Basel III Endgame may cut US banks’ excess capital

Bloomberg Intelligence

This analysis is by Bloomberg Intelligence Senior Credit Analyst Arnold Kakuda and Associate Analyst Nick Beckwith. It appeared first on the Bloomberg Terminal.

Basel Endgame clarity in August may unleash big US bank buybacks

Large US banks might increase share buybacks in 2H as final Basel III Endgame capital rules may be released in August, according to Bloomberg News. The final rule should be less onerous than the heavily criticized proposal. This means these lenders’ fortress of $155 billion of excess Common Equity Tier 1 capital above current requirements could be near its peak. Under the Fed’s current proposal, risk-weighted assets — the denominator for the CET1 requirement — may increase by 20-40%. That would wipe out many lenders’ pro forma surplus capital if the rules were enforced immediately instead of full implementation in 2028. JPMorgan Chase could be hit hardest, which has led it to be conservative with shareholder returns to build capital. With four years until full implementation, banks have time to take mitigating actions.

JPMorgan’s $53 billion surplus capital pile could decline in 2H

JPMorgan Chase’s $53 billion of surplus capital may fall in 2H if the lender increases share buybacks. The Federal Reserve could release final Basel Endgame rules in August, according to Bloomberg News, which may be less onerous than the proposal. JPMorgan’s pro forma Common Equity Tier 1 (CET1) was hit hardest under the proposal, which has seen it become conservative on buybacks to build capital.

$155 billion of excess capital may vanish with Basel Endgame

The eight US-based G-SIBs may collectively have about $155 billion of surplus capital with the inclusion of 2023 stress capital buffers (SCB) and 2024 G-SIB surcharges. 2023 SCBs took effect in 4Q23. The constraint on capital returns for most big US banks have been on their CET1 ratios as a percentage of risk-weighted assets. JPMorgan may have the most surplus capital ($53 billion), followed by Bank of America ($31 billion). Share buybacks have been muted for some to build capital ahead of the full implementation of Basel III endgame’s RWA inflation in 2028. If RWAs were to immediately increase 20-40%, big US banks may collectively have a $45 billion deficit, with JPMorgan most impacted. The final capital rule may be less onerous than the current proposal.

Big US banks rebuilt excess capital

Compared to a 2020 peak, elevated capital returns, AOCI hits from higher rates and increased RWAs had reduced many big US banks’ excess CET1 through 1H22. To meet higher CET1 hurdles through 1Q23 from increased 2022 SCBs and 2023 G-SIB surcharges, big banks retained capital and have now built a $155 billion surplus. Lower 2023 SCBs following solid 2023 stress test results have also built excess pro forma capital. The pace of share buybacks has been modest since 2023 to build CET1 due to the Fed’s proposed higher capital requirements via Basel III RWA inflation. Excess capital is about equal to its peak from 4Q20.

Goldman’s excess capital rose most of peers

The eight US-based global systemically important banks’ excess CET1 may be peaking. Excess capital declined through 1H22, but has increased afterwards. 1Q increased about $1 billion vs. 4Q using 2024 requirements. Lenders’ collective excess capital is $155 billion, according to our analysis. Goldman’s surplus CET1 rose most vs. 1Q24 requirements.