- BIS3: US Banks OK given softer standards, longer timeline "Proposed changes to BIS capital and liquidity standards have been a key source of uncertainty for Global Banks. Original proposals were vague but harsh, particularly as it related to liquidity requirements and timeline. BIS has now pushed back implementation dates for key items and softened some effects including deductions from Tier-1 Common, netting of derivatives, and liquidity requirements. We believe, US firms appear well armored in terms of capital/liquidity, with JPM strongest on relevant metrics. See tables on pg 3 for impact of key BIS3 capital/liquidity standards on US brokers/money center banks."
- JPM, GS, C well positioned for early capital deployment "Under our base case which assumes 2.5x Market Risk RWA (i.e. trading book) “inflation”, we believe the 4 big US dealers we cover appear sufficiently capitalized to meet BIS3, with JPM, GS, and C well positioned for early capital deployment in 2011, MS in 2012. Under BIS3 liquidity req. (Net Stable Funding ratio >100%), we est. C and JPM are already at or above 100% target while GS and MS are currently below it - though given NSF ratio isn’t mandated until 2018, they have ample time to reach target. Based on our analysis, C appears most liquid (105%), MS least (86%)."
- Scenario: Rising RWAs, Core Tier-1 target of 6,7,or 8% "Impact of RWA “inflation” on BIS3 CT-1 ratio (i.e. adjusted T-1 Common) hard to estimate as capital targets not set and US banks report RWA under BIS1. In our scenario analysis, we assume: Market Risk RWAs rise 2x-5x; counterparty credit risk RWAs rise 37.5%; a CT-1 target ratio of 6, 7, or 8%; no increased capital deployment; and roll forward RWA & earnings to 2012E. Results show JPM, C best positioned to withstand higher multiples of Market Risk RWA. Note though, C may face higher RWA “inflation” than peers (see below)."
- Stressed VaR to drive differences in RWA “inflation” "Comparing VaR across firms is treacherous given different methods of calculating it. However, comparing VaR reported at “peak” stress periods to Market Risk RWA, we can estimate how much of a firm’s RWA drives capital to support “normal risk” and how much reflects extra “cushion” for “tail risk”. Firms that currently fail to address “tail risk” face higher RWA “inflation”, we believe. Given VaR inconsistencies, we run 2 scenarios where we measure “tail risk” as a % of Market Risk (trading risk) and as % of combined Market and Credit Risk (cpty. credit risk). Based on our analysis, C appears weak on both metrics and could face higher RWA “inflation”. That said, given C’s excess CT-1, per our estimates, we believe it can withstand significant RWA “inflation” and still achieve min. CT-1 t argets. We also see potential for capital deployment at C, as early as 2011."
- JPM, GS, C well positioned for early capital deployment "Under our base case which assumes 2.5x Market Risk RWA (i.e. trading book) “inflation”, we believe the 4 big US dealers we cover appear sufficiently capitalized to meet BIS3, with JPM, GS, and C well positioned for early capital deployment in 2011, MS in 2012. Under BIS3 liquidity req. (Net Stable Funding ratio >100%), we est. C and JPM are already at or above 100% target while GS and MS are currently below it - though given NSF ratio isn’t mandated until 2018, they have ample time to reach target. Based on our analysis, C appears most liquid (105%), MS least (86%)."
- Scenario: Rising RWAs, Core Tier-1 target of 6,7,or 8% "Impact of RWA “inflation” on BIS3 CT-1 ratio (i.e. adjusted T-1 Common) hard to estimate as capital targets not set and US banks report RWA under BIS1. In our scenario analysis, we assume: Market Risk RWAs rise 2x-5x; counterparty credit risk RWAs rise 37.5%; a CT-1 target ratio of 6, 7, or 8%; no increased capital deployment; and roll forward RWA & earnings to 2012E. Results show JPM, C best positioned to withstand higher multiples of Market Risk RWA. Note though, C may face higher RWA “inflation” than peers (see below)."
- Stressed VaR to drive differences in RWA “inflation” "Comparing VaR across firms is treacherous given different methods of calculating it. However, comparing VaR reported at “peak” stress periods to Market Risk RWA, we can estimate how much of a firm’s RWA drives capital to support “normal risk” and how much reflects extra “cushion” for “tail risk”. Firms that currently fail to address “tail risk” face higher RWA “inflation”, we believe. Given VaR inconsistencies, we run 2 scenarios where we measure “tail risk” as a % of Market Risk (trading risk) and as % of combined Market and Credit Risk (cpty. credit risk). Based on our analysis, C appears weak on both metrics and could face higher RWA “inflation”. That said, given C’s excess CT-1, per our estimates, we believe it can withstand significant RWA “inflation” and still achieve min. CT-1 t argets. We also see potential for capital deployment at C, as early as 2011."
Merrill Lynch Banks Multinational Universal 20100812
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