Citigroup Inc. (NYSE:C) executives are likely to be in a jubilant mood today, after news this morning revealed that the Basel III conditions were going to be relaxed. The news is a boon to all of the major banks in the United States, but as a research note from Buckingham Research points out, Citigroup probably gains the most from the decision.
The Basel Committee on Banking Supervision announced this morning that it would ease the conditions of the accords governing the Liquidity Coverage Ratio of banks. The LCR is the ratio of High quality Liquid Assets of a 30 day net cash outflows. Under the accord, banks are required to maintain a ratio of more than 100%.
Under the new rules, a wider definition of High Quality Liquid Assets will be used, the Cash Outflow parameters have been reduced, and the phase in period has been extended. Under the original guidelines, banks had to comply with the rules by the start of 2015. The new rules phase in the requirements, starting at 60% of the proposed ratio in 2015 and building by 10% each year until 2019.
Citigroup Inc. (NYSE:C), and banks like Morgan Stanley (NYSE:MS), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Company (NYSE:WFC), and Bank of America Corp (NYSE:BAC), will all benefit greatly from the loosening, but the biggest winner is probably Citigroup.
The note from Buckingham Research indicates that most of the world’s banks will benefit from the news by reducing the need to maintain higher liquidity. For Citigroup Inc. (NYSE:C) however, the deal does much more than that.
Most banks do not disclose their Liquidity Coverage Ratio, but Citigroup Inc. (NYSE:C) has done so, probably because the firm had, under the more stringent rules an LCR of 116%, some issues meeting the requirements. The relaxation of the rules will bring the firm a huge relief.
This will allow Citigroup Inc. (NYSE:C) to use its money to invest in higher return strategies, rather than having to hold or push a deal into liquid assets. This leaves the company more agile than company’s like Bank of America Corp (NYSE:BAC), who will more than likely, have a more difficult time meeting the LCR requirements.
A simple estimation performed by Buckingham speculates that the changes might free up $50 billion of cash at Citigroup Inc. (NYSE:C). A marginal return of 5% on that sum would yield $250 million in extra revenue for the company. Citigroup could all but assure a higher return because its cash will be much more flexible.
Citigroup Inc. (NYSE:C) is seemingly in a much better position to benefit from the rule changes than its competitors. It has the added advantage of being highly exposed to developing world market, they provide 40% of its revenue, while firms like Bank of America Corp (NYSE:BAC) are locked in a United States economy still moving slow to recovery.
The news inspired a spike in the prices of banks stock early this morning, but prices fell as investors became reluctant in the face of what might be a difficult week for earnings. At time of writing, Citigroup Inc. (NYSE:C) stock was trading down 0.85% to $42.07.