Earnings Call Regulatory Round Up
Banks’ thoughts about the economy, and not relatively niche regulatory issues, rightly dominated the headlines coming out of today’s earnings announcements and conference calls.1 Even so, there were few a regulatory points raised that readers might find at least vaguely interesting. This post discusses them.2
Brooding About Basel
From a regulatory perspective a key discussion point on most of today’s calls was how banks are feeling about forthcoming changes to the capital rules. No one is enthusiastic about them, really, but the executives on the calls varied in how willing they were to share their feelings.
As was the case a decade ago, JPMorgan was happiest to vent about the forthcoming changes. In response to a question about RWA optimization, CFO Jeremy Barnum started things off by warning against a new set of capital rules that are unreasonably punitive:
So there are definitely still opportunities to optimize. We're continuing to work very hard, and it's a big area of focus. Some of that is reflected in this quarter's numbers, but some of the other drivers of this quarter are what you might call more passive items, particularly in market with RWA. And yes, but we should be clear that although we've said that the effects of capital optimization are not a material economic headwind for the company, they're also not 0. There are real consequences due to the choices that we're making as a result of this capital environment.
Add in a Basel III outcome that is unreasonably punitive from a capital perspective. There will be additional consequences to that. We obviously are hoping that's not the case and believe that it's not appropriate, but we'll see what happens.
Later in the call, Jamie Dimon had his own chance to weigh in:
Steven Chubak: In [Michael Barr’s] December speech, [he] strongly hinted at capital requirements moving higher for you and peers. You also alluded in your comments or in response to one of the questions that the finalization of Basel III can potentially be very punitive. Given the absence of the proposal, I was really just hoping you could speak to how your scenario planning for the eventual finalization and any additional detail you can offer on the areas of mitigation. I think the one issue or area of confusion is that one of the biggest sources of RWA inflation is op risk, which can't really be mitigated. So what are the actions that you can take to really offset some of those potential headwinds?
Jeremy Barnum: Yes. So Steve, I'd love to get into detail here, but I just think that the question of how to mitigate is really hard to discuss in a lot of detail until we see an actual proposal. And the reason that we talk about potentially punitive increases, I mean, you studied this issue closely. It's just to point out that under the version of the world where you get the worst outcome in all of the different moving parts of this thing, it's a very significant increase to the capital requirements of the system as a whole. And given how strong the system is today, that just like doesn't make sense to us. So we just want to say that. But yes, Jamie, please.
Jamie Dimon: Just, look, you guys know that the [op risk] capital, the trading book, the CCAR, G-SIFI, all those moving parts, let's just see what they are. We'll deal with them when we get there. And then we'll figure out what we have to modify our business and stuff like that. We don't think it's necessary to increase capital ratio. We're quite clear on that. … They're going to work it through their international laws, their international requirements. We're hoping that America is the same as international. That would be nice.
Notably, Dimon also on the call said that the G-SIB surcharge is “supposed to be corrected.” Like everyone else, though, JPM is waiting to see what actually happens.3
Bank of America and Citigroup management likewise offered variants of being in wait-and-see mode while also, like JPM, assuring investors that eventually they will figure it out.
BofA:
Kenneth Usdin: Okay. Great. Second quick one just on capital. You had 20 basis points increase in your CET1. You did $1 billion or so of the buyback. Just wondering how you're thinking about capital return with the [Michael] Barr package of rules still ahead of us going forward.
Alastair Borthwick: … I think the difficult part with Basel III endgame right now is we don't have the rules. So we got to wait, I think, until we see those They'll go through a comment period. At that point, we'll offer much more perspective. But I'll say the obvious banks have got plenty of capital. We were asked to take 90 basis points more in June. There's a lot of procyclicality already in things like the stress test and stress capital buffer and in CECL. And I think, look, we've shown our ability to perform and build capital, in this case, 75 basis points in 2 quarters. So we'll deal with whatever the ultimate rules come out with.
