But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
Must-read: Key takeaways for investors in the banking sector
The longer term outlook for Eurozone banks does look more positive than a year ago given reasons including the substantial deleveraging, capital raising by local banks and the European Central Bank (or ECB)’s recently announced ABS purchase program.
To be sure, banking stocks aren’t without their risks. In the United States, I expect the Treasury yield curve to flatten dramatically in coming months.
Increasing capital market activities should also help boost banking stocks’ earnings. A pickup in mergers & acquisitions activity, debt underwritings and initial public offerings globally should provide a boost to investment banks’ revenues in the next few quarters.
Solid loan growth should be a key contributor to higher net interest income for banks. One of the key themes that emerged from major U.S. banks’ second-quarter earnings reports is a notable pick-up in both consumer and, particularly, commercial loan volume.
Financials are likely to benefit from rising rates. I expect that rates are likely to moderately rise from here and continue to increase in coming years, as the U.S. economy strengthens.
This, of course, leaves open the question of whether or not financials constitute a “value trap.” Many market watchers, for instance, argue that the sector’s lower valuations are merely a reflection of a drop in the sector’s return on assets (or ROA) since the financial crisis.
Despite Basel III’s shortcomings, you must remember that it wasn’t the Basel norms that precipitated the subprime or global financial crisis. It was the people who didn’t implement the rules properly. Basel III is currently the best possible regulatory framework.
Basel III addresses most of Basel II and II.5′s deficiencies. But it still has some shortcomings. Firstly, the increased regulatory capital required under Basel III will increase barriers to enter into the sector.
Basel Committee on Banking Supervision came out with Basel III Accord in September 2010. Basel III Accord had a new capital framework. It revised and strengthened the three pillars of Basel II.
Basel II.5 was essentially a revision of Basel II norms, as the existing norms often failed to correctly address the market risks that banks took on their trading books. Basel II.5′s main aim was to strengthen the capital base, and so the banks’ ability to withstand risk, by increasing banks’ capital requirements.
Basel II was a comprehensive regulation that covered major sources of risks for banks. But it had a few major drawbacks. Firstly, it provided incentive to a bank’s management to underestimate credit risk.
Basel II’s third pillar concerns market discipline, and the requirements are related to disclosures of a bank’s market-related investments. According to pillar three, banks were expected to build comprehensive reports on their internal risk management systems.
The second axis of the regulatory framework is based on internal controls and supervisory review. It required banks to have internal systems and models to evaluate their capital requirements in parallel to the regulatory framework and integrate their particular risk profiles to the overall regulatory framework.
The first pillar updated the 1988 solvency ratio. Risk-weighted assets (or RWA) capital is still viewed as the most relevant control ratio, as capital is the main buffer against losses when profits become negative.
The Basel Committee on Banking Supervision received feedback from central banks across the world and other stakeholders. Since Basel I’s implementation in 1992, the banking landscape had changed a lot. So there was a need to come up with a new set of regulations.
Although Basel I brought a worldwide standard in regulations, introduced the risk-weighted assets concept, and segregated capital, it had a few deficiencies.
Basel I focuses on credit risk (other kinds of risks are left to the purview of national regulators). It defines “capital requirements” by the function of a bank’s on- and off-balance sheet positions.
Post World War II, there was growing globalization of financial intermediation. This occurred slowly but steadily, as exchange controls and other direct restrictions on financial flows were removed or eroded and as international communication improved.
The Office of the Comptroller of the Currency (or OCC) is an independent bureau of the U.S. Department of the Treasury. The OCC regulates all the national banks in the U.S. It also regulates all foreign bank branches in the U.S.
Capital is important because it’s that part of an asset which can be used to repay its depositors, customers, and other claimants in case the bank doesn’t have enough liquidity due to losses it suffered in its operations.