# JP, Citi may not see capital benefit from new op risk rules

## Collins floor may also prevent Morgan Stanley, State Street and Wells Fargo from realising SMA savings

The capital floor imposed on internal models by US regulators could prevent five of the country’s largest banks from realising hoped-for capital savings from the switch to the new standardised measurement approach (SMA) for operational risk.

US dealers were anticipating large reductions in operational risk-weighted assets (RWAs) under the SMA – part of the revised Basel III regulatory framework, which was finalised in December. However, if the SMA were implemented today, an analysis by Risk.net suggests the so-called Collins floor would prevent five of the largest US banks – JP Morgan, Citi, Morgan Stanley, Wells Fargo and State Street – from turning these operational RWA reductions into capital savings.

The amendment, proposed by Republican senator Susan Collins of Maine and implemented by prudential regulators in 2013, requires banks to evaluate their capital adequacy against the Basel standardised methodologies for credit and market risk. Put simply, if standardised credit and market RWAs exceed the total RWAs calculated under the advanced approaches, banks are bound by the former.

“I had thought the SMA would give them some relief, but if they’re already at the floor, they will not get any relief,” says the head of operational risk at a large New York-based bank. “SMA was pushed by these banks, especially JP Morgan, to reduce required capital as opposed to the advanced measurement approach [AMA].”

Jamie Dimon, JP Morgan chief executive, wrote in his 2016 shareholder's letter that operational risk capital “should be significantly modified, if not eliminated”.

A quantitative impact study conducted by the Basel Committee suggests operational RWAs will decline by 30% in aggregate for global systemically important banks (G-Sibs). US banks were expected to see the greatest reductions as they are currently required to hold greater amounts of op risk capital under the AMA than their European peers.

As of the fourth quarter of 2017, five US banks were constrained by the Collins floor (see chart), meaning total RWAs calculated using standardised approaches exceeded total RWAs calculated using the advanced approaches. Wells Fargo did not issue exact figures for its RWA totals as of December 2017, but stated in its earnings release that its capital ratio was calculated under the standardised method.

As a result, even if one of the banks were to realise a reduction in operational RWAs under the SMA, this would not be reflected in their minimum capital requirements. None of the banks had responded to a request for comment by press time.