Following its stress tests earlier this year, this morning the Fed announced individual large bank capital requirements which will become effective on October 1.
Somewhat counterintuitively the Fed unveiled that banks without major net interest income – such as Goldman and Morgan Stanley (as well as the usual foreign suspects such as Deutsche Bank and Credit Suisse) – would face the stiffest capital demands even though it emerged in recent quarters that balance sheet and loan exposure is in fact the biggest risk the US banking system currently faces.
As shown in the table below, the capital levels determined by the Fed’s most recent stress-test process, give Goldman Sachs the highest CET1 Capital Requirement target among domestic banks, with an overall capital minimum at 13.7% of risk-weighted assets, while Morgan Stanley is second with a target of 13.4%; JPMorgan Chase, the largest U.S. bank, will need to maintain 11.3% under the standards taking effect Oct. 1. Among foreign-based lenders, Deutsche Bank AG is highest at 12.3%, with Credit Suisse Group AG at 11.4% and UBS Group AG at 11.2%.
The below table shows the total common equity tier 1, or CET1, capital requirements for each large bank, which is comprised of several components, including:
- Minimum capital requirements, which are the same for each firm and are 4.5 percent;
- The stress capital buffer, or SCB, which is determined from the stress test results, and is at least 2.5 percent; and
- If applicable, a capital surcharge for global systemically important banks, or GSIBs, which is at least 1.0 percent.
The new capital buffer applied individually to each firm’s capital demand was meant to simplify bank capital by incorporating annual stress-test performance into the industry’s day-to-day demand to maintain sufficient capital. As the Fed details, capital buffers, such as the SCB and GSIB surcharge, are different than minimum capital requirements for each firm.
As Bloomberg notes, each overall target number – such as Citigroup Inc.’s 10% – is made up of a base capital level that’s the same for every bank: 4.5%. The Fed then adds the stress capital buffer, which is based on the bank’s stress test performance. For Citigroup, that was 2.5%. And the last number is a surcharge based on a bank’s size, complexity and interconnectedness. For Citigroup, that adds another 3%.
Other totals among the largest U.S. lenders included: Bank of America Corp., 9.5%; Wells Fargo, 9%; Bank of New York Mellon Corp, 8.5%; and State Street Corp., 8%.
The Federal Reserve also said that it supports banking organizations that choose to use their capital buffers to lend to households and businesses and undertake other supportive actions in a safe and sound manner. When using their buffers, banking organizations may make capital distributions up to prescribed limits, which include automatic limitations in the capital framework, as well as any additional limitations determined by the Board.
In retrospect, this aggressive micromanagement of the US banking system by the Fed should not come as a surprise: in a world where every market is now centrally-planned by the Fed, and where covid has made debt repayments one giant question mark, US banks are now nothing more than closely controlled utilities.