business

Deposit-Shunning Banks Get Big Break as U.S. Eases Leverage Rule

  • Federal Reserve, OCC said to prepare a looser capital rule
  • Revision to mimic Basel formula, ending some U.S. gold-plating
Photographer: Daniel Tepper/Bloomberg

Bank of New York Mellon Corp. and State Street Corp. stand to benefit most as U.S. regulators rush to ease a key leverage rule, giving the custody-banking giants room to once again accept deposits they’ve shunned in recent years.

The Federal Reserve and the Office of the Comptroller of the Currency may unveil a proposal as early as next week to ease the leverage ratio from the 5 percent minimum currently in place for the nation’s eight largest banks, according to people with knowledge of the plan. BNY Mellon and State Street would see their minimum requirement drop to below 4 percent, giving the pair leeway to soak up billions of dollars in additional deposits, under draft terms described to Bloomberg.

Leverage Relief

Custody banks would benefit the most from planned changes to U.S. capital rule

Sources: Company filings, Bloomberg estimates

Revised figures were calculated by taking the systemic capital surcharges disclosed by the firms at the end of September, dividing them by two and adding the result to the 3% leverage minimum required by international standards.

The planned revision comes more than a month after the Basel Committee on Banking Supervision tweaked the global leverage requirement -- a minimum capital ratio that unlike calculations for many other standards ignores the riskiness of assets on the balance sheet. The Fed and OCC are pursuing a U.S. version with unusual speed, aiming to thwart a bipartisan bill pending in Congress that would soften the rule further.

“For the custody banks, it means they can bring back the deposits they’ve pushed off the balance sheet since 2015,” said Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods. “They can make more money that way.”

Spokesmen for the Fed, OCC, BNY Mellon and State Street declined to comment.

Banks face a variety of rules -- all measuring their size and capital slightly differently -- that limit how much money they can return to shareholders through buybacks and dividends. For the largest lenders -- such as JPMorgan Chase & Co, Bank of America Corp. and Citigroup Inc. -- the leverage changes aren’t as impactful because they’re more constrained by the Fed’s annual stress test.

Eschewing Deposits

The U.S. gold-plated the Basel leverage requirement for the eight largest lenders when it implemented its own version in 2014, increasing the minimum by 2 percentage points for holding companies and 3 points for the firms’ deposit-taking bank units.

The next year, BNY Mellon was still below the 5 percent minimum and State Street barely above. That prompted them to push away deposits with measures that included additional fees on certain types of accounts. They also switched how they swept institutional clients’ extra cash, moving them into money-market funds instead of regular deposits.

While that can help banks raise their leverage ratio, it also crimps profits. The fees earned on the investment funds are typically less than the spread banks get by paying virtually nothing for deposits while parking the money in Treasuries or at the Fed.

The planned revision would bring the U.S. closer to the international standard by adding a surcharge to banks’ two leverage ratios that’s equal to half of the buffer they face in other requirements from being a systemically important firm. For JPMorgan, that means the rule change would have little effect because the systemic surcharge is so high for the nation’s largest bank.

Stress Tests

The legislation wending through Congress would impose different methodologies on custody banks and traditional lenders for calculating their leverage ratio. The Fed and OCC are opposed to treating the business models differently. Part of their aim in rushing through new rules is to persuade Congress its legislative fix isn’t needed.

Initially, the legislation’s impact on custody banks would be similar to what regulators are planning. But it could diverge over time. The proposal in Congress would enable those two banks to soak up unlimited deposits so long as they park the money at the Fed.

As regulators tackle one regulation, the biggest banks are hoping they next turn to the stress test.

Randal Quarles, confirmed to become the Fed’s regulatory czar in October, has talked about simplifying and potentially easing some of the assumptions in the tests. Changes will likely be announced later this year, according to the people familiar with the discussions. That would mean revisions wouldn’t take effect until next year’s tests.

“Without stress-test changes, the leverage ratio change doesn’t really free up capital for the big banks,” Kleinhanzl said. “But there will be more changes, to the stress tests and to other rules. This is just the beginning.”

— With assistance by Jesse Hamilton

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