Basel III- Commentary September 13, 2010 From: Mike Durante Sent: Monday, September 13, 2010 10:38 AM Subject: Tier 1 RBC remains 6% - here are the larger US banks on that measure (again) - you will see how unnecessary M2M accounting was Importance: High Basel III sets Total RBC at 8%; Tier 1 at 6% and TI Common at 3.5% building to 4.5%... Here’s how America’s banks stack-up. The reason why US banks are in such great shape is because the Europeans can’t catch-up in balance sheet strength to ours fast enough. It’s mind blowing that US banks are so undervalued save they are State Enemy #1 in American politics (at present). Call me (214) 871-6721) if you need a definition on what RBC or RWA means or is calculated. Western Reserve has a built-in system that automatically calculates these figures. Too be fair to Bob McTeer (and Bill Isaac), I “borrowed” some old UBPR software from my examiner days. We calculate RBC ratios in seconds. Bob – I did return my examiner’s bag to the The Fed tho in mint condition. Bill – And the towels missing from the swanky FDIC training center in VA was not me… you gotta watch those OCC guys, they can be forgetful sometimes…Fed guys get towels with the Fed’s seal on them. Far cooler! Total RBC Tier 1 RBC CE/RWA Primary Capital* NOTE JP Morgan 15.8% 12.1% 9.6% 20 8% CRAZY HIGH; dividends imminentCitigroup 15.6% 12.0% 9.9% 20.1% Ditto JPMBank of America 14.8% 10.7% 8.0% 20.8% Lower risk profile than JPM; C (less trading)Wells Fargo 14.5% 10.5% 7.5% 17.5% Lunatic capital levels; low risk taking bankUS Bancorp 13.5% 10.1% 7.4% 16.3% Low risk bankCapital One 17.0% 10.0% 7.2% 22.3% Silly * Primary Capital is total risk-based capital plus loan the contra asset (capital) loan loss reserve. It’s the historic way a regulator would assess capital adequacy. I also thought many would like to know how the new standards, which penalize European and Asian banks (I don’t think the Chinese will adopt it by the way, creating a competitive problem for the folks in the West with the Chinese… (See China Bubble discussion below). We didn’t like wealth transfer via the Kyoto Protocol. I doubt China, as a member of the G-20, will adopt Basel III. We shall see. Meanwhile, US banks are in exceptional shape versus the world at large.

Select larger regional US banks and some non bank BHC’s

Total RBC Tier 1 RBC CE/RWA Primary Capital* NOTEWells Fargo 14.5% 10.5% 7.5% 17.5% Lunatic capital levels; low risk taking bankUS Bancorp 13.5% 10.1% 7.4% 16.3% Low risk bankCapital One 17.0% 10.0% 7.2% 22.3% SillyRegions Financial 15.9% 12.0% 7.7% 19.4% Some legacy SE loans to deal on, but high capitalMarshal & Ilsley 14.4% 11.0% 7.0% 18.1% Some SW loans to chew on yet, but high capitalZions Bancorp. 15.3% 12.6% 7.9% 19.4% Some SW loans to chew thru, but high capitalKeyCorp 17.8% 13.6% 8.1% 21.9% Wow! And a clean loan book too!Comerica 15.0% 10.6% 9.8% 17.4% Clean bank! PNC 14.3% 10.7% 8.3% 17.6% Clean bank and ratios absorb National City tooFifth-Third 18.0% 13.7% 7.2% 23.0% Fortress balances sheet again at 5/3

Huntington 15.0% 12.5% 7.1% 18.7% Well healedFirst Niagara 15.1% 14.3% 13.4% 18.1% Silly * Primary Capital is total risk-based capital plus loan the contra asset (capital) loan loss reserve. It’s the historic way a regulator would assess capital adequacy. The “capital strike” was caused by a combination of Bill Isaac’s “SENSELESS PANIC” over M2M accounting, which others like McTeer and Western Reserve noted and then the Obama administration’s renege on TARP terms by announcing an unlawful ‘stress test”, which was legal only under the Bank Holding Company Act (via the Fed). The Executive branch was not allowed to call for such a “test” of bank holding companies. The result of which is extreme capital hoarding at banks or a “capital strike” now widespread throughout the economy. No regulator has ever seen a large bank universe with this much excess capital. All is on the table now – dividends; stock buy-backs (my favorite form of bank acquisition); and acquisitions of smaller banks. Western Reserve has pounded this reality since 2008. Trees and forests come to mind. Regarding China… As members of the G-20, I will venture to presume China will not adopt Basel III. They can’t come even close. The question is whether this is a sign China cannot withstand a bubble bursting there and/or will US and European banks will be at a competitive disadvantage to over taxing regulation. Under Kyoto, the US was penalized for its “carbon print”… but not China. This is the inherent problem with “international” standards where not all are treated equally. The Chinese have our old S&L loan impairment rules also knows as “evergreening”. See comments below from Seeking Alpha.

