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TheStreet Open House

Even Wells Fargo Challenged by Brown-Vitter

Stocks in this article: BAC C JPM WFC MS GS

NEW YORK ( TheStreet) -- Wells Fargo (WFC - Get Report) would have the highest capital ratio among the largest U.S. banks under the Brown-Vitter bill, but would still need to raise a huge amount of capital or take other radical measures to comply, according to KBW analyst Frederick Cannon.

Senators Sherrod Brown (D., Ohio) and David Vitter (R., La.) last Wednesday introduced the Terminating Bailouts for Taxpayer Fairness Act, which would require "megabanks" with total assets of over $500 billion to raise capital levels to at least 15% of total assets.

The TBTF Bill -- which also conveniently stands for "too big to fail" -- raises capital requirements for the largest banks while also requiring regulators to "walk away from Basel III," by throwing out risk-based asset calculations for use in capital ratios.

Under the Basel III agreement, which 27 countries have signed, including the U.S., all key members of the European Union, Russia, China, India and Brazil, banks' minimum capital requirements are based on a Tier 1 common equity ratio, with risk-weighted assets in the denominator. This means that banks' capital requirements are based in part on the perceived risk of their assets. For example, cash has a zero risk-weighting, so it is not added to risk-weighted assets and it doesn't increase a bank's capital requirement. Direct obligations of the U.S. government have a 20% risk-weighting. Mortgage-backed securities with AAA or AA ratings have a 20% rating. A-rated MBS have a 50% risk-weighting, while BBB paper has a 100% risk-weighting and BB paper has a 200% risk-weighting under Basel III, because of the higher likelihood of default.


In addition to a minimum Tier 1 common equity ratio requirement of 7.0%, Basel III also requires capital buffers for global systemically important financial institutions, or GSIFIs. Based on determinations by the Basel Committee, the additional capital surcharges for Citigroup (C - Get Report) and JPMorgan Chase (JPM - Get Report) are 2.5%, so each of these banks has a fully phased-in minimum Basel III Tier 1 common equity ratio requirement of 9.5%.

For Bank of America (BAC - Get Report) and Wells Fargo (WFC - Get Report), the surcharge is 1%, for fully phased in Basel III Tier 1 common equity ratio requirements of 8.0% for each company.

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