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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

Interesting article outlining bank balance sheet problems and likely forced M&A / capital raising coming. Banks are in limbo without a key lifeline. Here's where cracks may appear next https://lnkd.in/efji9mgW

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/iMQydm COI-0001208

Bond traders are discounting the bonds issued by banks with heavy CRE exposure. (Which is not a huge surprise.) "Some of the regional lenders with portfolios weighted toward underperforming commercial real estate markets include Bank OZK, Valley National Bancorp and Webster Financial Corp., according to Morgan Stanley. None of the trio of banks responded to requests for comment from Bloomberg News. Barclays says that Webster has commercial real estate exposure equal to more than 250% of its capital. The Stamford, Connecticut-based bank has bonds due 2029 that traded at spreads of nearly 200 basis points, or 2 percentage points. Those spreads have been widening since late January. ...... In the US, smaller banks are relatively more exposed to commercial property: They have more than two thirds of the commercial real estate loans in the banking system, despite having about a third of the assets, according to data from the Federal Reserve." On the other hand, Steve Mnuchin just invested $1B in NYCB, so opinions on the real level of risk here vary. https://buff.ly/3Toz12Z

Synthetic, or as referred to in Europe, Significant Risk Transfer (SRT) transactions have seen a notable pick up this year in the US. This development has aligned with the “Capital Recession” theme we have outlined as ongoing with the various factors impacting bank balance sheets. The emergence of this product from bank sellers is symbolic of the transfer of assets to private entities through private credit and asset-based finance (ABF) channels.

This feels like another game of hot potato. As U.S. regulators push banks to hold more capital reserves banks seem to be pushing risk over to private credit companies. How much risk are shadow banks hiding for already over leveraged banks? The Financial Times reports that private capital is capitalizing on significant risk transfer trades, and at a much greater pace and with far less scrutiny than in Europe where SRT's have been more commonly used https://lnkd.in/ewGndwVZ

What are Additional Tier 1 bonds? This video explains why banks issue AT1s, why they typically carry such high yields, and covers some of the key risks for investors to consider. https://okt.to/2MhzpJ

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

Shadow Bank Loans Top $1 Trillion as US Regulators Warn of Risks (April 2024) - Banks’ lending to non-bank financial firms has steadily risen - Janet Yellen said this week that officials are monitoring risk The amount that US banks have loaned to so-called shadow banks surpassed the $1 trillion mark, according to Federal Reserve data, even as regulators warn of potential risks to the financial system. - The Fed reported Friday that lenders crossed the threshold in loans outstanding to non-deposit-taking financial companies such as fintechs and private credit investors at the end of January. The figure was about $894 billion a year earlier, the data show. Learn more about Bloomberg Law or Log In to keep reading: https://lnkd.in/gZFJkH4g

Following the global financial crisis, banks lengthened the maturity of their assets relative to their liabilities, principally through increasing their investments in mortgage-related assets. Whether this type of maturity transformation exposes banks to interest rate risk depends in part on the effectiveness of bank deposits as a hedge against interest rate shocks. In this paper, we provide evidence that, despite an increase in the average maturity of bank assets, the duration of bank equity was negative for most of the post-financial crisis era. We document that an important factor contributing the decrease in the duration of bank equity was an increase in the average duration of deposits due to a positive relation between deposit betas and the level of interest rates. The dynamic nature of the deposit betas also explains why deposits provided a poor hedge against recent rate hikes and declines in the value of bank long term fixed rate assets. We provide corroborative evidence concerning the impact of variation in deposit betas on bank interest rate risk exposure using a text based analysis of bank earnings conference calls. Overall, we provide evidence that variable deposit betas contribute to the negative convexity of bank equity and variations in bank interest rate risk exposure.