Market Impact of TLAC Requirements FIG DCM Bank Capital Solutions - - PowerPoint PPT Presentation

December 17, 2015

Market Impact of TLAC Requirements

FIG DCM Bank Capital Solutions

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RWA vs. SLR Driven TLAC Requirements

• The Fed’s RWA driven

minimum TLAC requirements appear to be well aligned with FSB requirements

• The Fed’s leverage ratio

driven minimum TLAC (9.5%) materially exceeds FSB requirements (6.75%)

• The Fed’s implied

minimum TLAC debt (i.e. 47%) requirement is also more binding than FSB’s 33% TLAC debt

requirement Key1

External LTD requirement (RWA approach – 6.0% + GSIB surcharge) Capital Conservation Buffer (2.5% + GSIB surcharge) 1.5% Additional Tier 1 4.5% CET1 Minimum

LTD Tier 1 Capital

TLAC

• 1. GSIB surcharge applied to minimum LTD requirement and the capital conservation buffer is based on estimates disclosed with the GSIB capital surcharge final rule in July 2015.

23% FSB Max 21% FSB Min FSB SLR 6.75%

Fed's SLR driven TLAC requirement is more stringent than FSB TLAC framework

13.0% 12.0% 11.0% 10.5% 11.5% 11.5% 10.0% 9.5%

10.5% 9.5% 9.0% 8.0% 9.0% 9.0% 7.5% 7.0% 23.0% 22.5% 22.0% 21.5% 21.5% 21.5% 21.0% 21.0% 23.5% 21.5% 20.0% 18.5% 20.5% 20.5% 17.5% 16.5%

0% 5% 10% 15% 20% 25%

JPM C BAC WFC MS GS STT BK 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 0% 2% 4% 6% 8% 10% JPM C BAC WFC MS GS STT BK

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170 158 173 141 72 59 24 16 20 10 6 31 36 33 36 14 10 28 29 5 9 138 136 120 72 146 122 28 1 12 12 JPM BAC C WFC GS MS ($Bn) 2022 LTD Shortfall 2019 LTD Shortfall Additional TLAC Qualifying Capital Shortfall Tier 2 Additional Tier 1 Common Equity Tier 1

Source: Bloomberg, SNL, Company Filings as of 6/30/15; debt outstanding as of 10/2/15.

• 1. We estimate that 10% TLAC / Leverage Exposure is binding for JPM relative to 16% RWA and for BNY & STT relative to 16 & 18% RWA

Capital & TLAC Shortfall Need

U.S. G-SIBs Appear to be Well Positioned

• Avg. Annual Sr. Issuance

$21.5 $29.0 $20.4 $18.5 $24.2 $19.5 $4.7 $3.3 2022 LTD Need as Multiple 1.3x 0.9x n/a 2.4x n/a n/a n/a 1.2x

• Sr. Bank Debt Out

$52.4 $11.5 $4.8 $18.3 n/a n/a n/a n/a % of 2022 LTD Need 52% 226% n/a 245% n/a n/a n/a n/a

Proposed rule is fairly benign relative to market expectations We estimate that the US G- SIBs will need $164bn of additional TLAC, $62bn of which is capital shortfall and $102bn of which is due to LTD shortfall Some of the LTD shortfall can be met by refinancing bank level debt with Holdco leading to ~40bn incremental supply

174 162 173 143 72 59 25 16 1 20 10 6 32 36 34 38 14 11 21 40 120 120 104 62 125 101 27 19 26 26 50 100 150 200 250 300 350 400 JPM BAC C WFC GS MS ($Bn) 18 13 2 3 2 1 18 8 4 10 20 30 40 BK STT ($Bn)

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Capital Structure & TLAC Need at 16 / 18% RWAs (6.00 / 6.75% SLR) 1

The Canadian D-SIBs Have Excess Wholesale Funding

Source: Bloomberg, SNL, Company Filings as of 7/31/15; debt outstanding as of 10/23/15.

• 1. We do not anticipate a 6.75% leverage requirement to be binding for any Canadian bank

Incremental Grandfathered Senior Debt TLAC Required to Reach 18% TLAC Required to Reach 16% Tier 2 Additional Tier 1 Common Equity Tier 1

• Avg. Annual Sr. Issuance

$18.3 $10.8 $8.7 $6.0 $24.5 $3.9 $2.0 18% TLAC Need as Multiple 1.1x 2.6x 3.2x 3.2x 0.4X 1.0x 2.0x

25 17 16 6 3 3 2 5 4 2 2 14 7 2 3 5 3 2 1 23 22 7 8 20 40 60 80 BMO CIBC CCDJ NBC

Canadian D-SIBs have excess wholesale funding and regularly access the unsecured funding market globally Given their regular access to the capital markets and upcoming maturity profile, the Canadian banks would be able to meet TLAC needs through refinancing However, the grandfathering of the

• utstanding senior

unsecured has made the situation more complicated

42 36 37 7 4 5 8 7 9 26 21 21 8 7 7 57 41 24 20 40 60 80 100 120 140 160 RBC BNS TD (CAD Bn)

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The criteria by which debt will qualify for TLAC in Europe will vary from jurisdiction to jurisdiction For example, Deutsche Bank appears to have ample senior unsecured and is in a regime that already has a clear solution CS & UBS, on the other hand, will need to issue HoldCo debt to meet the newly announced 10% leverage requirement for Swiss TLAC

Capital Structure & TLAC Need at 16 / 18% RWAs (6.00 / 6.75% SLR)1

Meaningful Uncertainty Remains in Europe

Source: Bloomberg, SNL, Company Filings as of 6/30/15; debt outstanding as of 10/23/15.

