U.S. Bank Bancorp pledges to shrink to avoid additional scrutiny by the Federal Reserve

(Bloomberg) — U.S. Bancorp promised federal regulators that it would shrink its balance sheet and reduce risk, a move that frees it from tougher regulations.

Most read from Bloomberg

The nation’s largest regional bank said in a regulatory filing that it has received approval from the Federal Reserve to retain its classification as a Category 3 bank. This means they face less costly and time-consuming regulations.

The promises to trim itself came after the bank, which had $665 billion in assets as of Sept. 30, spent months preparing to comply with rules associated with becoming a so-called Class II bank, a designation given to lenders with more than $700 in capital. Billion dollars in assets.

“US Bancorp represents that it expects to take further actions to reduce anticipated risks, including further net reductions in assets and increases in regulatory capital,” Federal Reserve Board Secretary Anne Misback said in a letter to U.S. Bancorp’s lawyers. It said that based on the facts presented by the company, “the Board of Directors approved U.S. Bancorp’s request for complete relief from the liabilities.”

A US Bancorp spokesman declined to comment on the letter. Shares of the Minneapolis-based bank rose 7% to close Tuesday at $34.89, the biggest gain since March.

A Category 2 rating would have brought stricter liquidity requirements, an annual rather than biennial stress test administered by the company, and a more complex methodology for determining capital requirements.

‘Very positive’

US Bancorp has already taken steps to reduce risks, according to the Federal Reserve. This includes reducing its investment portfolio by about $30 billion and completing loan sales and securitizations worth about $7 billion, while reducing short-term borrowing on its balance sheet, the Fed said.

The story continues

In its decision, the central bank also cited a series of proposals it has put forward that would tighten rules for Tier 3 lenders, such as one that would require such lenders to include unrealized losses on their balance sheet investments in their capital ratios.

US Bancorp has agreed to undergo a tougher regulatory regime as part of its deal for Mitsubishi UFJ Financial Group’s Union Bank. It previously said it would be able to adhere to the stricter rules by the end of 2024.

“The regulatory change is very positive for US Bancorp,” Gerard Cassidy, an analyst at RBC Capital Markets, said in a note to clients. “It will give the company greater flexibility in managing its balance sheet over the next two years.”

–With assistance from Jenny Soran.

Most read from Bloomberg Businessweek

©2023 Bloomberg L.P