(Bloomberg) — US Bancorp has promised federal regulators to shrink its balance sheet and reduce its risk profile, a move that frees it from tougher regulations.
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The country’s largest regional lender has received approval from the Federal Reserve to maintain its classification as a Category III bank, it said in a regulatory filing. This means it has less costly and time-consuming regulations to contend with.
The commitments to downsize itself came after the lender, which had assets of $665 billion as of September 30, spent months preparing to comply with rules that would come with converting to a so-called Category II -Bank Affiliates, a designation given to lenders with more than $700 billion in assets.
“US Bancorp states that it expects to take further actions to reduce its projected risk profile, including further net asset reductions and increases in regulatory capital,” Federal Reserve Board Secretary Ann Misback said in a letter to US Counsel Bancorp. Based on the facts presented by the company, the board “approved of US Bancorp’s request for full relief from its obligations,” she said.
A spokesman for US Bancorp declined to comment on the letter. Shares of the Minneapolis-based lender rose 7% to close at $34.89 on Tuesday, their biggest gain since March.
A Category II classification would have entailed stricter liquidity requirements, a stress test conducted by the company annually rather than every two years, and a more complex methodology for determining its capital requirements.
‘Very positive’
According to the Fed, US Bancorp has already taken steps to mitigate risks. This includes reducing its investment portfolio by about $30 billion and completing about $7 billion in loan sales and securitizations, as well as reducing short-term borrowing on its balance sheet, the Fed said.
The story goes on
In its decision, the central bank also cited a number of proposals it has made to tighten rules for Category III lenders, such as one that would require those lenders to include unrealized losses on their balance sheet investments in their capital ratios.
US Bancorp agreed to subject itself to a stricter regulatory regime as part of its deal with Mitsubishi UFJ Financial Group’s Union Bank. The company had previously announced that it would be able to comply with the stricter rules until the end of 2024.
“The regulatory change is very positive for US Bancorp,” RBC Capital Markets analyst Gerard Cassidy said in a note to clients. “It will give the company more flexibility in managing its balance sheet over the next two years.”
– With support from Jenny Surane.
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