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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: pogohere who wrote (101713)	9/7/2009 5:34:44 PM
From: pogohere	1 Recommendation Respond to of 116555

and this: Bank capital Published: September 7 2009 09:30 \| Last updated: September 7 2009 22:14 No more funny money. Last Thursday, US Treasury secretary Timothy Geithner said banks needed more capital – yet bank stocks rallied. This weekend, G20 finance ministers repeated the same – adding the capital had to be higher quality, with lower pay-outs. Yet bank stocks have continued to rally. Although the G20 has pledged to keep pumping out the stimulus, markets seem to be missing a trick. Bank share prices should be falling. Higher tier one capital ratios would shrink returns on equity. If banks have to hold a couple of extra cents for every dollar or euro that they generate, profitability will suffer. Even fat years could be lean if buffers have to be built up in them. Then there is the threat of equity issuance. In April, the International Monetary Fund estimated it would take $875bn of extra capital for US and European banks to boost tangible common equity as a proportion of total assets to 4 per cent. To get to 6 per cent, the mid-1990s norm, would cost $1,700bn. As the market capitalisation of all US and European banks is about $2,000bn, that shows how large share issues could be if such a “Basel III” scheme was ever implemented. Equity investors would not suffer alone; bank debt investors would have to “burden-share” too. So far, bondholders have gained more from bank bail-outs than shareholders. US bank stocks are some 40 per cent below where they traded last year. By contrast, spreads on US subordinated bank debt have returned to pre-Lehman levels, and credit default swap premiums on bank debt are close. The knocks that the hybrid market has taken lately, after European governments told bailed out banks to defer coupon payments, may be a sign of things to come. At the very least, the importance of the perpetual securities market will fall. Clearly, the other way for banks to raise capital ratios is to restrict asset growth or even shrink their balance sheets outright. But then the problem shifts to borrowers. That is bad for the economy. It is bad for stock markets too. ft.com