big banks Tag

Here Comes the Surcharge: Big Banks Dealt another Regulatory Blow by the Feds

21:09 20 November in Blog
140
Here Comes the Surcharge: Big Banks Dealt another Regulatory Blow by the Feds
In another effort to reduce the risk of “too big to fail” banks and financial institutions, the Federal Reserve plans to hit the largest of U.S. banks with an expensive new regulation.  Accordingly, Federal regulators intend to impose a surcharge on the largest U.S. banks requiring them to maintain a fatter cushion in order to protect them from potential losses. The version of the surcharge proposed by the Feds will be tougher than the one international regulators agreed to. 
Additionally, when determining the size of the new capital surcharge, the Fed will penalize those banks that heavily rely on volatile forms of short term fund, such as overnight loans.  By implementing these measures, some of the larger U.S. banks may need to increase their capital cushions beyond those of their international rivals.  The move has led some to wonder if Washington is putting U.S. banks at a competitive disadvantage.  The exact amount of capital needed by big banks has yet to be determined.
Banks have added substantial capital since the financial crisis and, at present, are currently subject to many new regulations. The exact range for their capital surcharge hasn’t been settled on by the Fed.  However, they are considering a range that extends a few percentage points higher than the top range of 2.5% of risk-weighted assets imposed by international regulators.  It’s quite possible U.S. banks could face surcharges as high as 4.5%.
According to regulators, by raising the capital requirement amounts for firms that pose the greatest risk to the U.S. financial stability, the Fed intends to improve these firm’s resiliency.  What is at issue is the requirement that the world’s largest financial institutions hold an additional layer of padding in case of another financial crisis.  While the details of the Fed’s proposal on specific banks are not yet clear, firms with large broker-dealer operations, like Goldman Sachs Group, could potentially face increased capital charges under the Fed’s plan.  This is because such firms rely on large short-term loans to finance client activities.
Firms like Goldman Sachs and Morgan Stanley count such short-term liabilities as more than one-third of their liabilities. Both firms have indicated in regulatory filings that they are maintaining enough capital to meet international surcharge requirements.  The U.S.’ plan to enact a higher surcharge shows the latest move by Washington to boost the banking system by requiring Wall Street to protect themselves against losses. As a bonus, regulators adopted additional rules requiring banks to hold safe assets that they can sell for cash if they need to. 
It is not clear how many U.S. firms will be required to raise additional capital to comply with the United States’ tougher surcharge requirements, and some of the larger banks declined to comment. However, it is clear that larger U.S. banks will argue the surcharge is putting them at a competitive disadvantage. 
As the Feds continue to further regulate the banking industry, loans to small and midsized businesses become increasingly more difficult to obtain.   Capstone Capital Group, LLC can assist you.  We have been assisting small to mid-sized businesses in obtaining the required working capital they need to grow and thrive, and have been doing it for many years.
Capstone specializes in Single Invoice Factoring (“Spot Factoring”) for businesses in need of immediate cash. For more information about our Spot Factoring product and how we can help your business grow, contact us today at 347-821-3400, or visit our website at www.capstonetrade.com.
 

Promising Numbers Mask True Problems for Big Banks

19:38 30 October in Blog
130
A recently released report on the economic conditions and earnings of big banks seem to paint a picture of stability. However, a more plausible interpretation would attribute it to stagnation and the difficulties that lie ahead. Overall, investors see a rather unimpressive rate of return in terms of equity. Meanwhile, among the big banks, Citigroup came out slightly above expectations and J.P. Morgan Chase and Wells Fargo slumped a little in the third quarter.


Wells Fargo’s returns fared somewhat better, which is mostly due to the nature of banking versus more volatile capital markets. Even with this advantage, returns still didn’t live up to those from the year before, which were almost a whole point higher. J.P. Morgan, on the other hand, has hit a plateau at a 10% return rate, casting a more negative shadow on the recent numbers. Conversely, Citigroup looked strong in many areas. They even registered profits through legacy holdings and downsizing, but still only managed a 6.5% return.


