Re-writing Banking Regulations at “Stress” speed
April 2009 is promising to be a watershed month for Banking Regulations. Regulations and guidelines are being revisited regarding asset valuations, scenarios to consider while arriving at the capital adequacy and definition of the bank capital itself!
With clear directions from Congress, FASB is aggressively revisiting the mark to market rule esp for illiquid assets. Most of the banks are likely to see marked positive impact with any relaxation in mark to market rule. The Stress Test (Capital Assessment Program) is taking very sobering baseline and adverse scenarios while arriving at the health of the bank:
2009 2010 Real GDP Baseline Scenario -2.0 2.1 Adverse scenario - 3.3 0.5 Civilian unemployment rate Baseline 8.4 8.8 Adverse 8.9 10.3 House prices Baseline -14 -4 Adverse -22 - 7
These tests will mandatorily evaluate bank holding companies (BHC) with assets more than USD 100 bn, roughly covering two thirds of US BHC assets. In addition, many smaller banks may also choose to undergo similar test in order to gain access to funding. Last, increasingly Tangible Common Equity (TCE) is replacing Tier 1 capital as the indicator of banks stability.
While it is too early to arrive at the net results of these changes, some outcomes are more likely then others - Banks will need and get funding possibly beyond remaining funds under TARP, Banks will raise TCE either through new issue or conversion of “hybrid” capital into TCE and US Government stake will go up in relatively weaker banks while stronger banks may choose to raise private capital in order to avoid restrictions. In any case, next few weeks will keep the adrenaline rushing.
