Brooke Masters: The Leverage Story Banks Want to Hide

brookemastersSlowly, ever so slowly, banks are being forced to clear away the fog and mirrors that have protected their balance sheets from the prying eyes of investors and sceptics.

Last month, UK banks became the first in the world to disclose their total borrowing, known as leverage ratio, on a standardised basis.

They haven’t done this willingly – the Bank of England insisted – and their disclosures are all surrounded by lots of hemming and hawing about how the leverage rules are still changing.

The results are instructive. The UK’s five biggest banks are considered among the best capitalised in Europe on the traditional measure of core tier one equity divided by risk-weighted assets, which includes everything from home mortgages and small business loans to complex derivative contracts, each multiplied by a factor intended to reflect the amount the bank could lose. The ratios range from 12.3 per cent at HSBC down to 10.3 per cent at Royal Bank of Scotland.

The disclosed leverage ratios strip out the effect of risk modelling, which has the effect of more than doubling the size of every bank’s balance sheet and more than tripling that of Barclays. These numbers partly reflect the size of low-risk, high volume businesses. But they will be a boon to critics who think some banks have been tweaking their models to cut their capital requirements.

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Brooke Masters: The Leverage Story Banks Want to Hide

Brooke Masters: On-site supervisors a good start for ECB

brookemastersBanking union is the flavour of the month. Faced with investors who doubt the ability of some eurozone sovereigns to make good on their debts, the 17 members of the single currency have agreed to work together to channel aid directly to troubled lenders. But the deal is conditioned on the creation of a single banking supervisor, empowered to crack down on risky banks, no matter where they are located.

Setting up an impartial expert to oversee the banks could well be a key step toward restoring trust. Freed from local political concerns, a central supervisor might well have a clearer view of the problems and the fortitude to take the almost certainly unpleasant decisions needed to solve them.

But well-informed banking supervisors can’t be summoned with the wave of a wand, and key eurozone finance ministers this week repeated calls for something to be put in place by the end of the year. Given that tight deadline, the options are pretty limited. The fledgling European Banking Authority, which opened its doors just over 18 months ago, currently sets standards but it has no legal authority to supervise banks. Its mandate to create a stable and level playing field throughout the single market also runs counter to taking on a specific eurozone role.

The European Central Bank is seen by many as the only operator with the credibility and resources to crack down hard on recalcitrant lenders. The current plan is for the ECB – or some offshoot – to take charge of the bigger, cross-border institutions while smaller banks would continue to be supervised locally. That arrangement – which parallels the UK plan to hand supervision back to the Bank of England next year – raises concerns about an overly powerful central bank trying to do too many jobs at once. It also contains a problematic fudge. Small banks can be dangerous too. Witness the woes of the Spanish regional savings banks and the 2007 depositor run on Northern Rock, a middle-sized UK lender.

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Brooke Masters: On-site supervisors a good start for ECB

Brooke Masters: Latest trend in investor activism raises questions

brookemastersWhen most US investors do not like the way a company is heading, they vote with their feet and sell their shares. But a new generation of activist investors is challenging that tradition by opting to amass shares and demand board representation and strategic change instead.

Hertz, the car rental group, became the latest US company to come under such pressure. It is now said to be considering selling or spinning off its equipment hire business after stakebuilding by investors including Dan Loeb and Carl Icahn.

While activists have been around for decades, the scale appears unprecedented. Such hedge funds were managing $90bn as of last year’s fourth quarter, almost triple the total five years ago, according to Hedge Fund Research.


Brooke Masters: New York law chief turns spotlight on dark pools

brookemastersThe US financial regulatory system can be described as a bowl of spaghetti. Multiple watchdogs with overlapping jurisdictions routinely tangle with each other over how best to keep markets safe and honest.

Financial groups routinely moan about the contradictory requests and soaring compliance costs that result.

This week, Eric Schneiderman, the New York attorney-general, reminded investors why the US system of competitive regulation can sometimes work in their best interests. Mr Schneiderman fired a warning shot on Wednesday into the murky world of dark pools – trading venues where investors buy and sell large blocks of shares anonymously, with prices posted publicly only after deals are done.

He alleged that Barclays’ pool, Barclays LX, favoured high-speed traders while misleading institutional investors.

Click here to read the rest of the piece in Financial Times.