The final rule setting a leverage ratio for U.S. banks will likely hit the trust and custody banks hardest, says Fitch Ratings in a new report.
Earlier this week, three U.S. bank regulators finalized their rule setting a leverage ratio for the biggest banks, which will require the eight U.S. banks that are considered to be systemically important on a global basis to maintain a 5% leverage ratio at the holding company level, and 6% for banking subsidiaries. This is tougher that the minimums imposed under Basel III.
Fitch notes that, according to the U.S. regulators, the estimated capital shortfall to comply with the rule is US$68 billion. Although banks have until Jan. 1, 2018 to become compliant. The rating agency says that it expects banks will be able to comply with the new rule.
“Overall, affected banks not yet in compliance have adequate capital generation and balance sheet flexibility to meet the new standards, and we expect they will likely comply before the 2018 implementation date,” says the report, adding that the ratio will likely constrain balance sheet growth at those banks.
Fitch says that banks with large trust and custody operations could feel the effects of the rule the most “as their holdings of cash and low risk securities earn next to nothing in the present interest rate environment but will attract a 6% capital charge at the banking subsidiary level.”
“While its implications will vary by bank, we see the rule hitting trust and custody banks, namely Bank of New York Mellon Corp. and State Street Corp., harder as they tend to carry large balances of cash and low risk securities,” it says.