Large banks won't know until the middle of next year what — if any — extra tax they'll face for being deemed "too big to fail."
Banks viewed as a threat to the financial system may have to hold more capital, and that could be a particularly heavy burden for PNC Financial Services Group Inc. and U.S. Bancorp, which occupy the awkward space between big and supermassive.
The more capital regulators demand they set aside to absorb losses, the less they have to raise dividends or make acquisitions. Midsize rivals like Fifth Third Bancorp and KeyCorp in the ubercompetitive Midwest could win a competitive edge if PNC and U.S. Bancorp have to maintain safety buffers similar to those of megabanks JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Bank of America Corp.
U.S. Bancorp and PNC don't quite fit in with those four banks, which all have more than $1 trillion in assets and collectively hold roughly 34% of the country's bank deposits. Experts say those four are all likely to be considered systemically important.
But lumping U.S. Bancorp and PNC in with regional banks isn't quite fair either, market watchers say. U.S. Bancorp, with assets of $290 billion, and PNC, with $260 billion, pose a far greater risk to the economy than companies that straddle the $100 billion-asset mark, like KeyCorp and Fifth Third. Calling it a regional would overlook how U.S. Bancorp is an even bigger player than Bank of America in the global merchant processing business. And PNC's reach extends far deeper into the business and financial markets than most other regional banks; it's involved in everything from treasury management to investment banking.
"Both are beyond the threshold of being systemically important to the economy," said Marty Mosby, an analyst with Guggenheim Partners LLC. "What happens to the Midwest economy if you don't have PNC anymore?"
To be sure, U.S. lawmakers had that in mind in drafting the Dodd-Frank Act, which considers all banks with at least $50 billion assets "too big to fail," and thus, subject to stricter lending and capital standards. The specifics of those standards have not been determined yet.
Undecided standards at the global regulatory level add an additional layer of uncertainty. World leaders in November agreed to rules that should ensure that by 2019 all banks maintain at least 7% of assets in the form of equity, reserves and other core, risk-free capital. The old standard was 2%. Major banks whose failure could spur another financial crisis may have to maintain an extra capital buffer. The body that sets policy framework for global banks, the Financial Stability Board, said it will release in mid-2011 guidelines for identifying globally risky banks and establishing their extra capital reserves.
For their part, the heads of U.S. Bancorp and PNC said this month that even they are not sure where they stand when it comes to systemic importance. Richard Davis, U.S. Bancorp's chief executive, predicted that banks would be graded on a scale. U.S. Bancorp should be at the low end.
"I don't know this for sure, but I collected a lot of data," Davis said at a conference in December. "I think the [Federal Reserve] is going to take tranches and take gradation, and I think the trillion-dollar banks will be at the top of that … I think we are kind of in the not-so-interesting but need to be bigger than small [tier]."
So-called fiduciary banks such as State Street Corp. and Bank of New York Mellon Corp. would be deemed riskier than U.S. Bancorp as well, he said. That would put his institution "somewhere in the middle to the low end" of a ranking of the most systemically important institutions.
James Rohr, PNC's chief, also said during the same conference that a scale "would be more appropriate" for determining who is risky and how much that should cost them.
"They're looking for companies that are globally systemic. Clearly that is not the case with us," Rohr said, adding that PNC also doesn't have a "large trading desk, large counterparty risk."
"From those two points of view, I don't think we're a systemically risky company," Rohr said. "That having been said, we're the fifth-largest deposit player, so they could put us in there."
Where they land could determine how free PNC and U.S. Bancorp are to make strategic moves.
Mosby at Guggenheim Partners said a mandate of, for example, 1% in additional capital could mean billions of dollars less to raise the dividend or purchase another institution.
He said U.S. Bancorp, for instance, should end 2012 with an additional $6.5 billion over the minimal 7% buffer. Were that buffer to be 8%, U.S. Bancorp would have just $4 billion set aside.
"That eats some of the cushion," Mosby said.
Scott Seifers, managing director in the research department of Sandler O'Neill & Partners LP, said he hopes that regulators look past simple scale when determining who is risky, and consider other metrics, such as whether an institution relies on wholesale or deposit funding, and what kinds of loans and securities it has on its books.
One blueprint could be the Federal Deposit Insurance Corp.'s assessment tax, taking into account an institution's funding profile and asset risk, Seifers said.
"It's tough to tell exactly how it will end up flushing out at this point," he said. "In a perfect world, the regulators will see the distinction" between U.S. Bancorp and PNC and smaller banks, and "hold them at a competitive disadvantage to the other basic-banking players."