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Dr. Martien Lubberink

lines on the record: 83
first: 2023-04-20
most recent: 2023-04-20
sittings or episodes: 1
sources: podcast

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“And I think there will be more focus on the liquidity dimension here. I think most regulators were surprised with the swiftness and the speed with which depositors are able today to flee to safer harbors. I think that caught many people by surprise. So we may see some changes over time with respect to the rules on liquidity.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“I'm not being normative here and telling you what a country should do, but there are many tools in the regulatory toolkit that can be used. So I don't think that the Basel Committee is going to change a lot based on what it sees now. It's a very stable and predictable global regulator where they cover the interest of, I think, 25 countries. And this was kind of, if you look at the shock, Switzerland is a Basel member, yes, and the US is a Basel member, but they were kind of localized shocks. I think that is insufficient to move and to change a lot with respect to the Basel III framework. So my suggestion, or what I predict is that countries may make more use of the tools offered by Basel III.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“To be honest, I think there's not going to be a lot of changes with respect to capital requirements. They're high and there's a lot of tools in the toolkit that can still be used and that have not been used. So my reference just back to the US system is that the Basel III toolkit is available and yet the US decided not to apply all the tools to the US banks. And there may be good reasons for that. So I'm not.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Exactly. Yeah, which is we all know is very risky. So you have high risk. And you have low regulation, so what could possibly go wrong? It's tricky in a way. But then again, Let's see how it goes. But there is a bit of an issue there, I think, that the US may have to solve going forward. That's time will tell, I think.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Mean they don't have to satisfy Basa III requirements. And so it looks like for these banks, nothing has changed since the global financial crisis, which I think is a bit of a worry because... Know there was a reason why we have Basel III and you see it at work in Europe now in particular, but also other countries like Australia, New Zealand, where these rules do create a stable banking system. And so the May be super or may be fully compliant with Basel III regulation, but on the other hand, there is a vast number of small banks, which in total Comprise a lot of the or cover a lot of the economy of the US, which are more or less on the same regulatory footing as they were 15 years ago. To me is a bit of a worry, and I can see why commentators and pundits identify that worry as well.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“So my understanding was that it happened in 2018 under the Trump administration, they increased the level so that more banks could fly under the radar. I think it was 250. Billion dollar assets or so they made it easier for smaller banks to not satisfy the requirements and sort of be freed of stress test consequences and so that probably Point of view. And if you look at Basel three implementation reports, the US comes across as always be super compliant with Basel III regulations. It's kind of disturbing because it only applies to the large internationally operating banks in the US, and that is actually the remit of Basel III, where Basel III is only for large and international operating banks. And so, but a lot of smaller banks in the US are just”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“at least a borrow to pay about 8%, even if the going rate is way lower. So credit risk may be on the rise, but I don't think it's going to be large numbers. But yeah, some people will feel the squeeze and the duration of mortgages here is way shorter than in the US, like in Holland and the US, it's not abnormal to have 30 years, but here I think it's about five years and then it stops just how the market works here. So yes, there will be some of the mortgages will end their fixed period. in the months to come and they will have to renegotiate or they have to re Reset their rates at a higher level. And there's where you see this. Is where you will see the market having an effect on a particular credit risk. Interest rate risk.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“I think credit risk will increase because of house prices are going down now and the economy is meant to because of these initiatives of the reserve bank jacking up the interest rates, the economy will cool. A lot of people have bought houses in 2020 and 21. So there may be a bit of credit risk there. Again here New Zealand regulations are such that they stress loan applicants I think at 8% interest rate before they are allowed to buy a house at the time. So before banks were allowed to To lend to mortgages holders or to homeowners, the homeowners were stressed or they require”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“New Zealand. Okay, okay, that's what I thought. So is there a risk that? If housing prices go down, banks will be on the hook, and then there is credit risk. And I also want to ask in America, there's a fixed rate mortgages 30 years. And I know in Europe that's, you know, it's an American thing. So if you own not if you banks who make 30-year mortgages, that's more interest rate risk because it's 30 years, it's fixed, as opposed to if it's a floating rate mortgage, you know, in Italy, it's five years, there's much less credit risk. So I want to ask you about interest rate risk and credit risk in New Zealand.