The U.S. Federal Reserve has warned regional banks about stricter liquidity requirements in a fresh regulatory push that will impact 2024 earnings of six affected banks, an analyst at J.P. Morgan said in a research note on Thursday.
Vivek Juneja cited a report by Bloomberg that the Fed has contacted banks about holding enough cash on their books as regulators continue to make moves to prevent another sudden collapse in the wake of the demise of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year.
“There has been no formal proposal issued yet but we expect there may be one in the future,” Juneja said. “Banks are working on increasing liquidity, some have announced plans, and they will likely have time to implement changes.”
The liquidity rule would apply to Category 4 banks, which are lenders with $100 billion to $250 billion in assets.
Those names include U.S. Bancorp
USB,
Fifth Third Bancorp
FITB,
PNC Financial Services
PNC,
Regions Financial
RF,
Truist Financial
TFC,
and Citizens Financial Group
CFG,
Based on a 25% increase in liquidity and 1% of negative carry, which is the cost of holding capital when it exceeds the income from holding it, the six banks would lose a median of 1.3% of their 2024 earnings, according to Juneja’s estimates.
Broken out by individual banks, US Bancorp would absorb the largest impact of 1.9% to its 2024 earnings, while Citizens Financial and Fifth Third would see a 1% earnings impact as the two lowest.
The liquidity requirements are coming into focus after the Fed and the Federal Deposit Insurance Co. earlier this week introduced long-term capital requirements for regional banks. The public comment period on the long-term capital proposal ends on Nov. 30.
The impact of the long-term capital requirements seems manageable at first look, but the proposal remains more complex than initially seen, Juneja said.
“Banks should be able to issue the debt required which would impact longer term profitability,” Juneja said. “Key is whether banks can offset some of this longer term through increased pricing — however, this could reduce banks’ competitiveness a little.”
Also read: FDIC Chair Gruenberg pledges aggressive oversight, new rules for regional banks
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