US Banks Face $100 Billion Capital Shortfall

The top 35 US banks will be short of between $100 billion and $150 billion in equity capital after the new Basel III global bank regulations are imposed, with 90 percent of the shortfall concentrated in the biggest six banks, according to Barclays Capital.

The BarCap study assumes the banks will need to hold top quality capital equal to 8 percent of their total assets, adjusted for risk.

This 8 percent tier one capital ratio, a key measure of bank strength, provides a one point cushion against falling below the effective global minimum of 7 percent set in September by the Basel Committee on Banking Supervision.

The Basel III reforms will hit banks in two ways – by gradually tightening the definition of what counts as tier one capital; and by forcing banks to increase the risk adjustment for big swathes of their businesses.

Banks can respond by increasing their capital through retained earnings or equity issuance or they can cut their risk-weighted assets through sell-offs and by cutting back on risky business lines.

So far most analysts believe the big US banks will not be forced to raise capital just for regulatory purposes. But some people worry sharp cuts in assets could force banks to curb lending to the real economy or raise borrowing costs.

“These shortfalls are entirely manageable ... The more difficult question is what affect the new rules will have on the cost and availability of credit and bank profitability,” said Tom McGuire, head of the Capital Advisory Group at BarCap.

He estimates that US banks can cut their equity needs by $10 billion with every $125 billion reduction in risk-weighted assets.

Analysts say it is hard to predict the impact of the reforms on US banks because they have to apply Basel III risk-weighted asset changes as well as an earlier Basel II set of rules that European banks have been following for years.

Analysts at CLSA, an arm of Credit Agricole, estimate the 14 biggest US global and regional banks will need a total of $41 billion to achieve the same 8 percent tier one ratio, if both the Basel II and III changes are included.

“It’s extremely difficult and there’s more reliance on company forecasts than I’m normally comfortable with. While these are the best numbers we can publish, we recognise a degree of uncertainty . . .” said Mike Mayo, US banks analyst.

Neal Wolin, US deputy Treasury secretary, said this week, “US banks have gotten out front on these issues in a very impressive way and are world leading in terms of preparing themselves for this new world.”

BarCap also projects that the 35 US banks will need to come up with another $500 billion in cash and easy-to-sell assets to meet new Basel liquidity requirements that take effect in 2015. But the needs are not evenly distributed – only two-thirds of the banks have any shortfall at all.