The U.S. Federal Reserve rolled out new capital requirements for 34 of the country’s largest banks on Monday, imposing the highest requirements on Goldman Sachs and Morgan Stanley based on stress tests conducted earlier this year.
This is the first time the Fed has given out custom capital requirements for each bank using its new “stress capital buffer,” which uses results from the supervisory stress tests to determine a firm’s capital requirements for the coming year. The new buffer was approved in March.
Every bank must have a minimum common equity tier 1 capital ratio of 4.5% and a stress capital buffer of at least 2.5%. Several global systemically important banks are also required to have a surcharge of at least 1%. The new capital requirements go into effect Oct. 1.
Goldman Sachs’s 13.7% capital requirement is a product of a 6.7% stress capital buffer and a 2.5% surcharge as a global systemically important bank. Morgan Stanley, which will have a 13.4% capital requirement, has a 5.9% stress capital buffer and a 3% surcharge.
At the end of 2019, Goldman Sachs had a CET1 ratio of 13.3%; according to the Fed’s stress test, that could fall to 6.9% in a severely stressed scenario. Morgan Stanley had a CET1 ratio of 16.4%, which the Fed said could fall to 11.1% in a severely stressed scenario.
State Street Corp. will have the lowest capital requirement of the global systemically important banks at 8% — the minimum for a systemically important bank. Wells Fargo will have the second-lowest at 9% because of a 2% systemically important surcharge, slightly higher than the minimum.
Of the non-global systemically important banks, DB USA Corp. — a subsidiary of Deutsche Bank — will have the highest capital requirement at 12.3%, and Credit Suisse will have the second-highest at 11.4%. Eleven non-systemically important institutions — including American Express, Fifth Third Bank, PNC Financial Services, Santander Holdings USA, Toronto-Dominion Bank and U.S. Bancorp, among others — will have the minimum requirement of 7%.
The Fed also said it had dismissed appeals from five firms that had requested reconsideration, including Goldman Sachs, BMO Financial Corp., Capital One, Citizens Financial Group Inc. and Regions Financial Corp. Each of the banks went through a reconsideration process, which involved an independent group analyzing and evaluating the stress test results to make sure the models worked as intended.