Analysts have pinpointed several reasons for this lackluster performance.  J.P. Morgan and Citigroup both still face legal challenges in the midst of the global slowdown. Also, interest rates have remained extremely low while demand for loans has remained steady.  All this as regulations and the required amounts of capital have gone up. 


Some experts cite these facts as proof that this reflects a permanent shift in returns that investors can expect in the future. Of course, banks also have to conform to stress tests performed by the Federal Reserve, which makes them less flexible than firms in other industries. Other macroeconomic factors don’t seem to bode well either, as new mortgages issued at J.P. Morgan, Citigroup and Wells Fargo fell by 14%, 51%, and 40%, respectively.


Trading in certain commodities and currencies has generated some growth. But these mostly signify slightly less anemic banks as opposed to strong ones. Some hold out hope for increased rates in the near future, although many investors have become restless due to the impact of current low rates on net interest margins.


Banks are still finding growth opportunities hard to come by without higher returns. Price-to-book multiples for J.P. Morgan and Citigroup have averaged 1.07 and .076 times, respectively. So, for the time being, the only solution for banks is to rely on cutting costs and looking for gains elsewhere. Despite the initial appearance of the numbers, they really just show that sometimes silver clouds have dark linings.

As the major money center banks continue to adjust their operations to Dodd-Frank’s lower earnings environment, cost cuts translate into less personal service.  For small business owners, less personal service means a higher likelihood that their loan applications will be processed automatically through computer software. Thus, removing any discretion from the loan approval process.  Capstone Capital Group, LLC., on the other hand, provides the personal service of an old time banker and does not rely on the credit of its clients to make their credit decisions.  Capstone relies on the credit of its client’s customers to determine whether or not they will get the working capital they need.
As the Feds continue to scrutinize and further regulate the activity of Big Banks, and with interest rate increases looming in the future, small to midsized business loans are becoming increasingly more difficult to obtain.  What is a business owner to do if he or she needs working capital to make payroll or expand operations?  Capstone Capital Group, LLC has the solution.  We have been helping small to mid-sized businesses for years obtain the necessary working capital they need to sustain and grow during uncertain economic times without all the red tape you normally get from most banks.
 
Capstone Capital Group, LLC specializes in Single Invoice Factoring (“Spot Factoring”) for firms in need of immediate cash. Spot Factoring provides flexible, no contract invoice selling in exchange for working capital from Capstone Capital Group.  For more information about our business funding solutions and how we can help your business grow and succeed, give us a call today at 347-821-3400, or visit our website at www.capstonetrade.com.

 

Lawmakers Continue to Turn Up The Heat On Big Banks

20:49 16 October in Blog
170
In a recent hearing before the Senate Banking Committee, lawmakers continue to call for increased regulatory reform from regulators in an effort to reduce the risk big banks pose to the U.S. financial system. 
 
A distinction was made between large banks and other financial institutions. Several senators encouraged regulators to lessen the burden, or possibly exempt, certain insurance companies and small to midsized banks from aspects of Dodd-Frank.
 
Sen. Bob Corker (R., Tenn.), for instance, called on regulators to take whatever steps necessary to make certain these banking institutions are not too complex so as not to be resolved through bankruptcy. 
 
Other senators praised the Federal Government for promising to raise the capital requirements on the largest U.S. banks.  According to Sen. Sherrod Brown (D., Ohio), there is a great deal of support in both the house and senate to implement stronger capital standards.  Such standards could require big banks to retain additional earnings in order to build capital they would use to fund lending rather than allocating such earnings to their shareholders. 
 
Banking executives believe that capital rules for the largest U.S. banks are already too high.
The senators’ frustration regarding Wall Street banks were further expressed in the hearing by Sen. Elizabeth Warren (D., Mass.). She inquired as to why individual bankers were not being held accountable for their nefarious actions which lead to the financial crisis.  Ms. Warren’s concern is that lack of criminal prosecution may send the message that you can break the law, get away with it, and receive a bigger paycheck. 
 
