Boosting capital:The European Banking Authority has told banks they need to boost core capital ratios to 9 per cent by next June. Rights issues, dividend cuts and asset sales are not the only means of correcting the €106 billion shortfall, however.
Banks can potentially game the system by changing how they calculate risk-weighted assets (RWA) – that is, the probability of default assigned to loans and derivatives. Called “risk-weighted asset optimisation”, it’s an increasingly popular practice.
Spain’s biggest lenders, Santander and Banco Bilbao, have said they can raise €4 billion and €2.1 billion respectively by adjusting their models. Italian bank UBI is making what it calls a “progressive changeover” to an “advanced” risk model. Lloyd’s and HSBC have already done so, while Commerzbank expects to benefit by doing so. No bank has yet increased its RWA count as a result of model changes.
Conventional deleveraging has economic consequences, which is why regulators are sympathetic to this approach. Nevertheless, this appears a short-term solution, and one that will ultimately further erode investor trust in banks.
Transparency concerns:Warren Buffett's Berkshire Hathaway this week announced it had bought a 5.5 per cent stake in IBM. The $10.7 billion (€7.9 billion) purchase is Buffett's biggest ever foray into technology.
He’s been building the stake since March, although there was no mention of the holdings in Berkshire’s public filings. Buffett took advantage of a rule stopping public disclosure of information “for public interest reasons or the protection of investors”, thereby preventing other investors from piggybacking onto his trade.
One can understand Buffett’s motivation, although there are obvious transparency concerns when a billionaire is able to behave in a way that ordinary investors cannot. As hedge fund manager Larry Feinberg once said, confidential filings are unfair. “If I’m going to pull down my pants in public, I want everyone to pull down their pants, too,” he quipped.
Downright weird:A new study has found a stock rises when CNBC reports positive news about it. No surprise there. The study also found investors react to stale news, with a stock rising when CNBC reports on it in the 24 hours following a news event. Surprising, if not shocking.
What is downright weird is that stock mentioned on CNBC in the 24 hours after a negative news event also enjoys a price pop. Why? The author suggests “limited attention”, whereby ordinary investors unable to short sell stocks become net buyers when they hear of a stock “that they had not previously considered as a potential investment”. There is a more succinct explanation that will resonate with anyone who has ever watched Jim Cramer: CNBC viewers are not very bright.
