The nation's largest banking companies expect their risk-weighted assets to balloon under Basel III, but none believe they will have to sell additional stock to shore up their capital ratios.
Instead, they are counting on asset sales and runoff, along with some more complicated nips and tucks; earnings and a transition that will take most of the decade to fit into the new framework. At the same time, they have positioned themselves against the imposition of a much greater capital buffer for too-big-to-fail institutions, arguing that the baselines established so far are plenty.
Bank of America Corp. has reckoned that its balance sheet would amount to $2.1 trillion — a 40% increase — under the new regime (see charts), which applies tougher risk weightings in an attempt to protect against dangers posed by trading counterparties and holdings of structured securities. JPMorgan Chase & Co. has estimated that its risk-weighted assets would stand at $1.5 trillion in the fourth quarter under Basel III — about 30% higher than in the third quarter under the existing rules.
But risk-weighted assets at the Big Four have generally been shrinking in recent quarters, and companies expect to make large additional strides soon.
During B of A's third-quarter earnings call, Chief Executive Brian Moynihan said a recent move to repackage private-label mortgage bonds into new securities would relieve the company of about $100 billion of risk-weighted assets under Basel III. Issuance of such deals, where bonds that have gone bad are recombined into investment-grade paper, has been prolific industrywide, though some of the securities have once again lost top ratings due to continued collateral deterioration.
"There's a lot of work to do, but there's a lot of areas to do it," Moynihan said in October. He noted that B of A has a higher proportion of risk-weighted assets to total assets than Wall Street competitors like JPMorgan Chase and Citigroup Inc., which he said reflects "inefficient" but resolvable concentrations of counterparty exposures acquired when the company grafted Merrill Lynch & Co.'s book onto its own.
Including a withdrawal from proprietary trading and alterations of ties to counterparties, B of A expects to finish 2012 with $1.9 trillion of risk-weighted assets, measured by the pending formulas.
That would still be a 25% increase from the third quarter under existing standards, and Citi also expects a large increase in its risk-weighted assets, even after "mitigating actions" — 30% to 35% for its core businesses and a much bigger jump at Citi Holdings, its repository for a wide array of assets and operations slated for divestiture.
Wells Fargo & Co., which has a relatively small capital markets business, expects only a modest increase in its risk-weighted assets; it estimated that it would have had a 6.9% Tier 1 common equity ratio under the new rules in the third quarter.
Despite the anticipated bulge at JPMorgan Chase, the company figures its capital would be sufficient to keep it clear of a 7% Tier 1 common equity ratio even in the third quarter. Along with a "conservation buffer" that would only be fully phased in by the beginning of 2019, 7% would be the effective minimum, excluding an additional cushion for systemically significant institutions that has yet to be set and a countercyclical layer of up to 2.5% that could be imposed during a period of excessive credit growth.
Though JPMorgan Chase has said it could achieve a 10% ratio next year without selling shares if it made some tough decisions about what businesses to sell or exit, and despite the view among many regulators and experts that Basel III is far too soft, it has argued that such a level would be overkill.
With the stricter risk weightings, "7% is the functional equivalent to 10% or 11%" under current standards, Douglas Braunstein, the company's chief financial officer, said during a presentation in November. "That is a sufficient level of capital for any institution."