With lawmakers continuing their efforts to put pressure on regulators to come down hard on banks, the ones that ultimately suffer are those looking to banks for capital.  Individuals and small business owners who rely on bank financing may find it more difficult to obtain the loan they so desperately need in order to make payroll or expand their business.  
 
As lawmakers continue to apply pressure on regulators to impose more stringent requirements on the banking industry, it is clear small business and working capital loans will become ever more difficult to acquire. Capstone Capital Group, LLC understands the concerns of commercial borrowers who are considering bank financing.  Accordingly, we offer various business finance options, including “Single Invoice Factoring” which functions as a safer alternative to traditional, and often times unpredictable, bank financing. 
 
Our underwriting guidelines are simple, straightforward and not subject to stringent regulatory oversight and control.Capstone Capital Group, LLC specializes in Purchase Order factoring, Single Invoice Factoring (“Spot Factoring”) for firms in need of immediate cash. Spot Factoring provides flexible, no contract invoice selling in exchange for working capital from Capstone Capital Group.  Give us a call today to find out how we can help you.

Citigroup, Other Big Banks Pass Midterm Stress Test

17:28 14 October in Blog
190
The nation’s largest banks continue to prepare for exams to be conducted by the Federal Reserve next year. These exams are to determine whether they have the financial strength to handle a severe downturn akin to the 2008 financial crisis.

Under the 2010 Dodd-Frank financial law, the nation’s too-big-to-fail banks are required to run themselves through stress tests designed to ensure that they can weather another financial crisis. They do this by determining if they have sufficient liquid capital to handle some hypothetical worst-case scenarios. The “stress tests” are the Fed’s way of mitigating against another dismal performance by the banking sector in response to a financial calamity.

Citibank, Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and others have been war gaming in preparation for the official Federal Reserve stress-tests. This round of tests is particularly important for Citigroup, which has had two requests for approval to return capital to shareholders rejected by the Fed. While Citigroup met the Fed’s capital requirements this year, the central bank expressed concern about the company’s competence in measuring the risks facing its global operations.

The Fed uses the so-called Tier 1 common capital ratio as its measure of a bank’s ability to buffer itself against another severe economic downturn. Federal regulations require that banks maintain a minimum of 5% common capital. Citibank chose a hypothetical sharp decline in emerging-market currencies as its doomsday scenario. Defaults by its sister banks in the Far East, and weaker housing markets throughout the region, it assumed, would subsequently occur. It predicted that its ratio would fall to 8.4% under that scenario. The bank’s projected ratio was 9.1% under the stress-test it conducted last year.

J.P. Morgan Chase and Morgan Stanley passed their own midterms with solid results. J. P. Morgan Chase predicted its capital levels under a hypothetical economic downturn would be 8.4%, down from 8.5% a year ago. Morgan Stanley projected its ratio would fall to 8.9%, down from a 9.5%. Bank of America Corp. said it would have the same capital level – 8.4%- that it had last year under a stressed scenario, but said it took on tougher hypotheticals on some fronts.

Goldman Sachs and Wells Fargo & Co predicted they would be in a better position to navigate strong financial headwinds than they were. Goldman pegged its estimated ratio at 10.1%, up from 8.9%, and Wells Fargo predicted its ratio would be up from 9.6%to 9.9%. The Federal Reserve’s annual stress-testing process typically concludes sometime in spring.

As big banks continue to shed riskier investments in order to pass the government’s stress test, small business will most likely suffer.  This is because small business loans may be subject to increased risk ratings making borrowing more difficult. Capstone Capital Group, LLC understands the concerns of commercial borrowers who are considering bank financing.  Accordingly, we offer various business finance options, including “Single Invoice Factoring” which functions as a safer alternative to traditional, and often times unpredictable, bank financing.  Our underwriting guidelines are simple, straightforward and not subject to stringent regulatory oversight and control. Capstone Capital Group, LLC specializes in Single Invoice Factoring (“Spot Factoring”) for firms in need of immediate cash. Spot Factoring provides flexible, no contract invoice selling in exchange for working capital from Capstone Capital Group.  Give us a call today to find out how we can help you.

