In the wake of the global economic downturn of 2008, financial regulators around the world have been working on tighter rules to ensure the sustainability of global banks in the event of such circumstances repeating in the future. The need for the banks to shore up their capital structure has figured at the top of their list of to-dos. This is why banks around the globe have diligently worked towards meeting the stringent guidelines laid down as a part of Basel III capital requirement standards, even though the standards themselves have not yet been finalized.
The fact that some of the banks were already implementing sweeping changes to their business model in response to new economic conditions gave them an added incentive to prioritize Basel III compliance. That would explain the fact that many global banking giants have already met their Tier I common capital requirements, although full compliance from them is only expected by the end of 2019.
In this article, we highlight the degree to which the largest U.S. banks have improved their Tier I common capital ratios over the last two years – with some of them surpassing requirements comfortably and with some barely making the mark.
The Basel III norms formulated by the Basel Committee on Banking Supervision (BCBS) form the crux of the proposed financial sector reforms, with banking industry regulators for each country implementing additional controls over and above those laid out under Basel III. While increasing the common equity and Tier I capital requirements laid out in Basel II, the Basel III norms also tighten the banks’ capital structures by proposing additional capital buffers, a minimum leverage ratio and adding mandatory requirement ratios – the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).
Of all these regulatory capital ratios, the Tier I common capital ratios are most often used as a quick reference to gauge a bank’s capital strength and also to compare them side-by-side. And this is the figure we tabulate below to allow for the comparison of the country’s biggest banks. The figures below have been taken from the quarterly filings for each of the banks over the last six quarters – the period for which data is available for all the banks. Do note that some of the banks revise the Tier I common capital ratios from time to time retrospectively to account for ongoing modifications in the Basel III norms and these figures capture the most recent data available. The table also includes the Tier I common capital ratio target regulators have set for each of these banks (details of which are provided later in the article).
|TARGET||Q3 2012||Q4 2012||Q1 2013||Q2 2013||Q3 2013||Q4 2013|
|Bank of America||8.50%||8.97%||9.25%||9.52%||9.60%||9.94%||9.96%|
Citigroup leads the U.S. banking giants with a core Tier I capital ratio figure of just under 10.6% at the end of 2013 – a considerable effort, considering the investment bank has improved the figure by almost two percentage points within six quarters. The bank’s decision to shift non-performing and non-core assets into the umbrella Citi Holdings division in 2009 and to subsequently divest them in the best possible manner has paid off for the globally diversified bank. This has helped the bank systematically reduce the size of its risk-weighed asset (RWA) base which forms the denominator in the calculation of the core Tier I capital ratio.
While Citigroup ranks highest among these banks in terms of absolute Tier I capital ratio figures, Morgan Stanley does better in terms of achieving its target ratio. Morgan Stanley’s decision to scale back its capital-intensive FICC business and complete the acquisition of all remaining stake in Smith Barney from Citigroup over the last couple of years gives it a comfortable margin when it comes to achieving its core Tier I requirements. This is because the global systemically important banks (G-SIBs) have been categorized into separate “buckets” based on their complexity, global footprint as well as interdependence – the higher the bucket a bank is placed in, the higher its capital requirement surcharge (see The Basel III Challenge For Banks: Why Extra Capital Requirements?). The target figure shown in the table above is based on the specific bucket each of these banks is currently placed in.
Bank of America comes in third among the banks with a ratio just shy of 10%. Improved profitability stemming from its large-scale reorganization plan (dubbed Project New BAC) have helped the bottom line figures over the recent quarters, which have in turn given the capital ratios a push. Notably, one thing the three top-ranking banks in this table have in common is that all of them have maintained their dividends at the 1-cent-a-share level since the economic downturn. Coupled with improving profitability over recent quarters, the token dividend payout has helped these banks retain most of the cash they earn – thus improving capital ratios. The situation is, however, expected to change for all of them as they reveal their stress test results over coming weeks and all three banks will likely announce a significant hike in dividends.
While at the bottom of the list, U.S. Bancorp is still in a strong position in terms of capital structure as it is not a G-SIB like the other banks mentioned here. JPMorgan stands out as the only bank which has barely achieved its capital requirement target, with all other shoring up capital enough over the last couple of years to beat Basel III requirements by at least 100 basis points (1%).