U.S. Banks: 3Q23 Regulatory Capital & TLAC Review

Jesse Rosenthal - Head of Banks
Peter Simon, CFA - Head of Brokers and Regional Banks
Iris Shi, CFA - Banks Analyst
George Milonopoulos - Banks Analyst

  • U.S. banks and investors remain in a state of regulatory purgatory after the Fed dropped a long and comprehensive list of proposed reforms during the summer.
  • We continue to see the Basel III endgame proposal(s) as having the greatest complexity, pushback, and potential for meaningful changes ahead of finalization. Regulators seem to agree, extending the already-long 120 day comment period into January 2024; we also reiterate that two Fed members voted against the proposal, highlighting many of the concerns echoed not just by industry trade groups but by both Congressional parties during a recent hearing with Vice Chair Barr (who also seems to have tempered his cost/benefit tone in recent speeches and testimony).
  • Capital ratios largely improved in 3Q23 as the sector remains in capital build mode—GSIBs in advance of Basel III endgame and RWA inflation, Regionals in advance of the AOCI opt-out elimination. Earnings remained solid, allowing banks to accrue book equity amid conservative distribution policies; banks yanked the buyback lever and while we could see incremental activity in 2024, especially if interest rates come down and ease the unrealized loss pressure, expect payout ratios to remain subdued in this ~50% range until the sector has more clarity on both regulations and the near-term macro outlook. On the denominator, RWA optimization should be an ongoing process into 2024 as RWA declines this year look more tied to the consistent slowdown in loan growth rather than targeted bank actions.
  • The downloadable excel file incorporates some of the regulatory changes likely to come down in 2024, including AOCI adjustments for regional banks and incremental TLAC haircuts for the GSIBs. We will continue to iterate in coming quarters as we get more clarity on both final rules and ultimate impact across the issuers.

Banks and investors are in regulatory limbo as we await the end of various comment periods after the Fed dropped a long list of proposed reforms ranging from Long-term Debt (LTD) requirements for Category III-IV banks to sweeping Basel III endgame changes to the risk-weighting framework to tweaking certain GSIB methodologies (Method 2 surcharge and TLAC qualification).

We continue to view the Basel III reforms as having the most uncertain timeline and greatest capacity for changes in the ultimate rule writing—underscored by the Fed extending the already-long 120 day comment period (now ending January 2024), and the fact that two out of six members voted against the proposal. Contrast that to the unanimous regional bank LTD proposal, where pushback from Bowman and Waller centered around appropriate tailoring of requirements by bank risk and complexity, rather than the underlying concepts. And while the regulatory proposal has met with the predictable industry backlash, there were notably bipartisan concerns raised during Barr’s Congressional testimony in early November—main talking points being procedural rigor and data reliance in crafting the rules, and (relatedly) the cost/benefit analysis for end credit consumers.

Timing is also an issue when it comes to finalizing Basel III however: given the U.S.’ delinquency in crafting the proposals and general need to align timelines with other regions, regulators would need to move fast to meet the 2025 target for starting implementation. That’s particularly relevant for Market RWAs and the CVA adjustment, where U.S. banks more typically compete heads-up with foreign institutions and where staggered regulatory phase-in schedules could disrupt the competitive playing field. Although not our base case, we wonder if the Fed could look to separate out certain segments of the 1000+ page proposal and stagger finalization to maintain consistent chronology across global regimes.

Running Through the Ratios

3Q23 Capital Snapshots

During 3Q23, most Category I and II banks saw their capital ratios increase compared to 2Q23; buybacks remain fairly subdued with sector payout ratios sitting around 60% as banks build nominal capital in preparation for higher RWAs due to Basel III. Nominal share repurchases during the quarter were just ~25% of the pre-pandemic 3Q19 level. That said, we could easily see buybacks tick higher in 2024 after meaningful CET1 accretion this year, especially as equity multiples remain depressed and seemingly offer an attractive return to management teams.

The biggest sequential increase in the peer group was JPMorgan reporting a 47 bp increase in its CET1 ratio, increasing resulting in a 289 bp cushion over requirements when incorporating the new SCBs that went into effect at the beginning of 4Q23. The sequential increase reflects the firm’s RWA optimization actions and strong earnings generation, partially offset by share repurchases and common dividend payouts. Bank of America had the second largest sequential CET1 ratio increase in the peer group, with the firm’s CET1 ratio increasing 30 bp to 11.9% reflecting a 240 bp cushion over its CET1 requirement effective as of 4Q23. Similar to JPM, BAC’s sequential CET1 ratio increase primarily reflects the firm’s ongoing RWA optimization actions and strong earnings generation, partially offset by share repurchases and common dividend payouts.

To download the full article, fill out the form opposite and we’ll email you a PDF copy of the report.

Would you like access to the report?
Submit your contact details to request the full report.

Request a Trial

Receive 1-month complimentary access to our research platform, where you can browse our library of expert-produced insights and reporting. Qualifying institutions can gain access to our platform.


Sign up to our Newsletter

It is our mission to enable fixed income professionals to know more, risk better, and ultimately create value. Sign up to receive our monthly newsletters to get the latest credit insights direct to your inbox.


Our Products

We’re proud to be the trusted resource for these credit research consumers:


The independent research and actionable ideas you need to help guide investment and risk management decisions.

Risk Products

From BondScore to Credit Quality Score and Fallen Angel Score, these products give you an analytial edge.

Covenant Review

In-depth analysis and impact assessment on current and future leveraged finance deals from the market’s trusted authority on bond and loan covenants.

LevFin Insights

News and analysis covering the debt capital markets including leveraged loans, high yield, secondary trading, CLOs, middle market and BDCs.

Markets Served

We’re proud to be the trusted resource for these credit research consumers:


From mutual funds, pensions and hedge funds to the world's largest insurers, managers at these institutions are guided by our credit research


Financial intermediaries-the world's broker-dealers, market makers and liquidity providers-rely on our credit insights each day


Brokers, financial advisors and private wealth managers entrusted with their clients' assets leverage our intellectual capital when it comes to the credit markets