The largest U.S. banks, down 21 percent this month, aren’t seeing the same retreat by counterparties and clients that helped drive some firms to the brink of collapse in 2008.
The nation’s banks are maintaining trading with major counterparties and haven’t seen widespread, large withdrawals by clients, according to people with direct knowledge of dealings at four firms, who asked to remain anonymous because customer interactions are private. The five largest Wall Street firms had $1.49 trillion of liquidity resources -- cash or assets that can be sold quickly -- which is enough to weather the “market dislocations,” CreditSights Inc. wrote in a report yesterday.
Lenders including Bank of America Corp. and Citigroup Inc. have plummeted this month as the European sovereign debt crisis and a potential double-dip recession in the U.S. sent the Standard & Poor’s 500 Index down 13 percent. The retrenchment hasn’t caused funding markets to freeze as in 2008, when the government injected $700 billion into the largest lenders to stave off collapse.
“We have a financial system that has more equity, more capital, lower levels of leverage, stronger liquidity,” said Randy Snook, executive vice president at the Securities Industry and Financial Markets Association, a banking trade group. “The overall economic environment and economic growth questions are the largest issues that the marketplace is facing right now. Compare that with 2008, the marketplace was dealing with the functioning and the resiliency of the financial system.”
U.S. and Europe
European banks haven’t fared as well as U.S. lenders. Among the world’s biggest banks, nine of the 10 perceived as the most likely to default are European, data compiled by Bloomberg show.
The spread between the three-month dollar London interbank offered rate and overnight indexed swap, a gauge of banks’ reluctance to lend to each other, rose to 19.16 basis points yesterday. It reached 366 basis points in October 2008.
Rates in repo markets, where firms obtain short-term financing, have fallen for five of the last six days. U.S. banks have seen “no evidence” of investors requiring more collateral for a given loan, or raising the so-called haircut, SIFMA managing director Rob Toomey said yesterday.
“If I thought this was a calamity, I would go back to New York,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told CNBC. “People are careful, but they’re still doing business with their clients. A lot of the markets are fine, the repo markets, the mortgage markets, some of the credit markets are still open.”
Bank of America, based in Charlotte, North Carolina, fell 11 percent yesterday in New York Stock Exchange composite trading, increasing its decline to 30 percent in August and 49 percent so far this year. Citigroup dropped 10 percent yesterday, while Morgan Stanley and Goldman Sachs Group Inc. each fell more than 9 percent.
“People are responding to a huge amount of uncertainty around the economic outlook,” said Richard Staite, an analyst at Atlantic Equities LP. “It is expected that investors would look to sell the banks as being one of the most impacted sectors from that.”
Credit-default swaps on Bank of America added 26 basis points to 304 basis points yesterday in New York, according to data provider CMA. Contracts on Wells Fargo & Co. increased 2.7 basis points to 117, the data show. Contracts on New York-based banks Goldman Sachs and Citigroup climbed to 195 basis points and 194 basis points, respectively.
U.S. banks’ Tier 1 common capital ratios, a measure of financial strength, have almost doubled since 2008 to an average 10 percent at the end of June, analysts at Goldman Sachs led by Richard Ramsden said in a report this week. Liquid assets make up 35 percent of holdings at Bank of America, JPMorgan and Citigroup, compared with 27 percent in 2007, according to the report.
“The teams that are managing liquidity at these firms have seen the abyss and have peered down into it recently,” said David Knutson, a credit analyst at Legal & General Investment Management. “Those memories are fresh in these management teams’ minds and I think that’s why the risk is low.”
Concerns about banks’ capital and liquidity are less pronounced than in 2008, Charles Peabody, an analyst at Portales Partners LLC, said in a Bloomberg Radio interview.
“The problem is, when are we going to see any kind of revenue improvement?” Peabody said. “Given the flatness of the yield curve, margin assumptions are going to be cut again, and given the uncertainties in the economy, loan demand assumptions and the capital markets assumptions are going to be pared back. So, you’ve pushed out any kind of revenue recovery until the first quarter of next year.”
Morgan Stanley, which borrowed more than $100 billion from the Federal Reserve in September 2008 after hedge-fund clients pulled funds from the firm’s prime brokerage unit, hasn’t seen similar prime-brokerage withdrawals this month, Sanford C. Bernstein analyst Brad Hintz said in a note yesterday. Lenders haven’t reduced credit lines to the firm, Hintz wrote.
“Since concerns about a potential U.S. government default began to build in July, no bank or counterparty has turned down the Morgan Stanley name,” Hintz wrote.
The spread between the three-month euro interbank offered rate and overnight indexed swap rose yesterday to 69.7 basis points, the highest since April 2009.
European Union regulators failed eight of 91 banks in stress-test results announced last month, requiring the lenders raise 2.5 billion euros ($3.5 billion) in capital. While the examinations considered a 25 percent writedown on Greek government bonds, they didn’t include the possibility of a sovereign default, a scenario that’s now the focus of investors.
Societe Generale slumped 15 percent to 22.18 euros yesterday in Paris. Credit-default swaps on the bank rose 65 basis points to a record 337 basis points. Societe Generale “categorically denies all market rumors,” Emmanuelle Renaudat, a spokeswoman for the French bank, said yesterday in an interview. She declined to be more specific.
European bank shares lost 5.3 percent, for the biggest decline among the 19 industry groups in the Stoxx Europe 600 Index and the steepest drop since May 2009.
Continued declines may erase the current U.S. stability. Clients are likely to pull business from banks if shares drop below 50 percent of tangible book value, which would indicate concerns about solvency, Peabody said. Bank of America is at 54 percent of tangible book value, while Citigroup and Morgan Stanley are at 58 percent and 62 percent, respectively.
“If this moves from concern to fear, then all bets change quickly,” Knutson said. “For anyone who lived through the 2008-2009 period, it’s not at that level yet.”
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