There has been plenty of speculation that regulators will break up banks that fall under the “too big to fail” concerns, but analysts at one firm don’t think this will happen. Instead, Nomura analysts Glenn Schorr, Kevin Mixon, Kaimon Chung and Keith Murray believe that we’ll see a proposal for an orderly liquidation authority.
“Orderly Liquidation” For Big U.S. Banks
In a report issued to investors today, the analysts noted the increased regulatory requirements through the Dodd-Frank act in the U.S. and Basel III in Europe. They also said that it looks like “groundwork is being laid to be able to resolve systemically important banks through orderly liquidation without taxpayer support.”
Nomura analysts expect to see regulators to release more requirements for banks regarding minimum debt and capital structure. They also believe that debt requirements will keep drawing the attention of regulators and that the resulting requirements could negatively impact earnings of some banks, possible 10 to 20 percent in the worst case scenario.
However, in their view, the “ultimate impacts” will continue to be “pretty manageable” for most of the banks and financial firms which end up on the list of those that are systemically important. They believe those impacts will remain in the low to mid-single digits.
Possible Debt Requirements
In their report, the analysts said there are a few important questions regulators will have to face when looking at the potential financial impact on various financial institutions when it comes to setting new requirements. Of course there’s the obvious question, like how big the debt requirement should be. Also regulators will need to consider whether it should be based on total assets or risk weighted assets. Third, they will need to determine if institutions will be required to follow a mandated portion of subordinated debt.
Of course the analysts say that this analysis is still preliminary because there are so many potential assumptions that could be made, but they believe that debt requirements will be based on risk weighted assets rather than total assets. They also believe it will “include an offset by reallocating debt from subsidiary to parent” and that regulators will require “some subordinated debt issuance.”