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“I want to ask about the risks that you see in the New Zealand banking system of interest rate risk and credit risk. It's my understanding that America is, you know, I'm American, so I'm always thinking of looking at things through the lens of America. The real estate boom in America to Americans, it seems extreme, but my understanding that actual housing price appreciation can be as much more extreme in places like Canada and Australia. But also here.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“And whether it leaves a single bank, we have a similar system like that. They call it a dashboard from the reserve bank, which is quite detailed, but they come out every quarter and it takes a while before the quarterly information. Is published. So, you know, ideally, I would like to have the data from the latest data available, but I have to wait a couple of weeks before I get that to give a firm answer on your question. But I don't think there is that much of a risk here.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“probably equally strong or if not stronger than New Zealand supervision. So they belong to the Australian New Zealand banking system. They're probably the best supervised banking systems with very solid banks. So I don't think that the public feels that there is any risk that they lose out. Interestingly, there's still not a deposit insurance system in force here in New Zealand. Maybe some people may have become a bit jittery, but then again the safety of the system is perceived very high, so I don't expect a lot of run. The thing is I was actually about to look into these numbers, whether there was deposit flight. The problem is the data availability. I couldn't get my fingers around it because then you have to look like in the US you can look at these call reports and then figure out where money is going from”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“I don't think that it's really a big of an issue. I think depositors here are sticky. The alternatives, I mean Big four banks they have about they have a large fraction of the total market and these are Australian owned large banks and there's no reason to believe that Australian banks will get into trouble also you know again here Australian banks supervision is”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“What are deposits doing in New Zealand? In America, deposits are going down and over the past month, there's been a quite significant drain on deposits in small banks, regional banks. And some of that money has gone into big banks, but not enough. So there's been a flood from the general banking sector to money market funds ultimately leading to the Federal Reserve and has a reverse repo facility, which is basically a deposit facility. What's that look like in New Zealand?”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Documentation was all a foregone conclusion that the state would buy it anyway. Now half a year later and I looked at the profitability of Kiwi Bank and it's still so so they're gonna struggle to survive. I'm not saying that it's a problem bank, but it's still not easy sailing and a challenge for the bank to survive in the future. They'll get there and it's kind of okay to have it state supported now. It lowers their funding cost obviously and the state is willing to prop up capital. But it's kind of Not ideal, I think.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“I send a FOIA request to the Treasury or the Ministry of Finance, and they said, well, actually, there's no such calculation. It was agreed between parties. I mean, that had the characteristic of Horse trading, like it's like a nice round number, $2.1 billion. Maybe the idea was to have something between $2 and 2.5. They settled for 2.1. But upon requesting the workings for that calculation or the valuation, send me the spreadsheet or send me your workings. I just got zero answer on that one, which I think is not great because it's taxpayers' money being spent on a bank, which is not the most profitable bank. And if you go through the documentation which was released, it seems as though it was a foregone conclusion early on in 2020 that the bank would have been bought by the government anyway. And so it wasn't a lot of work done on trying to find the best solution for the bank, i.e. maybe having it partially floated or having outside investors in it or having other solution. It seems as though from the”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“The current situation where the bank was unsustainable in that it couldn't meet the higher requirements, it could only do so by being far more profitable than it was. And it isn't that profitable. It makes profit. Yes, it's not a loss-making bank, but it's not as profitable as the other big four banks. The government stepped in, bought the bank, and I tried to figure out what price, actually, why did they pay, why did the government pay $2 billion or 2.1 billion New Zealand dollars for that bank? So in our country, we have a freedom of information or official information act which allows you to Asked government about these transactions, so I send an OIA or a request. I think in the US