Large US banks are preparing now for impending heightened capital requirements that are likely to weigh on their lending appetite and performance metrics.
Federal regulators have long been expected to update capital requirements for banks, but now, concern over the industry's stability since recent failures could push regulators to act sooner. According to a recent report from The Wall Street Journal, regulators could propose rules that would require a 20% boost to large banks' capital bases as soon as this month.
Speaking at a recent industry conference, large-bank CEOs said they expect changes to capital requirements such as total-loss absorbing capital (TLAC), Basel III endgame, liquidity coverage ratio (LCR) and the inclusion of accumulated other comprehensive income (AOCI) in capital ratios, which is currently only required of global systemically important banks.
Holding onto cash
Though the rulemaking process can take years, some banks are bracing for such possibilities by hoarding capital now.
"We're in a build capital mode," Truist Financial Corp. Executive Chairman, President and CEO Bill Rogers said at a recent industry conference. "We're on a flight path and building capital, [but] where that flight path stops, I'm not exactly sure. But we're going to be in a build mode until we have more information, more certainty."
Capital growth is always a top priority for Bank of America Corp., but that focus is even more important now because "when you're heading into a recession, ... you just got to make sure the capital is there," Chairman, CEO and President Brian Moynihan said.
Citigroup Inc. is being "modest" with capital spending initiatives such as buybacks right now until there is more clarity on capital requirements and a less challenging operating environment, CEO Jane Fraser said.
"[W]e will take it quarter by quarter as we have more information about what's going on," Fraser said.
Others not as concerned
A Piper Sandler analysis of the impact of a 20% increase to big banks' capital requirements identified Citizens Financial Group Inc. and PNC Financial Services Group Inc. as "comparatively strong" for regional banks.
Speaking at the recent industry conference, the CEOs of both banks said they anticipate changes to TLAC, Basel III, LCR and the inclusion of AOCI in capital ratios to impact their institutions. However, both said they are not that worried about those changes.
Citizens Financial has "a strong capital position," so it does not anticipate a need to focus on "eight quarters of capital build if the AOCI filter goes away, like some banks that we compete against," Chairman and CEO Bruce Van Saun said.
Similarly, PNC's CEO William Demchak said on June 1 that he is "not terribly worried about it." "We can pull to par pretty quickly in a way that still affords us an ability to have a strong dividend, which is important to us, and have excess capacity to run the bank."
Equity analysts agreed that the coming changes, whatever they may be, will not be hard for large banks to comply with.
"As long as they are given time to comply (which we expect they will be), virtually all big banks should be able to meet new requirements with room to spare," Piper Sandler analyst Scott Siefers wrote in the note examining the impact of a 20% increase to big banks' capital requirements.
"The key is the timeline to compliance," Siefers wrote. "While all our banks look thin on capital if we made these immediate adjustments to today's [common equity Tier 1], the reality is that they will very likely have years to comply with any new requirements."
Broader impact
However, while banks should easily be able to meet the heightened capital requirements, it may have other impacts on their operations.
"As higher capital is coming, not just for us, but for a broader range of banks, I think that will certainly be an impact and certainly could impact lending availability in the environment," Wells Fargo & Co. President and CEO Charles Scharf said.
JPMorgan Chase & Co. President and COO Daniel Pinto said he already sees a contraction among regional and smaller banks as they build capital.
"Regional banks and smaller banks, they are building up liquidity, building up capital, they are lending a bit less," Pinto said. "I don't think that the big banks have really changed their lending standards at this point because of that."
U.S. Bancorp Chairman, President and CEO Andy Cecere expects loan growth to be flat or up just slightly as "we and all banks are also being very prudent around capital utilization."
A few weeks prior to the industry conference last week, JPMorgan CFO Jeremy Barnum said during an investor day on May 22 that while the company has a "staggering amount of capital," potential capital rule changes "could render certain of our products fundamentally, economically unviable when burdened with even higher capital requirements."
"If we have to make those decisions, we will. No one should doubt the real impact of these ever-increasing capital requirements on the availability of products and services," Barnum said.
Aside from lending and other products and services, higher capital requirements could also weigh on key performance metrics such as return on equity (ROE), according to Truist's Rogers.
"You'll see some pullback in ROEs," the CEO said.
