Impact of Obama Plan on Prospect of Big-Bank Breakups

CreditSights believes that the prospect of the breakup of big banks such as Citigroup (NYSE: C) is receding in the light of the Obama Administration’s proposed regulatory changes. However, Standard & Poor’s still sees this as a real possibility, according to CreditSights’ interpretation of an S&P conference call on its recent downgrading of many retail banks.

In contrast to our view that the Obama proposal reaffirms the position of large banks, S&P seemed more cautious and stated that it did not know how regulators would look at systemic risks. The agency seemed to believe that there could still be a real possibility for big bank break-up scenarios, whereas we feel that this risk is receding.

S&P noted that the Obama plan seemed to call for a more level playing field between banks and non-banks, but could also lead to differentiation among banks between the Tier 1 FHCs (systemically important financial institutions) and others. The agency stated that it would have to evaluate the implications for competitiveness for institutions which might be subject to different rules and/or higher standards under the proposal.

CreditSights has published its initial thoughts on the plan, especially as it relates to the long-term structure of the banking industry and the creation of new oversight bodies such as the CFPA (see: Bank Regulatory Overhaul: Obama Proposals Reviewed).

CreditSights analysis of S&P’s downgrade actions U.S. Banks: S&P Bank Ratings Revamp includes a useful table showing the degree of downgrades:

Comments

[greedcanbgood:]

Bad table, not so useful....or at least sorted VERY poorly. Banks like USB, BB&T and PNC STILL are mainting VERY high ratings and generally fund much cheaper thier their respective pier groups. This indicates significantly less risk in these institutions when compared to the rest of the industry. A rising tide raises all ships but the chart/article fail to make note of the converse.

Jun 19 02:54 PM

[DmytrenkoArtem:]

due to recent reforms in financial regulatios we shorted big weak american banks - JPM, KEY, STI and hedged it with long Canadian banks - TD, BNS, RY

Jun 19 06:53 PM

[Jasper M:]

I take no issue with the table, though it being based ultimately on S&P's work does kind of lessen any faith in its utility.

But I would Very wary of the notion that PNC and USB are "maintaining very high ratings" (per green, above). I would recommend checking out their ratings under Dr. Weiss's bank screener, buried in the thestreet.com
SO much of the US banking system is in such danger, especially at the large end, that which ones go down next is going to be largely a function of system noise.

Jun 19 10:37 PM

[TinyTim:]

"it did not know how regulators would look at systemic risks. The agency seemed to believe that there could still be a real possibility for big bank break-up scenarios"

this is the best way to reduce systemic risk.
then concentrate on the linkages between the smaller entities

Jun 20 02:53 PM

[greedcanbgood:]

Jasper - look at the spreads on debt issuances by these institutions. This is a good indicator of how the market preceives risk. PNC, BB&T and USB (USB especially) consistently fund debt at a MUCH lower rate than peers. My issue with the chart is that it's sorted by how many "notches" a company's rating was lowered - but one needs to also consider from where it was lowered.

Jun 23 09:58 AM