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 U.S. banks are already required to hold equity equal to about 10
percent of their balance sheet to serve as a shock absorber to cover
the risk of a sharp drop in the value of loans, investments and
other assets on their books. Banks expect U.S. regulators to require
them to hold another 10 percent in bonds with maturities of more
than a year and other instruments, as part of the forthcoming rule.
Wells Fargo's <WFC.N> loss-absorbing capital stood at 17 percent at
the end of last year, State Street's <STT.N> was 18.2 percent and
JPMorgan <JPM.N> stood at 19.1 percent, according to a Reuters
analysis of eight banks, based on regulatory filings and methodology
recently presented by Citigroup.
"These are figures which have been circulating," said Bernard De
Longevialle, a credit analyst at Standard & Poor's. "The market
tends to view these three (banks) as those who would potentially be
the most stretched."
Analysts and officials at banks are basing their estimates for the
benchmarks partially on discussions with regulators and on wider
market assumptions for what would be a reasonable level. The Federal
Reserve has typically taken a tougher stance than its counterparts
in the European Union.
The Fed and the Federal Deposit Insurance Corporation (FDIC), who
are jointly working on the rule, declined to comment.
Regulators want creditors - and not just shareholders - to take a
hit if a bank lands in trouble, to prevent a repeat of the panic
that spread when Lehman Brothers collapsed in 2008.
The equity requirements that U.S. banks already conform to are in
line with recommendations made in the global Basel III accord. The
Fed has said it is planning similar requirements for long-term debt
instruments that investors buy knowing they might lose all or part
of their money. This would double the loss-absorbing capacity of a
bank's capital to about 20 percent.
Regulators from across the world are also working on such plans, but
they still disagree about the details of a common approach they want
to present when the G20 largest countries of the world meet at a
summit in Brisbane, Australia, in November.
DOUBLE THE BUFFERS
The European Union wants banks' loss-absorbing capital to stand at
about 18 percent of the balance sheet, and analysts believe that the
Fed will come up with a similar number, somewhere between 18 percent
and 25 percent.
JPMorgan declined to comment. State Street said it had "an ongoing
dialogue with industry participants and regulators over a wide
variety of issues", and that it remained one of the most
well-capitalized banks in the United States.
Wells Fargo pointed to a May investor day, during which its
Treasurer Paul Ackerman said he expected the bank's long-term debt
"to grow a little bit" to fill any gap. Since the beginning of last
year, Wells Fargo has issued more than $11 billion in debt with
maturities greater than 10 years.
Bank of New York Mellon <BK.N> stood at 23.4 percent, Citigroup <C.N>
at 22.8 percent and Bank of America <BAC.N> at 23.2 percent. [SEE
GRAPHIC]. All numbers are based on regulatory filings as of Dec. 31,
2013.
The rule is intended to make sure that governments can wind down a
failing bank that is considered to pose too much risk to the
financial system to go through ordinary bankruptcy, while not
burdening the taxpayer.
In the U.S., for example, the FDIC has explained how it would go
about the exercise, but the plan won't work without the extra
buffers.
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"Banks are more or less asked to keep a capital base ... of 9 to 10
percent of risk-weighted assets, and it's just a simple rule of
thumb to say you would have ... debt that would allow to double this
amount," De Longevialle said.
FitchRatings in a recent presentation also assumed a total
loss-absorbing capacity of 20 percent.
MORE RULES
Banks may not have too much trouble in raising more long-term debt
depending on the exact details of the Fed's requirement, analysts
said, particularly if there is a long transition period.
Questions about the levels and about what instruments would count
towards the total add to banks' anticipation about a long list of
new rules that haven’t been fully implemented, or that regulators
are still writing.
The Fed alone is working on four more rules: to raise more capital
for systemically important banks, to require banks to invest in
assets they can easily sell, to balance the maturities of assets and
liabilities, and to make the short-term funding market less
susceptible to panics.
One of the reasons that Wells Fargo is behind some of the other
banks is that it has traditionally relied on client deposits for
funding, and simply did not need to borrow money from other banks or
from investors.
While clients can quickly withdraw deposits, they are still
considered "sticky" – meaning banks don't anticipate that depositors
will withdraw their funds all at once-- and the Fed may take that
into account by granting banks such as Wells Fargo more leeway when
setting its long-term debt requirement.
"We would not be surprised if there are some differentiations
between the banks based on their business models. But that's an
assumption, that's not an information," De Longevialle said.
Morgan Stanley <MS.N> and Goldman Sachs <GS.N> have far fewer
deposits to fund their business, and they are also the two banks
that far exceed the 25 percent thought to be the upper boundary for
loss-absorbing capital level.
A senior Fed staffer working on the rule said at a conference last
week he would prefer consensus among the world's regulators grouped
together in the G20's Financial Stability Board before the Fed put
out its own rule.
Banks in Europe often have a different legal structure than those in
the United States, which group all their operating subsidiaries
under one holding company, and this may make it hard to agree on a
common approach soon.
(Reporting by Douwe Miedema; Editing by Karey Van Hall and John
Pickering)
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