Fed sets final capital requirements for large banks

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In a string of enforcement actions issued Thursday, the Federal Reserve barred one former banker from the industry for misappropriating confidential supervisory information and fined three others for misappropriating internal bank records.
Bloomberg News

WASHINGTON — The Federal Reserve Board Wednesday released individual capital requirements for large banks after incorporating results from stress tests earlier in the year

The Board also announced it would lower Goldman Sachs' capital requirements after the Board reviewed arguments that certain non-recurring expenses related to business divestitures should not influence the bank's stress test-related capital calculation.

Large banks with $100 billion or more in assets are still required to maintain a common equity tier 1 capital ratio of at least 4.5% in addition to, in some cases, a stress capital buffer and — for the largest firms — a GSIB surcharge. The new capital requirements are effective October 1, 2024. 

Deutsche Bank's US counterpart DB USA Corp. received the highest CET1 capital requirement at 18.4% — up from 13.8% in 2023 — primarily due to its exceptionally high stress capital buffer of 13.9%. 

Citigroup saw a slight drop in its CET1 requirement of 12.1%, down from 12.3% the previous year. Goldman Sachs and Morgan Stanley received CET1 requirements of 13.7% and 13.5%, respectively, up from 13% and 12.9% in 2023. JPMorgan Chase also requires a CET1 capital ratio of 12.3% up from 11.4% in 2023. The Fed also set JPMorgan's GSIB surcharge to 4.5%, up from 4.0% in 2023.

This ratio represents the core equity of a bank — comprising retained earnings and common stock — and is the highest quality of capital that regulators can require banks to retain in order to absorb initial losses.

The stress capital buffer is a capital requirement the Fed determines after considering each bank's stress test performance. The capital requirement — which must be a minimum of 2.5% — was introduced to streamline banks' funding rules by combining existing elements from stress tests and Basel III guidelines to reduce redundancy and simplify compliance for non-global systemically important banks.

For the largest and most complex banks, the GSIB surcharge adds an additional requirement ranging from 1% to 4.5%, reflecting each bank's systemic importance. This surcharge is updated annually and can be higher than international standards to address the unique risks these banks pose to the financial system.

The Federal Reserve Board adjusted Goldman's required stress capital buffer to 6.2% — down from  6.4% — effective on October 1, 2024. The action comes after the bank issued the Fed a request for reconsideration of its regulatory requirements. In a release, however, the Board says it denied the investment bank's request for an "informal hearing" on the matter, with the Board saying that there were no disputed issues requiring further discussion.

"Goldman Sachs argued that recent expenses associated with impairment of goodwill and other intangibles from business divestitures should not influence pre-provision net revenue projections of noninterest expense," a Fed letter to the firm noted.  "After consideration of the Board's stress testing policies and all relevant facts, including the information provided in the request, and consistent with the Board's regulations, the Board has determined to modify the preliminary SCB requirement provided to Goldman Sachs on June 26 from 6.4% to 6.2%."

The Fed says banks that do not meet their total capital requirements will face "automatic restrictions on both capital distributions and discretionary bonus payments."

The Federal Reserve's 2024 stress tests revealed that the largest U.S. banks are still strong enough to handle a severe economic downturn, but their capital levels had weakened compared to the previous year. All 31 banks tested kept their capital above the minimum regulatory requirements, despite facing a scenario that included a severe global recession, a sharp decline in commercial real estate and home prices, and high unemployment rates. Projected total losses rose to nearly $685 billion from $541 billion in 2023 due to higher credit card balances, increased non-investment-grade corporate lending, and rising expenses.


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