Citi:
Ebrahim Poonawala: I guess just one question as a follow-up on capital. As we think about post the second half of the year, let's say, you've taken the hit from Banamex. But coming out of this test, any sense, Mark, if there's any reason why Citi would have an outsized negative impact from the Basel and game reforms. Just give us a sense, I'm just wondering hopefully, we don't get another disappointment as we get our hopes it for buybacks in the back half and there's something idiosyncratic about the business mix that could come back to hurt the bank? Would love any perspective there?
Mark Mason: Yes. So look, as we pointed out, we've built a significant amount of capital over the course of the year. We are ahead of the target we set for the middle of the year, middle of the year. We do have some exits that will have a temporary impact on that CET1 ratio. And we do obviously have a DFAST that's in front of us that we'll have to see what the outcome is of that work.
I think, look, the Basel end game and final views and decisions on that are still outstanding. And I think we'll have to take those into consideration when they become available. That is an industry dynamic that will play out however it plays out. And similar to [SA-CCR], we'll get after it in a very significant way to make sure that we're able to handle whatever headwinds or tailwinds may come along with that. But it really is difficult at this point to opine on exactly what that means for the industry in light of the fact that there aren't final rules out just yet.
BNY Mellon offered broadly similar commentary, although theirs was a bit more detailed in that they called out specific potential downsides and upsides for the company from the new rules.
Steven Chubak: … We still don't have a proposal, but we know something is coming in early '23. And given [Michael Barr’s] speech had hinted at capital requirements moving higher for the G-SIB cohort, recognizing there is still no proposal, but I was hoping you could just speak to how your scenario planning for the finalization of Basel III, whether that has any influence on the potential cadence of future buybacks or just capital management more broadly, how you see that potentially evolving?
Emily Portney: Sure. So look, we're obviously very involved with regulators in the industry around the conversations around Basel IV. It's true. Of course, the introduction of operating or operational risk RWA into the standardized approach would, by itself, drive an increase in our standardized RWAs. When we crunch the numbers, our talks suggest something a bit less than probably what you've seen for the [indiscernible] aggregate in the QIS. And there are also -- we do also expect there are going to be some offset for us. So lower [indiscernible], lower credit risk RWAs and also will probably benefit modestly from a more risk-sensitive market to market, the more risk sensitive market framework. They'll be puts and takes. We'll have to wait, really, until the regulators release their proposed version. And we already -- and we do obviously -- for us, we're always looking at RWA optimization. You can actually see that RWAs came down in the quarter, again from optimization that we have been ongoing, that's ongoing and we've been doing. And I would just remind you, too, that the industry will have time to leg into whatever the results end up being.
A Crypto Custody Update from BNY Mellon
In October, BNY Mellon announced that it was launching a digital asset custody platform, following approval from the NYDFS for the bank to provide custody services for bitcoin and ether held by select customers. (Prior notification to the the bank’s lead supervisory point of contact at the Federal Reserve was also required.)
In prepared remarks at the beginning of the call, BNY Mellon’s CEO Robin Vince stated that “the recent events in the crypto market only further highlight the need for trusted regulated providers in the digital asset space.” A little later, in response to an analyst’s question, Vince stated that the firm is “leaning into the future with things like digital assets.”
When will the future arrive? Maybe not all that soon.
Mike Mayo: … you said you have 4 growth initiatives. You did mention digital assets post the recent debacle. Can you put any concrete metrics to put more meat on the bones as far as where you'd like to eventually get to or revenues or what's the endgame…
Robin Vince: Sure. So I just want to make one comment about the 4 things that I mentioned and that you're quoting. Those aren't the only growth initiatives in the company. I pick them out because I think they're good and representative examples, but -- and they're different things, and they have different timelines associated with them as well. But there are other things that I haven't mentioned, at least haven't given great as much prominence to, but that could be very interesting to us over time. But specifically for digital assets, it's the longest term play out of any of the things that we talked about.
