Against the backdrop of recent European bank mergers, it is worthwhile examining the effects of acquisitions on regulatory capital. This is interesting because many European banks trade below book value. Normally, firms that acquire other firms pay a premium over book value to purchase the target firm. This premium is called goodwill. However, with the… Read More Badwill accounting
This week and the last, the Reserve Bank of New Zealand published two speeches discussing the strength of our financial system. It has been a while that I heard Geoff Bascand and Toby Fiennes on this topic, their speeches were as welcome as they were overdue. Geoff encouraged banks to be courageous. To support the… Read More Balls please, no horses
And what does it mean for one bank in particular? Last week, audit firm KPMG published its quarterly Financial Institutions Performance Survey (or FIPS). It featured the deteriorating profitability of New Zealand’s banks. Bad news of course, and the New Zealand financial press quickly jumped on the survey. Radio New Zealand printed a headline sporting… Read More Eyes Wide Shut: Did Bank Capital Grow under RBNZ’s Governor Orr?
I posted my paper on SSRN. It examines the association between discretionary capital buffers, capital requirements, and risk for European banks. The discretionary buffers are banks’ own buffers, or headroom: the difference between reported and required capital. I exploit capital requirements data that banks started to disclose since the release of a 2015 European Banking… Read More Max Headroom: Discretionary Capital Buffers and Bank Risk
Michael Reddell’s blog post of today reminded me that RBNZ governor Adrian Orr is scheduled to appear before the Parliament’s Epidemic Response Committee (PERC) tomorrow. The appearance will be an interesting event for sure, because it is difficult to challenge the Governor, ask him important or prickly questions in the flesh. In testing times like… Read More More questions for the RBNZ
Yesterday’s interest.co.nz featured an article summarising the work the RBNZ has done to support our economy. The article shows a long list of actions taken by the Reserve Bank, and yes, it looks impressive. On the other hand, the text appears to serve as a mouthpiece for Assistant Reserve Bank Governor Christian Hawkesby, offers little… Read More On bank capital, what should the RBNZ do now?
I just read Gareth Vaughan’s opinion in today’s interest.co.nz. Though most of his contributions are spot on and relevant, on the topic of bank capital I have seen Gareth once in a while making things up as he writes. For example, his idea that the Standardised Approach (SA) for risk weight calculations, as opposed to… Read More A resilient banking system
Fragile by design Banks are fragile by design*. They have lots of debt, equity is only a fraction of total assets, depositors can withdraw their money on the drop of a hat. If depositors want their money back then there is a first-come-first-served rule, which differs from non-bank, corporate (orderly) bankruptcy, where creditors know their… Read More Max Headroom
A lesson that I learned from the Global Financial Crisis is that the “one in the many years” events materialise much quicker than expected. The thing is, these models never rule out that the event will happen tomorrow. The RBNZ predicated its recent capital plans on a 1-in-200 year chance of a financial crisis. The… Read More A one-in-200 year event
An evaluation of RBNZ’s hybrid capital securities Will the RBNZ’s latest innovation on bank capital, the Redeemable Perpetual Preference Shares, contribute to more and better bank capital? The analysis below casts doubt on the success of RBNZ’s attempt to help New Zealand banks to issue capital at a low cost. A victim of its own… Read More Political Tier 1 Capital: PT1