Finance

U.S. regulators on Thursday unveiled a sweeping set of proposed changes to banks’ capital requirements to address evolving international standards and the recent regional banking crisis.
While the heightened requirements apply to all banks with at least $100 billion in assets, the changes are expected to impact the biggest and most complex banks the most, the regulators said.

Michael Barr (L), Vice Chair for Supervision at the Federal Reserve and Martin Gruenberg, Chair of the Federal Deposit Insurance Corporation (FDIC), testify about recent bank failures during a US Senate Committee on Banking, House and Urban Affairs hearing on Capitol Hill in Washington, DC, May 18, 2023. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)
Saul Loeb | Afp | Getty Images

U.S. regulators on Thursday unveiled a sweeping set of proposed changes to banks’ capital requirements to address evolving international standards and the recent regional banking crisis.
The changes, designed to boost the accuracy and consistency of regulation, will revise rules tied to risky activities including lending, trading, valuing derivatives and operational risk, according to a notice from the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

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Long expected by banks, the proposed rules seek to tighten regulation of the industry after two of its biggest crises in recent memory — the 2008 financial crisis, and the March upheaval in regional lenders. They incorporate parts of international banking regulations known as Basel III, which was agreed to after the 2008 crisis and has taken years to roll out.
The changes will broadly raise the level of capital that banks need to maintain against possible losses, depending on each firm’s risk profile, the agencies said. While the heightened requirements apply to all banks with at least $100 billion in assets, the changes are expected to impact the biggest and most complex banks the most, they said.
“Improvements in risk sensitivity and consistency introduced by the proposal are estimated to result in an aggregate 16% increase in common equity tier 1 capital requirements,” the regulators said in a fact sheet. Tier 1 common capital levels measure an institution’s presumed financial strength and its buffer against recessions or trading blowups.

Long phase-in period

Most banks already have enough capital to meet the requirements, the regulators said. They would have until July 2028 to fully comply with the changes, they said.
The KBW Bank Index dipped less than 1% in midday trading; the index has fallen 11% this year.

Further, in response to the failure of Silicon Valley Bank in March, the proposal would force more banks to include unrealized losses and gains from certain securities in their capital ratios, as well as compliance with additional leverage and capital rules.
That effectively eliminates a regulatory loophole that regional banks enjoyed; while larger firms with at least $250 billion in assets had to include unrealized losses and gains on securities in their capital ratios, regional banks won a carve-out in 2019. That helped mask deterioration in SVB’s balance sheet until investors and customers sparked a deposit exodus in March.

Higher standards

The changes would also force banks to replace internal models for lending and operational risk with standardized requirements for all banks with at least $100 billion in assets. They would also be forced to use two methods to calculate the riskiness of their activities, then adhere to the higher of the two for capital purposes.
“Today’s banking system has more large and complex banks than ever to support our dynamic economy,” acting OCC head Michael Hsu said in a statement. “Our capital requirements need to be calibrated to this reality: providing strong foundations for large banks to be resilient to a wide range of stresses today and into the future.”
Regulators have invited commentary on their proposal through Nov. 30; banks and their interest groups are expected to push back against some of the new rules, saying they will boost prices for customers and force more activity into the so-called shadow banking sector.
Trade groups including the American Bankers Association, the Consumer Bankers Association and the Financial Services Forum issued statements questioning the rationale for the stricter capital requirements.
“There is no justification for significant increases in capital at the largest U.S. banks and no other jurisdiction is likely to adopt the approach proposed today, which will only increase the significant disparity that already exists between U.S. and foreign bank capital requirements,” Kevin Fromer, CEO of the Financial Services Forum, said in an email.
“Regulators and other policymakers should carefully consider the harmful economic impact of this proposal,” he added. More

Federal prosecutors told a Manhattan judge they wouldn’t pursue a campaign finance charge against FTX founder Sam Bankman-Fried.
It’s the second time Manhattan prosecutors have had to forgo charging the billionaire, who is accused of precipitating the collapse of his crypto exchange through a multibillion-dollar fraud.
Bankman-Fried still faces multiple wire and securities fraud charges.

