U.S. banks’ capital falls short of new debt funding rule

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Last Updated: Aug 10, 2016

U.S. regulators are hammering a rule that is meant to mitigate taxpayer losses in case of another financial crisis. The rule stipulates minimum capital threshold that must be met by the banks. Surprisingly, JPMorgan Chase & Co, Wells Fargo and State Street are below or almost at minimum capital threshold expected to be included in this new rule.

Banks are expecting that the new regulations will require them to hold 10 percent of their balance sheet in bonds with maturities of more than a year and other instruments. Already they are required to hold equity equal to approximately 10 percent of their balance sheet which is meant to cover the risk of a sharp drop in the value of investments, loans and other assets on their books.

Based on regulatory filings and methodology recently presented by Citigroup, JPMorgan’s loss-absorbing capital stood at 19.1 percent at the end of last year, Wells Fargo’s was 17 percent while State Street’s was 18.2 percent. These are the three banks that the market tends to view as those who would be the most stretched.

Officials and analysts at banks base their estimates for the benchmarks partly on wider market assumptions and partly on discussions with regulators for what they think would be a reasonable level. The Federal Reserve has always taken tougher stance than its counterparts in the EU.

The regulators want creditors to take a hit if a bank lands in trouble; this is to prevent a repeat of the panic that spread in 2008 when Lehman Brothers collapsed.

The equity requirements by the regulators are in agreement with recommendations made in the global Basel III accord. Fed is planning similar requirements for long-term debt instruments that investors usually buy, and this is expected to increase loss-absorbing capacity of banks to about 20 percent.

Other regulators across the world are also working on similar plans. But there are some disagreements on the details of a common approach they want to present during the G20 meeting to be held in Brisbane, Australia in November.

The EU wants the loss-absorbing capital to stand at about 18 percent of the balance sheet. It is highly expected that Fed will also come up with a figure between 18 percent and 25 percent. JPMorgan declined to comment on this matter, while State Street said there is an ongoing dialogue with regulators and industry players over a variety of issues. It added that it still remains one of the well-capitalized banks in the U.S.

Wells Fargo pointed to what its Treasurer Paul Ackerman said in May that he expected the bank’s long-term debt to grow a little bit to fill any gap. Since the beginning of last year, the bank has issued more than $11 billion in debt with maturities greater than 10 years.

According to regulatory filings as of Dec. 31, 2013, the loss-absorbing capital of Bank of New York Mellon stood at 23.4 percent, Citigroup stood at 22.8 percent while the Bank of America was at 23.2 percent.

Banks would not have trouble complying with the new rule, only that they may require a longer transition period.

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