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Stress Test Buffer: Fed Raises Capital Requirements For Big Banks

JPMorgan Dimon
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EDITOR NOTE: Is the Fed's stress testing just another compliance exercise, or is the Fed really trying to ensure the resilience of banks under severe risks? As we covered the topic a while ago, the conditions of the stress test were not severe enough to account for the economic effects of the COVID-19 pandemic, according to the Brookings Institution (research group). So, what are we to say about these results? What do they really mean to us in a crisis afflicted economy? Are they reliable? Many unanswered questions. One thing we do know is the capital requirements are scheduled to increase by October 1, 2020, right before the IMF has their meeting in Washington DC to discuss the role of the US Dollar in the Global Money System. Are the Fed's preparing for a worst-case meltdown of our financial system? Only time will tell...

WASHINGTON — The Federal Reserve on Monday published capital requirements for the largest banks it supervises that for the first time will incorporate a so-called stress capital buffer.

Goldman Sachs will have to comply with the highest capital requirements out of all of the 34 banks, with a common equity Tier 1 requirement of 13.7%. The new requirements will kick in Oct.1 .

The common equity Tier 1 capital requirement is made up of the minimum CET1 capital ratio of 4.5%, which applies to each of the 34 banks, combined with the stress capital buffer requirement and, if applicable, a surcharge for the eight U.S.-based global systemically important banks.

The stress capital buffer — which the Fed finalized in March — is calculated as the difference between a bank’s starting and projected capital ratios under the “severely adverse” stress test scenario. The buffer also factors in a bank's common stock dividends as a percentage of risk-weighted assets.

Goldman Sachs will have to comply with the highest capital requirements out of all of the 34 banks, with a common equity Tier 1 requirement of 13.7%.

Goldman Sachs will have to comply with the highest capital requirements out of all of the 34 banks, with a common equity Tier 1 requirement of 13.7%.  Bloomberg News

 

Morgan Stanley will be required to comply with the second-highest capital requirements after Goldman Sachs with a CET1 requirement of 13.4%. DB USA, an affiliate of Deutsche Bank, has the highest capital requirement among non-U.S. GSIBs at 12.3%.

The lowest capital requirements are 7% for American Express, DWS USA (another arm of Deutsche Bank), Fifth Third Bancorp, Huntington Bancshares, KeyCorp, M&T Bank, Northern Trust, PNC Financial Services Group, Santander Holdings USA, TD Group and U.S. Bancorp.

State Street Corp. has the lowest capital requirements out of the eight GSIBs at 8%, followed by Wells Fargo at 9%.

However, the final capital requirements could be subject to change. The Fed is conducting a midcycle stress test this year due to the coronavirus pandemic, and it has left open the possibility that a firm’s stress capital buffer could be recalculated based on the results of the second round of stress tests.

Although the midcycle stress tests will likely not be conducted before the capital requirements are set to take effect Oct. 1, the Fed could update a firm's stress capital buffer requirement and require a firm to comply with a new requirement at a later date.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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