New requirements take effect in October
The Federal Reserve Board has released its final individual capital requirements for all large banks, set to take effect on October 1.
These requirements are based on the results of the annual stress test, which assesses the banks’ ability to withstand a severe economic downturn.
The requirements are composed of several elements, including a minimum capital requirement of 4.5% for all banks, a stress capital buffer requirement of at least 2.5% based partly on stress test results, and, for the largest and most complex banks, a capital surcharge updated annually to account for each bank’s overall systemic risk.
If a bank’s capital falls below its total requirement, it will face automatic restrictions on capital distributions and discretionary bonus payments.
The Fed also announced a modification to Goldman Sachs’ capital buffer. After the bank requested a review, the Fed agreed to lower its stress capital buffer requirement from 6.4% to 6.2%, taking into account certain one-time expenses that the bank argued should not have impacted its stress test results.
The Federal Reserve emphasized its commitment to refining the stress testing process. “The Board is focused on continuously improving the stress testing framework,” the Fed noted, hinting at future adjustments to better capture the nuances of bank operations in their models.
The stress test results, released last month, revealed that while large banks could face steeper losses in a hypothetical severe recession, they remain well-capitalized overall.
The test projected nearly $685 billion in losses across 31 banks, driven by a scenario that included a deep global recession, a 40% drop in commercial real estate prices, and an unemployment rate surging to 10%. Despite this, all banks maintained capital above the required minimum.
“While the severity of this year’s stress test is similar to last year’s, the test resulted in higher losses because bank balance sheets are somewhat riskier and expenses are higher,” said Michael Barr, vice chair for supervision. “The goal of our test is to help ensure that banks have enough capital to absorb losses in a highly stressful scenario. This test shows that they do.”
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