Regulators Rethink ‘Too Big to Fail’

19:18 03 October in Blog
130
“Too Big to Fail Banks” (TBTF) has a nice ring to it if you are a banker, but many struggling citizens are demanding tougher regulations on the members of the Federal Reserve System (FED). The United States is considering increasing the surcharge for being part of the FED. Some of this mirrors public anger over the High Street banks of London and the Occupy Movement against Wall Street banks of New York.
 

Bank Profits Up 

In September 2014, FED Governor Daniel Tarullo announced that central banks were contemplating charging higher rates for member banks. This is occurring in an environment with the following characteristics: record bank profits, concerns over taxpayer bailout funds, admitted financial fraud, and economic turmoil. The banks have become a popular target for outrage.
Let us start with the Federal Reserve System. Most people don’t realize that this is a private organization, and it is not a member of the United States government. Yet, it has been given control over issuing the Federal Reserve Note (also known as the United States Dollar).
If that wasn’t enough of a conflict of interest, when the Federal Reserve member banks ran into financial problems, they received a bailout from the US taxpayers. This act increased the level of congressional oversight and scrutiny. After the bailout, these banks enjoyed record profits. Now, the top six (6) American banks control nearly 60 percent of the gross domestic product of the United States, leading to monopoly concerns.

Luxury Tax on Banks 
 
Major League Baseball has a luxury tax on the teams with the largest salaries. The Federal Reserve is considering a similar proposition. Tarullo told the Senate Banking Committee: “We’re all trying to come to grips with what we really need in order to provide more assurance that these firms (top banks) do not threaten the financial system …” Analysts are lamenting that the same problems in 2008 that nearly led to the meltdown of the entire global banking system remain in 2014.
Global regulators have listed 29 banks (including eight in the United States) whose failure could lead to serious macroeconomic distress in the worldwide economy. For example, JP Morgan Chase Manhattan (JPM) may be forced to increase its capital requirements by 2.5 percent of its assets. Many fear that the balance sheets of the top banks remain woefully under-capitalized. The top banks had the biggest surcharge to avoid a repeat of TBTF bailouts.
As regulators continue to target banks, access to small business and working capital loans are sure to suffer as a result. Capstone Capital Group, LLC understands these concerns and offers various business finance options, including Purchase order factoring, “Single-Invoice Factoring,” which functions as a safer alternative to traditional, and oftentimes unpredictable, bank financing. Our underwriting guidelines are simple, straightforward, and not subject to stringent regulatory oversight and control. Capstone Capital Group, LLC specializes in Single-Invoice Factoring (“Spot Factoring”) for firms in need of immediate cash. Spot Factoring provides flexible, no-contract invoice selling in exchange for working capital from Capstone. Give us a call today to find out how we can help you.

Why “Big Banks” Are Turning Down Working Capital Lines of Credit at a Record Pace (Part 3 – Dodd Frank Does It Again)

