Garnet Capital Advisors Blog

February 23, 2015

Rising dollar creates another speed bump for major banks

Major banks, already facing a tough environment, have been encountering an additional headwind stemming from the dollar's sharp rally. The currency's recent appreciation, along with proposed capital guidelines, could make US banks seem bigger relative to their European counterparts, and therefore in need of additional capital.

U.S. banks have had to cope with a difficult regulatory environment over the last several years, as lawmakers and regulators have provided them with various new requirements, including those affecting their capital levels.

Capital guidelines
The eight largest banks in the nation - deemed systemically important financial institutions - have generated substantial visibility due to their scope. Late last year, the Federal Reserve proposed guidelines that would obligate these SIFIs to hold more robust capital cushions than other banks in the nation. 

In December 2014, Stanley Fischer, vice chair of the Fed, revealed that all but one of the eight largest banks had the required capital, according to The Wall Street Journal. Even those that had accumulated the needed financial resources would likely build up more to ensure their capital far surpasses the required amount, analysts predicted at the time.

Doing so could prove expensive, as one way they can expand the extent of their cushion is to raise additional equity, The Wall Street Journal reported. Alternatively, banks might meet the guidelines by unloading assets through loan sales and other transactions, analysts from Keefe, Bruyette & Woods said in a report. 

Competitive concerns
Major U.S. banks have contended they will have to hold far more capital than their competitors across the Atlantic because of the strong dollar and the proposed capital guidelines, according to The Wall Street Journal. Many economists believe the greenback will continue to be strong relative to the euro, and this situation could help sustain a situation where financial institutions with dollar-denominated assets and operations appear larger than their rivals overseas due to currency exchange rates. 

Fed proposal concerns
While U.S. banks have already voiced their concerns that they face stiffer requirements than the ones that European financial institutions are expected to face, they are now asserting that fluctuating currency markets have laid bare some problems that exist in the Fed's current proposal, The Wall Street Journal reported. 

Fed officials recently met with representatives of several major banks - including Goldman Sachs Group Inc., Citigroup Inc., Morgan Stanley and Bank of America - to discuss the Fed rule and its potential pitfalls, individuals present at the meeting told The Wall Street Journal. To address these matters and request alterations to the proposal's method for calculating extra capital, the banks intended to compose and file an official comment letter later in February.