Recipe for Financial (In)Stability?
DK Matai - April 23, 2008
Recapitalisation has been the resonant word in capital markets this week as investors weigh up the benefits of Royal Bank of Scotland's GBP 12bn rights issue, Europe's largest ever stock offering to all existing shareholders. Banks going through a recapitalisation process are eager to repair their balance sheets.
The numbers are staggering: the rights issue will be sold at a 46.3% discount to Monday's share price and will inflate the share count 60%. Further, the bank will cut its cash dividend per share. No wonder the shareholders are not happy. As a result, RBS's Tier 1 ratio of capital to total assets -- capital adequacy ratio -- will move from 4% toward 6%, but only after an additional GBP 4bn of disposals are made. Is this the way to go for the next round of bank recapitalisations or will institutional investors, in future, want preferred stock or high-yielding bonds (8 percent or higher) so that they stand first in the queue in the event of further negative events? If recapitalisation entails higher costs of capital than in the past, does this not mean lower profitability for banks in the future?
Confronted with continuing credit market turmoil and the potential for bank liquidity problems to evolve into systemic risk, the Financial Stability Forum (FSF), the Bank for International Settlements (BIS) in Basel, central bankers, and other national regulators appear to have agreed that all banks, big and small, need to strengthen their capital adequacy ratios significantly. This consensus was strongly reinforced by the G7 finance ministers and central banks in their Washington, DC, meeting about ten days ago. Recapitalising a handful of troubled banks may be considered manageable by financial markets, however, encouraging all North American and European banks to recapitalise at the same time, ie, in a synchronised way, poses challenges of an entirely different magnitude.
The article can be read from here.
[ENDS]
The ATCA briefing was written jointly by myself and Dr Harald Malmgren, Chief Executive, Malmgren Global, based in Washington, DC.
The LinkedIn Q&A can be accessed from here. We welcome your thoughts, observations and views. Thank you.
With love and warm wishes to you and family
DK with family
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Posted by DK Matai at April 23, 2008 03:24 PM
Comments
1. Posted by
Keith
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on
April 23, 2008 03:48 PM
DK,
Many try to cling to the dysfunctional old system, but the world will soon see through it's fictions, strife will be the fuel for the revolution of change and the implementation of the new systems.
Everything is happening perfectly in a manner conducive to our evolution.
2. Posted by
Richard Thomas ∞Φ
on
April 25, 2008 07:40 AM
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Recent Comments
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Richard Thomas ∞Φ commented on Recipe for Financial (In)Stability?
DK,
Many try to cling to the dysfunctio
-
Keith commented on Recipe for Financial (In)Stability?
We are surely doomed! Dad gummit!
.
We are surely doomed! Dad gummit!
.
Tis a good time to gather together
for a synchronized, asymmmmetric
recapitulation of the undigested facts!
.
"I get around..." Beach Boys