Wells Fargo, State Street and JPMorgan Chase are below or almost at minimum capital thresholds expected to be included in a rule still being hammered out by U.S. regulators that's meant to mitigate taxpayer losses in another financial crisis, according to a Reuters analysis.
U.S. banks are already required to hold equity equal to about 10 percent of their balance sheet to serve as a shock absorber to cover the risk of a sharp drop in the value of loans, investments and other assets on their books. Banks expect U.S. regulators to require them to hold another 10 percent in bonds with maturities of more than a year and other instruments, as part of the forthcoming rule.
Wells Fargo's loss-absorbing capital stood at 17 percent at the end of last year, State Street's was 18.2 percent and JPMorgan stood at 19.1 percent, according to a Reuters analysis of eight banks, based on regulatory filings and methodology recently presented by Citigroup.
"These are figures which have been circulating," said Bernard De Longevialle, a credit analyst at Standard & Poor's. "The market tends to view these three (banks) as those who would potentially be the most stretched."
Analysts and officials at banks are basing their estimates for the benchmarks partially on discussions with regulators and on wider market assumptions for what would be a reasonable level. The Federal Reserve has typically taken a tougher stance than its counterparts in the European Union.
The Fed and the Federal Deposit Insurance Corporation (FDIC), who are jointly working on the rule, declined to comment.
Regulators want creditors—and not just shareholders—to take a hit if a bank lands in trouble, to prevent a repeat of the panic that spread when Lehman Brothers collapsed in 2008.
The equity requirements that U.S. banks already conform to are in line with recommendations made in the global Basel III accord. The Fed has said it is planning similar requirements for long-term debt instruments that investors buy knowing they might lose all or part of their money. This would double the loss-absorbing capacity of a bank's capital to about 20 percent.
Regulators from across the world are also working on such plans, but they still disagree about the details of a common approach they want to present when the G-20 largest countries of the world meet at a summit in Brisbane, Australia, in November.
Double the buffers
The European Union wants banks' loss-absorbing capital to stand at about 18 percent of the balance sheet, and analysts believe that the Fed will come up with a similar number, somewhere between 18 percent and 25 percent.
JPMorgan declined to comment. State Street said it had "an ongoing dialogue with industry participants and regulators over a wide variety of issues," and that it remained one of the most well-capitalized banks in the United States.
Wells Fargo pointed to a May investor day, during which its Treasurer Paul Ackerman said he expected the bank's long-term debt "to grow a little bit" to fill any gap. Since the beginning of last year, Wells Fargo has issued more than $11 billion in debt with maturities greater than 10 years.
The rule is intended to make sure that governments can wind down a failing bank that is considered to pose too much risk to the financial system to go through ordinary bankruptcy, while not burdening the taxpayer.
In the U.S., for example, the FDIC has explained how it would go about the exercise, but the plan won't work without the extra buffers.
"Banks are more or less asked to keep a capital base ... of 9 to 10 percent of risk-weighted assets, and it's just a simple rule of thumb to say you would have ... debt that would allow to double this amount," De Longevialle said.
FitchRatings in a recent presentation also assumed a total loss-absorbing capacity of 20 percent.
Banks may not have too much trouble in raising more long-term debt depending on the exact details of the Fed's requirement, analysts said, particularly if there is a long transition period.
Questions about the levels and about what instruments would count towards the total add to banks' anticipation about a long list of new rules that haven't been fully implemented, or that regulators are still writing.
The Fed alone is working on four more rules: to raise more capital for systemically important banks, to require banks to invest in assets they can easily sell, to balance the maturities of assets and liabilities, and to make the short-term funding market less susceptible to panics.
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One of the reasons that Wells Fargo is behind some of the other banks is that it has traditionally relied on client deposits for funding, and simply did not need to borrow money from other banks or from investors.
While clients can quickly withdraw deposits, they are still considered "sticky"—meaning banks don't anticipate that depositors will withdraw their funds all at once—and the Fed may take that into account by granting banks such as Wells Fargo more leeway when setting its long-term debt requirement.
"We would not be surprised if there are some differentiations between the banks based on their business models. But that's an assumption, that's not an information," De Longevialle said.
Morgan Stanley and Goldman Sachs have far fewer deposits to fund their business, and they are also the two banks that far exceed the 25 percent thought to be the upper boundary for loss-absorbing capital level.
A senior Fed staffer working on the rule said at a conference last week he would prefer consensus among the world's regulators grouped together in the G-20's Financial Stability Board before the Fed put out its own rule.
Banks in Europe often have a different legal structure than those in the United States, which group all their operating subsidiaries under one holding company, and this may make it hard to agree on a common approach soon.