Indicted FTX founder Sam Bankman-Fried leaves the U.S. Courthouse in New York City, July 26, 2023.
Amr Alfiky | Reuters

Federal prosecutors dropped a campaign finance charge against Sam Bankman-Fried, the second time they have narrowed the indictment against the founder of crypto exchange FTX .
Prosecutors told Judge Lewis Kaplan on Wednesday that they were dropping the charge of conspiracy to make unlawful campaign contributions because they had failed to obtain permission from the government of the Bahamas for that charge when Bankman-Fried was extradited from the island nation in December.

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The U.S. Attorney’s Office in Manhattan previously dropped another charge against him, for violating anti-bribery statutes, on the same grounds.
The moves narrow the criminal exposure of the former billionaire, who prosecutors allege conspired to defraud investors and customers out of billions. The alleged scheme precipitated the collapse of Bankman-Fried’s FTX and sent shockwaves throughout the crypto industry.
Prosecutors had alleged that Bankman-Fried funneled hundreds of millions of dollars in bipartisan campaign financing through two unnamed co-conspirators to avoid campaign contribution limits. The charge could have added two to five years to Bankman-Fried’s imprisonment if convicted.
In their letter Wednesday to Kaplan in U.S. District Court in Manhattan, prosecutors wrote, “The Government has been informed that The Bahamas notified the United States earlier today that The Bahamas did not intend to extradite the defendant on the campaign contributions count.”
“Accordingly, in keeping with its treaty obligations to The Bahamas, the Government does not intend to proceed to trial on the campaign contributions count,” prosecutors wrote.
Since Bankman-Fried’s detention and extradition, civil and criminal charges have been brought against several exchanges, advisors and individuals for crypto-related schemes. Former FTX executives, including top lieutenants Caroline Ellison, Gary Wang and Nishad Singh, have all pleaded guilty to federal charges. They are cooperating with the government’s prosecution against Bankman-Fried, who is expected to face trial later this year. More

“Shark Week” is an annual block of TV programming on Discovery. It runs July 23 to July 29 this year.
Perhaps the most famous shark — the fictional great white from the 1975 Steven Spielberg summer blockbuster “Jaws” — can teach investors an important lesson about behavioral bias.
“Recency bias” is the tendency to put too much emphasis on recent events like a stock market rout when making investment decisions.

A ‘Shark Week’ blimp flies over the San Diego Convention Center on July 23, 2022.
Aaronp/bauer-griffin | Gc Images | Getty Images

It’s “Shark Week,” the annual television-programming event on Discovery that stars the ocean’s apex predators. And perhaps the most famous of these fish — the fictional, man-eating great white from the 1975 thriller “Jaws” — can teach an important money-saving behavioral lesson to investors.
Specifically, investors have a tendency to get swept away by the fear or euphoria of the recent past. This is called “recency bias,” and it’s often accompanied by financial loss.

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This bias leads investors to put too much emphasis on recent events — say, a stock-market rout, or the meteoric rise of bitcoin or a meme stock like GameStop.
“People need to understand that recency bias is normal, and it’s hard-wired,” said Charlie Fitzgerald III, an Orlando, Florida-based certified financial planner. “It’s a survival instinct.”

By Wildestanimal | Moment | Getty Images

Even so, allowing short-term emotion to guide long-term financial decisions is generally counter to investors’ best interests, as is often the case when selling stocks in a panic.
Recency bias is akin to a common yet illogical human impulse, such as watching Steven Spielberg’s classic summer blockbuster “Jaws” and then being afraid of the water.
“Would you want to go for a long ocean swim after watching ‘Jaws’? Probably not, even though the actual risk of being attacked by a shark is infinitesimally small,” wrote Omar Aguilar, CEO and chief investment officer at Schwab Asset Management.

Fitzgerald equates the impulse to a bee sting.
“If I get stung by a bee once or twice, I’m not going to go there again,” said Fitzgerald, a principal and founding member of Moisand Fitzgerald Tamayo. “The recent experience can override all logic.”

Recency bias is largely associated with FOMO

Here’s a recent real-world illustration.
The financial services sector was among the top performers of the S&P 500 Index in 2019, when it yielded a 32% annual return. Investors who chased that performance and subsequently bought a bunch of financial services stocks “may have been disappointed” when the sector’s returns fell 2% in 2020, a year when the S&P 500 had a positive 18% return, Aguilar said.

