A proposal this week from U.S. banking regulators that would double the minimum Basel III leverage ratio for subsidiaries of the biggest U.S. banks will be tough on them, and could cause some shifting of affected businesses to non-bank subsidiaries, suggests Fitch Ratings in a research note.
Earlier this week, U.S. regulators announced that they would require the eight U.S. banks that have been deemed global systemically important banks (G-SIBs) to maintain leverage ratios of at least 5% at the holding company level, and that their banking businesses must maintain a 6% ratio, which is double the 3% required by Basel IIII.
Fitch says that meeting the 5% threshold “is likely to be manageable for affected banks”; however, it suggests that the 6% standard will be “onerous for bank subsidiaries”, and it says that this may push these firms to conduct certain activities, such as derivatives, from their broker-dealer subsidiaries.
“The higher 6% minimum required for subsidiary banks… to be considered “well capitalized” and avoid prompt corrective action is tough,” it says. “It may lead to balance sheet changes at bank subsidiaries as some assets and businesses are shifted to non-bank subsidiaries within the same group.”
Fitch notes that regulators expect that $89 billion of capital will be required to meet the 6% leverage ratio at the bank level, and that $63 billion of capital is needed to meet the 5% leverage ratio at the holding company level. “We anticipate the institutions should be able to build capital and be in compliance by the proposed 2018 effective date,” it says, adding that three of the eight affected firms likely already meet the 5% threshold.
Moreover, it suggests that the requirements could still be softened. “Given past changes to [rule proposals] and how dynamic regulators have proved to be in final rule making, it is possible that this rule will change,” it says. “There are also numerous issues that have been flagged but are yet to be addressed, such as additional capital charges on banks’ long-term unsecured debt. We expect these issues to be addressed in 2013 and the debate on appropriate capital levels to continue.”