Fitch: More Disclosure Needed for Banks' Capital Market Revenues
U.S. banks' public disclosure of capital markets revenue is insufficient to allow investors and counterparties to make a proper assessment of the impact upcoming regulatory changes will have on firms' future profitability, capital adequacy, and competitive position.
As large banks continue the process of complying with Basel III capital and liquidity standards and the Volcker Rule, a more granular and detailed presentation of trading and market-making revenues in public disclosures is essential, in our opinion. While Fitch Ratings often receives more detailed information as part of its analyses, banks report the largest components of capital markets revenues only in a very general fashion, through public disclosure, rarely breaking out performance within the broad category of fixed income, currencies, and commodities (FICC).
FICC activities drive between 50% and 60% of aggregate capital markets revenues for the largest U.S. trading banks, such as Goldman Sachs, Morgan Stanley, JP Morgan Chase, Citigroup, and Bank of America. However, there is no public disclosure of the five primary components of FICC revenues - interest rates, credit, mortgages, currencies, and commodities.
The move toward Basel III capital and liquidity requirements and the forthcoming Volcker Rule will likely reshape the product mix within FICC and significantly affect core market-making activities, particularly in less liquid trading products. Investors, counterparties and other industry observers would benefit greatly from disclosure of FICC revenues on a more detailed basis.
We believe some areas, such as rates and currencies, will likely receive more favourable treatment under Basel III and Volcker. Other segments, however, may be hurt. These could include mortgages and high-yield corporate bond and loan trading, as well as complex structured transactions.
In order to support a complete assessment of the impact of the various drivers of trading revenue on Basel III and Volcker compliance, which will likely be a key running theme in future bank reporting periods, we believe that banks should prioritize a switch to more detailed capital markets revenue reporting practices.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
One State Street Plaza
New York, NY 10004
+1 212 908-0624
+1 312 368-3141
70 W. Madison
Chicago, IL 60602
Brian Bertsch, +1-212-908-0549 (New York)