Fans celebrate the June 14, 2005, release of the “Jaws” 30th Anniversary Edition DVD from Universal Studios Home Entertainment.
Christopher Polk | Filmmagic | Getty Images

Among other examples posed by financial experts: tilting a portfolio more heavily toward U.S. stocks after a string of underwhelming performance in international stocks, and overreliance on a mutual fund’s recent performance history to guide a buying decision.
“Short-term market moves caused by recency bias can sap long-term results, making it more difficult for clients to reach their financial goals,” Aguilar said.
The concept generally boils down to fear of loss or a “fear of missing out” — or FOMO — based on market behavior, said Fitzgerald.
More from Personal Finance:’We’re all crazy when it comes to money,’ advisor saysWhy our brains are hard-wired for bank runsThe fear of missing out can be a killer for investors
Acting on that impulse is akin to timing the investment markets, which is never a good idea. It often leads to buying high and selling low, he said.
Investors are most vulnerable to recency bias, he said, when on the precipice of a major life change such as retirement, when market gyrations may seem especially scary.

What’s in a well-diversified portfolio

Long-term investors with a well-diversified portfolio can feel confident about riding out a storm instead of panic selling, however.
Such a portfolio generally has broad exposure to the equity markets, via large-, mid- and small-cap stocks, as well as foreign stocks and maybe real estate, Fitzgerald said. It also holds short- and intermediate-term bonds, and maybe a sliver of cash, he added.

Investors can get this broad market exposure by buying various low-cost index mutual funds or exchange-traded funds that track these segments. Or, investors can buy an all-in-one fund, such as a target-date fund or balanced fund.
One’s asset allocation — the share of stock and bond holdings — is generally guided by principles such as investment horizon, tolerance for risk and ability to take risk, Fitzgerald said. For example, a young investor with three decades to retirement would likely hold at least 80% to 90% in stocks. More

The 13th Annual CNBC Delivering Alpha Investor Summit—New York City, September 28, 2023.  Register below

A KKR logo is displayed on the floor of the New York Stock Exchange (NYSE), August 23, 2018.
Brendan McDermid | Reuters

Private equity firms should be motivated to hunt for deals despite the challenging interest rate environment as the potential purchase price tends to be more in their favor, according to KKR’s Global Co-Head of Private Equity Pete Stavros.
“This is a great time to do deals,” Stavros said in an interview with CNBC’s Leslie Picker for the Delivering Alpha newsletter. “When you want to be more cautious is when capital is everywhere. You can get as much debt as you want. The credit markets are red hot. The M&A market you know is on fire. Those are times to raise your bar and be a little bit more cautious.”

Arrows pointing outwards

Private equity fundraising has slowed down drastically after a series of aggressive interest rate hikes made borrowing costs skyrocket. Globally, private equity funds raised $444.65 billion in the first half, down 20.5% year over year from, according to S&P Global Market Intelligence.
“When the public markets are more volatile and when credit markets are tighter, better return deals are done. That’s the history,” Stavros said. “It’s logical because purchase prices are constrained because you can’t borrow as much and the the money you can borrow is more expensive. This is the time to be leaning it now.

KKR announced its latest exit deal that involved RBmedia, a audio-books publisher that was sold to another investment firm H.I.G. Capital. The deal has an employee stock ownership program in place.
Stavros said private equity investors shouldn’t decide to sit on sidelines or go all in based on the market environment, adding that KKR instituted a rigorous process of not over-deploying or under-deploying in any given year.
“One of the most important points as it relates to private equity M&A, my view is as a private equity investor, you should not be trying to time the market,” Stavros said. More

The 13th Annual CNBC Delivering Alpha Investor Summit—New York City, September 28, 2023.  Register below

(Click here to subscribe to the Delivering Alpha newsletter.)
The job market may be strong, but the invisible strings that connect workers to their jobs are increasingly weaker. 

