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The proposed Basel III endgame rules, while largely in line with expectations, still means that a group of banks with assets between $100B-$700B will be subject to stricter capital rules than they currently are. And the largest banks will need to comply with stricter rules on risk-weighted assets (RWA), analysts said in recent notes.
Category III and IV banks, with assets in the $100B-$700B range, would be subject to regulatory capital calculations that the largest U.S. banks already have to deal with. They'll need to include AOCI (accumulated other comprehensive income) impacts, capital deductions, and rules for minority interest in common equity tier 1 calculations. That means that they'll have to include available-for-sale securities unrealized gains or losses in calculating their CET1 ratios.
"We estimate that AOCI inclusion would negatively impact banks under coverage 2025E CET1 ratios by 1%-2%, but would remain compliant with the capital requirements set forth by the Fed during the 2023 CCAR Stress Test," Baird analyst David George wrote in a note to clients.
He pointed out that Category III and IV banks include, American Express (NYSE:AXP), Citizens Financial Group (NYSE:CFG), Capital One Financial (NYSE:COF), Fifth Third Bancorp (NASDAQ:FITB), Huntington Bancorp (NASDAQ:HBAN), KeyCorp (NYSE:KEY), M&T Bank (NYSE:MTB), PNC Financial (NYSE:PNC), Regions Financial (NYSE:RF), Truist Financial (NYSE:TFC), and U.S. Bancorp (NYSE:USB).
Banks in the $100B-$250B range (Category IV) would be subject to supplementary leverage ratio and countercyclical capital buffer. Those banks include Citizens (CFG), Fifth Third (FITB), Huntington (HBAN), Key (KEY), M&T (MTB), and Regions (RF).
Wolfe Research analyst Steven Chubak sees the proposed rules hurting Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C). The Category I and II banks are estimated to have a 19% increase in required CET1, with "greater impact to firms more geared to fees, and trading in particular," he wrote in a note.
He expects that the effect of the AOCI inclusion will be neutralized by the lengthy phase-in of the rules. Under the proposal, the new rules would start to take effect on July 1, 2025 with full implementation on July 1, 2028.
Higher RWA weightings for mortgage and commercial landing compared with the international standard should result in higher capital requirements for regional and money center banks, Chubak said.
Analysts varied in terms of their takes on the proposal. Baird's George saw it as an "incremental positive" for the group, "as the 'guessing-game' is largely over and banks can begin to capital plan with a higher degree of confidence."
Jefferies analyst Ken Usdin said, "There is nothing too surprising in the proposal, which focuses on moving away from internal models for risk-weighted asset calculations with changes phased-in over four accounting periods beginning 3Q25." Like Chubak, he noted that the RWA changes would affect larger banks more than smaller ones.
Evercore ISI analysts Glenn Schorr and John Pancari said, "we think this is a net negative as-is for the banks and a net positive for the alternative asset managers, who will be there to soak up the diminished capacity in certain parts of the business."
Odeon Capital analyst Dick Bove is more blunt. "This is a terrible idea," he said in a note to clients. The proposed changes would: "Meaningfully harm the banking industry, dramatically increase the risks in the American financial system, and slow the growth in the economy," he said.
In addition, the new rules would accelerate the process of non-banks taking market share from banks as it reduces banks' ability to compete, Bove reasoned. "The American banking industry does not need new rules; it needs regulator accountability," he added.
But before selling bank stocks, there is still a comment period that's open until Nov. 30, 2023. The regulators could make some significant tweaks before the rules become final.
Publicly tradied alternative asset management names include: BlackRock (BLK), KKR (KKR), Brookfield Assest Management (BAM), and Apollo Global Management (APO), Carlyle Group (CG), and Ares Management (ARES).