A U.S. Senate proposal to raise the level at which banks are deemed systemically important could help free up as much as $66 billion in capital at 11 lenders and allow for increased shareholder payouts.
If lawmakers approve the most extensive rewrite of the 2010 Dodd-Frank Act, it would remove an obstacle to returning capital for firms such as American Express Co., which has the largest percentage buffer over required minimums, and Capital One Financial Corp., which would have the most additional capital on a dollar basis, according to data compiled by Bloomberg.
The Senate Banking Committee is scheduled Thursday to debate a bill by Chairman Richard Shelby, an Alabama Republican, that would exclude banks with less than $500 billion of assets from being automatically designated as systemically important financial institutions, or SIFIs. If the measure becomes law and the Federal Reserve adopts similar limits in its annual stress test, regional and specialty-finance lenders could be freed from some of the toughest and most costly regulatory burdens.
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"There's a lot at stake for these banks," said Jennifer Thompson, an analyst at Portales Partners LLC. "To the extent they can get any relief at all would be incrementally better."
Thirty-one banks, including foreign firms with U.S. units, are currently designated as systemically important and must undergo stress tests measuring their capacity to withstand economic shocks. The Fed subjects those same firms to a second round of tests — not required by Dodd-Frank — that assess their ability to boost shareholder payouts and have resulted in them holding additional capital on top of minimums set by international regulators.
If Congress raises the SIFI threshold above the current level of $50 billion, the Fed will probably do the same, said Jaret Seiberg, an analyst at Guggenheim Securities. Only the six largest U.S. banks have more than $500 billion in assets.
While there's no guarantee the legislation will pass or the central bank will act, some Democrats and regulators, including Fed Governor Daniel Tarullo, have said they're open to raising the level. Democrats on Tuesday published an alternative bill that would help community lenders without providing relief for regional banks.
Sixteen U.S. lenders, not including custodial banks, would benefit if spared some requirements of the stress tests. The biggest 11 would have $66 billion in capital above their required minimums, according to the data compiled by Bloomberg, which is based on the companies' first-quarter regulatory filings. AmEx has $7.9 billion, or 6 percentage points, more than the minimum, while Capital One has an extra $12.1 billion, the data show. PNC Financial Services Group Inc. has $9.1 billion in such capital and U.S. Bancorp holds $7.3 billion.
Increased Lending
Last year, the 11 lenders returned about $23.8 billion to shareholders, including common dividends and stock repurchases. In addition to payouts, banks could also use the capital to invest in their business or for acquisitions.
Regional banks would primarily use excess capital for expanding lending, said William Moore, executive director of the Regional Bank Coalition, an industry group formed in March to lobby for raising the SIFI threshold. Members include AmEx, Capital One and Regions Financial Corp.
"Freeing up that capital will let them meet more of the credit needs of small and mid-size businesses and consumers," Moore said. "That's where these banks are focused."
Increased competition from less-constrained regional lenders is one reason bigger Wall Street firms are cool to Shelby's proposal, according to bank executives and lobbyists.
A compromise may be in the offing with Democrats open to raising the threshold, though not as high as Shelby proposed. If it's set at $250 billion, as some analysts expect, then eight of the 11 banks, including AmEx and regional lenders such as SunTrust Banks Inc. and BB&T Corp., would be spared a SIFI designation. That would free up about $38 billion of capital, according to data compiled by Bloomberg.
Credit Suisse Group AG analysts led by Susan Roth Katzke predict the level will be closer to $100 billion, which would result in only Cleveland-based KeyCorp falling below the threshold. Wherever the bar is set, the bill still would allow regulators to designate banks below that level as systemically important after an elaborate process that gives firms a right to appeal.
While being dropped as a SIFI would reduce banks' compliance costs tied to stress tests, lenders may not be able to immediately distribute all excess capital. Chief executives have historically preferred to maintain a buffer above regulatory minimums, often 1 percentage point. And even if they aren't SIFIs, the lenders will still face scrutiny from regulators, according to Isaac Boltansky, a policy analyst at Compass Point Research & Trading.
"It's going to take a lot more than the legislative language in Shelby's bill to change the tough realities of operating as a bank in the United States," Boltansky said. "It's still a hyper-regulated, incredibly rigorous supervision process for big banks."
Bloomberg News
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