Trends such as “lazy girl jobs” and “quiet quitting” have gone viral in a post-pandemic world where young workers are trading ambition for balance. Actors and writers continue to strike. UPS workers were on the brink of one before reaching a tentative agreement with their employer. More than half of employees in a recent survey reported feeling burned out due to a demanding workload. 
How would all of that change if there were greater economic alignment between employers and their employees? If employees had more so-called “skin in the game?” 
That’s the rhetorical question that Pete Stavros finds himself constantly asking. As the co-head of global private equity at KKR, he’s been a key champion of instilling employee stock ownership programs in all the companies the firm buys for its $19 billion Americas Fund.
These are effectively additional benefits, doled out to the rank-and-file – outside traditional management stock plans. Employees are given a stake in the company they’re employed by; it’s additional compensation above their regular wages and benefits, so that they can participate in any upside value the company delivers. 
“So why should people do this? It’s because it’s just a superior way to run a business from every respect,” Stavros said in an interview for the Delivering Alpha Newsletter. “It’s better for investors, it’s better for the company, it’s better for employees, and in the end, it’s better for the communities that they live in.” 

The latest deal, announced this week, involved RBmedia, a KKR-backed audio-books publisher that was sold to another investment  firm H.I.G. Capital. At the closing of this transaction, expected by the end of the year, all RBmedia employees will receive a cash payout based on their tenure with the company. On average, that will amount to 100% of their annual salary. 
Stavros said the firm has exited about nine of these deals now, noting, “they are among the best.” He said the exits have returned anywhere from 3 times to 10 times the capital that KKR invested. Over 60,000 non-management employees have been awarded billions of dollars in total equity value through these ownership programs since 2011, the firm said. 
Stavros said that in KKR’s companies that utilized this program, quit rates went down and engagement scores skyrocketed. But he said that equity can’t just be given out to employees without support. He said there needs to be financial literacy, tax advice and education, as well as a way for employees to voice ideas and concerns – as any stockholder would do. 
“So when it’s done well, and it’s in this holistic effort, for sure, it can affect worker discontent, which will lead to people walking out the door less, people being more engaged on the job, and caring about where the business is headed,” he said. 
Stavros’s goal is to “see this roll out across the whole industry.” He and KKR are founding members of a non-profit called Ownership Works, with the ambition of generating at least $20 billion of wealth for lower-income and diverse workers over the next decade through shared ownership. Through the non-profit, other private-equity firms like Apollo and TPG also committed to advancing shared ownership within their own portfolios. 
It’s still relatively early days – especially an industry not known for quick change – but the concept appears to be the antidote to worker discontent…one exit at a time. More

A Southwest Airlines aircraft at a gate at AustinBergstrom International Airport (AUS) in Austin, Texas, US, on Thursday, Feb. 16, 2023. 
Jordan Vonderhaar | Bloomberg | Getty Images

Check out the companies making headlines in early morning trading.
Southwest Airlines — The carrier slid 6% premarket after reporting a mixed financial update early Thursday. Southwest said business revenues are continuing to recover, but not yet back to back to pre-pandemic levels, cited higher costs, including raising its jet fuel forecast for the full year to $2.70-2.80 per gallon from an earlier $2.60-2.70.

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Chipotle Mexican Grill — Shares of the burrito chain fell more than 8% after its latest financial update showed sales fell short of Wall Street expectations. Chipotle reported $2.51 billion in revenue, while analysts polled by Refinitiv had expected revenue of $2.53 billion.
Edwards Lifesciences — The company saw its shares fall 6% after it posted slightly better-than-expected earnings and revenue for the second quarter but issued weaker than expected guidance. A forward earnings forecast of 55 cents to 61 cents per share excluding items fell below analysts’ estimate of 63 cents per share, according to FactSet.
Ebay — Shares of the e-commerce giant fell nearly 6% after issuing weak guidance for the current quarter. The company anticipates third-quarter adjusted earnings per share of 96 cents to $1.01 per share, while analysts polled by FactSet estimated $1.02 in earnings.
Align Technology — The orthodontics company surged 14% after posting adjusted earnings late Wednesday of $2.22 per share for the second quarter, beating estimates of $2.03 per share, according to Refinitiv. Revenue for the quarter also topped estimates, and revenue guidance for the year was above analyst expectations.
Meta Platforms — The Facebook parent jumped nearly 9% after reporting earnings and revenue for the second quarter that topped analysts’ estimates. Meta also issued a better-than-expected forecast for the current period amid a rebound in digital advertising.