20:20 11 December in Blog
120
Community Banks are closing their doors because of the cost of compliance.  Small Business pays with less access to credit.  Unintended consequence of one size fits all regulation schemes.
WSJ Headline “Tally of US Banks Sinks to Record Low” on December 3, 2013.  There were many banks that failed as a result of the financial crisis, but-the real impact of the reduction of banks in the US is on small businesses that rely on credit from Community Banks.  This means less credit for small businesses who rely on the Community Banking network for working capital and lines of credit
Community Banks are bearing the brunt of Dodd Frank because of the costs of compliance with the new regulations and are closing as a result.  The new regulations are being enforced through out the banking system even though throughout the financial crisis Community Banks were not the cause of the crisis or nor even a significant portion of the crisis could be attributed to Community Banks.
Community Banks are smaller banks with several hundred million dollars in assets that are typically formed by successful local businessmen and women.  Their typical business plan is to stimulate the local economy by lending to other small businesses that large banks tend to avoid.  These smaller businesses require more support than a typical money center or regional bank is able to provide.  However, their presence in small markets and even in major metropolitan areas such as New York City is vital to the strength of small business and their ability to grow.  They provide accounts receivable lines of credit, equipment loans, real estate loans and in some cases even accounts receivable factoring.
Community bankers work on the principal of the Three C’s: Credit, Collateral and Character.  Large banks work off of computer models that determine whether or not you will be granted a credit line.  In most cases cyclical business, which many small businesses are characterized as, do not stand a chance against the money center or regional bank’s computer models as they are regularly rejected.  The beauty of a Community Bank pre Dodd Frank was that the small business owner could sit down with their local community banker to review the collateral, demonstrate they have good credit and character and establish a credit facility to help grow their business.  In the alternative, if there was not a chance that the bank could lend to a small business they would let them know immediately.  There is a benefit to a fast “No”.
We see this time and time again in our business at Capstone Capital Group, LLC.  Clients tell us they our factoring services as a backup to the line of credit they are applying for.  We can see immediately that there is no chance they will be approved by the money center or regional bank’s computer model.  However they go to the bank and apply through a business officer who is not trained to prequalify the applicant.  Several weeks are wasted in preparing and presenting all sorts of information that is required as part of the application process.  Once the loan request is denied, the business owner cannot make up for the lost time consumed by the lengthy application process that resulted in a denial of credit. 
Most non-bank financial institutions that support small business act like the pre Dodd-Frank community banker in many ways.  The Three C’s are employed because they take the time to understand the customer’s business and attempt to craft a program that will help the customer grow. 
Speaking from experience, we were in need of a $10,000,000 letter of credit facility to support our trade finance business.  We went to one of the large banks that you see on every corner in New York City where Capstone Capital Group, LLC has its operating accounts.  We advised the bank that we did not want to borrow from them, but instead we wanted to give them money so our letters of credit were cash collateralized.  You would think this is a pretty safe credit facility; after all we are giving them cash as collateral.  Although we were using our own cash to collateralize the “credit facility” we still had to provide a significant amount of both business and personal information.  This was understood since they are regulated by the federal government. 
What we were not prepared for was the approval process.  The bank actually wanted us to put up $20,000,000 for a $10,000,000 credit facility.  The process would work in the following manner:
  • A $10,000,000 deposit would be used to establish the letter of credit facility 
  • When letters of credit documents were presented we were not able to use the $10,000,000 that had already posted as collateral to pay for the goods purchased under the letter of credit. 
  • New funds would constantly be needed to provided the bank to cover the drawings under the various letters of credit issued so the $10,000,000 in collateral would always be on deposit. 
We inquired as to the logic of this approach and we were advised that their system is completely automated and in fact there was no human intervention whatsoever. To ensure that they did not extend us credit without cash collateral we were required to have twice the value of the letter of credit facility available to the bank.  Needless to say we took our business elsewhere where the credit terms made more sense. 

The federal government wants small business to thrive and grow and hire new employees to reduce the unemployment rate.  However, the federal government’s policies have unintended consequences that actually stymie progress for small businesses.  Could you imagine the growth rates of small business in the U.S. if the regulations that restrict their growth and ability to borrow were relaxed?  There would be one hell of an economic recovery underway!!Visit our website or connect with us on LinkedIn or respond below should you wish to discuss this further.

Download our Two Guides - Restarting your Business Post Covid & Turning your PPP Loan into a Grant

Capstone Capital Group, LLC wants to help you make sure your planning is flawless, which is why we are offering these free guides to help you get back to business on a sound financial footing.

Download

    Logo

    Privacy & Terms