The U.S. Federal Reserve has recently issued a warning to regional banks regarding stricter liquidity requirements. This regulatory push, according to J.P. Morgan analyst Vivek Juneja, will have an impact on the earnings of six affected banks starting in 2024.
As reported by Bloomberg, the Fed has reached out to banks in an effort to ensure they hold adequate cash on their books. This move comes as regulators aim to prevent any sudden collapse similar to what occurred earlier this year with Silicon Valley Bank, Signature Bank, and First Republic Bank.
Juneja notes that although no formal proposal has been issued yet, it is expected that one may be forthcoming in the future. Banks are actively working on increasing their liquidity levels, with some already announcing their plans. They are likely to have sufficient time to implement the necessary changes.
The proposed liquidity rule would specifically apply to Category 4 banks, which encompass lenders with assets ranging from $100 billion to $250 billion.
The six banks directly impacted by these stricter requirements are as follows:
- U.S. Bancorp (USB)
- Fifth Third Bancorp (FITB)
- PNC Financial Services (PNC)
- Regions Financial (RF)
- Truist Financial (TFC)
- Citizens Financial Group (CFG)
Impact of Liquidity and Capital Requirements on Banks
The recent introduction of long-term capital requirements for regional banks by the Federal Reserve and the Federal Deposit Insurance Co. has brought attention to the liquidity requirements faced by these institutions. According to estimates by expert Juneja, the six banks under consideration are estimated to experience a median loss of 1.3% of their 2024 earnings due to a 25% increase in liquidity and a 1% negative carry.
Analyzing the impact on individual banks, US Bancorp would bear the brunt of a 1.9% reduction in its 2024 earnings, while Citizens Financial and Fifth Third would face a 1% earnings impact, representing the lowest among the group.
Although the initial outlook suggests that the repercussions of these long-term capital requirements are manageable, Juneja highlights the complexity of the proposal, which may have more profound effects than initially perceived.
According to Juneja, banks should be able to issue the necessary debt to comply with these requirements; however, this could potentially affect their long-term profitability. Furthermore, there is a concern that increased pricing to offset these impacts may somewhat compromise their competitive position.
It is worth noting that the public comment period for the long-term capital proposal concludes on Nov. 30.
Related: FDIC Chair Gruenberg emphasizes aggressive oversight and new regulations for regional banks