Bank stocks down again; Fed mulls new bank capital buffer

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August blues
Bank stocks added to their August woes on Monday, falling nearly 2%, making them the worst-performing sector in the S&P 500. The KBW Nasdaq Bank Index is down more than 9% so far this month, nearly three times the 3.3% drop in the S&P 500.

“Falling interest rates, fears of a global economic slowdown and unrest in the Asian financial hub of Hong Kong have conspired to beat up bank stocks this month.”

“For shareholders of U.S. banks, the biggest risk isn’t that America slides into recession next year. Post-crisis rules have ensured that most banks, especially the biggest ones, have the capital to ride out a downturn,” the Financial Times says. “The truly frightening possibility is that medium and long-term interest rates keep falling from here, as they might in a recession — but stay there indefinitely, as the U.S. economy muddles along.”

“The Japanification or Europification of U.S. banks is not the most likely outcome,” the paper adds. “America’s economy is stronger and more dynamic than those across the Atlantic and the Pacific. But neither is it a scenario to be dismissed. Policymakers in Europe and Japan hoped that pressing down on short-term rates would stimulate growth expectations, leading ultimately to higher long-term rates — and healthier banks. It has not happened. Many in the U.S. have the same hopes for Fed rate cuts, and the outcome may be the same, too.”

Many of the 30,000 people who lost investment banking jobs this year may eventually find new positions in the sector, but many more might not. While the recent drop in interest rates “does look cyclical” and “this cycle must eventually turn,” two other factors are likely here to stay, the FT says.

“Regulation is only heading in one direction. Trading profits will also be hit by a need to hold more capital under new Basel IV rules. Automated trading is also a significant structural change that is unlikely to be reversed," the paper notes. "Algorithms can now trade faster and more efficiently than human investment bankers and do not charge fees to cover big bonuses. Little wonder banks’ fixed income, currency and commodities trading revenues have fallen to 2006 levels, according to research firm Coalition. If they do not come back, nor will many of the 30,000 jobs.”

He must have missed the ethics class
A 23-year-old “former student-body president at New York University’s Stern School of Business” and newly minted analyst at RBC Capital Markets was charged with criminal insider trading involving a $1.7 billion buyout. The analyst, Bill Tsai, was also sued by the Securities and Exchange Commission.

“Authorities allege that Mr. Tsai earned about $99,000 by purchasing bullish options on Electronics for Imaging Inc. that rose in value after the company announced it would be acquired by a private-equity firm. Mr. Tsai didn’t disclose to RBC the account he used to buy the options, according to the SEC’s complaint.”

Tsai's group at RBC "focused on deals in the technology sector, according to court records," the Wall Street Journal reports. "In March, he worked on a report that listed the potential buyout of EFI by Siris Capital Group, a private-equity manager, the SEC alleged. RBC provided financing to Siris on the deal." Wall Street Journal, Financial Times

Wall Street Journal

Fed buffer dilemma
Federal Reserve officials is considering imposing a countercyclical capital buffer on large banks as a means to reduce the risk of a credit crunch. The tool, which was approved by the Fed in 2016 but never used, would allow the Fed “to require banks to hold more loss-absorbing capital should the economy show signs of overheating, or to keep less of it during bad economic times. The buffer applies generally to banks with more than $250 billion in assets.”

While using the tool “could provide banks with additional lending firepower in a subsequent downturn … deciding whether to use the buffer is somewhat fraught, though. Banks are reluctant to hold even more capital than they do today as this could hamper their profitability. Plus, it isn’t clear how markets would interpret such a move by the Fed, especially since this would be a first. Investors could find the buffer reassuring, believing the Fed is giving itself additional room to fight a downturn. Or they could be unsettled by it, fearing the Fed believed a slowdown was imminent.”

Financial Times

Digital challenge
Digital challenger banks have raised $2.5 billion in 55 deals so far this year, boosting “their efforts to unseat traditional deposit-taking institutions.” Customers have opened more than 30 million accounts at these fintechs, a report from start-up research company CB Insights says. The data doesn’t include companies in India and China “that dwarf similar businesses in Europe, Latin America and North America.”

Quotable

“I’ve seen people open restaurants.” — A vice president at bank, commenting on the future job prospects for the 30,000 people in investment banking who have lost their jobs so far this year