Stimulus Tapering May Give Banks – and Bankers – a Temporary Headache

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Bernanke

Bernanke's caveat on QE

The Federal Reserve is expected by many economists to begin tapering its monthly purchases of Treasury and mortgage bonds by as soon as September. It will likely end its stimulus shopping spree at some point in 2014. So, what happens then? A whole lot of conflicting developments.

If the economy appears steady enough for Fed Chairman Ben Bernanke to take off the stimulus training wheels – which he has suggested it soon will be – interest rates are likely to climb. That’s bad for consumers, but good for banks thirsty for decent margins on personal and commercial loans. We reported back in February that margins for mortgage units at big banks were down as much as 40%.

But, as the Wall Street Journal’s David Reilly astutely points out, it will take a bit of time for banks to see margin gains on their balance sheets. Couple that with the fact that loan demand will likely tick downward following an interest rate increase, and we’re not looking at an immediate win for banks.

Then there is the issue of debt securities, which banks have swallowed up as Bernanke has done his thing. With an interest rate increase, banks will likely see “sizeable” unrealized losses, says Reilly, which won’t show up in P&L but do affect tangible book value.

More importantly, the losses are counted against capital under new Basel rules. That’s bad news considering U.S. regulators are already considering implementing a new standard that would force large banks to hold capital reserves equal to 6% of their total assets, twice the level set by global banking supervisors.

Banks have shown a proclivity to slashing underperforming business units, along with the asset sales, when they need to build up capital. Can they hold off until interest rates gains outpace losses in securities holdings? We’ll see. It could take two to three years for that to happen.

Most Head-Scratching Things Bankers Did This Year (eFinancialCareers)

We all do and say dumb things, but when it happens on Wall Street, you’re bound to get a bit more exposure.

Unfair Stints (WSJ)

The guidelines used sentence white-collar criminals involved in fraud cases may be revised to put less emphasis on financial-loss calculations. The current guidelines allow judges to take share price hits into effect, which can cause some jail sentence durations to balloon.

Tech Chief Wanted (Financial News)

Nasdaq is on the lookout for a new manager of its technology division, and it sounds like additional hires could be in the pipeline. “Nasdaq is embarking on a significant strategic growth strategy of developing its technology and services footprint.”

Get to Work! (WSJ)

Americans spent three hours and 32 minutes a day doing work-related activities last year. We spent two hours and 50 minutes a day watching TV.

New Strategy Coming Into Focus (Financial Times)

Morgan Stanley has been given the green light to complete the buyout of its retail brokerage joint venture with Citigroup. The move underscores Morgan Stanley’s push to focus more resources on wealth management and less on trading. The bank laid off as many as 35 commodities traders last week.

Goldman Alums Flock to Hedge Funds (eFinancialCareers)

Where do most ex-Goldman bankers end up if they don’t quit the financial services industry altogether? Our research suggests that they have two preferred destinations: hedge funds, or failing that – Bank of America Merrill Lynch.

Buzz Around the Office

Baby Seattle (US Weekly)

You knew Kim Kardashian and Kanye West weren’t going to name their baby daughter anything traditional, but a pun, really? Meet baby North West.

List of the Day: Young Employees

If you want your young employees to prosper, do this.

  1. Provide them with a mentor.
  2. Let them struggle a bit.
  3. Create an ownership mentality.

(Source: The Daily Muse)

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