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U.S. Downgrade Doesn't Hit Bank Capital Requirements

WASHINGTON ( TheStreet) -- Following Standard & Poor's downgrade of the long-term sovereign debt rating for the U.S. to double-A-plus from triple-A, federal regulators on Friday announced that capital requirements for banks and credit unions would be unaffected.

The Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and National Credit Union Administration jointly announced that the risk weighting for "Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities" would be unchanged.

If a bank, credit union or bank holding company sees an increase in its risk-weighted assets calculation -- which can happen when securities are downgraded by the ratings agencies -- its risk-based capital ratios decline.

With so much paper affected by S&P's downgrade, Friday's decision by the regulators is extremely important to banks and credit unions. The decision will also come into play as the enhanced capital rules under Basel III come into effect, since foreign bank regulators may not agree with the U.S regulators' decisions, especially if more downgrades take place.

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Under Basel III, banks will be required to achieve 7% Tier 1 common capital ratios by January 2019, with additional capital requirements set by the Basel Committee in June for the largest banks, ranging from 1% to 2.5%, "depending on a bank's systemic importance," with "an additional 1% surcharge," to "provide a disincentive for banks facing the highest charge to increase materially their global systemic importance."

Although the Basel Committee didn't specify which banks would be considered "global systemically important," KBW analyst Fred Cannon said his firm continued to believe that Bank of America (BAC - Get Report), JPMorgan Chase (JPM - Get Report), Citigroup (C - Get Report), Goldman Sachs (GS), Morgan Stanley (MS), Wells Fargo (WFC), State Street (STT) and Bank of New York Mellon (BK) would be considered systemically important, and that the U.S. banks subject to the 2.5% buffer would be Bank of America, Citigroup and JPMorgan Chase.

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Bank of America has quite a bit on its plate from the mortgage mess, with resistance growing to its $8.5 billion settlement in June of institutional investors' mortgage putback claims against Countrywide, which the bank acquired in 2008. The last thing the nation's largest bank needs is to see its risk-based capital ratios decline because of a decision by the ratings agencies.

The banks are still waiting for the federal agencies to issue final rulings on capital requirements, which are expected later this year.
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