The proposed new liquidity requirements for large U.S. banks will negatively affect profitability, says Fitch Ratings in a new report.
The rating agency notes that it sees the rule, which was proposed by U.S. banking regulators yesterday, “as generally positive for bank credit ratings. However, the push for additional liquidity will negatively affect bank profitability if the proposal is implemented.” (See Investment Executive, Fed proposes new liquidity rules for big banks, Oct. 24, 2013.)
Fitch says that the proposed rule would impose a tougher standard on large U.S. banks than the Basel III international framework contemplates. For one, it proposes a tighter definition of assets that qualify as liquid assets, excluding things such as private label mortgage-backed securities, covered bonds and municipal securities. Fitch estimates that roughly 25% of bank investment portfolios could be excluded based on second-quarter data.
To comply with the proposed rule, Fitch says that it believes “banks would likely need to derisk their investment portfolios and move towards very liquid lower-yielding government and agency securities.” Alternatively, it suggests that banks could achieve compliance by pursuing longer, term-funding structures that would reduce deposit outflow risk.
“Nevertheless, Fitch views either derisking investment portfolios or longer, term-funding structures as a drag on profitability for most banks,” it says.
The U.S. proposal also takes a stricter approach to the implementation timeline, by requiring banks to achieve 80% compliance by 2015, and full implementation by 2017. The international standard only requires 60% compliance in 2015, and full implementation in 2019.
Fitch says that liquid asset levels are currently approximately $200 billion below the targeted level for compliance. “However, we believe the two-year window for compliance will provide adequate time for banks to boost liquid assets where needed,” it says.