it's FOIA or so”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“that the owners or one of the one of the owners thought like you know this is not a great investment and and they wanted to abandon their investment in in kivankank so that's not great if the owner wants to walk away from a bank that's kind of a mini run not by depositors but the owners but but yeah and so a solution was made for kiv bank to have it bought by the state and it was bought from its three owners. One is a large pension fund, the other is a health insurance state-owned health insurance firm, and the third one was the New Zealand Post. So the three owners were bought out by the state in August last year. And to me, it was more like a bailout in that”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Struggling to get their capital up to the higher requirements from the reserve bank. So I think I said before that the reserve bank increased its capital requirements significantly and these are phased in over the next five, six, seven years. Kibank lost capital or they couldn't get the capital up. And that was clear, I think, after the announcement of these capital requirements in 2019, just before COVID arrived. It was clear that Kyiv Bank would struggle to increase capital because they're not so profitable, they're not so large to make use of all the effects or all the goodies that comes with size. And so it was decided.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Oh, Kibubank is a traditional New Zealand bank. It hasn't been around for very long, a couple of decades maybe. And it was more or less like what we've seen in many other countries, a bank that was half state, owned, half private owned. It was a smaller bank, one of the smaller banks with the big four ones are Australian-owned banks, but then the next step is Key Bank, which is bank number five. And that's a truly New Zealand bank. And there's a bit of a political dimension there because some people in New Zealand find it very comfortable to have a truly New Zealand bank which isn't owned by Australian parent banks. That bank performed okay-ish over the last decade, but what I've noticed is that they were”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, but it depends on who's on the other side. And I said, you know, in some cases will be firms that have a different asset structure, like pension funds. Long liabilities and short assets, and that matches in a way is the counter towards the other parties. So you have to find, so these industries currently, as we've seen, pension funds are now a bit stressed out because they are absorbing the risks that of being on the other hand of the swap.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Central clearing party. So there's the clearing risk, but do those parties also take on the risk of if I want to enter into a swap where I make money if as interest rates rise, they're on the other side. Like they are not just clearing, but they are a counterparty.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“the swaps and another it could also be pension funds which are now increasingly under stress because of that so i think most of the risks are farmed off balance and and they they land elsewhere and the question is and that's one of the things that is a bit of unknown is like with the global financial crisis nobody realized that most of the risks were absorbed by aig or in the end ended up with aig and so that To prevent that from happening we have the CCPs, which probably manage these risks better than before the crisis. So yeah, somebody will take that risk, but I think the framework has improved in that the risks at the other end of the swaps don't end up with a single insurance company.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“the borrowing side of the bank's balance sheet so their assets they are they're swapped and who's so these swaps interest rate swaps may be taken by Small and medium sized firms and farmers and so forth, the counterpart, the party holding the risks of the swap on the other hand, my understanding is that it goes to what is the CCPs, so these central clearing institutions that Absorb the risk associated with these.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Can you explain that interest rate hedging points? So let's say I'm a New Zealand bank, you're a New Zealand bank, you'll RBNZ reserve bank of New Zealand. They raise interest rates. They increase our future profitability when we make loans and the spread probably will be higher than that spread will go up more than the deposit rate. So we'll make higher net interest margin. That's good. That's why people say rising interest rates are good for banks. But on securities, particularly fixed rate, long duration securities that we own, we will suffer losses realized or unrealized. So we hedged that risk. So let's say I want to hedge that risk. I entered into a swap contract with you where I make money as interest rates go up and you lose money as interest rates go up. But now you have that exposure. You know, it's kind of like a hot potato I'm passing to you. You're passing to another bank. Where do the losses go and who is on the other side of that trade who can absorb the loss of?”