Breaking up large banks

This is one item that has been on the academic agenda, if not the political agenda, ever since the sub-prime crisis erupted. It hasn't gathered momentum because the 'how to' issues are not easy to tackle. Which parts of the universal banks to break up? Where are the buyers? And so on.

And yet one shareholder did pose the question at Citibank's annual meeting last week. FT's Lex comments:

Meantime, the US universal banks trade at discounts to some smaller, more focused peers on a price to tangible book basis. And break-up values seem attractive. CLSA, for example, puts a sum-of-the-parts valuation of $73 a share on Citi versus a market price of $47. 

Citi counters that it continues to shed non-core assets and it is cutting 11,000 jobs. But chairman Michael O’Neill says “dismembering [the bank] in an uneconomic way” would not be in the best interest of its shareholders. The likes of Citi, JPMorgan and Deutsche Bank argue that there are still real benefits to universal global banking. For now, the too-big-to-fail legislation does not seem to have much traction. Lobbyists are out in force. Still, if politics does not break up banks, then investor greed might – unless banks can boost their returns.

As Lex points out, legislation being discussed in the US Congress could give a push to the break up of large banks. Congress wants to raise capital requirements for large banks to 15% against the 10.5% proposed by Basel III. The US Fed is weighing in with a higher leverage requirement. than the 3% contemplated under Basel III. A UK regulator Andy Haldane has proposed  4-7%. 

Mind you, these are minimum requirements. Banks generally hold capital above the regulatory minimum. In India, the regulatory minimum of 11.5% will translate into a market expectation of 15-16% of capital. Banks would be wise to plan their capital requirements accordingly.