• 1. We estimate that the 6.75% leverage requirement is binding vs. 18% for BARC, and the 10% requirement is binding vs. both 16 and 18% for CS and UBS.
• 2. Hatch pattern represents senior debt of banks / in jurisdictions where the treatment is uncertain.
• Avg. Annual Sr. Issuance

€ 12.2 € 13.6 € 7.5 € 8.4 € 8.4 € 16.3 € 2.6 € 13.9 € 10.0 € 1.5 € 10.0 € 3.0 € 8.3 € 2.6 € 16.7

Shortfall to 18% RWAs

€ 56. 56.9 € 63.1 € 14.0 € 43.0 € 13.1

• € 1.8

€ 21.0 € 29.6 € 23.2 € 25.6

• € 22

€ 24 € 7.2

129 68 59 75 66 20 15 32 8 18 9 19 188 84 106 83 96 36 47 3 31 3 21 16 11 12 10 50 100 150 200 250 300 350 400 450 HSBC BNP BARC SAN CA (EUR Bn) 59 40 49 43 43 39 35 36 36 24 3 7 2 4 4 7 2 3 7 14 12 12 11 9 16 9 11 4 114 95 63 57 58 56 73 13 4 32 13 22 15 16 22 24 3 2 8 8 8 9 4 20 40 60 80 100 120 140 160 180 200 DB RBS BPCE UNI BBVA SG STAN CS UBS NDA 2022 TLAC Shortfall 2019 TLAC Shortfall Additional TLAC Qualifying Debt Tier 2 Additional Tier 1 Common Equity Tier 1

For the European banks included in our analysis below, we estimate a total TLAC need at 18% of RWAS to be about €344.5bn

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70 80 90 100 110 120 130 140 150 160 170 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 GS Feb-23 JPM Feb-23

FSB to Fed Proposal Sep 14 -Sep15 GS/JPM Spread= 15-35ps

70 90 110 130 150 170 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 JPM Sep-22 PNC Nov-22

Fed NPR Oct 30 JPM./ PNC= 15bps FSB to Fed Proposal Sep 14 –Sep 15 JPM./ PNC Spread= 15-25bps

Spread Moves in U.S. Bank Senior

We observed a modest 5 to 15 bps of relative widen in US Senior Holdco Spreads

Euro market (Spread to € Swap) US$ domestic market (Spread to Treasury)

Source: Bloomberg Source: Bloomberg

Pre-TLAC Jan – Aug 2014 JPM/ PNC Spread= 0 -10bps FSB Proposal Nov 10, 2014 JPM./ PNC= 10bps Post Fed -NPR Oct-Dec 15 JPM./ PNC 5-15bps 12/8/2015 JPM/PNC = 5bps Pre-TLAC Jan – Aug 2014 GS /JPM Spread= 35-45bps Post Fed - NPR Oct-Dec 15 GS/JPM =25-35ps 12/82015 GS./ JPM 30ps FSB Proposal Nov 10, 2014 GS /JPM=35bps Fed -NPR Oct-Dec 15 GS/JPM ~30bps

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20 30 40 50 60 70 80 90 100

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DB Jan-23 RABOBK May-23

60 70 80 90 100 110 120 130 140

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DB Feb-19 RABOBK Jan-19

Spreads moves in German bank Senior

Confirmation of Bail-in risk has seen German senior spreads widen by 28 to 34bps on a relative basis

Euro market (Spread to € Swap) US$ domestic market (Spread to Treasury)

Source: Bloomberg Source: Bloomberg 10-Mar: German Draft Law DB / Rabobank Spread = 7bps Current DB / Rabobank Spread = 35bps 10-Mar: German Draft Law DB / Rabobank Spread = -11bps Current DB / Rabobank Spread = 23bps

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Monthly Senior HoldCo Issuance 2013-2015

The Fed's NPR provided the market with clarity on the total amount of required TLAC and LTD However, the qualification criteria (no cross-defaults, must be governed by U.S. law, etc.) have left issuers with meaningful questions

• n whether currently
• utstanding and interim-

issued debt will qualify or be grandfathered This has resulted in less supply from GSIBs since the NPR

Impact of NPR on Issuance Volume

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 2014 2015

November and December GSIB Senior Holdco issuance has been impacted by the Fed's NPR

Nov and Dec made up 5.6%

• f supply in

2015 vs. 10.5% and 8.5% in 2013 and 2014, respectively

Issue Date Issuer Ranking Rating Coupon (%) Size ($mm) Maturity Date

11/19/2015 BANK OF NY MELLON CORP Senior HC A1/A 2.450 800 11/27/2020 11/30/2015 WELLS FARGO & COMPANY Senior HC A2/A 2.550 2100 12/7/2020 11/30/2015 WELLS FARGO & COMPANY Senior HC A2/A 1.462 400 12/7/2020 12/1/2015 CITIGROUP INC Senior HC Baa1e/BBB+ 2.050 1650 12/7/2018 12/1/2015 CITIGROUP INC Senior HC A3/BBB+ 1.312 350 12/7/2018

GSIB Senior HoldCo Issuance Since November 2015

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