Economy
Bank of America Corp, Citigroup expected higher on new regulations |
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| Economy | |
| Written by Roberta Murray | |
| Friday, 25 June 2010 | |
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Bank of America Corp and Citigroup have five years to adjust calculations of Tier One capital.
Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) will have five years to stop including hybrid securities such as trust-preferred securities when calculating their Tier One capital ratios. Wall Street banks will be forced to adhere to new capital limits under an agreement between politicians who are putting the finishing touches to legislation aimed at reforming US financial regulation. Bank of America Corp futures are higher by 1.93% at 7:38 AM EDT as it appears investors will breath a sigh of relief that the reforms are not as tough as they had factored in. Citigroup Inc futures are higher by 1.59%. Should the two banks rally at opening then we will witness a similar reaction by investors as was the case at Lloyds Banking Group and RBS after the UK government announced new rules on Tuesday. Legislation in detailUnder the legislation, major banks such as Citigroup and Bank of America will have five years to stop including hybrid securities such as trust-preferred securities when calculating their Tier One capital ratios. Tier One capital is an important indicator of a bank's financial health, used by regulators across the world good gauge as to whether an institution might be in trouble. Under the reforms, pushed by Senator Christopher Dodd, smaller banks with assets of less than $15bn (£10bn) will be allowed to use such hybrid securities when calculating their Tier One capital. The changes are likely to anger the banking fraternity has campaigned through lobbyists to ensure specific requirements were not included in the legislation's wording, instead leaving it to financial regulators to decide on what was acceptable. In a speech in Washington DC this week, Bob Diamond, Barclays' president, said that "determining the right level of capital... should be a regulatory issue, not a statutory issue". He added that there should be an even playing field between countries with major financial services centres to avoid "capital arbitrage". The capital changes came as the politicians involved in finalising the reform bill hashed out their final differences in order to allow the votes in both the US House of Representatives and the Senate at some point next week. "We believe we can finish. A lot of progress is being made," said Congressman Barney Frank, who is chairing the negotiating committee. However it is understood that there was still no agreement on the equally controversial derivatives rules, proposed by Senator Blanche Lincoln, which would force banks to divest swaps desks into separately capitalised units.
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