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Goldman, Morgan Stanley Cut by JPMorgan on Capital Requirements

Jan. 25 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley were cut by an analyst at JPMorgan Chase & Co. on concern that a U.S. regulatory proposal may make the banks’ capital requirements stricter than European rivals.

The regulation draft released last month is an example that U.S. investment banks “operate with ongoing un-coordinated regulatory headwinds, reducing the competitiveness against European investment-bank peers,” Kian Abouhossein wrote in a note to investors today. He cut both New York-based firms, the U.S. banks most reliant on trading, to “neutral” from “overweight.”

The proposal addresses a mandate from the Dodd-Frank Act to remove credit ratings from banking rules. Alternatives to credit ratings could lead to increased capital requirements, specifically from higher risk weightings for securitizations and corporate debt exposures, Abouhossein wrote.

The regulation draft would likely cut his estimate for Goldman Sachs’s Basel III Tier 1 common-equity ratio at the end of this year to 8.5 percent from 9.7 percent, and Morgan Stanley’s to 9.1 percent from 9.9 percent, Abouhossein wrote. That would limit the banks’ ability to repurchase shares, he wrote.

The proposal was released in December by the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. It’s part of a U.S. effort to implement global capital rules revised in 2009 by the Basel Committee on Banking Supervision, which coordinates global regulation.

The so-called market-risk rules, which cover assets on bank trading books, were supposed to be in place by the end of 2011. A European Union version went into effect Dec. 31. The Dodd-Frank Act’s credit-ratings ban slowed the process in the U.S. as regulators devised an alternative. Congress barred ratings after firms including Moody’s Investor’s Service and Standard & Poor’s gave their highest grades to mortgage-backed securities, which allowed lenders to treat them as risk-free.

The proposed rules could be revised after a public comment period that ends Feb. 3. A final version may be published a few months later, according to regulators.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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