Morgan Stanley analysts estimate that revised regulatory proposals unveiled last month could permit 36 large U.S. banks to free an estimated $320 billion in excess capital once the rules are implemented, according to a note circulated on Wednesday. That figure represents about a 20% increase relative to the current estimate of $266 billion.
The Federal Reserve previously indicated that under the softened draft versions of the international "Basel" rules and changes to the globally systemically important bank, or "GSIB," surcharge, capital levels at large U.S. banks would decline by between 4.8% and 7.8%. Regulators framed those reductions as a potential industry win because they would make billions of dollars available for lending, shareholder dividends and share buybacks.
Analysts caution, however, that the ultimate sum available for distribution is not yet fixed. Morgan Stanley said it expects banks to begin disclosing preliminary ranges for the amounts they could release during their first-quarter earnings calls once the rules are finalized and implemented.
Executives at major institutions have already signaled potential impacts. In its most recent shareholder letter, JPMorgan said the firm could have roughly $40 billion of excess capital that might become available if the regulatory changes go through, while also describing the draft proposals as "flawed."
Timing for implementation remains uncertain. Some market participants expect the changes may not take effect until next year, while Morgan Stanley suggested the rules could be finalized by the third quarter. Banks are currently reviewing the regulatory proposals.
The distribution of benefits is likely to vary across the sector. Morgan Stanley analysts identified regional banks as the primary beneficiaries of revisions to the risk-weighted asset calculations, noting that the adjustments reduce the amount of risk attributed to credit exposures. Among the largest, Goldman Sachs and Citigroup were cited as likely stand-out winners from a reduction in the GSIB surcharge.
The article also contained an investor-oriented aside referencing a fair-value tool related to Citigroup (ticker C) valuation queries.
As the proposals move through review, market participants will be watching both the detail of regulatory calibrations and the timing of any official adoption, since those elements will determine how much capital institutions can ultimately reallocate to lending, dividends and buybacks.