Chinese Business Press reports that the head of Shanghai’s China Banking Regulatory Commission (CBRC) says they’re seeing rising default risks on loans to real estate developers. Banks have had to roll over loans for some developers that are running low on cash due to the slowdown in sales caused by government cooling efforts. Which goes to show what I wrote yesterday, that at-risk loans are by no means limited to Local Government Financial Vehicles (LGFV). Shanghai Security News cites an unnamed CBRC official responding to the flurry of concern over the latest LGFV figures, arguing that “incompliant” loans do not necessarily equal nonperforming loans (NPL), because the collateral may be big enough to cover the risk.

Source: Seeking Alpha

From: Mike Durante Sent: Monday, September 13, 2010 10:07 AM Subject: Bank Capital Standards Set for 2015-2019: Internationalists Can't Compete w/ US Banks (if we leave US banks alone) Importance: High As a former regulator (the non-government kind = Federal Reserve Bank Holding Company Inspector), I have a platitude with regulatory capital analysis and two prior Basel Accords. I was not old enough for Vatican II (in case it comes up). The primary US regulators (The Fed; The Incompetent Comptroller of the Currency; the after-the-fact FDIC; and the now defunct Office of Thrift Unsupervised) all agreed to the Basel III new regulatory capital standards to be ratified in November by the G-20.

• New standards start “in effect” in 2015 and phase-in by 2019? This clearly is to give European banks plenty-o-time. Keynes quote about the long-term comes to mind

• US banks need no Keynes and no time to implement. They already are there and have

been. Here’s the non-event. And per my note last week, the Wall Street Journal miscalculated the “common equity” ratio as noted in my note last week on this. It’s not ‘common equity-to-assets…it’s common equity-to-risk-weighted assets as we proscribed. I’m not certain the financial press has any idea yet what RWA is.

• Final rule is 4.5% CERWA and ONLY 3.5% by 2013 is well below all major US banks • 61 of 62 US banks will have no need to raise capital by 2019 to meet the requirements

and the 1 below will earn it through retained earnings and only results in this 2.5% “buffer” added by 2019

• All 50 large “systemic” banks now regulated by the crack squad at the Fed (shameless self indulgence?) are past 2019 already

• 61 large US banks already have the 2019 “buffer” in place creating an ROE crisis and not a capital crunch

US bank capital is TOO HIGH

• Dividends are in the offing • Buybacks are in the offing • If the government gets off the banker’s back, then maybe lending too is in the offing?

From: Mike Durante Sent: Wednesday, September 08, 2010 1:44 PM Subject: International Bank Capital Standards: US Banks Lead Globe in Capital Strength Importance: High I was a bit perturbed this A.M. to read the Journal’s report on the international bank capital standards negotiations. The notion of some standardized regulatory capital standards across the G-20 is not new. Basel is in its third iteration now. Anyway, the Journal mentioned the rumored minimal capital levels being hashed-out, but failed to note for the reader that large US banks already greatly exceed the levels in negotiation. It’s the European banks and their regulators that

are holding-up the negotiations. US banks have the highest capital standards on the planet as well as the most onerous accounting for credit impairment. It’s just that nobody other than a bank examiner-type like knows this. Okay – here’s what is rumored and where the larger US bank holding companies stand: Rumored new rule on Common Equity to Risk-Weighted Assets (CERWA) 4.5%-5% Rumored new rule on Tier Risk-Based Capital (T1RBC) 8%-9% CERWA T1RBC JP Morgan 9.7% 12.2% Bank of America 8.0% 10.7% Citigroup 9.9% 12.0% Wells Fargo 7.7% 10.5% US Bancorp 7.4% 10.1% Goldman Sachs 12.5% 15.2% Capital One 7.1% 9.9% American Express 10.7% 10.7%