Home Business U.S. Bancorp Vows to Shrink Itself to Avoid Added Fed Scrutiny

U.S. Bancorp Vows to Shrink Itself to Avoid Added Fed Scrutiny

by Mark Mendoza

U.S. Bancorp has received approval from the Federal Reserve to retain its Category III bank designation, allowing it to operate with less costly and time-consuming regulations. The bank had initially prepared to comply with the stricter rules associated with being classified as a Category II bank, meant for institutions with over $700 billion in assets. However, U.S. Bancorp made commitments to shrink its balance sheet and reduce its risk profile, leading to the approval for Category III classification.

According to a regulatory filing, U.S. Bancorp plans to take further actions to reduce its projected risk profile, including reducing assets and increasing regulatory capital. Ann Misback, secretary for the Federal Reserve Board, expressed that based on the information presented by the bank, the board has approved U.S. Bancorp’s request for relief from its commitments.

A Category II designation would have subjected the bank to stricter liquidity requirements, an annual stress test, and a more complex methodology for determining capital requirements. Therefore, the approval for Category III status is seen as a positive outcome for U.S. Bancorp, providing greater flexibility in managing its balance sheet over the next two years.

The bank has already taken steps to decrease risk, including reducing its investment portfolio by approximately $30 billion and completing loan sales and securitizations worth around $7 billion. It has also reduced short-term borrowing on its balance sheet. These actions were noted by the Federal Reserve as evidence of U.S. Bancorp’s commitment to mitigating risk.

Additionally, the Federal Reserve cited its own proposals to tighten regulations for Category III banks, illustrating that the bank’s approval for a less stringent regulatory regime does not mean a complete absence of evolving rules. For instance, one proposed rule would require Category III banks to include unrealized losses on their balance sheet investments in their capital ratios.

U.S. Bancorp had previously agreed to the stricter regulatory requirements as part of its acquisition deal with Mitsubishi UFJ Financial Group’s Union Bank. The bank has expressed confidence in its ability to comply with the more rigorous rules by the end of 2024.

Following the announcement, U.S. Bancorp’s shares surged by 7% to close at $34.89, marking the largest gain since March. Analysts, such as Gerard Cassidy from RBC Capital Markets, view the regulatory change as a positive development for U.S. Bancorp, providing the company with greater flexibility in managing its balance sheet in the coming years.

Overall, U.S. Bancorp’s approval for Category III status highlights the significance of the bank’s commitments to reduce risk and shrink its balance sheet. This regulatory relief will enable the bank to navigate its operations with fewer burdensome regulations, fostering its ability to adapt and grow in a changing financial landscape.

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