In order to comply with the Federal Reserve's proposed new long-term debt and capital requirement level for the "too big to fail" banks, Wells Fargo & CompanyWFC would need to issue around $40 to $60 billion in debt. The announcement was made by Chief Financial Officer (CFO) - John Shrewsberry at an investor conference on Friday.
According to Shrewsberry, by raising $40 billion of net new long-term debt, the company would be able to meet regulators' "total loss-absorbing capacity" (TLAC) requirement. However, he plans to raise an additional $20 billion debt as TLAC buffer.
With an aim to shift the burden of any probable default by big banks to the companies' debt and equity investors, thereby safeguarding taxpayer money from another bailout, the Federal Reserve proposed the TLAC rule. Under the proposed rule, selected banks will be required to include the long-term debt in their respective holding companies' balance sheets. Notably, such debt can be converted into equity in the event of a failure, as this would help infuse the capital required to support critical operations during a crisis.
The Rule
Per the proposal, domestic global systematically important banks (GSIB) will be required to maintain a long-term debt balance of 6% of their respective GSIB surcharge of risk-weighted assets ("RWA") or 4.5% of total leverage exposure, whichever is greater.
Additionally, it requires banks to maintain a TLAC amount of 18% of RWAs or 9.5% of total leverage exposure, whichever is greater.
More importantly, the new requirement comes on top of the need to maintain sufficient high-quality assets (proposed in 2014) as well as a cushion to raise capital levels by an additional $200 billion, over and above the industry requirements.
Notably, other banks subject to the new proposal also include Citigroup Inc. C , JPMorgan Chase & Co. JPM and Bank of America Corp. BAC .
The Company's Move
Depending on certain factors including Wells Fargo's RWA growth, timeliness of issuing debt and internal buffer holding capacity of the bank, Shrewsberry would take the move for issuing $60 billion debt.
Wells Fargo will raise the required senior unsecured debt in portions with varied maturities as the rule would take time to get implemented. However, on expected interest rates hike, the bank will speedily raise the debt.
"We expect the impact to be manageable," Mr. Shrewsberry said. "The markets will have to be open and well-functioning for Wells Fargo and other U.S. TLAC victims."
Bottom Line
According to Federal Reserve Board Chairperson Janet Yellen, the proposed rule "would substantially reduce the risk for taxpayers and the threat to financial stability stemming from the failure of these banks. This is an important step toward ending the market perception that any banking firm is 'too big to fail.'"
We believe that reduced government support for banks, in case of failure, will make these financial institutions more resilient toward their business conducts.
Currently, Wells Fargo carries a Zacks Rank #3 (Hold).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
