Fitch: Operational RWA New Twist in Regulating US Bank Capital

Tue Feb 25, 2014 12:19pm EST

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(The following statement was released by the rating agency) CHICAGO, February 25 (Fitch) The Federal Reserve's move to allow the use of Basel III advanced approaches in the calculation of large banks' risk-based capital will give some institutions more flexibility in meeting capital targets. But Fitch Ratings sees accompanying increases in operational risk-weighted assets (RWA) as an additional tool for U.S. bank regulators to use in supervising capital levels in the industry. The Fed, together with the OCC, announced on Feb. 21 that certain large banks would be allowed to begin using the advanced approaches methodology (i.e. using internal models to estimate RWA) in computing regulatory capital levels, effective second-quarter 2014. This is an important development, as U.S. banks under the Basel III's advanced approaches have invested heavily to develop the necessary data and methodologies to calculate risk-weighted assets. On Feb. 21, Citigroup noted in a press release that, as part of the agreement with the Fed concerning use of the new risk-based capital approach, the bank would be required to increase the level of RWA associated with operational risk to $288 billion, compared with $232 billion at year-end 2013. As a result, its pro forma Tier 1 common (T1C) capital ratio under Basel III fell by approximately 40 bps to 10.1%, though still above its newly revised Basel III T1C target of 9.5%. This followed earlier additions to operational RWA in fourth-quarter 2013 announced by both JP Morgan and Citigroup. JP Morgan noted in its Investor Day presentation today that its operational risk capital was $30 billion at year-end 2013, which equates to $375 billion of RWA. Recent additions to operational risk capital had a negative 50 bps impact on T1C in fourth-quarter 2013. A shift to the use of advanced approaches in regulatory capital calculations is positive for Citigroup and the other approved institutions such as JP Morgan, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street Financial, US Bank, and Northern Trust. Fitch views the approval for these banks favorably as it suggests the regulators believe the data and internal risk-weighting methodologies are sufficient for these banks. However, we see the required changes in operational RWA as a reflection of regulators' desire to respond to changing industry conditions by altering operational risk assumptions when needed. Operational risk is a developing risk within the regulatory framework, and likely will receive more attention over the near-term due to recent events and losses. This contributes to the continuing theme of regulatory uncertainty for the industry. The Fed also pushed back the date these institutions would be required to incorporate the advanced approach methodologies into the annual capital planning and stress testing, now beginning Oct. 1, 2015, providing them additional time to integrate the advanced approach frameworks into capital planning and stress testing. Contact: Julie Solar Senior Director Financial Institutions +1-312-368-5472 Bill Warlick Senior Director Fitch Wire +1-312-368-3141 Fitch Ratings, Inc. 70 W. Madison Chicago, IL 60602 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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