Fed to Release Basel 3 Capital Rule Re-Proposal
Charles Peabody
September 19, 2024

Basel 3 Capital Position Updates

We expect the Federal Reserve to release its long-awaited Basel 3 regulatory capital rules today. The release today will be a re-proposal of the original (but revised) rules issued over a year ago. The new rules are likely to spur another long round of debate, but they should eventually provide capital relief (versus the original proposal) across the board for banks. The largest (G-SIB) banks are potentially the biggest beneficiaries (e.g., JPM, Citi, etc.), but there will also be substantial relief for smaller Category IV banks, i.e., those banks with $100B to $250B of assets (e.g., CFG, MTB, etc.). Those banks between $250B and $700B in assets (e.g., PNC, USB, TFC, etc.) don’t get material relief.

Last week (see 9-8-24 report entitled “Basel 3 Rules Previewed” and 9-10-24 Sales Call entitled “Barr Updates Basel 3 Endgame – Capital Relief and Sensible Updates”), we got a good sense that the US banking industry (particularly the G-SIB banks) would receive meaningful capital relief (from the original proposal) when the final Basel 3 capital requirements are released.  Expectations are for the final Basel 3 endgame rules to be released this week.  The bottom line is that the large banks’ capital requirements are now expected to rise by about 9%, rather than the original proposed increase of around 19%.  The larger super regional banks should see a 3% to 4% increase in their capital requirements (down from around 6% as previously proposed). Category IV banks will benefit from the “Tailoring Rules,” which should exempt them from most of the new Basel 3 rules, except the inclusion of unrealized losses in their capital calculations. Below we show the current CET1 capital metrics the excess capital under current and proposed conditions.

 

We estimate that the G-SIB banks (as a group) have $129B of excess capital today under the current capital rules (see below).  This is measured as current CET1 capital versus the regulatory minimums.  The group is led by JP Morgan with some $53B of excess capital.  Of course, this measurement is versus the regulatory minimums.  There would be even less excess capital if managements were to maintain a 50bps to 100bps buffer above their regulatory minimums (see Table above for management’s CET1 target ratios).  Finally, should the capital requirements increase by 9% as proposed, then the amount of excess capital would shrink considerably and even become a shortfall for the 2 investment banks.  Of course, it’s unlikely the final rules will take effect much before early 2026, and so, banks will have time to rebuild capital internally.  This may mean a reduction in the pace of buybacks for many of these banks, at least through mid-2025.

 

 

 

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