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, mainly because of competition. I think in the funding side will become more expensive because deposits will demand higher rates. And so that will lower the profitability of banks going forward. Then again, the New Zealand banking system is one of the most profitable banking systems also in the world. the ROE is about 12%, which is high. ROA is also very positive and high. And so therefore our banking system will probably not be affected too much by these higher interest rates. So the trade-off between financial stability and monetary policies are probably not so prevalent here in New Zealand.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Came as a bit of a surprise. But then again, the interest risk is covered through derivatives. And so banks are insured against the interest rates risk. So I think banks will manage quite quickly. On the other hand, there will be a bit of a squeeze because the higher interest rates. So what happens is that depositors will demand a higher interest rates. And as we've noticed, depositors may have become a bit more easy to move their funds elsewhere. So that puts elevated costs on the funding side of banks. There's competition also in the market for mortgages. And so that may push the net interest margins for New Zealand banks down. So that could be a bit of a slow burn which may affect the profitability of New Zealand banks. Going forward. So the asset side is a bit squeezed because of competition and because of”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“They're super high amongst the highest in the world. They're working towards that. So they started working from a traditional Basel requirement in the whereabouts of 10%, but they're moving it up to close to 20% now, which is good. The other thing is the risk rates in New Zealand are such that they don't discount the risk too heavily, like worldwide comparison will show that New Zealand banks risk rates are kind of high compared to other countries. As a result of that, that forces up the amount of capital that New Zealand banks have to hold already. So the New Zealand banking system is super safe and probably one of the safest ones in the world. But yes, you know, the interest rate risk that the question was about the reserve bank, they jacked up the rate by 50 base point last Wednesday.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Well, the thing is with New Zealand banks is there, I can't promise anything for the future, but they are amongst the most resilient banks in the world. They have increased the capital ratios. There will be about close to 20% now, which is very high compared to other countries. So they're...”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Right, so some of the problems in the US banking system or at some banks, I should say, probably wouldn't have happened if the Federal Reserve hadn't raised interest rates close to 500 basis points in roughly a year. How is the New Zealand banking system doing, given that it has raised by 525 basis points over a similar period?”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, that's operational risk, I think. It's just mismanagement. And they were, if you follow the correspondence between Archigos and Kriti Suis was kind of waiting for results to come through from Archigos, which then weren't delivered. And so time lapsed. And so there's something in the way the bank organizes these things that is not okay. It's just maybe the incentive structure, maybe the reward structure, the governance structure. And so to cover that all in a single metric for operational risk is obviously not easy and that may have contributed, I think, to to the demise of Credit Suisse. It's just Maybe the authorities in Switzerland were very traditional in that they thought like we covered liquidity, we covered credit risk and we probably have some cover or some idea of how to deal with operation or with”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“What There could be a lot of problems with operational risk. It's just how the bank conducts its operations and what can go wrong there. So things like fraud is one, but fraud can be wide. I mean, it can be accounting fraud. It could be a single person stealing some money. That's already one. And then money laundering is one. Operational risk other”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Pretty much for all banks, and they implemented it in full, including the whole capital framework, but also liquidity framework and many other tools that Basel III offered. And so you see that work now because I think most of the stress is now gone in European banks, and they held up very well. So I agree with that. But the other thing is complacency and stuff that is still not well covered, I think. As I mentioned before, there is still problems with operational risk. which are hard to model and hard to regulate. And this case was, as I said, Crudy Suisse was a long story of a lot of operational risks. And a slow”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Yes, I mean, correct, because if you look at the spreads of AT1 now, they've gone down. So the shock over the last weeks seems to be abating. It's getting less what the spreads are going down and things are stabilizing. And the European Banking Center, the European banking sector held up quite strongly, whereas I think before the global financial crisis affair like an epic failure like the one that we've seen with Critique Suisse would have probably lead to far more serious contagion. So yes, you know, the framework of Banza 3 and the way Europe implemented it, most likely in full and many non-US countries implemented Basel III.