Bank Executives Share Thoughts on Forthcoming Basel Proposal
Also, resolution plans and a proposal to "restore" the Federal Reserve Board
Earnings Season
It is again earnings season which means it is again an opportunity for bank executives to share their hopes and fears regarding the upcoming U.S. implementation of the Basel III endgame. Today on earnings calls JPMorgan, Wells Fargo, Citigroup and State Street did just that to a greater or lesser extent. Other large banks are scheduled to report results next week.
JPMorgan
JPMorgan CFO Jeremy Barnum, “indulging a little bit of guess work,” predicted that “the biggest single driver of the increase that people are talking about” will be the changes to operational risk RWAs calculation, in particular “the way operational risk is getting introduced into the standardized” approach under the U.S. capital rules.
Shifting gears to the expected changes to the market risk framework following the Fundamental Review of the Trading Book, Barnum said it is complicated.
On FRTB, it's really very nuanced. It's probably like too much detail for this call, to be honest. But just to give you like one immaterial and insignificant but useful example. One product under FRTB is yield curve spread options. And if the FRTB proposal goes through as currently written, that product has become not viable. So obviously, if we need to stop doing that product, no one really cares -- but it's just one example of the way sometimes when you're really disciplined about allocating capital thoroughly all the way down to new products and responding accordingly.
One notable theme in Barnum’s remarks throughout the call was the extent to which JPM may be able to bring its pricing power to bear in mitigating the effects of some of the forthcoming changes. A sampling:
“The one thing to point out is that the straight-up math of simply diluting down the ROTCE by expanding the denominator misses the possibility of repricing of products and services which, of course, goes back to our point that these capital increases do have impacts on the real economy. So we're not suggesting that we can price our way out of it. But we obviously need to get the right returns on products and business and where we have pricing power, we will adjust to the higher capital.”
“To the extent that we have pricing power and the higher capital requirements mean that we're not generating the right returns for shareholders, we will try to reprice and we'll see how that sticks and how that flows into the economy and how it affects demand for products. And if the repricing is not successful, then in some cases, we will have to remix and that means getting out of certain products and services and [garbled], that probably means that those products and services leave the regulated perimeter and go into elsewhere. And that's fine. As Jamie points out, those people are clients.”
As context for that final remark about clients, Jamie Dimon had interjected at an earlier point during the call to note that the revised capital rules will be “great news for hedge funds, private equity, private credit, Apollo, Blackstone…”
State Street
State Street’s stock has had a rough day today so far for other reasons, but as relevant to this blog State Street CFO Eric Aboaf in response to a question gave a brief overview of what State Street preliminarily sees as the potential negatives and positives from revised rules.
On the expected increase in operational risk capital under the new Standardized Measurement Approach, Aboaf noted that this is going to have an impact on banks’ fee-based businesses, including those of State Street, but “because we actually want to build our fee-driven businesses” State Street is likely just going to have to deal with any increased requirements here, rather than looking to shift business mix to mitigate them.
On the expected changes to credit risk weights, State Street believes “[t]here'll be some reduction on the lending book, so that will be helpful.”
Finally, although the FRTB changes to the market risk rules may be a negative for some firms, Aboaf believes overall they could be a positive for State Street.
Aboaf: “And then I think in particular, while the fundamental review of the trading book will affect the universal banks potentially in a negative way. For us, the sec finance business will tend to be a positive, will be in a positive territory where capital requirements will be less. We'll no longer need to hold capital to indemnify treasury. So they'll finally become economically more rational in the safer areas, right, as they should be. They should obviously -- capital needs to be held for the riskier activities. But we don't traffic in the riskier areas.”
Citigroup
No exciting pull quotes here, but throughout the earnings call CEO Jane Fraser and CFO Mark Mason discussed, among other capital-related topics, Citi’s ongoing efforts at RWA optimization and how the firm’s ongoing transformation, including some of its divestitures, may impact those efforts.
Wells Fargo
Wells Fargo was most circumspect in its comments on the capital rules, sticking to general comments that the firm’s capital requirements are expected to increase, but noting that the extent of the increase is not yet clear.
