U.S. Bancorp executives plan to ask the Federal Reserve to increase the company's share repurchase program before the next round of stress tests.
The move follows a recent Fed rule that provided more clarity on the bank's capital requirements. Management also said the rule change will free up as much as $15 billion of liquidity, which will be deployed in the investment portfolio.
Management said during a third-quarter earnings call the bank had been waiting to know the impact of the current expected credit loss accounting standard as well as the Fed's final capital rule. On Sept. 12, the bank provided an estimate that CECL would require a 25% to 35% increase in the bank's reserves.
"With the recent release of the final rules, we plan to make a request to the Federal Reserve to increase our share repurchase program to enable us to begin reducing our common equity Tier 1 ratio from 9.6% to approximately 9.0%," said CFO Terrance Dolan.
On Oct. 10, the Federal Reserve finalized its rules altering the regulatory framework for banks with more than $100 billion in total assets. Banks with total assets between $250 billion and $700 billion and with cross-jurisdictional activity below $75 billion are classified as "category III" banks under the new framework. Among the changes, those banks do not have to abide by the advanced approaches capital framework and have a reduced minimum liquidity coverage ratio, or LCR.
During the call's question-and-answer session, management clarified that the bank aims to complete the share repurchase ramp-up before the end of the 2020 second quarter so that it would not be part of next year's capital planning exercise.
Executives also talked about liquidity impacts from the rule change. Previously, the bank had to meet an LCR requirement of 100%. As a category III bank, the requirement drops to 85%, which an executive said would free up between $11 billion and $15 billion of liquidity.
"I think that we'll look at kind of remixing the investment portfolio in order to be able to both extend duration and possibly enhance the yield a little bit. We may look at reducing our debt level in the wholesale market, and I think a number of those different actions would be beneficial to the company," an executive said, adding that the benefit to net interest income would be relatively small.