Is Citibank safer than Jpmor­gan?

The Pak Banker - - FRONT PAGE -

The new­est stress tests for US banks pro­duced scores that are at odds with other mea­sures of lenders’ safety, in an­other sign that some in­sti­tu­tions may be too big for reg­u­la­tors to un­der­stand and ex­ec­u­tives to man­age.

For ex­am­ple, Cit­i­group Inc, which has been bailed out mul­ti­ple times by the US government, showed up on the score sheets posted by the Fed­eral Re­serve on Fri­day as be­ing clearly safer than JPMor­gan Chase & Co. That con­clu­sion is at odds with the views of in­vestors, bond an­a­lysts and credit-rat­ing agen­cies, as well as when mea­sured by a yard­stick reg­u­la­tors them­selves want to use in the fu­ture. “At the end of the day, there is a le­git­i­mate ques­tion about the abil­ity of reg­u­la­tors to fully eval­u­ate $2 tril­lion in­sti­tu­tions be­cause of the com­plex­ity and ex­po­sures they have,” said Fred Can­non, di­rec­tor of U.S. re­search at Keefe, Bruyette & Woods.

On Thurs­day, the Fed­eral Re­serve re­ported the lat­est re­sults of the tests that be­gan af­ter the 2007-2009 fi­nan­cial cri­sis to de­ter­mine if banks have enough cap­i­tal to with­stand a se­vere eco­nomic cri­sis. The Fed con­cluded that the banks are in “a much stronger po­si­tion” than be­fore the fi­nan­cial cri­sis in 2008. While ex­perts are not ar­gu­ing with the fact that the banks are bet­ter cap­i­tal­ized now and that the sys­tem is safer than it was in the run-up to the fi­nan­cial cri­sis, some of the num­bers the reg­u­la­tors pub­lished left an­a­lysts and bank ex­ec­u­tives grop­ing for ex­pla­na­tions. The test raises ques­tions about the abil­ity of reg­u­la­tors to head off the next big threat to the fi­nan­cial sys­tem be­cause of the com­plex­ity of the in­sti­tu­tions.

The re­sults are also im­por­tant as they will help the Fed de­cide how much cap­i­tal banks can re­turn to in­vestors.

The report showed that Cit­i­group’s cap­i­tal, as tracked by the Tier 1 com­mon cap­i­tal ra­tio, would dip to 8.3 per­cent dur­ing two years of hy­po­thet­i­cal stress. JPMor­gan’s would fall to 6.3 per­cent. Both num­bers are bet­ter than the 5 per­cent min­i­mum un­der cur­rent reg­u­la­tions, but they show Cit­i­group hav­ing a big­ger cush­ion to weather losses.

That does not make a lot of sense to Kath­leen Shan­ley, a bond an­a­lyst at Gim­meCredit, a re­search ser­vice for in­sti­tu­tional in­vestors.

“I wouldn’t say that Citi is safer than JPMor­gan, for a va­ri­ety of rea­sons, in­clud­ing its track record,” Shan­ley said.

Cit­i­group has lower credit rat­ings than JPMor­gan, and prices for credit de­fault swaps show the mar­ket views JPMor­gan as safer. Cit­i­group is the third-big­gest U.S. bank by as­sets and JPMor­gan is the big­gest.

A Fed­eral Re­serve spokes­woman de­clined to com­ment, as did rep­re­sen­ta­tives for Cit­i­group and JPMor­gan. Cit­i­group’s score came out bet­ter partly be­cause it started the test with a bet­ter Tier 1 com­mon ra­tio, 12.7 per­cent com­pared with JPMor­gan’s 10.4 per­cent.

The start­ing ra­tios were based on the banks’ fi­nan­cial state­ments at the end of Septem­ber. They were cal­cu­lated based on a set of in­ter­na­tional reg­u­la­tions known as Basel 1, which the Fed­eral Re­serve in­tends to re­place as in­ad­e­quate with a pend­ing new set known as Basel 3.

Un­der the ex­pected Basel 3 rules, Cit­i­group has es­ti­mated its ra­tio was 8.6 per­cent at the end of the third quar­ter, about the same as the 8.4 per­cent JPMor­gan es­ti­mated.

Among the rea­sons that Cit­i­group’s ra­tio will fall so much un­der Basel 3 from the Basel 1 level is that the new rules will not treat as fa­vor­ably Cit­i­group’s de­ferred tax as­sets.

Cit­i­group ex­pects those as­sets to al­low it to pay lower taxes on fu­ture prof­its be­cause it lost so much money when the fi­nan­cial cri­sis and re­ces­sion hit. Also, Basel 3 will re­duce the ben­e­fits of stakes Cit­i­group has in joint ven­tures, such as its bro­ker­age with Mor­gan Stan­ley.

The Fed­eral Re­serve did not pub­lish stress scores for the banks un­der Basel 3 be­cause the reg­u­la­tors have not fi­nal­ized those rules yet.

An­a­lyst Can­non said there was one rea­son to think of Cit­i­group as be­ing safer: its cap­i­tal mar­kets busi­ness is smaller than JPMor­gan’s. Reg­u­la­tors re­gard cap­i­tal mar­kets op­er­a­tions as riskier than con­sumer bank­ing busi­nesses.

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