Lam Research — Shares of the semiconductor equipment maker rose 3% after the company reported a strong quarter late Wednesday. Lam posted adjusted earnings of $5.98 per share, beating estimates by 91 cents per share, per Refinitiv. Revenue of $3.21 billion topped expectations of $3.13 billion. Financial surpassed estimates as well.
McDonald’s — The dominant fast food chain rose more than 1% after posting earnings and revenue Thursday that topped Wall Street expectations. McDonald’s cited a rebound in China sales as well as success from its Grimace Birthday Meal. Same-store sales grew 11.7% in the second quarter.
Honeywell — Shares of the industrial company fell 1.6% after Honeywell reported a mixed second quarter. The company earned an adjusted $2.23 a share on $9.15 billion of revenue. Analysts surveyed by Refinitiv were expecting $2.21 per share on $9.17 billion of revenue. The thermostat maker saw sales decline year over year for its safety and productivity solutions products.
Mattel — The toymaker’s shares slipped about 1% after it announced the departure of Richard Dickson, chief operating officer, who is leaving to become CEO of Gap. The Barbie maker also posted second-quarter adjusted earnings of 10 cents a share on revenue of $1.09 billion. Analysts called for a per-share loss of 2 cents and revenue of $1 billion, per Refinitiv.
ServiceNow — Shares of the tech company dipped about 1% despite ServiceNow second quarter results beating estimates on the top and bottom lines. ServiceNow reported $2.37 in adjusted earnings per share on $2.15 billion of revenue. Analysts surveyed by Refinitiv were looking for $2.05 per share on $2.13 billion of revenue. Several Wall Street analysts cited guidance that pointed to slowing growth on a constant currency basis in the third quarter as a potential concern.
Comcast — Shares of the NBC and Xfinity parent advanced more than 2% after reporting strong earnings Thursday morning, citing higher prices that offset slowing broadband growth. It also said subscribers for its Peacock streaming service nearly doubled to 24 million compared to the same period a year ago.
Imax — The big screen movie company added 6.4% following a strong second-quarter report. IMAX earned 26 cents per share, excluding one-time items, on $98 million in revenue, while analysts polled by Refinitiv anticipated 16 cents per share and $86.6 million. Management said that last weekend was one of the best global box office performances ever and that an accelerated rate of signups and installations signals positive long-term growth.
Sunnova Energy — Shares of the solar company slid more than 7% following weaker-than-expected financial results in the second quarter. Sunnova posted a wider-than-expected loss of 74 cents per share, while analysts expected a loss of 42 cents per share, according to FactSet. Revenue came in at $166.4 million compared to expectations of $195.5 million.
Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.
 — CNBC’s Jesse Pound, Alex Harring and Yun Li contributed reporting More

