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December 23, 2012 8:04 pm
Capital Group, one of the world’s largest asset managers, has been quietly lobbying in Washington against an expected proposal designed to make it easier to deal with large banks facing financial difficulties.
A US Federal Reserve rule, expected to be proposed next year, could force the largest financial groups to issue substantial amounts of debt at the holding company level, according to regulators and industry officials who have been briefed on the matter.
Some regulators believe big financial groups should hold more debt at the holding company level rather than in operating businesses as such borrowings could more easily transform into equity during a crisis to help resolve capital problems.
As a top-10 shareholder in several big banks including Citigroup and JPMorgan Chase, Capital Group has been arguing in private meetings with members of the Senate banking committee that the proposal would erode banks’ future earnings and decrease profitability because the proposal would increase banks’ funding costs, said participants in the meetings.
A representative for Capital Group, with $1.1tn under management, declined to comment. The Fed declined to comment.
Dan Tarullo, the Fed governor overseeing the central bank’s regulatory and supervision efforts, said this month that to enhance financial stability the minimum long-term debt idea “did not immediately suggest any unfavourable unintended consequences, thereby perhaps strengthening its appeal as a near-term policy priority”.
Bank strategists have begun to recommend trade ideas to clients based on the expectation that the proposal would force the biggest financial groups to increase debt issuance.
Morgan Stanley analysts said last month that leading US banks eventually may have to issue hundreds of billions of dollars in subordinated debt to comply with the proposal, dragging down future earnings as a result. Analysts at Barclays forecast that the Fed’s proposal could require the largest financial groups to hold equity and unsecured debt equal to 15-30 per cent of total assets.
More than a dozen US banks could be forced to issue $1.1tn in new debt to meet the 30 per cent threshold
The Fed is expected to propose the debt rule in part because it is supposed to make it easier for regulators to wind down large failing financial groups. During a resolution process, regulators have said they will transfer key operating subsidiaries of a failing bank to a temporary entity, leaving behind enough equity and debt at the holding company level to cover the original institution’s losses.
The proposal would allow regulators to impose haircuts on investors that carry holding-company debt, sparing holders of bank-level debt.
Barclays analysts have told clients to purchase bank-level debt and avoid holding company debt. Bank-level debt, they say, offers attractive yields while being more likely to avoid losses in the event of a financial group’s failure.
Capital Group is a specialist stock picker, with the great bulk of its clients’ money in mutual funds sold under the American Funds banner. Across its funds, the group is a top 10 shareholder at Citi, Wells Fargo, JPMorgan and Bank of America – the four largest US banks by assets and among the financial institutions to be affected by the Fed’s proposal.
The privately held firm, based in Los Angeles, has struggled with investment performance since the financial crisis, and investors have pulled a net $209bn from its funds over the past four years, according to Morningstar, or more than 30 per cent of its total assets as of the end of 2008.
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