Systemically important U.S. banks appear headed toward tougher regulatory capital requirements after three of them finished 2021 in higher surcharge buckets than the year prior.

The most recent risk scores for the eight U.S. global systemically important banks, or G-SIBs, would translate into capital ratio requirements 50 basis points higher for the trio than at the end of 2020, according to S&P Global Market Intelligence data.

The scores go into effect with a lag of about two years, and four of the banks — JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. — have said they expect their surcharges to increase in 2023 and 2024, including the impact of previous measurement cycles. The industry has been arguing that the scores have been inflated by the Federal Reserve's actions to support the economy during the pandemic and has been pushing for a recalibration that would reflect economic growth since the surcharges were instituted about seven years ago.

Wells Fargo & Co., which is subject to a regulatory asset cap over past consumer abuses, bucked the trend with a surcharge that fell to 1.5% in 2022 from 2.0% in 2021. Its risk score stayed in the 1.5% bucket at the end of 2021.

Score management

The risk scores are determined by factors including total size and exposures to complex derivatives. They correspond to surcharges that play a role in several regulatory requirements, including standards for common equity Tier 1 capital.

Across the G-SIBs, scores increased about 226 points, or 5.3%, in 2021, including a rise of about 73 points in the size component. The component that measures reliance on short-term wholesale funding rose about 74 points, though reforms like the liquidity coverage ratio limit the risks banks can take with such borrowing.

The component for complexity, which includes measurements of over-the-counter derivatives, was about flat from the year prior and down about 65 basis points from the third quarter. Researchers at the Fed have found that banks tend to manage down their derivatives positions ahead of the year-end measurement periods that determine the surcharges.

Living with constraints

Some G-SIBs have said they are wrestling with the trade-off between higher capital requirements and business they would like to do.

They have also been restraining deposit growth and issuing preferred stock to keep clear of a 5% minimum for their supplementary leverage ratios. Pressure on SLRs should ease as the Fed makes a hawkish pivot and starts shrinking its balance sheet.

Citi, one of the banks gearing up for a higher capital requirement in the near term, also said in March that it expects its surcharge to fall back to 3% over three to five years as it remixes away from capital-intensive businesses and completes exits from consumer markets around the world.

Still, the bank said it would "continue to advocate for G-SIB calibration."