NEW YORK, March 28 (IFR) - With the latest Fed stress tests
out of the way, US banks and investors are now weighing up the
potential impact of the next major regulatory move - the Orderly
Liquidation Authority resolution rules, which could see the
eight largest US banks having to issue at least US$83bn of
subordinated bonds in coming years.
Banks were hopeful that the Fed would release a so-called
Notice of Proposed Rulemaking as early as the second quarter,
which would outline just how much debt and equity as a
percentage of risk-weighted assets the eight largest US firms
But now it seems it may not be until November that those
eight - Citigroup, Bank of America, JP Morgan, Wells Fargo,
Goldman Sachs, Morgan Stanley, State Street and Bank of New York
Mellon - will get any clarification as to how much in senior
unsecured and subordinated bonds they will need to keep on their
"It seems to have been delayed again," said Bernard De
Longevialle, lead analytical manager for S&P's financial
institutions division, who spoke after a bank conference held by
S&P in New York on Thursday. "The regulators haven't said
anything, but it doesn't look like we'll know until late this
He spoke after hearing comments from Herbert Held, the
Federal Deposit Insurance Corp's deputy director for systemic
resolution planning and implementation, and others at the
conference who indicated that US regulators would probably
co-ordinate their Single Point of Entry resolution mechanism
with the UK Financial Stability Board's own version.
The Single Point of Entry mechanism is a key component of
the OLA resolution regime under Title II of the Dodd-Frank Act
and is designed to allow regulators to close a failed bank's
holding company while transferring healthy subsidiaries into a
A comment period on those rules closed on March 20, but
until the rules governing the mechanism are nailed down, it will
not be decided how much debt capital US banks are required to
hold - and in what form.
According to De Longevialle, the FSB might not settle on a
minimum debt requirement to add to the Tier 1 capital banks need
to hold until the G-20 meeting in Brisbane in November.
The market is expecting that US regulators will require the
US's eight "systemically important financial institutions" to
hold somewhere between 15% and 25% of Tier 1 equity and
unsecured debt as a percentage of RWAs to ensure there are
enough privately held securities available to absorb losses of a
bankrupt holdco bank and to recapitalise a new bank housing
whatever businesses are salvaged from the wreckage.
But it's not just the desire for co-ordination that is
holding up the rules.
Steven Merriett, chief accountant of the Fed's division of
banking supervision and regulation, told the conference that
regulators were struggling to come up with the right minimum
debt requirement that would be enough to recapitalise a SIFI,
but not so much as to overwhelm the capital markets with new
debt issuance that would cause banks' cost of capital to blow
"It's tough," Merriett said, when asked to give some idea of
when the market could expect an NPR from the Fed on the subject.
"The team [working on the rules] is working really hard. The
goal is to achieve some measure of debt that can be converted
into equity in the new institution, but how much that should be
is very difficult to measure [They need to consider] the
ability of the market to bear this issuance and what prices
would be charged."
Barclays strategists expect the rule to require the eight US
SIFIs to hold Tier 1 capital at 8.5% of risk-weighted assets and
then another 8.5%-11.5% in unsecured debt, to take the total
amount of debt and equity capital to between 17% and 20%.
The market consensus is that outstanding subordinated bonds
will be required to equal 3% of RWAs, which Barclays estimates
would require US$83bn of sub-debt issuance between now and the
expected 2019 phase in deadline.
But the amount of sub-debt could end up being much more.
"[The percentage of sub debt] would actually need to be at
least 5% of RWAs to be a credible means to recapitalise a SIFI
without resorting to senior debt impairments," wrote Brian
Monteleone, a senior bank credit strategist at Barclays, in a
Whatever the number, any requirement for extra sub debt
means higher capital costs, as well as a possible widening in
sub debt spreads.
"Our estimates [of an 18.5% base case total equity and debt
requirement] represent a sizeable 70% increase in the balance of
holdco subordinated debt outstanding across these eight firms,
to US$201bn," said Monteleone.
The eight US SIFIs currently have US$118bn of subordinated
debt outstanding, so if Barclays' base case comes true, it would
require another US$83bn of sub debt to be raised across those
firms to reach a 3% of sub debt to RWA level. That US$83bn of
extra sub debt would represent a sizeable 70% increase in the
balance of their holding company subordinated debt, to US$201bn.
"Such a spike in subordinated issuance could weigh on
spreads, even if spread across multiple years of regulatory
phase-in," Monteleone told IFR.
Most of the eight US SIFIs already have enough total Tier 1
and unsecured debt to meet any requirement between 17% and 20% -
the big exceptions being Wells Fargo and, to a lesser extent,
Monteleone estimates that Wells would need to raise US$18bn
more debt and State Street US$3bn if the requirement was struck
at 18.5%, in the middle of the 17%-20% range. As for sub debt,JP
Morgan and Wells would need to issue the most if the rules end
up requiring subordinated bonds to be 3% of RWAs - with JP
Morgan at US$29bn and Wells at US$21bn.
"Most firms would refinance existing senior debt balances as
sub debt in order to meet requirements," said Monteleone.
(Reporting by Danielle Robinson; Editing by Matthew Davies)