Fitch: US Banks Ready For Bump in Buffers, Consequences Unclear

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings says the Federal Reserve's official compliance with Basel III rules requiring the largest banks to boost capital above minimum requirements could further strain U.S. banks striving to increase lending and will add burden to an industry already taxed by regulatory reform. Excess capital buffers under Basel are expected to be unveiled by the Fed as early as this week.

Last month, The Basel Committee on Banking Supervision released its list of 29 globally systemically important financial institutions (G-SIFIs) that included 8 U.S. banks. G-SIFIs will be required to hold additional core capital, regarded as a "buffer," shielding taxpayers in the event of a failure. Many U.S. banks have voiced opposition to these specific requirements arguing that if implemented, would be too constricting, and further limit lending thereby hindering economic growth.

The Fed's expected compliance with Basel is much to the chagrin of the largest U.S. banks. Global SIFIs, including those in the U.S., will be required to boost their reserves based on their size and potential impact of default. Current guidelines suggest between 1% for smaller firms and 2.5% for the largest institutions. That's on top of the expected 7% base capital requirement, and larger banks forced to comply will likely face a higher level of overall operating difficulty.

The Fed has not yet detailed the size of the buffer for each bank, making it difficult to gauge the impact.

We previously evaluated the potential for U.S. banks to meet capital buffers and broadly regard this event as manageable for most U.S. banks potentially subject to enhanced capital requirements. Nonetheless, broader ramifications based on credit availability are difficult to ascertain. Still, banks simply can't be expected to conform to higher capital requirements and increase lending in an already difficult operating environment. Many have already shed non-core assets in order to strengthen their capital levels, and some continue to do so.

While we believe buffers are necessary for large banks more susceptible to market and contagion risk, the effectiveness of excess capital as a meaningful avenue to mitigate risk remains unclear. Additional capital under Basel will in theory ensure enough US bank liquidity to guard against market shocks, but it may also seriously impede growth.

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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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