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Fed Gives Bankers More Time to Whine

NEW YORK (TheStreet) -- The Federal Reserve on Wednesday extended the public comment period on its proposed final rules to implement the Basel III capital standards for banks, giving the industry a much needed month-and-half to complain about requirements they have resisted for years.

The Fed, along with the Federal Deposit Insurance Corporation and the Comptroller of the Currency on June 7 proposed rules to implement the enhanced Basel III capital standards for large banks, seeking comments by Sept. 7.

After Rep. Spencer Bachus (R-Ala.) -- the Chairman of the House Committee on Financial Services -- last Thursday sent a letter to Federal Reserve chairman Ben Bernanke requesting a 90-day extension to the public comment period, the Federal reserve and the other federal bank regulators announced that the comment period would be extended by 45 days, "to allow interested persons more time to understand, evaluate, and prepare comments on the proposals."

Bachus had called the new set of rules "extremely complex," and said that "a longer comment period will lead to more substantive comments, which in turn will be much more useful to reviewers."

The Fed's compromise extension means that the regulators may well settle on their final version of the rules before the November elections.

Even though the regulators' final Basel III rule technically hasn't been finalized, large banks have already acted to modify their capital structures to conform to the new rules, redeeming trust preferred securities that will no longer qualify as Tier 1 capital, and for the most part, avoiding paying premiums for high-yielding trust preferreds, while also being free to call in the securities before the original call dates, because of the "capital treatment event.

The largest banks also updated their estimates of Basel III Tier 1 common equity ratios, to conform to the Fed's proposed capital rules, which lowered the estimated ratios for most big banks. Nevertheless, the largest financial players -- including those that have plans to return significant capital to investors -- continue to express confidence that they will achieve full Basel III compliance years before the rules are fully phased in, in January 2019.

  • JPMorgan Chase (JPM) estimated that under the capital rules proposed in June, the company's Basel III Tier 1 common equity ratio was 7.9% as of June 30, and would rise to 9.1% "after impact of mitigants and runoff through 2014." JPMorgan Chase's fully phased-in Tier 1 common equity ratio requirement will be 7.0%, plus an additional buffer of up to 2.5%, at the end of 2018. The Federal Reserve in March approved a plan by JPMorgan to increase its quarterly dividend by a nickel a share to 30 cents, along with $12 billion in common share repurchases s during 2012, followed by another $3 billion in buybacks during the first quarter of 2013. While JPMorgan CEO James Dimon suspended the buyback in May program after disclosing the company's hedge trading losses, when the company on July 13 reported a second-quarter profit of $5 billion -- even after absorbing $4.4 billion in trading losses -- Dimon said "hopefully, if all goes well, we can start buying back stock early in the fourth quarter."
  • Bank of America (BAC) estimated that as of June 30 its Tier 1 common equity ratio was 8.1%, "on a fully phased-in basis." CFO Bruce Thompson said during the company's earnings conference call on July 18 that the company had "estimated we would be in excess of 7.5% under Basel III at the end of the year; so based on where we came at out at the end of the quarter we are quite pleased with the progress we have made so far." CEO Brian Moynihan said that "we continue to make strong progress and feel good about where we stand, especially in light of our Basel III guidance. In a year's time we have gone from being behind our peers to being ahead of our peers."
  • Citigroup (C) estimated that its June 30 Basel III Tier 1 common equity ratio under the capital rules proposed in June was 7.9%, "up from 7.2% in the first quarter," according to CFO John Gerspach, who also said during the company's earnings call that "we continue to expect to be above an 8% Basel III Tier 1 Common Ratio later this year." While the Fed in March rejected the company's plan to begin returning capital to shareholders, Citigroup may be returning a very significant amount of capital to investors over the long haul. Atlantic Equities analyst Richard Staite said in July that Citigroup had as much as $63 billion in excess capital tied up in its Citi Holdings run-off subsidiary and deferred tax assets, setting the company up for a significant capital return during 2013.
  • Wells Fargo (WFC) in March received Fed approval to raise its quarterly dividend to 22 cents a share from 10 cents, and for the company to execute "a higher level of common share repurchase activity in 2012 versus 2011," when it bought back 85.8 million shares. Wells Fargo bought back roughly 53 million shares during the second quarter, and entered into forward purchase agreements to buy back 11 million more shares in the third quarter. The company's estimated Basel III Tier 1 common equity ratio under the capital rules proposed in June was 7.78% as of June 30. While he couldn't provide specific figures on buyback plans, CFO Tim Sloan said during the company's earnings call that "we continue to believe our shares are undervalued, and we are going to continue to be in the market."

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