Largest U.S. banks will catch a break from Fed's capital-rule changes, KBW says

By Steve Gelsi

KBW analysts see a boost for JPMorgan Chase, Goldman Sachs, Citi and Wells Fargo in lighter capital requirements

An earlier version of this story contained the wrong first name for KBW analyst Chris McGratty. It has been updated.

The largest U.S. banks will benefit from the Federal Reserve's upcoming changes to its capital-requirement proposals to bulk up balance sheets for potential systemic problems, KBW analysts David Konrad and Chris McGratty said.

The two analysts dug into some of the details that came this week from Michael Barr, the Fed vice chair for supervision. Barr's plan would revise some of the central bank's Basel III endgame proposals for bank capital requirements.

JPMorgan Chase & Co. (JPM) will get a boost from a proposed change to include the effects of inflation and economic growth in the Fed's formula for systemic risk for the biggest U.S. banks, the analysts said in a research note published Wednesday.

JPMorgan Chase would also be helped by a move to facilitate the use of banks' internal models for risk, subject to a multiyear period of implementation to test the models.

JPMorgan Chase, as well as Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), BNY (BK) and State Street Corp. (STT), would gain from a proposal to no longer require so-called minimum haircut floors for financing of securities transactions and repurchase agreements, or repos.

The haircut floor is defined as a required amount of collateral in unregulated financial institutions for securities finance transactions that are not centrally clear, according to PWC.

The wealth-management businesses of Morgan Stanley, BNY, State Street and Northern Trust Corp. (NTRS) would be helped by the Fed's move to change the calculation for operational risk to now include net fee revenue.

Wells Fargo & Co. (WFC) and Citigroup Inc. (C) will benefit from a proposal to no longer look back and include historical operational losses in the Fed's calculation for operational risk, they said.

Barr also moved to remove some requirements for mortgages in a potential boost for first-time homeowners, low- and moderate-income borrowers and minority communities.

To do this, the Fed would back away from higher capital charges for most mortgages.

A move by the Fed to increase the capital requirements for global systemically important banks, known as G-SIBS, by 9% instead of its initial proposal of 16% to 19% was expected, they said.

"It is positive news as it takes a negative risk factor out of play," Konrad and McGratty said.

KBW's current model assumes the G-SIBs would see an average capital increase of 11%, a level analysts said "is manageable and allows buybacks for all the names while hitting the regulatory requirement fully by [the fourth quarter of 2025]."

The G-SIBs in the U.S. are JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley and Bank of America Corp. (BAC).

The new proposal will now go before the full Federal Reserve board, as well as the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, before being released for a 60-day public-comment period.

As Wall Street absorbed these developments, investors have been wading back into some bank bonds and moving out of others on Thursday.

Bank of America has attracted the most net buying and Citigroup the most net selling, as shown in the chart below.

Earlier this week, money was flowing out of most bank names as recession jitters swirled in financial markets along with uncertainty about the final form of the Basel III requirements.

The capital requirements mark the last round of changes under the international Basel III regime of banking regulations put in place after the global financial crisis of 2007-09.

-Steve Gelsi

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09-13-24 1253ET

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