I expect it to be negligible from a revenue point of view over the course of the next couple of years, it might be negligible for the next 5 years, but as the world's largest custodian, we are in the business of looking after stuff. We look after $44 trillion worth of stuff. And if there's going to be new stuff to look after, we should be in the business of looking after it.
If the way in which we look after stuff, which is the point about the technology changes, we have to adapt to that. And so we're investing for a future that probably will come to be, but it may not. But if it does come to be, we have to be there. It would be like being the custodian of 50 years ago and sticking with paper and not adopting a computer. That's not going to be us. So we're investing. We're being cautious. We're being deliberate and we've got R&D in different parts of the company, and it's measured. But we do think it's important for us to participate in the broader digital asset space.
I’ll be interested to see if BNY Mellon quantifies in its 10-K just how much crypto custody it is doing (or, equally, if anything on this question can be gleaned from its call reports/FR Y-9Cs). But I suspect it might be hard to tell - $44 trillion is a lot of stuff to look after, and crypto is a negligible part of it, at least for now.
How Are Things Going at Wells Fargo and Citi?
Wells Fargo and Citi are each dealing with ongoing supervisory difficulties with the Federal Reserve Board, OCC, and other regulators.
Citi did not provide many new details today about where it believes it stands, other than to reiterate that the transformation of Citi’s risk and control infrastructure is an ongoing process, with more work still to be done. Citi’s presentation materials today also tried to drive that home by highlighting the following reminder.
As for Wells Fargo, current management continues to be impressed by the work current management has done since taking charge. In opening remarks, CEO Charlie Scharf explained:
We also continue to make progress on putting legacy issues behind us. Our broad reaching agreement with the CFPB in December is an important step forward that helps us resolve multiple matters, the majority of which have been outstanding for several years.
Over the past 3 years, we have made significant changes in the businesses referenced in the settlement and many of the required actions were already substantially complete prior to this announcement. While our risk and regulatory work hasn't always followed a straight line and we have more to do, we've made significant progress, and we will continue to prioritize our work here. In addition to our risk and regulatory work, it's also critical for us to continue to invest in the future as we build off the great market positions we have. […]
While we're focused on improving our returns, making progress on building the appropriate risk and control and infrastructure for a company of our size and complexity will remain our top priority, and we will dedicate the time and resources necessary.
As previously discussed, there is some tension here between this relatively rosy view and recent comments from at least one regulator who seems not to be as optimistic, instead worrying that the company has “delayed needed reform” in favor of “product launches, growth initiatives, and other efforts to increase profits.”
On today’s call, an analyst also wondered whether there was a potential tension:
Vivek Juneja: … with the CFPB settlement, there was a comment by the head of CFPB about growth initiatives slowing your progress. So Charlie, just a question to you is what are you planning to do in regards to that comment in terms of the growth initiatives? Are you trying to slow anything? Any color on that?
Scharf responded by rejecting any assertions that the company’s priorities are in the wrong place:
Charlie Scharf: I addressed it in my remarks, which is we've been very, very clear and I think if you look back on every earnings call, let alone any time I speak publicly. We're very consistent in making sure that everyone understands both internally and externally that our #1 priority is getting that work done, that is how we're running the company. We have very clear processes internally to make sure that, that happens. And we're very confident that's the case. And the things that we are doing to grow the business, we think, are actually helpful to actually making it a more controlled place. And we're going to continue to go forward the same way we've been going forward, being very conscious of making sure things don't get in the way.
****
The remaining U.S. G-SIBs, as well as a number of large regionals, are set to report earnings next week.
Bank of America, BNY Mellon, Citigroup, JPM, and Wells Fargo all released earnings today. (First Republic and Washington Federal too.)
All quotes are taken from transcripts prepared by S&P Capital IQ and available via MarketScreener.
Full quote: “G-SIFI is supposed to be corrected. We'll see if that happens. So let's just see. We don't have to guess. And if the number's too high, we're going to tell you what we're going to do about it.”