In order to avoid more restrictive restrictions, U.S. Bancorp assured federal authorities that it would decrease its risk profile and balance sheet.
According to a regulatory document, the biggest regional lender in the country received permission from the Federal Reserve to keep its classification as a Category III bank. It therefore confronts fewer onerous and expensive restrictions.
The institution, which had $665 billion in assets as of September 30, made the pledge to reduce its size after spending months getting ready to comply with the regulations needed to become a so-called Category II bank—a classification granted to lenders with more than $700 billion in assets.
The Federal Reserve Board secretary, Ann Misback, wrote a letter to U.S. Bancorp’s attorney stating, “U.S. Bancorp represents that it anticipates taking further actions to reduce its projected risk profile, including further net reductions in assets and increases in regulatory capital.” She stated that the board “has approved U.S. Bancorp’s request for complete relief from the commitments” based on the facts the business submitted.
U.S. Bancorp declined to comment on the letter through a spokeswoman. The Minneapolis-based lender’s stock increased 7% to settle at $34.89 on Tuesday, marking the highest rise since March.
A Category II designation would have resulted in more stringent liquidity requirements, an annual stress test conducted by the firm instead of a biannual one, and a more intricate process for calculating its capital requirements.
The Fed claims that U.S. Bancorp has already taken action to reduce risk. According to the Fed, this entails lowering short-term borrowing on its balance sheet and finishing loan sales and securitizations totaling approximately $7 billion in addition to cutting its investment portfolio by around $30 billion.
The central bank also included a number of its own ideas in its ruling, including one requiring Category III institutions to incorporate unrealized losses on their balance sheet investments in their capital ratios.
As part of the agreement to acquire Union Bank from Mitsubishi UFJ Financial Group, U.S. Bancorp consented to be subject to more stringent regulatory guidelines. It had previously stated that by the end of 2024, it will be able to abide with the stricter regulations.
In a note to clients, RBC Capital Markets analyst Gerard Cassidy stated, “The regulatory change is very positive for U.S. Bancorp.” “Over the next two years, it will give the company more flexibility in managing its balance sheet.”