Deutsche Bank has indicated that the recent rebound in U.S. bank stocks since the end of September may compel major American banks to scale back their activities in the repurchase agreement or foreign exchange derivatives markets. This is primarily because the stock prices of banks are a factor in calculating a portion of their regulatory scores for globally systemically important banks (GSIB), which will be assessed at the year's end to determine the capital surcharge banks must maintain on their balance sheets. A higher regulatory score necessitates banks holding more cash.
Banks often reduce derivatives and repo market activities to lower potential scores by year-end. Deutsche Bank strategists, including Steven Zeng, noted that banks experiencing an increase in GSIB indicators during the year might face significant pressure to reduce year-end activities, as they risk higher surcharges in the future.
Based on closing prices as of November 21, the scores for five GSIBs with substantial brokerage operations could rise by 2.5 to 6.6 points. Deutsche Bank estimates that these major banks need to cut $95 billion in repo activities or $290 billion in foreign exchange activities to completely offset the impact of rising stock prices on their regulatory scores.
In recent weeks, year-end overnight repo rates, which are loans secured by U.S. Treasury securities, and mortgage-backed securities rates have surged, partly due to a spike in repo volumes on September 30. The recent surge in U.S. stock markets has increased demand for stock-backed repos, further tightening funds. Wall Street is bracing for greater volatility on the last trading day of 2024.
More than half of the eight GSIBs may face pressure, with JPMorgan Chase (JPM, Financial) and Bank of America (BAC) already encountering higher surcharges based on third-quarter estimated scores. Goldman Sachs (GS), Morgan Stanley (MS), and Citigroup (C) are nearing the surcharge cap corresponding to their scores.
JPMorgan's GSIB estimated score for the third quarter has increased by 160 points since last year. If the score remains unchanged by year-end, the bank will face a maximum surcharge of 5.5%. To address a 50-basis-point increase in the surcharge, JPMorgan would need to reduce at least $160 billion in repo activities.
