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Regulators Double Basel III Capital Requirement (Update 1)

Mosby has a more positive viewpoint on positioning of the big banks for compliance with a 6% supplementary Basel III Tier 1 leverage ratio. He estimated last week that as of March 31, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo had supplementary Basel III Tier 1 leverage ratios in excess of 6%.

According to Mosby, large banks with less than 6% estimate supplementary Basel III Tier 1 leverage ratios as of March 31 included Goldman Sachs, with a 5.91% ratio; Morgan Stanley, with a 4.46% ratio; Bank of New York Mellon, at 4.54%; and State Street, at 5.93%.

Estimating the supplementary Basel III Tier 1 leverage ratio "depends on what you are incorporating off balance sheet," according to Mosby. "We are looking at the fair value of those off-balance sheet items, and trying to layer them in to calculate the supplementary ratio."

Dividends and Share Repurchases

Mosby expects the new rules to have no effect on banks' dividend payouts, "because they are limited to 30% of earnings anyway, and the regulators have no interest in suppressing dividend payments. What we are really looking at is how much they can add on top of that for share repurchases?"

According to Mosby, large banks have been seeking eventually to add share repurchases equivalent to 40% to 50% of earnings, for combined returns of capital of 70% to 80% of earnings.

"The question now is whether the higher constraints make banks retain more of their retained earnings going forward, to trim total payout to 60% rather than 70% to 80%," he says.

The ongoing market rally for bank stocks continued on Tuesday, despite the proposed increase in regulatory capita requirements. The KBW Bank Index (I:BKX) was up 0.5% to 64.63 in afternoon trading, with all but five of the index components showing gains.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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