JPMorgan Calls Basel III Leverage Compliance 'Manageable'

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) on Friday expressed confidence it would meet an important new regulatory capital requirement three years in advance of the due date.

One week after the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. issued their final rules to implement the Basel III capital standards for U.S. banks, the three regulators on Tuesday proposed doubling the minimum Basel III supplementary Tier 1 leverage capital requirement for the nation's largest insured financial institutions to 6%, while raising the requirement for large bank holding companies to 5%.

Under Basel III, banks are required to have minimum Tier 1 leverage ratios of 4%, but large, systemically important banks are required to perform a separate supplementary Tier 1 leverage ratio calculation that incorporates off-balance-sheet items. The minimum requirement for this supplementary Tier 1 leverage ratio under the Basel III agreement is 3%, although U.S. banks will be required to hold much more capital.

The proposed rules are subject to a 60-day comment period, but as they stand, the new capital requirements will be phased-in beginning in 2015, with full compliance required by January 2018.

JPMorgan Chase on Friday reported strong second-quarter results and said its estimated Basel III supplementary Tier 1 leverage ratio was 4.7% as of June 30.

In its earnings presentation, the company said that by "holding capital distributions flat" through 2014, it would generate 60 basis points in additional Basel III Tier 1 leverage capital, putting it in compliance with the new supplementary leverage ratio requirement three years ahead of the due date and before the phase-in period even begins.

Even when "holding capital distributions flat," JPMorgan would continue returning significant amounts of capital to investors. The company in March was approved by the Federal Reserve to increase its quarterly dividend on common shares to 38 cents from 30 cents, making for a yield of 2.76%, based on Thursday's closing price of $55.14.

The company also received Federal Reserve approval to repurchase up to $6 billion in common shares through the first quarter of 2014.

"Although compliance is not without impact, it is manageable," the company said in its second-quarter earnings presentation. The company also said it expected its largest bank subsidiary's compliance with the new 6% supplementary Basel III Tier 1 leverage requirement "will follow" the holding company's compliance.

JPMorgan Chase is also required to raise its Basel III Tier 1 common equity ratio to 9.5% by the end of 2018. The company estimated this ratio was 9.3% as of June 30, "including the estimated impact of final Basel III rules issued on July 2, 2013."

Considering that the Federal Reserve felt comfortable with the company raising its dividend significantly and repurchasing up to $6 billion in common shares through March 2014, despite the "London Whale" hedge trading losses of at least $6.2 billion during 2012, it appears that regulators are very comfortable that JPMorgan will easily comply with Basel III.

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

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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 TheStreet.com 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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