Some of the nation's most complex banks have significant wiggle room under regulatory requirements to hold total loss-absorbing capacity and long-term debt.
During earnings calls the past two weeks, the nation's global systemically important banks, or G-SIBs, have focused less on total loss-absorbing capacity, or TLAC, and more on common equity Tier 1 ratios when discussing their capacity for capital returns to shareholders. A few years ago, it appeared TLAC requirements might act as a binding constraint on how banks manage their capital. When the Federal Reserve passed the rule on TLAC and long-term debt in 2016, regulators estimated banks faced a $70 billion shortfall.
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Now, the U.S. G-SIBs subject to the rule have plenty of capital and are focused on the risk-weighted CET1 ratios.
"We have well over $200 billion of equity. We can issue preferreds, we can issue debt. We can issue stock, if we had to do something," said JPMorgan Chase & Co. Chairman and CEO Jamie Dimon during the bank's Oct. 13 earnings call. "So I don't think we need dry powder. I think our capital cup runneth over where it is."
The bank's TLAC, which includes common equity and certain types of debt, was $35.9 billion higher than the regulatory minimum as of the second quarter, according to data collected by S&P Global Market Intelligence. Data for the third quarter is not yet available.
On recent investor conference calls, analysts have inquired about capital return plans as banks beat consensus estimates with robust earnings boosted by reserve releases thanks to strong credit quality. During Bank of America Corp.'s earnings call, CFO Paul Donofrio pointed to the bank's CET1 ratio, saying the bank had a $26 billion capital cushion. Under TLAC, the bank had an $87.8 billion surplus of capital.
"We continue to return the excess capital and all the current earnings because, frankly, we can grow without retaining capital," Chairman, CEO and President Brian Moynihan said during the earnings call.
Regulations also require banks meet a long-term debt requirement, which does not include equity, translating to less of an impact on capital return decisions. While all eight U.S. G-SIBs met the long-term debt requirements in the second quarter, surpluses were considerably lower. For example, JPMorgan's surplus long-term debt was $6.4 billion in the second quarter, just 3% over its regulatory minimum.
The investment banking-heavy G-SIBs, Goldman Sachs Group Inc. and Morgan Stanley, boasted the largest surpluses on long-term debt with Goldman at $84.5 billion over its regulatory minimum and Morgan Stanley $67.2 billion higher. The i-banking heavyweights also reported the largest TLAC surpluses with Goldman having $108.3 billion of wiggle room and Morgan Stanley $89.0 billion over its minimum.
Trust bank G-SIBs, which are the smallest G-SIBs, had the lowest nominal surpluses when measuring TLAC. Still, executives felt comfortable with their capital situation.
In September, State Street Corp., the nation's smallest G-SIB, decided to deploy $3.5 billion of cash into its acquisition of Brown Brothers Harriman & Co.'s investor services business. During the company's Oct. 18 earnings call, management said the CET1 ratio represented "the core of our capital constraint," and that the company felt comfortable with its capital management planning following the deal.
"We know where to judiciously manage the balance sheet," said CFO Eric Aboaf. "I think we'll continue to do that while bringing on deposits and serving our clients as best as we can."
