Here’s How The Largest U.S. Banks Fare In Terms Of Basel III Compliance

by Trefis Team
Wells Fargo & Co.
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Over the last few quarters, banks around the globe have focused considerably on shoring up their capital structures in order to meet the stringent guidelines laid down as a part of Basel III capital requirement standards. The standards themselves are yet to be finalized, with changes being introduced from time to time regarding the manner in which the capital ratios are calculated, and they are also going to be phased in over several years, with full compliance from banks only expected by the end of 2019. But given the increased regulatory pressure since the economic downturn and the inevitability of the worldwide adoption of Basel III norms, many global banking giants have already done enough to meet all the proposed capital requirements.

So how do the largest U.S. banks fare in this regard? How many of them are sufficiently capitalized and how many of them have more work to do in this department? We set out to answer these questions below.

See our full analysis for Bank of AmericaCitigroupJPMorganWells FargoU.S. BancorpGoldman SachsMorgan Stanley

In the wake of the global economic recession 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 Basel III norms formulated by the Basel Committee on Banking Supervision (BCBS) form the crux of the proposed financial sector reforms. 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 five 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.

Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013
Morgan Stanley 9.00% 9.50% 9.70% 9.90% 10.80%
Citigroup 8.64% 8.74% 9.34% 10.03% 10.50%
Bank of America 8.97% 9.25% 9.52% 9.60% 9.94%
Goldman Sachs 8.50% 8.80% 9.00% 9.30% 9.80%
Wells Fargo 8.01% 8.18% 8.39% 8.55% 9.54%
JPMorgan 8.38% 8.74% 8.86% 9.33% 9.33%
U.S. Bancorp 8.18% 8.09% 8.22% 8.57% 8.62%

Morgan Stanley leads the U.S. banking giants with a core Tier I capital ratio figure of 10.8% at the end of Q3 2013 – a considerable effort considering the investment bank has improved the figure by almost two percentage points within five quarters. A large part of this improvement comes from the bank’s focus on de-risking its business model, thanks to which it has scaled back its capital-intensive FICC business and completed the acquisition of all remaining stake in Smith Barney from Citigroup.

Incidentally, it is the very same stake sale that went a long way in helping Citigroup boost its own Tier I capital ratio. Having categorized the stake along with other non-core assets under Citi Holdings, the globally diversified banking giant has been steadily getting rid of these assets to reduce the size of its risk-weighed asset (RWA) base.

Bank of America comes in third 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.

U.S. Bancorp finds itself at the bottom of the list, though it does not draw the same amount of regulatory pressure as its bigger peers who have all been named as global systemically important banks (G-SIBs) and are hence subject to stricter capital requirements. To put things in perspective, U.S. Bancorp is required to have a minimum Tier 1 common capital ratio figure of 7% – something it has comfortably achieved.

As for the other banks, their minimum capital ratio figure depends on the “bucket” they were classified under by the Financial Stability Board (FSB), with higher buckets imposing a higher level of surcharge (see The Basel III Challenge For Banks: Why Extra Capital Requirements?). According to the rules as they stand now, Citigroup and JPMorgan fall under Bucket 4, which mandates a 9.5% minimum common capital ratio. Categorized under Bucket 2, Bank of America, Goldman Sachs and Morgan Stanley have been set a target of 8.5% whereas Wells Fargo needs to keep this figure above 8%.

Based on this, the only bank that has yet to meet the Basel III Tier 1 core capital ration requirement is JPMorgan. Given that the bank reported a rare quarterly loss in Q3 2013 due to its legacy legal issues, the current level of 9.33% is understandable and JPMorgan will most likely be able to meet the requirement within the next two quarters.

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