Capital ratios keep improving for the U.S.'s largest banks. The median common equity Tier 1 ratio, or CET1 ratio, for the 10 large banks that file under the Basel III "advanced approaches" guidelines increased 23 basis points quarter over quarter and 80 basis points year over year to 12.3% as of June 30. All 10 filers remained well-capitalized as of June 30 and seven reported an increased CET1 ratio year over year.
Total CET1 capital for the group hit $882.1 billion at the end of June, up $15.1 billion year over year.
Even after posting an 18-basis point decline in its CET1 ratio year over year, Morgan Stanley still reported the highest CET1 ratio in the group at 16.6% as of June 30.
Northern Trust Corp.'s CET1 ratio increased 172 basis points year over year to 12.3%, the largest increase in the group, while State Street Corp. reported the highest year-over-year decrease at 77 basis points, as its CET1 ratio fell to 11.2%. U.S. Bancorp reported the overall lowest CET1 ratio at 9.5% as of June 30.
Northern Trust, State Street and U.S. Bancorp continued to report lower CET1, Tier 1 and total capital ratios under the standardized approach, while JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. reported a lower Tier 1 capital ratio under the standardized approach and lower CET1 and total capital ratios under the advanced approaches. All other banks on the list reported lower capital ratios under advanced approaches compared to the standardized approach.
Total pre-adjusted CET1 capital for the 10 companies fell 1.1% from the end of March to $1.127 trillion, but aggregate adjustments and deductions under the Basel III framework also fell 48 basis points to 21.75% of pre-adjusted CET1.
A company is defined as an advanced approaches institution under federal regulatory capital rules if it has consolidated total assets of $250 billion or more, on-balance-sheet foreign exposure of $10 billion or more, or is a subsidiary of a depository institution that uses the advanced approaches to calculate total risk-weighted assets.
Under Basel III, banks are required to make adjustments to both risk-weighted assets and CET1 when calculating capital ratios. When calculating risk-weighted assets, advanced approaches institutions must take into account credit risk and market risk - similar to the "standardized" approach - but must also factor in operational risks. Market risk is calculated similarly under both the advanced approaches and standardized guidelines, except when it comes to securitization exposure. Advanced approaches institutions must also use internal ratings-based models to determine credit risk exposures.
When calculating CET1, advanced approaches institutions are required to make deductions for goodwill, intangible assets and significant common stock investments in unconsolidated financial institutions, as well as other items. Furthermore, these institutions must make deductions from CET1 if mortgage servicing assets, certain deferred tax assets or significant investments in the capital of unconsolidated financial institutions exceed 10% of the Tier 1 capital deduction threshold. Those items subject to the 10% threshold also cannot collectively exceed 15% of CET1 capital at the institution, net of preliminary adjustments and deductions.
Advanced approaches banks are required to determine compliance with minimum capital requirements based on the lower of each capital ratio calculated under both the standardized and advanced approaches frameworks.
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