U.S. banking regulators are proposing capital requirements for the country’s biggest banks that are tougher than global standards, which may impact banks’ earnings and capital distribution plans, according to a new report from Fitch Ratings.
The rating agency says that newly-proposed rules that will set capital surcharges for U.S. banks that qualify as global systemically-important banks (G-SIBs) are more onerous than international proposals. Fitch notes that the U.S. Federal Reserve Board estimates that the surcharge for U.S. banks could range from 1% up to 4.5%, which is 200 basis points more than the highest surcharge imposed by the Financial Stability Board (FSB).
The draft rules are generally viewed as a positive for creditors, Fitch says. However, it notes that some banks may have to curtail planned capital distributions, or possibly shift away from short-term wholesale funding, in order to meet the requirements. Moreover, Fitch says that this may create earnings pressure, with less reliance on cheaper short-term wholesale funding, which could lead to increased risk taking.
“Given the full phase-in requirement is not until Jan. 1, 2019, the eight U.S.-based G-SIBs will have time to make the necessary adjustments,” Fitch suggests, noting that the Fed did reveal that up to US$21 billion of additional capital would need to be raised, “which is viewed as manageable, assuming no material changes to market conditions.”
Fitch says that Goldman Sachs and Morgan Stanley have the highest degree of reliance on short-term wholesale funding; so, they are likely to face higher surcharges than the 1.5% charge that would be imposed under global rules.
Finally, it reports that the proposals also indicated that U.S. regulators intend to explore potentially integrating the surcharge into regulatory stress testing, “which would likely have meaningful impacts for capital distributions.”