Majority of US Banks Prepared for SIFI Buffers

Location: New York
Author: Brian Bertsch
Date: Monday, November 7, 2011

Fitch Ratings believes a majority of US banks now subject to additional capital requirements are prepared to do so. The Basel Committee on Banking Supervision Friday released its list of systemically important financial institutions (SIFI). The 29 banks appearing on that list, including 8 US banks, will be required to hold additional core capital, which is seen as a preventive measure to keep a bank from failing.

Under Basel guidelines, global SIFIs (G-SIFIs) will be required to boost their reserves based on their size and potential impact of default lying between 1% for smaller firms and 2.5% for the largest institutions, although Basel did not specify the exact charge each bank will be subject to. Named banks are expected to comply by 2019, and Fitch believes the banks required to do so would successfully comply well ahead of time. The list of 29 globally systemic important banks includes 8 US banks: Bank of America (BAC), Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Fargo.

Fitch previously estimated the implications of capital buffers on U.S. banks by applying this to banks with assets greater than $50 billion. Under this analysis, 11 out of 21 US banks would already meet their potential minimum SIFI buffer.

According to the Financial Stability Board (FSB), failure of the named banks would cause a significant disruption to the wider financial system and economic activity. In essence, banks with the potential to cause widespread panic in the event of a default are most eligible. The new requirements also serve as protection for taxpayers footing the bill in the event of a failure. The FSB noted stronger international standards for banks are necessary to reduce contagion risks if and when failures occur.

While banks have the capacity to raise capital in a number of ways, Fitch feels the majority of US banks appearing on the list have the option of covering additional reserves with normal earnings retention. In addition, Fitch thinks banks subject to the increased buffers could also dispose of assets and investments that receive more onerous capital charges in order to address their buffer.

FSB said the G-SIFI list will be updated annually and released in November.

The regulator's SIFI list was published in tandem with a newer version of the method for calculating surcharges, a point of debate for many US banks. While banks have the necessary capital to conform to the new rules, it could potentially damp lending leading to additional strain.

While Fitch feels most US SIFIs would have limited hardship associated with the new buffers, BAC may be more challenged with the new constraints, given its comparatively larger estimated shortfall. Still, Fitch feels that BAC would succeed in complying before the 2018 deadline as it continues to pursue mitigating actions.

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