Possibly more noteworthy was the commentary from Charlie Scharf in his prepared remarks about where things stand with the company’s regulatory remediation work.
Now let me update you on progress we've made on our strategic priorities, starting with our risk and control work. Regulatory pressure on banks with long-standing issues such as ours continues to grow, and as such, our continued intensive effort to complete the build-out of an appropriate risk and control framework for a company of our size and complexity is critical.
I continue to emphasize that this is our top priority and will remain so. And that while we have implemented substantial portions of the work required, we have more implementation to do as well as work to make sure the changes operate effectively over time. As I said before, we remain at risk of further regulatory actions until the work is complete. While we're devoting all necessary resources to our risk and control work, we're also continuing to invest in our business to better serve our customers and help drive growth.
Consistent with the usual pattern on Wells Fargo earnings calls, various analysts probed for more details on where specifically Wells Fargo is in the remediation process. Also consistent with the usual pattern, and in light of regulatory constraints on getting into this sort of thing, management generally declined to do so. For example:
Matt O’Connor: And I understand that you can't speak for them signing off on what you've done, but in terms of you accomplishing what you want to accomplish, where are you on that kind of process, like whether you want to frame it from an innings perspective or percent basis? Anyway to frame that, acknowledging there's a lot to do and that you've done a lot. But how far along are you in terms of what you can control on implementing these things?
Charlie Scharf: Yeah. Listen, I appreciate your desire to have me answer those questions. But again, all that matter -- our view of accomplishing the work doesn't matter. What matters is that our regulators look at it and say it's done to their satisfaction. So I really don't think it's helpful or productive to go beyond what I've said at this point. But again, I do understand and appreciate why you're asking.
Resolution Plan Public Filings
Yesterday the Federal Reserve Board and FDIC released the public sections of the resolution plans filed a few weeks ago by the U.S. GSIBs. I cannot pretend to have read, or to have any plans to read, through all of them, but they may be of interest to some readers.
Perhaps more interestingly on the subject of U.S. resolution planning is the remedial update filed by Credit Suisse in late May 2023. This is a plan resubmission that was required by the Board and the FDIC after they late last year found Credit Suisse’s 2021 resolution plan filing to be of “poor quality” and suffering from a “lack of content.”
The public section of the resubmitted plan is kind of a funny document to read, including because the plan was resubmitted a few months after UBS was cajoled into acquiring Credit Suisse, and just a few weeks before the acquisition would close.
Nonetheless, the resubmitted plan sportingly plays along with the resolution planning exercise by describing a global resolution strategy that is not quite how things worked in reality:
As a Globally Systemically Important Bank (G-SIB), CS develops resolution plans for both its global and U.S. operations. In developing these plans, CS works to ensure that they are mutually consistent and could be executed either independently or collectively, as required.
2.1 Group Resolution Strategy
The CS Group-level approach to resolution is a SPOE strategy that involves only Credit Suisse Group AG going into resolution. Under this strategy, all CS operating entities remain solvent, thereby maximizing the value of the enterprise and minimizing the disruption to customers and financial markets. This resolution strategy would not involve the bankruptcy of CSH USA, or insolvency of any U.S. MEs.
As a Global Systemically Important Bank, Credit Suisse maintains an ongoing dialogue with FINMA, Switzerland's independent financial-markets regulator, to develop and implement Group-wide resolution-critical capabilities.
Today in House GOP Messaging Bills
Next week the House Financial Services GOP continues its ESG Month with a hearing on climate risk and the U.S. federal financial regulators. The hearing itself could be interesting (or awkward), as it features senior staff, rather than political appointees, from the Board, FDIC, OCC, and NCUA, as well as, naturally, the Treasurer of Coconino County, Arizona.
More on that next week as warranted, but I mention this here today because Financial Services Republicans have now also released drafts of a few messaging bills in advance of the hearing.
A fairly silly draft bill, but one that is indicative of where sentiment is within HFSC Republicans, is a bill to “restore” the Federal Reserve Board.
How would the Board be restored? By “amend[ing] the Federal Reserve Act to remove the designation of one of the members of the Board of Governors of the Federal Reserve System as the ‘Vice Chairman for Supervision’.”