More AOCI bashing

Banks again blame the accounts for their own abysmal performance. More worryingly is the way the press reports on this. See Business Report writing it up:

Wells Fargo and JPMorgan Chase, the most profitable US banks, lost $6.5 billion in combined equity in the second quarter as rising interest rates and falling bond prices threaten capital levels across the industry.

As if the losses are exogenous. 

JPMorgan suffered a $3.1bn decline in accumulated other comprehensive income (AOCI), a measure of shareholder equity, in the second quarter while Wells Fargo reported a $3.35bn hit, according to results on Friday.

Okay, this is an accounting loss for sure, perhaps affecting bonuses. No imminent threat for the bank or for financial stability, as it is not clear yet from the text how AOCI affects regulatory capital or regulatory solvency ratios.

The reporter, Dakin Campbell, goes on to explain:

The equity figure includes unrealised security gains, which fell to $5.1bn at Wells Fargo from $11.2bn at the end of March.

Again, this per se should not pose a threat to regulatory solvency as the unrealized gains (and losses thereof) are likely to be excluded from regulatory capital ratios.

“The banks want that in their capital levels,” said Todd Hagerman, a Sterne Agee & Leach analyst and former Federal Reserve bank examiner. “If they lose that they have to raise that much more equity.”

Not sure if we all agree. Would Todd comment in similar fashion if the unrealized gains continue to evaporate and turn into unrealized losses instead?

Current rules do protect banks from unrealized gains and losses, and Basel III removes that protection. This will likely affect the volatility of important ratio’s – thus presenting a healthy incentive to increase capital buffers.