Following up on the earlier Morgan Stanley note predicting that new regulatory rules will significantly and adversely impact new credit creation and will further tighten bank lending standards, Morgan Stanley analysts expect the Fed to publish new bank-capital rules between late May and early July, followed by a comment period, and ultimately a Final Rule, that would be phased in over time between 2025-27.
They expect implementation of this “Basel III Endgame,” also known as Basel IV, to drive up risk-weighted assets (RWAs) and capital requirements for their US Large-Cap Banks coverage, with the greatest impact on Global Systemically Important Banks (GSIBs).
While the analysts acknowledge that they can’t assess the exact impact until the final rules come out, after triangulating data from numerous Bank for International Settlements publications , they conclude that Common Equity Tier 1 Capital (CET1) ratios in their US GSIB coverage could decrease by a weighted average 0.7% (range 0.5-1.4%) in a more moderate “Scenario 1”...
... and by 1.2% (range 0.9-1.9%) in a tougher “Scenario 2.” (for more please see "Basel III Endgame is Coming... Get Ready for Tougher Capital Requirements" available to professional subscribers).
Separately, and in keeping tabs on the ongoing debt crisis, Morgan Stanley refreshed its analysis of excess capital for our Large Cap Banks and Consumer Finance coverage. 1Q23 excess capital levels versus regulatory minimums at the median bank increased 13% q/q, but at the Money Centers excess capital decreased a median 16%, driven by declines at C and GS.
Bottom line: MS estimates some $153B of excess capital across the group vs. regulatory minimums as of 1Q23. Commentary from this earnings season suggests that managements are shifting into capital build mode as macro risk rises and as regulators are expected to impose tougher capital requirements on the industry.
For more see "How Much Excess Capital Do Banks Have?"