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“So, Martin, there's been a widespread view, a mainstream view that I've heard that yes, banks had a lot of problems in terms of their capital funding. They were undercapitalized, 2007, 2008. That's why the global economic crisis occurred. But the regulations which you, Martin, helped shape and create and implement, because of those regulations, Basel III, banks are much better capitalized. And I know that's a fact, that banks are much better capitalized, mostly all around the world than they were before Christmas. But the argument is because banks are much more capitalized, there's nothing going to be worried about. We're not going to have these banking issues again. Let's say in 2019 before all this happened, how much did you believe that argument in 2019?”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“That, but in the end, they didn't respect the hierarchy. The other thing that's kind of weird is they wiped out the entire 70 billion, 17 billion of additional T1, which is large, but the idea, as I explained at the start, is that capital should absorb losses. And if you go to the accounts from Critique Suisse, you will see that, yes, Criti Suisse had losses, but they had sufficient capital in the first place. So to absorb these losses and then through equity. And then for the remainder of losses that need to be absorbed, you have to take a look at these additional T1 bonds. But it's kind of a very greedy in a way from the official, from the authorities in Switzerland to wipe out 17 billion of 81. Whereas probably there was no need for that entire amount to be taken down.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“However, CreditSuse was not really in resolution. It was sold to UBS. And so there's a lot of misunderstanding about actually what was going on here. Was it resolution? No, not really. Was it loss-absorption and going concern? So there's a lot of confusion there. But the market was shocked by that because it was, even though it was written in the text, the expectations of investors were such that the investors expected the wipeout to start from equity and then work your way up to whatever you need to cover the losses to cover the losses through first equity, then AT1 or additional tier one, and then tier two, et cetera, et cetera. So that was a shock. And there were a couple of indications before the shock applied the regulators in Switzerland would respect.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Think it's very confusing what happened there and still the Finma and the authorities in Switzerland, they came out with some explanations about what they were doing and why they were doing. But it probably can be best characterized as been a messy way of resolving or solving the problem that Scots get really squeezed. The way the authorities went about it was just not great, to put it mildly. If a bank enters a resolution and that could have been done, in these cases you start from equity and then you wipe that out and then you wipe out additional t1 and then tier two and then all the unsecured debt etc etc so there's a clear ranking in the wipeout in gone concern or when a bank liquidates or is in resolution.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“So with credit Suisse taken over by UBS, those tier one bonds, I think we're completely wiped out, went to zero. And that risk, I think people who were in the know, people who read the prospectus, they knew that. But what happened that I think surprised a lot of people is that the tier one capital, those bonds, those additional tier one capital bonds got wiped out, but the equity didn't get wiped out. Those AT1 bonds were supposed to be on top of the equity. Do you know what happened there?”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“The regulator can decide to write them off or convert them into equity. And so the owners will be wiped out. And so the upside of that is that a well-capitalized bank, and there are many well-capitalized banks can issue these bonds for the bank it's tax deductible and advantageous to do so. And the holders of these or the investors in these bonds, they get a high coupon or high interest rate. So again, here it's the AT1. they have so many fantastic features they offer the investors a high coupon the bank gets tax deductibility and they contribute to loss absorbing capital”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Characteristics of debt. So this is a mix of equity and debt. And the reason that we have these additional T1 bonds is that they're very popular because the payments on these bonds are tax deductible for European banks. So in Europe, the 81 bonds are popular because they count towards capital, which is great. And even greater is that they're far less expensive than equity because the payments, the coupons or the interest rates is tax deductible. So there's a big tax advantage on issuing these additional T1 bonds and the great upside of that also is that they count towards loss absorbing capital. So it's the best of both worlds. And as a result, you see that Credit Suisse and many European banks have issued additional T1 bonds. What people didn't always realize is that these additional T1 bonds are meant to be loss-absorbing and going concern, which means that if the bank gets into trouble,”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“And these additional T1 items, these are bonds or hybrid capital, which are a bit of a mix between equity and debt. But they, in the case of Critis, they were bonds. And they are almost like equity, but they also have some...”