A Stronger Dollar May Make Big U.S. Banks Look Even Bigger

by Yalman Onaran

The dollar’s gain against the euro is prompting U.S. bank executives to raise alarms that the largest lenders will face higher capital charges. The numbers tell a different story.
When the dollar strengthens, assets of U.S. banks make up a bigger portion of the global total, which probably pushed up their capital surcharges by half a percentage point, Citigroup Inc. Chief Financial Officer John Gerspach said on a call with investors last month. The extra capital is calculated by looking at a dozen metrics including a bank’s share of global assets, derivatives trading and cross-border activities.
That’s not what happened with the most important measure, size. In the first nine months of 2014, as the dollar rose 9 percent against the euro, the share of assets of the world’s 75 top lenders held by the eight largest U.S. banks fell to 15.7 percent from 15.8 percent, according to data compiled by Bloomberg. Some banks haven’t reported fourth-quarter figures.

The dollar-denominated assets of U.S. banks weren’t the only ones to increase in value. Assets of Chinese and U.K. banks also rose along with their currencies. The Chinese yuan jumped 11 percent against the euro last year, while the British pound gained 7 percent. Even European banks, which have
significant assets in dollars on their balance sheets, wouldn’t necessarily see their share shrink just because the euro is declining.

The Financial Stability Board, which sets policy for global banks, is requiring 30 of the world’s largest banks to have extra capital above international standards because they’re considered systemically important, meaning that if one were to collapse, it could damage the financial system.
The board sets the surcharges annually based on end-of-year data, converting it to euros to make comparisons. The Federal Reserve has proposed rules that would almost double the FSB’s minimum surcharge for some U.S. lenders.

Goldman Sachs Group Inc. CFO Harvey Schwartz echoed Citigroup’s concern during a call with investors last month, saying U.S. banks could be asked to have more capital because the economy is growing faster than others. Even if that’s the case, it shouldn’t worry regulators, said Brian Kleinhanzl, a New York-based analyst at Keefe, Bruyette & Woods Inc.
“The whole idea behind bank capital rules is to increase the requirement for the firms growing faster than everyone else,” Kleinhanzl said. “So if your economy is growing faster and so are the banks along with it, then they should have higher capital requirements, according to the global framework.”

U.S. banks’ share of derivatives trading probably went up last year as Citigroup, Goldman Sachs and Bank of America Corp. increased holdings. Most non-U.S. banks don’t report detailed derivatives data.
Still, it’s hard to tie that to the dollar’s value as Citigroup and Goldman have been increasing their share of U.S. and global derivatives since at least 2012. Citigroup’s derivatives holdings have risen 28 percent in the past three years, while Goldman’s have jumped 21 percent, according to data from the Office of the Comptroller of the Currency.
Spokesmen for Citigroup and Goldman Sachs declined to comment. Citigroup Treasurer Eric Aboaf said last month that banks can’t know what their surcharge will be in advance, making it difficult to adjust businesses to lower capital requirements.
Bank CFOs raised the market-share issue at a Jan. 7 meeting with Fed Governor Daniel Tarullo and his staff, according to a statement from the central bank. The executives complained that the dollar’s rise put them at a disadvantage, the Wall Street Journal reported last week. A Fed spokesman declined to comment.
The Financial Services Roundtable, a lobbying group representing the biggest banks, said it’s working on a comment letter about the Fed’s proposed rule.
—With assistance from Dakin Campbell in New York