Capital ratios continued to improve in the first quarter for most of the 10 top-tier bank holding companies that filed under the "advanced approaches" capital framework.
The median common equity Tier 1 ratio, known as the CET1 ratio, hit 12.10% for the group as of March 31, up 65 basis points year over year and 38 basis points quarter over quarter. Seven of the 10 companies reported improved CET1 ratios year over year.
The chart below compares the capital ratios of the 10 Federal Reserve-approved "advanced approaches" institutions under the advanced approaches guidelines. The framework makes adjustments to both the numerator and denominator of capital ratios. 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.
Calculation of risk-weighted assets under the Basel III standardized approach framework includes credit risk and market risk, where credit risk is measured by applying fixed risk weights to on and off-balance sheet exposures. Under the Basel III advanced approaches framework, risk-weighted assets include an additional measure of operational risk. Market risk capital measurement under the advanced approaches framework is consistent with the standardized approach, except for securitization exposures, while credit risk exposures are measured using internal ratings-based models.
Advanced approaches banks that have completed their respective parallel runs 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.
Among these banks, Morgan Stanley continued to post the highest CET1 ratio at 17.39% as of March 31, up 174 basis points from the year-ago quarter, while U.S. Bancorp posted the lowest at 9.50%.
Similar to the fourth quarter of 2016, Northern Trust Corp., State Street Corp. and U.S. Bancorp reported lower CET1, Tier 1 and total capital ratios under the standardized approach. JPMorgan Chase & Co. and Wells Fargo & Co. reported a lower Tier 1 ratio under the standardized approach as well, but lower CET1 ratios and total capital ratios under advanced approaches. All other banks in the list reported lower capital ratios under advanced approaches compared to the standardized approach.
According to a May 2017 BNP Paribas research report by Céline Choulet, the advanced approaches are always less favorable overall for JPMorgan, Bank of America Corp., Citigroup Inc., Morgan Stanley, Bank of New York Mellon Corp. and Goldman Sachs Group Inc., while the standardized method is systematically more constraining than internal models for Wells Fargo, U.S. Bancorp and Northern Trust. The two approaches give virtually identical risk-weighted assets figures for State Street.
Under the new regulatory capital schedule, advanced-approaches institutions are required to compute CET1 ratios after making preliminary and threshold-based adjustments and deductions. Under the preliminary adjustments and deductions, these banks make amendments to goodwill, intangible assets, significant investments in the capital of unconsolidated financial institutions in the form of common stock, and other items.
These institutions are then required to make further adjustments depending on whether mortgage servicing assets, certain deferred tax assets or significant investments in the capital of unconsolidated financial institutions exceed 10% of the Tier 1 deduction threshold. Those items subject to the 10% threshold also cannot collectively exceed 15% of CET1 capital at the institution, net of the preliminary adjustments and deductions.
Total pre-adjusted CET1 capital for the 10 companies was $1.115 trillion as of March 31, 2017, down 0.5% from the linked quarter. The aggregate adjustments and deductions under the Basel III framework also rose quarter over quarter by 92 basis to 22.23% of pre-adjusted CET1.
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