CHICAGO, Oct. 9, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Citigroup Inc. (NYSE:C-Free Report), Bank of America Corp. (NYSE:BAC-Free Report), Wells Fargo & Company (NYSE:WFC-Free Report), Barclays PLC (NYSE:BCS-Free Report) and JPMorgan Chase & Co. (NYSE:JPM-Free Report).
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.
Here are highlights from Wednesday's Analyst Blog:
Banks to Hold Extra Capital Buffer: Will It Hurt Revenues?
In an attempt to avoid a re-run of the 2008 financial crisis, banking regulators across the world continue to formulate and impose new rules on 'too-big-to-fail' institutions. As per the documents (sent to G-20 group for comments) obtained by Bloomberg News, the Financial Stability Board (:FSB) is planning to propose an additional capital buffer for 29 global systemically important banks (:GSIBs).
The FSB plans to present this proposal to a G-20 summit that will be held in Australia in Nov 2014. Expected to be finalized by the end of 2015, the proposals will be fully implemented by 2019.
As of Nov 2013, the 29 GSIBs include Citigroup Inc. (NYSE:C-Free Report), Bank of America Corp. (NYSE:BAC-Free Report), Wells Fargo & Company (NYSE:WFC-Free Report), Barclays PLC (NYSE:BCS-Free Report), JPMorgan Chase & Co. (NYSE:JPM-Free Report), just to name a few. An updated list will be released by the FSB in Nov 2014.
As per the FSB's proposal, banks will be required to hold total capital buffer – as high as 25% of risk-weighted assets (:RWAs) – that could be spontaneously written down during a crisis. Further, the proposed additional capital buffer is expected to minimize the double-counting of bank capital, used for calculating the existing capital buffers.
Under the new proposal, additional capital buffer will be set in the range of 16%–20% of RWAs. This will be supplemental to the capital buffer already being followed by the banks.
The new FSB plan includes certain criteria that junior debt and securities will have to fulfill so as to be counted under the bank's 'total loss absorbency capacity' (:TLAC). Though the FSB proposal does not specify which security instruments will be considered for calculating TLAC, certain non-qualifying liabilities have been mentioned.
Further, junior debt issued must also have a minimum one-year maturity period remaining to qualify under TLAC. Also, under TLAC, banks would not be able to consider equity that they count while calculating other two existing capital buffers.
Of the two current capital buffers, the first (set by the Basel Committee on Banking Supervision in 2010) requires the banks to hold core capital of 2.5% of RWAs above the minimum Basel requirement, in order to absorb losses. Banks unable to meet this capital buffer face curb on their capital deployment activities and payment of bonuses.
The second capital buffer (set by the FSB for the biggest global banks) provides an additional protection at the time of crisis and could rise to 2.5% of RWAs for the biggest banks. Both these capital buffers must be fulfilled with high-quality capital that include shares and retained earnings.
Hence, the actual capital buffer that banks will be required to meet would rise to 21%–25%. Further, if the banks are required to meet countercyclical buffer set by its home regulator, then the figure could scale even higher.
The primary aim of the proposed new capital buffer is to ensure that the banks are self-sufficient to meet their cash requirements during a financial crisis. This would also entail less involvement of taxpayers' money for the bailout of troubled financial institutions.
However, for banks this would likely lead to a rise in interest expenses as these junior debt and other securities are expected to carry a higher rate of interest as compared to other senior and long-term debt. This, in turn, would put further pressure on revenues.
At the same time, such structural changes in the banking sector will continue to impair business expansion. Several dampening factors – asset-quality troubles, mortgage liabilities and tighter regulations – will decide the fate of the U.S. banks in the quarters ahead.
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.
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