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Oh, So the Credit Suisse story is a bit of a funny story, but They met all the requirements and they had sufficient capital. What they also had is what they call additional tier one. The origins of additional T1 bonds is Basel III. And But after Basel 3, or because of Basel III, the regulators decided to have high quality capital. Which is the best quality capital of all, which is called Common Equity 2 But then there was a layer created for pseudo-equity as I call it and that is additional t1 so you have a layer of tier one consisting of common equity t1 that's very popular and well known and on top of that you have additional t1”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“More risky acids, and for that we want you to hold, say, 50 basis points or 100 basis points, more pillar two capital. In some countries are more transparent about pillar two requirements and others are less transparent. The European Central Bank is very transparent about that. They have pillar two requirements that they publish. And so investors can look at that and say, hey, even though the bank meets its formal pillar one requirements, the one that are very known, like 7% for common equity to one or etc. Additional layer, what we call pillar two, is an add on. Which should cover most of the other risks.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Say 8% common equity one and the requirement is 7%, then there's only 1% headroom for that bank. That's not a lot in current standards. What we don't know is what part of that 1% is required, whether there is an additional requirement from the supervisor to hold more capital than 7%. And in Europe, that can be done through what they call Pillar 2 add-ons or pillar two, where the supervisor and the bank agree on holding more capital to cover risks that are not covered for credit risk, market risk, and operational risk. And so the ECB is an example here. The European Central Bank once every year they send a letter to the banks that they supervise and they tell them it's all fine in hunky-dory that you hold X amount of capital to meet the official requirements, but we think you have”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“The CET1 ratio requirement, and that's about, what is it, 7%, that requirement is what we call a pillar one requirement. And then there is buffer requirements on top of that, et cetera. That's all what we call pillar one. It's visible to investors and people like me and you. We know, for example, that if a bank has”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“No, well, no. Well, it depends. My focus is very much on the numerator of the ratios, what goes into the denominator, like how risk rates are determined at a very detailed level, that's beyond my reach at the moment. But in general, I think what is the case is that many of these risk weights, they are low for asset classes that are deemed to be safe. The problem is that there can be divergences here and there can be things like maturity, but that should be dealt with, I think, under market risk. And then there's in European banking regulation and worldwide, there's also what they call Pillar 2, which is an additional layer of capital which banks have to hold to deal with all sorts of risks that are not dealt with under the standard framework. So for example, just to explain that the”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“You caught me off guard on that one, so I think, yeah, I think it's very tied towards countries, whether it's OECD countries or not, but I'm not sure under Basel II rules, there may be Maybe if a bank can use its own modeling to determine risk rates, then probably maturity will factor in. So probably banks that are under IRB may be able to do that, but I'm not sure about the standardized approach or whether they can do that. But it would make sense.”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Like a lot of that sensitivity is paying attention to credit risk. Oh, a loan to a business, they might pay you back, they might not. So you should have a high risk rate. A loan to a government, aka sovereign bond, you're going to get paid back. Even in Greece, you know, you're probably going to get paid back. But there's interest rate risk as well. What do risk weights look like for sovereign bonds? New Zealand, Europe, US choose wherever you want. And do you have to is a 30-year treasury, 30-year sovereign bond, has that have a higher risk weight than a 10-year? Does that have a higher than five-year, a two-year? Is there a, in the same way that there's a gradation for credit risk, is there a gradation for duration risk?”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT
“Big short, and we're at the book, and we know that there is discrepancies here. The other example is that if you look at sovereign bonds, they have a very low risk weight, but then there's countries like Greece at some point in time that had very high risk attached to these sovereign bonds, and yet they were given a very low risk rate. So there can be discrepancies between the actual rate and the and the regulatory rate so again that that's for risk management and for supervisors to be aware of like oh ho ho man you're investing a lot of your your capital or your money is going into investments into greek sovereign bonds are you sure you're okay with that you know that should be the question of the supervisor then to put to the bank who invests in these assets”
2023-04-20 · Forward Guidance · Do Banks Have Enough Capital? | Dr. Martien Lubberink · IDENTIFIED FROM THE TRANSCRIPT