WASHINGTON—The Federal Reserve Board has finalized new individual capital requirements for large banks, effective Oct. 1, following its annual stress test. The requirements reflect the test’s forward-looking assessment of capital adequacy and risk.
In April, the Fed proposed averaging stress test results over two years to smooth out volatility in annual capital calculations. If adopted, this year’s results would be combined with 2024’s, with updated capital requirements to be issued separately.
"As the Board continues to fulfill its commitment to reducing year-over-year volatility and increasing transparency of the stress test, the individual capital requirements announced today represent a period of transition," Vice Chair for Supervision Michelle W. Bowman said. "Finalizing the rule proposed in April would be an important next step to reducing year-over-year volatility in bank capital requirements. This would allow the Board to publish revised stress capital buffer requirements once the rule is finalized, based on averaged stress test results."
Each bank’s common equity tier 1 capital requirement is made up of several components, including:
- The minimum capital requirement, which is the same for each bank and is 4.5%
- The stress capital buffer requirement, which is based in part on the stress test results and is at least 2.5%
- If applicable, a capital surcharge for the largest and most complex banks, which is updated in the first quarter of each year to account for the overall systemic risk of each of these banks
“If a bank's capital dips below its total requirement announced today, the bank is subject to automatic restrictions on both capital distributions and discretionary bonus payments,” the Fed stated.
The Fed added that the individual capital requirements published do not include a stress capital buffer requirement for Morgan Stanley, as the firm requested reconsideration to reduce this requirement.
“The Board is reviewing the request to reduce the firm's stress capital buffer requirement and expects to make its decision and publish, by Sept. 30., Morgan Stanley's final individual capital requirement,” the Fed stated.