Photographer: Chris Goodney/Bloomberg

Fed's Disaster Plan Is Bitter Pill for Debt-Averse Wells Fargo

  • Agency to propose loss-absorbing rule Oct. 30 for U.S. firms
  • Wells Fargo may have to add $26 billion in long-term debt

Wells Fargo & Co. Chief Executive Officer John Stumpf is about to get what he doesn’t want.

The Federal Reserve plans to propose a rule Friday that would force the largest U.S. banks to hold enough long-term debt that could be converted into stock in case of disaster. Most of them have little cause to worry because they’ve been building up piles of debt for years. But Wells Fargo is bracing to take the biggest hit since it has funded itself mainly through deposits.

John Stumpf

Photographer: Andrew Harrer/Bloomberg

Stumpf, whose bank withstood the 2008 financial crisis better than its Wall Street rivals, says "the last thing I need is debt." The San Francisco-based lender has "oceans of liquidity,” he told Bloomberg News during a May interview, referring to the abundance of cash that consumers have parked at his bank.

That traditional lender behavior doesn’t help since the Fed is demanding that megabanks store more unsecured debt in their holding companies. Institutions such as Goldman Sachs Group Inc. and Morgan Stanley already have enough debt, due in part to their legacy as investment banks until 2008.

According to the version of the rule being worked on by global regulators on the Financial Stability Board, banks will have to cushion themselves with qualifying debt that is more than 16 percent of their assets weighted by risk in 2019, moving to 18 percent by 2022, people with knowledge of the rule have said. Fed officials, however, have signaled they will stick with their custom of making rules tougher than international accords, and the initial discussions focused on a range as high as 20 percent, which was the maximum considered by the FSB.

BofA, JPMorgan

The rule on Total Loss-Absorbing Capacity, or TLAC, is a linchpin of global regulators’ efforts to avoid a repeat of the 2008 crisis. The goal isn’t to prevent banks from failing, but to ensure that their demise wouldn’t cause economic instability or require taxpayer-paid bailouts.

Wells Fargo is at about 18 percent, using the math being hashed out at the FSB, John R. Shrewsberry, the bank’s chief financial officer, said on an industry conference call last month. Using that methodology, another 2 percent would mean $26 billion in additional long-term debt, he said.

Jennifer Dunn, a spokeswoman for Wells Fargo, declined to comment on the Fed measure.

Other banks will still have to make adjustments, such as restructuring their debt, to comply with the rule. Those banks will also probably face higher operational costs, said Oliver Ireland, a partner with law firm Morrison & Foerster in Washington.

“We may have to issue a little bit more debt, but based upon what we’re hearing -- at least from a sort of rumor perspective -- it looks to be quite manageable,” Paul Donofrio, chief financial officer at Bank of America Corp, said on an earnings call this month.

Bank of America’s debt is estimated to be at 21 percent, according to an Oct. 26 research note by Barclays Plc analyst Jason Goldberg. Goldman Sachs and Morgan Stanley also seem to be in the clear on the rule and are well above the 20 percent threshold, Goldberg said. JPMorgan Chase & Co., like Wells Fargo, may need to add more debt, according to the note.

Structured Notes

If U.S. banks fail, investors in their stock will lose everything, and regulators intend to convert these heaps of long-term debt into equity in the new, reconstituted bank. It’s a key piece in the so-called living wills the firms have to submit to the Federal Deposit Insurance Corp. and Fed each year to map out their hypothetical demise.

Other unknowns about this week’s rule: whether the Fed will force the banks to comply by 2019, as expected from the global accord, and other charges they may face. Because these banks are thought to pose the greatest threats to the financial system, they may have to add capital surcharges approved by regulators in July on top of the loss-absorbing debt. For JPMorgan, the biggest bank, that could mean an extra cushion of 4.5 percent of risk-weighted assets.

The Fed also will decide whether to heed a call by banks to let some structured notes be included in their debt calculations because they say those securities are important to their funding operations. The notes are securities created by banks, which package debt with derivatives to offer customized bets to investors.

(Corrects FSB requirement year in fifth paragraph of story originally published Oct. 29.)
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