Changes In Banking Dominance
Largest Banks and Financial Institutions in terms of market cap (source Bloomberg).
1 Year Ago
1. Orco Property France
2. ICBC China A shares
3. Berkshire Hathaway
4. Wells Fargo
5. China Construction Bank H shares
6. HSBC
7. JPMorgan Chase
8. Agricultural Bank of China
9. Bank of China
10. Bank of America
Today
1. Berkshire Hathaway
2. Wells Fargo
3. ICBC China
4. JPMorgan Chase
5. HSBC
6. China Construction Bank
7. Citigroup
8. Bank of America
9. Agricultural Bank of China
10. Visa Inc
All attention back to US at the moment as American banks gain dominance in the global tapering chaos. EM banks seem to have fallen out of favour after the EM sell down and slower growth projections.
Note that DBS is 76th (prev 74), OCBC 93th (prev 86) and UOB 107th (prev 91).
US banks are out of the woods and will continue to thrive as regulations change and the rest of the world falls behind.
US Banks $40.3 Billion Profit in 1Q Sets Record, FDIC Says (American Banker)
1. Dodd Frank
The Dodd Frank Act whilst still hatching and partially implemented, has effectively shut out the less organised EM banks, most of whom have not embarked on their centralised collateral management projects nor have a system in place to handle one.
As opposed to the Americans and their swat teams of PHDs crunching at the models in their NY offices, the world of derivatives will tapering into the better equipped players.
The SEC and CFTC are widening their scope to cross border derivatives and securities which essentially includes the rest of the world which essentially means, everyone stop doing business till they are American compliant.
Finland has a collateral credibility issue (FT)
2. Basel III
Americans are precluded from Basel 3 while the Europeans and UK banks are still facing significant capital shortfalls.
Eg. German banks €14bn short of Basel III (FT)
Deutsche Bank “horribly undercapitalized”: U.S. regulator (Reuters)
BOE: U.K. Banks Need More Capital (WSJ)
3. Derivatives Dominance
Currently, just five banks control 90% of all derivatives contracts: JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs.
With Dodd Frank, the liquidity outside this circle will dry up. The 700 trillion derivatives market dwarves the total of global bond, equity and commodity markets. It makes loans look paltry and central banks looks small.
4. Bail Ins
Risk of Bank Failures Is Rising in Europe, ECB (NY Times)
The European ruling on bail-ins is a 2 edged sword, victory for banks ? defeat for depositors/shareholders/bondholders ? or defeat for banks with no depositors/shareholders/bondholders ?
It looks like all will be flocking to the safer US bets for now.
5. Too Big To Fail
TBTF is a good thing and we have seen it happen in 2008 and can rest easy knowing that there is a backstop for the big banks if they get naughty.
All signs are there that US banking dominance will grow. Little banks have no chance as their liquidity pools in international markets dry up. American banks are the largest liquidity providers for the interbank forex markets, the capital markets and the derivatives markets.
They have the armies of former regulators to circumvent for them, the rocket scientists to build the revaluation models that suit them and best accountants to churn profits out of their balance sheets.
It is a new ballpark now.
So when I hear my brother complain about the bank he is working for, which is a reputable one but alas not American, and the walls he is running into to get them on the idea of centralised collateral management and accounting for cost savings (profits) on their capital, I feel sorry for him and the bank, whose shares or sub debt or perp I will not be buying, too.
I am reminded of a conversation I had last year with a bright and young British banker who worked for a European bank. An innocuous question that could only be attributable to youth and idealism popped up. She asked quite hesitantly, for she imagined I was a senior banker, if I thought there was anyone in the bank who knew what was going on ? and the entirety of the picture ? My answer, no. Not me, not my boss, not his boss or his boss’s boss or the CEO for the matter. Its logical. Even Obama does not have a clue too. But we all like to believe in a banking God and for now, his name is Bernanke.
My two cents worth of opinion: American banks are not completely out of the woods yet. Although they are not as under-capitalised as the biggest European banks, it is also not comparable to pitch US banks against Europeans banks on a like-with-like comparison predominantly because US GAAP allows the netting off of derivative assets and liabilities. For a back of the envelope comparison, European banks derivative assets would be some 75%-80% lower (and a similar deduction on derivative liabilities) if accounted for under US GAAP.
In the next few years I foresee massive retrenchment in the banking sector from both sides of the Atlantic. The biggest reason I would say is because their cost to income ratio before credit provision is too high – in the region of 90% for European banks – and it leaves little room for credit provision and no room for error. Lots of European banks are barely profitable, using return on assets as a measure. American banks, well, if you calculate their profitablity after grossing up their balance sheet derivatives, are almost in the same league as the Europeans. The difference is American banks have axed their costs in greater extent than Europeans, not because of revenue growth.
The major thing which separates the American banks from the Europeans is their balance sheet asset quality which will only be evident in the next downturn when the European banks are forced to realise the impaired value of assets.
That sounds very bleak indeed.
Yet I am willing to bet they can get away with it. Simple. Just hire the chaps who wrote the accounting framework.
Just last week on 25 June Moody’s warned as US home equity lines of credit (HELOC) moves into amortising phase – these aggressively marketed HELOCs were issued before the last financial crisis typically have 10 years of interest only followed by an amortising phase – the monthly repayment of borrowers will rise and this will be credit negative for US (mainly regional) banks in general.
Daniel Tarullo, in charge of financial supervision at the Fed, said the Fed was working on four new rules for the country’s biggest banks in the coming months…