCES: “Which Banks Could Face Cap on Size?” by Victoria McGrane, WSJ 10/11/12; Financial

Break Up the Big Banks: The Key to Economic Prosperity and .../media/documents/news/... · SOURCES: “Which Banks Could Face Cap on Size?” by Victoria McGrane, WSJ 10/11/12; Financial

U.S. faces political, social, and economic crisis · hedge funds and investment banks borrow cheap money from large investors such as mutual banks to fund their operations. The borrower

U.S. faces political, social, and economic crisis · hedge funds and investment banks borrow cheap money from large investors such as mutual banks to fund their operations. The borrower

sophiasapiens.chez.comsophiasapiens.chez.com/gestion/Portfolio-Management-Exams... · Web viewBrokers' calls are funds borrowed from banks by brokers and loaned to investors in margin

sophiasapiens.chez.comsophiasapiens.chez.com/gestion/Portfolio-Management-Exams... · Web viewBrokers' calls are funds borrowed from banks by brokers and loaned to investors in margin

Your Guide to Business Planning & Investors€¦ · journey from banks to investors to friends and families, trying to get his Aviation business, literally off the ground., he met

Your Guide to Business Planning & Investors€¦ · journey from banks to investors to friends and families, trying to get his Aviation business, literally off the ground., he met

Innovating in the digital age to change the way ......- multilateral development banks, development-financing institutions, infrastructure investors, consultancy firms, contractors

Innovating in the digital age to change the way ......- multilateral development banks, development-financing institutions, infrastructure investors, consultancy firms, contractors

Banks, Break-Ins, and Bad Actors in Mortgage Foreclosure

Banks, Break-Ins, and Bad Actors in Mortgage Foreclosure

Tennyson's "Break, break, break"

Tennyson's "Break, break, break"

Investment Banks. Investors. Investor Relations. New York | London | Raleigh| South Africa| Nashville| What’s in your cup of T?

Investment Banks. Investors. Investor Relations. New York | London | Raleigh| South Africa| Nashville| What’s in your cup of T?

BREAK 30 min - Ericsson › assets › local › investors › ... · OSS & BSS, TV & Media – Per Borgklint Industry & Society – Magnus Mandersson & Charlotta Sund Resource allocation

BREAK 30 min - Ericsson › assets › local › investors › ... · OSS & BSS, TV & Media – Per Borgklint Industry & Society – Magnus Mandersson & Charlotta Sund Resource allocation

Issue #61 - May 2021€¦ · Turkish Foreign Debt Worries Investors: International investors are worried that Turkish banks won’t have enough foreign currencies to meet the demand

Issue #61 - May 2021€¦ · Turkish Foreign Debt Worries Investors: International investors are worried that Turkish banks won’t have enough foreign currencies to meet the demand

Vertical.ai PROVEN PERFORMANCE - Yingli Solard9no22y7yqre8.cloudfront.net/assets/uploads/products/downloads/DS... · First choice for millions of banks and investors, ... File name:

Vertical.ai PROVEN PERFORMANCE - Yingli Solard9no22y7yqre8.cloudfront.net/assets/uploads/products/downloads/DS... · First choice for millions of banks and investors, ... File name:

A briefing for investors, insurers and banks...EÜAŞ- A briefing for investors, insurers and banks 4 Production In 2018, EÜAù produced 44.4% of its electricity from thermal power

A briefing for investors, insurers and banks...EÜAŞ- A briefing for investors, insurers and banks 4 Production In 2018, EÜAù produced 44.4% of its electricity from thermal power

Portfolio Management for Institutional Investors. Banks. Jakub Karnowski, CFA Portfolio Management for Financial Advisers.

Portfolio Management for Institutional Investors. Banks. Jakub Karnowski, CFA Portfolio Management for Financial Advisers.

the role of banks, equity markets and institutional investors in long ...

the role of banks, equity markets and institutional investors in long ...

Blominvest Bank - The Lebanon Brief - New Angel Investors for Tech Startups - The Lebanese Banks 07-Sep 2013.pdf

Blominvest Bank - The Lebanon Brief - New Angel Investors for Tech Startups - The Lebanese Banks 07-Sep 2013.pdf

Foreign Portfolio Investors - NSE · Foreign Portfolio Investors Investments in India. ... regulatory framework, ... Private Banks and Merchant Banks allowed to undertake only

Foreign Portfolio Investors - NSE · Foreign Portfolio Investors Investments in India. ... regulatory framework, ... Private Banks and Merchant Banks allowed to undertake only

Canadian Banks Flex GIC · 2020-03-05 · INVESTING Canadian Banks Flex GIC, Investors Category 3 Scenario Analysis — The following hypothetical examples are included for illustration

Canadian Banks Flex GIC · 2020-03-05 · INVESTING Canadian Banks Flex GIC, Investors Category 3 Scenario Analysis — The following hypothetical examples are included for illustration

ADVICE FOR INVESTORS - BMA CAPITAL...CDS account, investors may contact CDC at phone Number: 0800 – 23275 (CDCPL) and e-mail: info@cdcpak.com. CES is connected to a number of banks

ADVICE FOR INVESTORS - BMA CAPITAL...CDS account, investors may contact CDC at phone Number: 0800 – 23275 (CDCPL) and e-mail: [email protected]. CES is connected to a number of banks

FOR PROFESSIONAL INVESTORS ONLY Are Hedge Funds Shadow Banks? Douglas Shaw COO Fundamental Equity, BlackRock April 2011.

FOR PROFESSIONAL INVESTORS ONLY Are Hedge Funds Shadow Banks? Douglas Shaw COO Fundamental Equity, BlackRock April 2011.

INVESTMENT BANKS March 2003 · Investment banks allegedly pressured analysts covering Enron and Global Crossing to give investors favorable or misleading investment recommendations

INVESTMENT BANKS March 2003 · Investment banks allegedly pressured analysts covering Enron and Global Crossing to give investors favorable or misleading investment recommendations