martes, 10 de febrero de 2015

martes, febrero 10, 2015
Heard on the Street

The Strong Dollar’s Squeeze on Wall Street

Biggest U.S. Banks Face Need for More Capital

By John Carney

Feb. 6, 2015 10:50 a.m. ET

John Gerspach, finance chief of Citigroup, surprised investors on a recent conference call by disclosing that the dollar’s appreciation will mean that the bank’s required capital levels will be higher than many expected.John Gerspach, finance chief of Citigroup, surprised investors on a recent conference call by disclosing that the dollar’s appreciation will mean that the bank’s required capital levels will be higher than many expected. Photo: Citigroup/Bloomberg News


Treasury secretaries can usually be relied upon to say that a strong dollar is good for America. Regardless of the veracity of that, the currency’s current strength could hit the country’s biggest banks—and in an unexpected way.

John Gerspach, Citigroup ’s finance chief, surprised investors on a recent conference call by disclosing that the dollar’s appreciation will mean that the bank’s required capital levels will be higher than many expected. That likely holds true for the other seven U.S. banks designated as “globally systemically important banks,” too.

It isn’t that the dollar’s strength threatens to destabilize the biggest U.S. banks or hurt their capital positions. Some overseas borrowers may falter, and revenue could contract as U.S. exports decline and businesses hold back on expansion. But those risks should be counterbalanced by the benefits of a stronger economy that could spur the Federal Reserve to raise rates, improving banks’ net interest margins.

Instead, the risk lies in an obscure quirk in a rule proposed by the Federal Reserve in December. That rule would impose a capital surcharge on systemic banks that ranges from 1% to 5.5% of risk-weighted assets depending on each bank’s so-called systemic indicator score and its reliance on short-term funding. Those scores are based on scores for various individual indicators, calculated by dividing the amount of each bank’s holdings by the aggregate amount summed across 75 global banks.

It is this proportionality that links the surcharge to currency moves. As the dollar strengthens against other currencies, banks with lots of dollar-denominated assets and liabilities see their shares of those global pools rise. This raises their systemic indicator scores, which can push up their capital surcharge.

That is what seems to have happened to Citi. It was widely assumed that Citi’s score would put it in the category of banks that require an additional capital buffer of 3.5% of risk-weighted assets. Mr. Gerspach says the dollar’s appreciation has moved his bank into the 4% group. It is very likely that other big U.S. banks have also been pushed into higher categories.

This is bad news for investors. Nomura’s Steven Chubak estimates that moving up into the higher categories would reduce the return on equity for Citi, J.P. Morgan Chase , and Bank of America by a half a percentage point and push down bank valuations by roughly 3% each.

Perhaps more important, having capital requirements subject to currency fluctuations makes it very hard to predict a bank’s ability to return capital to shareholders in the future. The dollar’s rally has resulted from myriad factors ranging from wobbles in emerging markets to the European Central Bank’s decision to launch quantitative easing.

Attempting to avoid the higher surcharge by shrinking may be futile. The only way a bank can cut its indicator score is to shrink its share of the relevant aggregate pool. But if other banks try to do the same, the aggregate itself shrinks, leaving proportions unchanged. The resulting prisoner’s dilemma compounds uncertainty over whether or not individual banks choose to shrink.

It was inevitable that the many new rules drawn up since the financial crisis would result in some unexpected outcomes. Making capital requirements at big U.S. banks subject to the currency market’s vicissitudes surely counts as one of them.

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