Bryan Bushnell’s Post

What are Additional Tier 1 (AT1) bonds, and why do banks issue them? Here is everything you need to know about what are typically the highest yielding bank bonds investors can buy. https://okt.to/fGVkY7 COI-0001208

After a dire year for duration in 2023, banks are once again looking at funding further down the covered bond curve This week has been the most active for longer dated issuance so far this year, and bankers are convinced that the market could support the first 15 year deal since 2022 — if spreads tighten Read the full story in GlobalCapital below. Non-subscribers can register to read.

Guaranteed Repo is highly efficient for banks, a fact that holds true now and under the clearing mandate for US Treasury repo. In previous articles, we have highlighted its exclusion from the [supplementary] leverage ratio, its ability to reduce RWAs under the Basel III Endgame by 40%-100% compared to other secured funding models (including clearing), and its exclusion from the SEC’s clearing requirement. This article takes the next step and presents its efficiency under the GSIB Surcharge, liquidity coverage ratio (“LCR”) and the net stable funding ratio (“NSFR”). Shiv Rao, SUNTHAY More on #finadium: https://lnkd.in/eS_AJ9P9

Guaranteed Repo is highly efficient for banks, a fact that holds true now and under the clearing mandate for US Treasury repo. In previous articles, we have highlighted its exclusion from the [supplementary] leverage ratio, its ability to reduce RWAs under the Basel III Endgame by 40%-100% compared to other secured funding models (including clearing), and its exclusion from the SEC’s clearing requirement. This article takes the next step and presents its efficiency under the GSIB Surcharge, liquidity coverage ratio (“LCR”) and the net stable funding ratio (“NSFR”). Shiv Rao, SUNTHAY More on #finadium: https://lnkd.in/evHvTgX7

Guaranteed Repo is efficient under a number of metrics, including the GSIB Surcharge, LCR and NSFR. The Basel committee recently introduced a proposal to require banks to use daily averages in calculating the stock elements of the GSIB Surcharge. Guaranteed Repo can help manage the impact. The exclusion of Guaranteed Repo transactions from these regulations reduces banking system risk, as the risks are borne by the principals to transactions. Please see Shiv Rao and SUNTHAY for more information on Guaranteed Repo.

Capital structure of banks Basis the Basel Accords, banks are monitored and required to maintain enough capital to cover their risks under stringent regulatory requirements. This includes Tier 1 capital, Tier 2 capital. Regulatory Framework for Bank’s capital - The main capital of a bank intended to sustain itself during times of stress is the Tier 1 capital on the other hand, Tier 2 capital is an additional buffer to Tier 1 providing extra cushion for the bank to absorb losses. The components of Tier 2 capital are mostly illiquid in nature. Common Equity Tier 1 has to be at least 4.5% of the Risk Weighted Assets (RWA) whilst the Tier 1 to be at least 6%. Now the mandate is to have at least 8% of RWA as total capital (this is the summation of Tier 1 and 2). Some basic examples of Tier 1 and Tier 2 instruments are – equity shares, retained earnings (profits that has not been distributed by the bank in the form of dividends) for Tier 1 capital. Additional Tier 1 capital comprises preferred shares, perpetual bonds (which in times of distress, these can be converted into equity or written down, as required). Subordinated debt, revaluation reserves (normally generated from the revaluation of any asset), general loan loss reserves (funds set aside for possible loan losses) for Tier 2 capital. Issues like credit risk and liquidity risk undoubtedly pertains to the bank’s capital however, there are several risks associated with Tier 2 capital specifically. As seen above, Tier 2 capital has some components of debt instruments which are vulnerable to changes in interest rate thus, interest rate risk has a major role here. The valuation of these Tier 2 instruments can sometimes be quite difficult thereby posing valuation risk. Consequences if the bank falls below the required levels Given such a situation, generally the Regulators conduct in-depth enquiry and supervision. Banks are mandated to draft a capital restoration plan in order to declare the actions of it plans to turn back with the regulatory requirements. In case the bank goes critically undercapitalized, the Regulators break in by helping the bank’s sale to some other institution to uphold financial stability. See you in the next post on Capital Adequacy Ratio. Stay connected to explore more on financial risk management. #capital #regulatorycapital #crisis #liquidityrisk #equity #financialriskmanagement

Failing Banks https://lnkd.in/e_eXQYqk NY Fed - Sergio Correia, Stephan Luck, Emil Verner '...the predictability of bank failures implies a role for ex ante interventions to 51 prevent bank failures or mitigate their damage... The fact that bank failures are predictable supports the active use of prompt corrective action measures, such as limiting dividend payouts and the use of non-core funding for poorly capitalized banks. More generally, our findings emphasize the importance of requiring financial intermediaries to be well-capitalized. Our findings also imply that ex post interventions during a crisis must address fundamental solvency issues. Policies that backstop liquidity without addressing insolvency are unlikely to be sufficient for mitigating the costs of bank failures...'

As we inch closer to Basel III endgame, investments such as asset-backed securities (ABS) and significant risk transfers (SRT) have seen an uptick in the last year as banks look to reduce risk and prepare for predicted capital requirement changes. Banks’ use of SRTs in particular is at its highest rate since the financial crisis.   The demand for ABS is being driven by the potential opportunity to generate higher yields than other forms of fixed income, while SRTs help to reduce the cost for banks on issued loans and allow for further lending opportunities. These markets will continue to be impacted by the anticipated Basel III requirements, and this bears monitoring considering the potential for planned regulation to be reconsidered.   We have deep, long-standing expertise in SRTs as Orchard Global was founded to solve complex challenges for banks. We stay apprised of market changes to help uncover opportunities for our clients and will continue seeking to offer transformational solutions to our counterparties, even amid an everchanging environment.  https://lnkd.in/ee-kUASb

"The temptation to strengthen regulatory requirements in the aftermath of such episodes is understandable. However, there is a limit on what regulatory requirements can achieve and on the degree of regulatory stringency that can be imposed without impairing banks' intermediation business." Regulators may make speeches like this, but regulation fails to operate within these confines. Capital regulation and an ample reserves regime drove banks out of short-term repo lending. Supervisory pressure in favor of government securities led to the buildup of interest rate risk. Now liquidity regulation will force banks into even more reserves and ultra-short term govies. https://lnkd.in/evxnNBbQ

Unrealized losses don’t matter until they suddenly do. In theory, “unrealized losses” on securities held by banks don’t matter because at maturity, banks will be paid face value, and the unrealized loss diminishes as the security nears its maturity date and goes to zero on the maturity date. In reality, they matter a lot as we saw with the above four banks after depositors figured out what’s on their balance sheets and yanked their money out, which forced the banks to try to sell those securities, which would have forced them to take those losses, at which point there wasn’t enough capital to absorb the losses, and the banks collapsed.