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Big Banks: Inflation Fear Losers

Stocks in this article: GS JPM WFC I:BKX

The minimum supplementary Tier 1 leverage ratio under Basel III is just 3%, meaning that large U.S. banks will operate at a serious disadvantage to foreign competitors, if the regulators have their way.

Following the completion of the Federal Reserve's annual stress tests for large banks in March, the regulator announced a "conditional" approval of Goldman's 2013 capital plan. The company didn't announce a dividend increase or new plans to buy back common shares, and was required to submit a revised capital plan to the Fed.

The company estimated that its Basel III Tier 1 common equity ratio under the Federal Reserve's final capital rules was 9.3% as of June 30. This puts it in compliance with the Tier 1 common ratio minimum of 8.5%, years ahead of the January 2019 deadline. However, Goldman didn't provide an estimate for its Basel III supplementary Tier 1 leverage ratio.

During the company's earnings conference call, Goldman CFO Harvey Schwartz gave the excuse that it was "hard to speculate" on how the final leverage ratio requirement will be finalized.

But that didn't stop three other large banks from doing just that, and providing investors with estimated Basel III supplementary Tier 1 leverage ratios as of June 30.

JPMorgan Chase (JPM) estimated a 30 Basel III supplementary Tier 1 leverage ratio of 4.7% and predicted compliance with the latest capital rule by the first quarter of 2015, with compliance for its largest bank subsidiary "to follow."

Citigroup (C) estimated its Basel III supplementary Tier 1 leverage was 4.9%.

Wells Fargo (WFC) CEO John Stumpf said during his firm's earnings call on Friday that "based on our initial review of the leverage ratio proposal issued this week, we believe our current leverage levels would exceed the well-capitalized requirements at both the bank and the holding company."

Analysts took Goldman to task over its lack of disclosure, with Schwartz repeatedly saying the firm was "comfortable" with its initial assessment of the new leverage capital rules.

Morgan Stanley analyst Betsy Graseck asked "On the leverage ratio, when you say you're comfortable, what is your definition of comfortable?" Schwartz simply said "comfortable," after which he said "I'm not trying to be cute with you," after doing just that. He reiterated "Our early read is all of the things we've done on the balance sheet over the past several years have left us reasonably well positioned."

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