Here are highlights from Wednesday's Analyst Blog:
ADP Sees 201K New Jobs Added
The Automatic Data Processing (NYSE: ADP) employment survey was a little weaker than expected in March. It shows that private sector employment rose by 201,000, slightly below consensus expectations for a 210,000 increase. The gains, however, were widespread, and if confirmed by the BLS on Friday, would still be a solid report.
In February, ADP was almost right on the money, but that came after a few months when its estimates were well off the mark. In January, it was far too optimistic, showing a gain of 187,000, and then the BLS only reported a gain in private sector jobs of 50,000 (later revised up to 68,000). In December, ADP was even further off the mark and reported a gain of 297,000 private sector jobs and the BLS only reported a gain of 113,000 (later revised up to 167,000) from the private sector.
Prior to the last three months, for most of 2010, ADP was being too conservative. However, the ADP numbers are also subject to revision, and the February gains were revised down to 208,000 from 217,000.
Bank Surcharge: A Recession Vaccine?
With the world still reeling under recessionary shockwaves, regulatory officials of more than two dozen countries are mulling over imposing a capital surcharge on the world's largest banks whose collapse could further threat the global economy, Bloomberg reported last week. This will be an addition to the new set of minimum capital standards, known as Basel III, imposed by the world regulators in 2010.
The convention will adopt tougher measures for banks deemed 'too big to fail', in desperate attempts to stave off another global financial crisis and restore public confidence.
As most of the major large-cap banks seem to comfortably maintain the minimum capital norms mandated by the Basel Committee, they will never hesitate to take extravagant risks. Also, the success of regulatory efforts in restoring worldwide financial stability has created a wrong impression that the government will save big institutions from failing whenever they are in major financial trouble. As a result, an additional capital restriction is needed to nip such institutions' risky indulgences in the bud.
Surcharge: To What Extent?
Mega banks worldwide may be forced to maintain an additional three percentage point reserves compared to other financial institutions under the new restriction. The extra capital surcharge may range from 1% to 3% of a bank's common equity, the source said.
The Swiss government was an early bird, proposing to increase the minimum common equity requirement to 10% from the Basel III mandate of 7% for UBS AG(NYSE: UBS) and Credit Suisse Group (NYSE: CS).
Competitiveness to Be Tainted?
Imposing higher-than-average surcharge on major financial institutions of some countries would give banks of other countries the benefit of lower capital reserves. For fear of losing competitiveness in the global market, the affected banks might even consider shifting their businesses to some other country where the extra reserve requirement is not in action. Perhaps a centralized decision would be more effective.
Is There a Deadline in Place?
During November of last year, G-20 nations instructed the Basel Committee to start framing additional measures for big banks. There is no concrete clue as to when the regulators of 27 countries -- including China, India, Brazil, Germany, the U.K. and the U.S. -- are going to impose the additional surcharge on mega-banks. However, the Financial Stability Board said that it will finalize the structure of the surcharge by the end of this year.
Position of U.S. Banks
According to the Basel III requirements, banks will have to maintain a minimum Tier 1 capital ratio as high as 12.0%. This will comprise a minimum buffer of 6.0%, a conservation buffer of 3.0% and an additional 3.0% anti-cyclical buffer. The anti-cyclical buffer will help increase the Tier 1 capital requirements to 12% during boom times.
Most of the major U.S. banks including JPMorgan Chase & Co. (NYSE: JPM) and Citigroup (NYSE: C) maintain Tier 1 capital ratios above the minimum level mandated by Basel. Furthermore, since most of the major U.S. banks have repaid the government bailout money, it should not be very difficult for these to maintain up to 3% in extra reserves. The latest stress test results and consequent approvals to hike dividend yields also back this view.
Unprepared = Unsafe
A weak capital level is always a threat to worldwide economic well being. Needless to say, such capital standards would act as building blocks of an already weak economy, with restrictions ultimately translating to fewer bank collapses and less involvement of taxpayers' money for bailing out troubled financial institutions.
Regulators and bankers are bound to disagree over the extent of positive impact from the new capital rules as there remain other lingering concerns, including a high unemployment rate, continuation of residential and commercial real estate loan defaults and liquidity challenges.
However, many big banking names that run on lower capital ratios will be forced to maintain higher capital standards, which would pull the reins on their risky ventures. Consequently, we see the surcharge as holding long-term promises to economic buoyancy.
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