December 10, 2014 / 5:16 PM / 6 years ago

Fitch: US G-SIB Capital Surcharge Tougher than Int'l Proposal

(The following statement was released by the rating agency) CHICAGO, December 10 (Fitch) Newly proposed rules establishing capital surcharges for the largest U.S. banks are more onerous than international proposals, says Fitch Ratings. Most importantly, the proposed rules incorporate a bank holding company's reliance on short-term wholesale funding, widely expected given earlier Fed speeches. While not disclosed for any of the institutions, the Federal Reserve estimates that the G-SIB surcharge could range from 1% up to 4.5%, which is 200 bps more than the highest G-SIB surcharge from the Financial Stability Board. While the draft rules, if adopted, are generally viewed as a positive for creditors, some institutions may have to curtail planned capital distributions or possibly shift the composition of funding away from short-term wholesale funding to meet the requirements. Further, Fitch notes this may create earnings pressure with less reliance on cheaper short-term wholesale funding, and potentially lead to increased risk taking in order to earn the higher cost of capital. 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. The Fed did disclose that up to $21 billion of additional capital would need to be raised, which is viewed as manageable, assuming no material changes to market conditions. The proposed rules did not disclose the actual surcharges for the banks, but did indicate that Method 2, which incorporates short-term wholesale funding reliance, could be the binding constraint for some institutions. The fully phased-in common equity Tier 1 ratio for the eight G-SIBs is currently approximately 10.4%. However, assuming a 4.5% surcharge, the fully phased-in Common Equity Tier 1 requirement would be 11.5%, absent any internal buffer, which presumably could mean targeted ratios of at least 12% for those banks with the highest surcharges, which is quite a bit higher than current levels. Fitch notes that Goldman Sachs and Morgan Stanley have the highest degree of reliance on short-term wholesale funding, and as such, are likely to face higher surcharges than the currently internationally agreed-upon surcharge of 1.5% each. It is currently not possible to calculate potential surcharges under Method 2 given the way short-term wholesale funding is defined in the notice of proposed rulemaking (NPR). For example, there is no publicly available data on the maturity profiles of this form of funding, other than it being less than a year. The NPR also indicated that it intends to explore potentially integrating some or all of the surcharge into regulatory stress testing, incorporating it into post-stress minimum capital requirements, which would likely have meaningful impacts for capital distributions. Also of note, the NPR confirmed our view that some of the large regional banks, such as U.S. Bancorp, Capital One, and PNC Financial Services Group, Inc., will not have any G-SIB surcharge as their systemic importance falls far below the threshold that triggers a surcharge. However, all bank holding companies with consolidated assets of $50 billion or more will still be required to be reviewed for their systemic importance on an annual basis. Contact: Julie Solar Senior Director Financial Institutions +1 312 368-5472 70 West Madison Street Chicago, IL 60602 Matthew Noll, CFA Senior Director Financial Institutions - Fitch Wire +1 212 908-0652 33 Whitehall Street New York, NY Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at 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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