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BlackRock’s Larry Fink calls for sharper global bank-recapitalization rule

The world's biggest bank-investor calls for an internationally negotiated rule that enforces penalties against institutions that experience progressive capital shortfalls.

Larry Fink, CEO of BlackRock, the world’s biggest investor in banking stocks, has called for a “transparent and granular” global banking rule that would force institutions to recapitalize in a timely fashion if they progressively fall below common tangible equity thresholds.

 BlackRock CEO, Larry Fink
 BlackRock CEO, Larry Fink

At a seminar at the IMF annual meeting in Tokyo, he said: “Regulators spend too much time focusing on the potential failure of an institution. We need to spend more time on resolution when there is even [just] a small deterioration of capital.

“If you are a bank with 9% [tangible] common equity and you have a bad quarter and capital [falls] to 8.5% ... you [should] have a 90-day cure period to restore common equity back to 9%.”

The definition of “resolution [mechanisms] globally should be much broader, transparent and granular”, he said.

Fink called for an internationally negotiated rule that enforce penalties against institutions that experience progressive capital shortfalls, suggesting Basel’s Financial Stability Board would be suited to lead the global charge.

He said regulators had focused too much time on endgames for failed banks, such as recovery mechanisms, bail-in debt and living wills, and should, instead, consider introducing more timely capital preservation rules. The introduction of such a rule would reduce sovereign risk and boost banks’ price-to-earnings ratios, he said, adding: “If we had a strong resolute process where every country had a process [to redress] any idiosyncratic reduction in [a given bank’s] capital because of bad investment decisions, we would not need to worry about resolution [mechanisms].

“The majority of large banks will have no problem raising common equity capital.”

Subsequent to the savings and loan crisis, US federal law gives regulators the power to issue 'prompt corrective action' directives that force deposit-guaranteed institutions to boost their capital base if they fall below a given threshold. Fink appeared to argue that such a rule should be made more transparent and prescriptive and implemented on a global basis.

Speaking at the same IMF panel, Federal Reserve vice-chairman Janet Yellen said that in the context of banking stress-tests conducted by the Fed, “not all the details of the valuations [of a given bank’s assets] are put in public domain, [but] we have given banks clear indication” of the Fed’s methodology and capital preservation requirements. 

In comments that will boost regulatory hawks, Fink said higher capitalization requirements and the flurry of new global banking rules would stabilize the international financial system, in a blow to critics that argue capital reforms are costly, pro-cyclical and damage investor appetite for banking stocks.

“Having more capital is the best way of protecting investors – not just bondholders, but shareholders," he said. "All regulation and supervision obviously make things more complex but markets adjust. In the short-run, all these regulatory issues create confusion, uncertainty, and [it] probably takes longer to heal.”

However, just as the introduction of the Sarbanes-Oxley Act sparked overblown fears of the “death of the marketplace,” investors, banks and markets “will adapt” to the new era of tighter global bank regulation. Stronger investor protection and greater transparency should boost banks’ price-to-earnings ratios, he added.

In other comments, Fink – who has been tipped for the role of US Treasury secretary in any second Obama term – lashed out about over the role of credit ratings agencies (CRA).

“CRAs have proven to be a guiding post for looking backwards," he said. "Most of their models look backwards, Unfortunately, I, as an investor, am required to follow CRAs. If a country goes from investment grade to junk, I have to [adjust] portfolios.”

The world’s largest investor favours its proprietary sovereign-ratings model that rewards countries with low external financing requirements and a stable banking system – a boost, in particular, for the Nordic region and Singapore.

He also argued the eurozone needed a weaker euro, 3% to 4% inflation, and further progress in boosting competitiveness, in particular wage cuts in the periphery. The regional adjustment programme and fiscal austerity could last up to nine years, he concluded.

In other speeches made at the IMF seminar dominated by eurozone fears, Bank of France governor Christian Noyer said the EU banking union plan would help boost transmission of the European Central Bank's (ECB) monetary policy and structurally reduce the vulnerability of member states to negative feedback loops with their respective banking systems.

In comments that echo the market consensus that lowering the ECB’s benchmark rate would only boost liquidity at the margin, Noyer said repairing the broken monetary transmission remained his principal objective. “We cannot accept that monetary policy is blocked,” he said. He added that the banking union could take up to one year to get off the ground. He also said the ECB’s outright monetary transactions policy needed to avoid moral hazard.

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