By Telis Demos
The Treasury Department's proposals to overhaul financial
regulation offer banks, especially the biggest, potentially
significant relief when it comes to how much capital they must
hold.
That would answer banks' biggest complaints in the
post-financial crisis era -- that excessive capital requirements
are holding them, as well as lending, back. J.P. Morgan Chase &
Co. Chief James Dimon, for example, has described his bank's
balance sheet as a "fortress" that could absorb crisis-style losses
not just for itself, but many other banks as well.
If the Treasury's changes were adopted, they could allow banks
to return more capital to shareholders, which in turn would boost
returns on equity and possibly further bolster stock-market
valuations. The downside, say critics, is that this could weaken
banks' loss-absorbing buffers and threaten confidence in the
financial system.
Here are some areas where banks stand to gain from the Treasury
proposals:
Leverage Ratio -- Current rules say the biggest banks must hold
capital equal to at least 5% of their total leverage exposure, a
broad-brush measure of their total assets and exposures. Treasury
is proposing that banks be allowed to exclude some holdings from
that measure, namely cash deposited at central banks, U.S. Treasury
debt, and some of the money held at clearinghouses related to
derivatives.
That small change would give a big boost to leverage ratios.
J.P. Morgan's could possibly increase by more than 1 percentage
point or more. The higher that ratio goes, the more likely the bank
is able to return more capital to shareholders.
Goldman Sachs analysts estimated that such rules changes could
leave the four biggest U.S. banks with nearly $90 billion in excess
common equity.
There is another potential benefit. The House recently passed
the so-called Choice Act, which would allow banks to opt out of
stringent regulation if they maintained a leverage ratio of at
least 10%.
While that legislation isn't expected to be taken up by the
Senate, the Treasury proposals support the 10% choice. Changing the
calculation of leverage exposure it would make it easier for banks
to get to that level.
The big six banks would need to raise nearly $400 billion,
combined, to get to that level, based on March 31 figures and Wall
Street Journal calculations. At J.P. Morgan alone, the shortfall to
10%, which currently would be about $105 billion, would fall to
about $60 billion or less.
Operational Risk -- Bankers say that among the most onerous
requirements they face is one that forces them to effectively hold
capital against possible "operational" losses. These are losses
that could come not from things like market moves or loan defaults,
but from the banks' own actions. Those could include fines or big
legal settlements.
Such costs soared after the financial crisis, amid a series of
billion-dollar settlements over mortgage practices, faulty
money-laundering monitoring and currency-market manipulation. Those
have created so-called operational risk assets that are equal in
some cases to about 30% of bank assets weighted for risk, which are
key to determining other capital measures.
Treasury says that a "more transparent, rules-based approach
should be used in the calculation of operational risk capital."
This means capital required for such risks would be more in line
with recent actions and could be reduced if banks take measures to
reduce that risk.
Analysts estimate the big banks have more than $200 billion in
capital tied up due to operational risk. Changes wouldn't eliminate
the need for all of this capital, but would likely allow banks to
return a big slug of it over time.
G-SIB Surcharge -- The largest "global systemically important
banks," known as G-SIBs, are required by U.S. regulators to hold an
additional capital buffer, or surcharge, on top of their other
requirements. This is to reflect their complexity and the
disastrous spillover effects their failure would have on the global
financial system.
This charge varies, but will average 2.8 percentage points
across the biggest banks when it is fully phased-in, according to
analysts at Nomura Instinet.
The Treasury proposes that this standard be "recalibrated," in
part to reflect the fact that these banks don't rely as much on
short-term funding, such as repurchase agreements, or "repos," to
fund themselves, reducing their risk of sudden insolvency.
Again, that could free up capital that could be returned to
shareholders.
TLAC -- Big banks subject to annual stress tests have to prove
that they hold enough capital and debt to cover major losses, a
measure known as "total loss-absorbing capacity."
The idea is that in a failure or stressed situation, some debt,
along with equity, could be used to absorb losses. As part of this,
banks have had to hold more long-term debt than they may otherwise
have done.
That pushes up banks' overall interest costs, which reduces net
interest income. This weighs on profits and dampens returns.
Treasury is proposing that regulators revisit rules on this
regarding the mandatory minimum debt ratio included in calculating
this requirement.
Write to Telis Demos at telis.demos@wsj.com
(END) Dow Jones Newswires
June 13, 2017 13:15 ET (17:15 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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