Morgan Stanley: Market Participants Do Not Appreciate The Implications Of New Capital Requirements

Morgan Stanley: Market Participants Do Not Appreciate The Implications Of New Capital Requirements

Summary : Insights from Betsy Graseck, our banks and consumer finance equity analyst, on the back of 2Q bank earnings highlight the impact of changes to regulatory capital requirements this year. These changes not only affect banks’ ability to buy back stock or pay dividends but are also likely to have a bearing on credit formation, credit spreads, and demand for high-quality assets on bank balance sheets, issues that are relevant for risk markets in general and fixed income markets in particular. The most recent results from these tests, released at the end of June, point to higher required regulatory capital than consensus expectations for some of the largest banks in the country, especially the money center banks.

But, in the banks’ RWA, the biggest line item by far is their loan portfolio.

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