Here's how much regional banks could lose under new liquidity rules

By Steve Gelsi

Under one scenario, JPMorgan analyst sees 1.3% median hit to 2024 earnings resulting from potential changes to liquidity requirements at six banks

The U.S. Federal Reserve has warned regional banks about stricter liquidity requirements as part of a fresh regulatory push that will impact the 2024 earnings of six affected banks, an analyst at JPMorgan said in a research note on Thursday.

Vivek Juneja cited a report by Bloomberg that said the Fed has contacted banks about holding enough cash on their books as regulators continue to make moves to prevent another sudden collapse like those of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year.

"There has been no formal proposal issued yet but we expect there may be one in the future," Juneja said. "Banks are working on increasing liquidity, some have announced plans, and they will likely have time to implement changes."

The liquidity rule would apply to Category 4 banks, which are lenders with $100 billion to $250 billion in assets.

Those names include U.S. Bancorp (USB), Fifth Third Bancorp (FITB), PNC Financial Services (PNC), Regions Financial (RF), Truist Financial (TFC) and Citizens Financial Group (CFG).

Based on a 25% increase in liquidity and 1% of negative carry, which is the cost of holding capital when it exceeds the income from holding it, the six banks would lose a median of 1.3% of their 2024 earnings, according to Juneja's estimates.

Broken out by individual banks, US Bancorp would absorb the largest impact of 1.9% to its 2024 earnings, while Citizens Financial and Fifth Third, as the two lowest, would see a 1% impact on earnings.

The liquidity requirements are coming into focus after the Fed and the Federal Deposit Insurance Corp. earlier this week introduced long-term capital requirements for regional banks. The public comment period on the long-term capital proposal ends on Nov. 30.

The impact of the long-term capital requirements seems manageable at first look, but the proposal is more complex than it might seem, Juneja said.

"Banks should be able to issue the debt required which would impact longer term profitability," Juneja said. "Key is whether banks can offset some of this longer term through increased pricing -- however, this could reduce banks' competitiveness a little."

Emmanuel Dooseman, global head of banking for accounting firm Mazars, told MarketWatch that long-term capital requirements were already on banks' radar prior to 2023, as regulators implement the international Basel III banking regulations aimed at strengthening the financial system after the global financial crisis of 2008. The regional-bank crisis earlier this year resulted in more urgency from regulators to introduce changes to the current system, he said.

Applying some of the same capital, liquidity and long-term debt requirements as larger banks have to medium-size regional banks of $100 billion or more will make the U.S. system more similar to Europe's, he said.

"We'll have more alignment between medium-size and larger banks to have a closer set of rules," Dooseman said.

Overall, the proposed long-term capital requirements will likely increase the resiliency of the U.S. banking system, but bank failures could still happen in the future.

"Resilience is not resistance," he said. "You'll still have shocks to the system but [the changes] will help you restore confidence more quickly."

Also read: FDIC Chair Gruenberg pledges aggressive oversight, new rules for regional banks

-Steve Gelsi

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08-31-23 1652ET

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