U.S. banks may take big hit from U.K. liquidity rules

Discussion in 'Stocks' started by sub0, Oct 14, 2009.

  1. sub0


    Basically they have raised the requirements for banks in the UK. Will other countries follow along? We'll see.

    Oct. 14, 2009, 7:00 p.m. EDT
    LONDON (MarketWatch) -- Controversial new U.K. rules that require banks to hold more cash and government bonds could end up costing U.S. and European financial institutions dearly as well.

    Many countries are looking at tougher liquidity rules, but the U.K.'s decision to move before an international consensus has been reached, and to apply its rules widely, could cost U.S. and European firms "potentially billions of dollars," said Simon Morris, a partner at law firm CMS Cameron McKenna in London.

    The Financial Services Authority's rules, which were finalized last week, will ensure banks hold more highly liquid assets, meaning they should still be able to sell them even during a financial crisis. That's important because many troubled firms found themselves unable to offload assets during the crisis, adding to the problems.

    The exact requirements will vary from firm to firm, but the new rules could require U.K. firms and banks to hold an extra 110 billion pounds of government bonds in the first year, resulting in an annual cost of around 2.2 billion pounds due to the lower yield on government debt than on other assets.

    Critically, as well as U.K.-based companies, the new standards say subsidiaries and branches of overseas firms and banks should be self-sufficient in terms of liquidity and not rely on their parent firms.

    The FSA will grant waivers for firms that have similarly strict rules in their home country, but the U.K. is making its changes before an international consensus on liquidity has been reached.

    Even though it's finalized the rules, the FSA says it will wait until the recession is over before forcing financial institutions to hold more safe assets.

    "Once again this makes the U.K. a more demanding place to do business than Europe," said Morris.

    The U.K. rules might end up as a template for European standards, but that's could take a long time and "there can be no certainty the U.S. will do anything," he added.

    The rules themselves apply very broadly to firms that take deposits or have trading books, and the greatest weight is likely to fall on those with big investment banking operations, such as Goldman Sachs /quotes/comstock/13*!gs/quotes/nls/gs (GS 194.50, +2.22, +1.16%) , J.P. Morgan Chase /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 46.99, -0.17, -0.36%) and Deutsche Bank /quotes/comstock/11e!fdbk (DE:DBK 55.75, +1.83, +3.39%) /quotes/comstock/13*!db/quotes/nls/db (DB 83.79, +3.70, +4.62%) .

    It's hard to pinpoint exactly how much these firms earn in the U.K., because they don't give break-downs by country. But Goldman, for example, generated 26% of its $22.22 billion revenue in 2008 from its Europe, Middle East and Africa business, which has its biggest office in London.

    Peter Snowdon, a partner at Norton Rose, said the debate over the rules has "caused quite a stir," with overseas institutions saying the regulator has overstepped its authority.

    Snowdon said he there will be room for foreign firms to agree waivers from the rules. He said it's impossible to quantify the likely final impact, but that a lot of U.S. firms will be affected.

    "It's not just a case of putting a few hundred thousand pounds in a separate account," Snowdon said.

    "You won't get a waiver sitting around doing nothing."

    Gilt demand
    The requirements don't demand that the government securities are exclusively from the U.K., but one side effect will be an increased demand for U.K. issues, known as gilts, just as the Bank of England's quantitative easing program under which it is buying up 175 billion pounds of gilts.

    Analysts at Deutsche Bank's fixed-income team have said the rules are "effectively a tax on the financial institutions," that will be used to ensure greater stability.

    Richard Bove, an analyst with Rochdale Securities, is less concerned about the impact of U.K. rules, but said a likely change to U.S. requirements will have much more far-reaching consequences.

    Bove said tougher rules requiring banks hold more capital will come hand-in-hand with new standards for liquidity.

    "Otherwise, what is the point of increasing capital if that capital is going to be invested in derivatives?" he asked.

    Overall, he suggested the impact will be to substantially increase the cost of loans over the long-term, to limit growth for banks to maybe 4% or 5% a year and to reduce their return on equity -- the ratio of income to shareholder equity -- to 11% or 12%.

    ROE has obviously been hit hard in the financial crisis, but prior to the crisis, Citigroup /quotes/comstock/13*!c/quotes/nls/c (C 4.98, -0.02, -0.40%) , for example, was targeting a return of 18% to 20%.

    Bove said the result will be to make U.S. banks more like utilities and return them to the business models of the 60s and 70s.

    "The bank of the future will be the bank of the past," he said.

  2. pitz


    Sneaky way of forcing more government trash paper down the throats of the populace, instead of just doing the honourable thing and cut back government spending so goverment bonds aren't necessary.

    A lot of people criticize the banks for how they run their affairs, but it pales in comparison with how the government is operated. If banks used the same accounting rules that government uses, they would have been out of business a long time ago.
  3. But I thought we all like tougher regulation of the banking system? Shouldn't these be viewed as positive developments?
  4. Lethn


    That's what I'm thinking right now, but it smells like a scapegoat scheme to cover up the real problems the government is hiding. I don't think they actually understand themselves how to fix the problems and are doing what someone advised them to do.
  5. As the article mentioned, no one cares abt what the brits might or might not do, these are no longer the days of the Empire, they are at best a third rate power, militarily and financially
  6. The Premier League is great though.
  7. pitz


    I personally like tougher regulation of government.

    A prohibition on the government interfering or participating in the financial markets through scams such as Fannie Mae/Freddie Mac.

    A prohibition on the government spending more than it takes in for taxes.

    Regulation of the government so that its participants are rewarded commensurately with how well the economy really is doing.

    A prohibition on government accepting any sort of bribes or kickbacks, enforced by actual prosecutions.