For an extended time period, U.S. banks faced the relatively flat yield curve and ultra-low interest rates. Now, when rates have started climbing, banks are faced with another headwind, capital requirements that might double for the largest bank in the U.S..
It seems like the headwinds for the biggest banks never stop blowing.
Capital requirements that might double
The largest banks in the US did not even start celebrating the rising interest rates yet when they were hit with another headwind. The banks were still living on their barely visible net interest rate margins when regulators disclosed that they are under increasing pressure to increase the capital requirements for the largest banks in the country in order to make them safer.
Currently, the banks are required to maintain a capital of 3% of their assets as an international requirement for what’s better known as the simple leverage ratio. Once the new requirements are in place, the largest bank would be required to hold another 3% of their assets as capital, making the simple leverage ratio reach 6%.
Do the banks comply right now?
Let’s look at the six largest banks of the US and see whether they comply with the new requirements right now or not.
None of the largest U.S. banks reports their simple leverage ratio. However, according to the estimates provided by Keefe, Bruyette & Woods Inc and reported by Bloomberg, five of the six largest banks fall below the 6% simple leverage ratio. Only Wells Fargo & Co (NYSE:WFC), with a 7.3% simple leverage ratio, would meet the new requirements if they are enforced today. Both, JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C) are at 4.5%.
The Basel committee has also increased its minimum risk-based capital requirements to 8% – 9.5%. Looking at the Tier 1 leverage ratio of the banks, I find out that Wells Fargo & Co (NYSE:WFC) has the most robust capital base. However, all the banks meet the new risk-based requirements. Wells Faro reported a Tier 1 leverage ratio of 9.53% at the end of the first quarter. This is compared to 9.39% and 7.3% for Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM), respectively.
Consequences of the new requirements
The new stringent capital requirements are aimed at making the banks safer and ensuring that they will withstand another severe crisis without the help of the US government. Remember, Citigroup Inc (NYSE:C) was bailed out thrice with $45 billion. JPMorgan was given $12 billion, while Wells Fargo & Co (NYSE:WFC) was paid $25 billion.
Since most of the banks are far behind the upcoming capital requirements, they might have to suspend their dividends in order to comply with the new requirements if they are put in force. They will also suffer from lost revenues as more cash will be caught up in the form of capital that is not generating any returns.