China has a new central-bank boss. Pan Gongsheng, who became governor of the People’s Bank of China on July 25th, is a technocrat. His career, which includes a phd in economics, research at Cambridge University and Harvard, and a stint as deputy governor, resembles those of central bankers elsewhere. But he inherits a different problem: too little inflation, not too much.China’s consumer prices did not rise at all in the year to June. The country’s GDP deflator, a broad measure of the price of goods and services, fell by 1.4% in the second quarter, compared with a year earlier. That is the biggest decline since 2009.Falling prices pose immediate dangers for the country’s policymakers. They can erode profits, depress confidence and deter borrowing and investment, which will only add to deflationary pressure. The absence of inflation also has a less immediate implication—one of particular interest to those keeping score in the geopolitical race between China and America. Deflation could delay China’s emergence as the world’s biggest economy.Despite its difficulties, China’s economy is expected to grow by about 5% this year. America’s will probably grow by 2% at best. China would then appear to be gaining ground. But these forecasts exclude inflation and ignore exchange rates. America’s “nominal” growth, before adjusting for inflation, could exceed 6%, according to Goldman Sachs, a bank. The country will produce 2% more stuff, the price of which could rise by about 4%. China’s nominal growth, on the other hand, is forecast to be only 5.5%.In theory, high inflation in America should weaken the dollar. This would make other economies like China loom larger in dollar terms. In practice, however, America’s currency has been strong. As a result, China’s GDP, converted into dollars, could fall further behind its rival’s in 2023, for the second year in a row. The country’s economy will be 67% the size of America’s in 2023, according to Goldman Sachs, compared with 76% in 2021. Thus the world’s second-biggest economy will be a more distant second.This trajectory is unexpected. Upstart economies like China’s are not only supposed to grow faster than mature economies, their prices are also supposed to “catch up” with the higher prices that prevail in rich countries. Emerging economies start out poor and cheap, then grow richer and more expensive—either because their prices rise quickly, or because their exchange rates strengthen. In the 1960s, for example, an American visiting Italy or Japan would have found that the dollar stretched further in these countries than back home. Lira and yen prices, when converted into dollars at market exchange rates, were lower than American prices for similar items. Two or three decades later, both Italy and Japan were just as pricey as the United States. The classic explanation for this phenomenon was provided by Bela Balassa and Paul Samuelson, two economists, in 1964. In catch-up economies, productivity grows briskly in industries, like manufacturing, that trade goods across borders. Because output per worker rises quickly, firms can afford to pay their workers more without raising their prices, which are pinned down by global competition. Meanwhile, in sectors such as services, which are not much traded across borders, productivity grows more slowly. Service firms must nonetheless compete with manufacturing for the country’s workers. That obliges them to raise their wages to attract recruits. Higher wages, in turn, force these firms to raise prices. These price hikes are required because productivity has not kept up, and possible because services are sheltered from global competition. The hikes also make the country more expensive: the price of haircuts rises in sympathy with the growing wages of increasingly productive manufacturing workers.China’s prices are now on average only 60% of American prices when comparing like-for-like items, according to the World Bank. Their figure lines up with this newspaper’s Big Mac index, which compares the price of burgers around the world. In China a Big Mac costs 24 yuan, the equivalent of $3.35. That is only 63% of the cost of a similar meaty treat in America. The long-term forecasters at Goldman Sachs expect China’s price level to have risen modestly, relative to America’s, by the middle of the next decade. By that point, China’s GDP will have become the biggest in the world, they project. If prices instead remain at their present low level, then China’s GDP may never overtake America’s at all. Capital Economics, a research firm, cleaves to this gloomier view. It thinks China’s growth per worker will slow to roughly the same pace as America’s within the next decade. If China is no longer catching up with America economically, it argues, there is no reason to expect its prices to catch up either.Catch-up and friesThat conclusion may be too hasty. History provides plenty of cases in which a country’s prices rise, relative to America’s, even as its GDP per head grows no faster. For example, Ireland, Israel and Italy all had spells in the 1980s when GDP per person grew more slowly than America’s, but they nonetheless became less cheap, through faster inflation or a strengthened exchange rate. Figures from the Penn World Table suggest that, all told, 156 countries have had at least one ten-year period of price convergence without economic convergence since 1960.This pattern is ultimately compatible with Balassa’s and Samuelson’s theory. If a dynamic manufacturing sector was offset by a moribund services sector, a country could grow modestly overall, but still become more expensive. The price of services would rise quickly, pulled along by competition for labour from more productive manufacturing companies. Will China’s cheapness persist? That will depend not just on how fast it grows relative to America, but how fast its manufacturing grows relative to homebound industries. To close the GDP gap with America, China will have to narrow the price gap, too. ■Read more from Free exchange, our column on economics:Why people struggle to understand climate risk (Jul 13th)Erdoganomics is spreading across the world (Jul 6th)The working-from-home illusion fades (Jun 28th) More

China has a new central-bank boss. Pan Gongsheng, who became governor of the People’s Bank of China on July 25th, is a technocrat. His career, which includes a phd in economics, research at Cambridge University and Harvard, and a stint as deputy governor, resembles those of central bankers elsewhere. But he inherits a different problem: too little inflation, not too much.Listen to this story. Enjoy more audio and podcasts on More