Federal Reserve Board announces final individual capital requirements for all large banks, effective on October 1

Following its stress test earlier this year, the Federal Reserve Board on Wednesday announced final individual capital requirements for all large banks, effective on October 1.

Large bank capital requirements are informed by the Board's stress test results, which provide a risk-sensitive and forward-looking assessment of capital needs. The table shows each bank's common equity tier 1 capital requirement, which is made up of several components, including:
• The minimum capital requirement, which is the same for each bank and is 4.5 percent.
• The stress capital buffer requirement, which is based in part on the stress test results and is at least 2.5 percent; and
• 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.

Also today, the Board announced that it had modified the stress capital buffer requirement for Goldman Sachs, after the firm's request for reconsideration. Based on an analysis of additional information presented by the firm in its request, the Board determined it would be appropriate to adjust the treatment of particular historical expenses incurred by the bank in the stress testing models' input data, due to the non-recurring nature of those expenses. As a result, the bank's stress capital buffer requirement has been adjusted to 6.2 percent from a preliminary 6.4 percent.

The Board is focused on continuously improving the stress testing framework. To that end, the Board will analyze whether to revise regulatory reporting forms to better capture these types of data and to explore possible refinements to certain model components.

🟢 Federal Reserve Board - Federal Reserve Board announces final individual capital requirements for all large banks, effective on October 1

⚡This is a Press Release from the Federal Reserve announcing the new capital requirements for large banks. This is in response to the Stress Tests earlier this year. We wrote about these tests earlier in the year. These tests are done YEARLY in compliance with the Dodd-Frank Act of 2010. These capital requirements can also change yearly. While the capital requirements do fall under the Basel 3 accords, they are not part of the FINAL GUIDELINES that we STILL need in order to be compliant. Those guidelines are STILL in the Rule making phase. This was confirmed in earlier articles written here in this channel.

GOLDILOCKS can't seem to get it right

⚡Basel III is a comprehensive set of reforms developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-2009. These reforms aim to strengthen the regulation, supervision, and risk management of banks. The adjustments to capital requirements, such as those announced by the Federal Reserve Board, align with Basel III’s goals to enhance the banking sector’s ability to absorb shocks from financial and economic stress. This includes measures like stress testing, which helps ensure that banks maintain sufficient capital buffers to withstand adverse condition. Stress tests conducted next year could indeed change the capital requirements for banks. Stress tests are designed to assess whether banks have enough capital to withstand adverse economic conditions. If a bank’s stress test results reveal capital deficiencies or vulnerabilities, regulatory authorities may require the bank to increase its capital buffers to ensure it can absorb potential losses.

For example, the Federal Reserve uses stress tests to set the stress capital buffer (SCB) requirement, which integrates stress test results with non-stress capital requirements into a forward-looking and risk-sensitive framework. Changes in economic conditions or the bank’s financial health could lead to adjustments in these requirements. Stress tests for banks are typically conducted annually by the Federal Reserve. These tests are designed to ensure that large banks have enough capital to withstand economic downturns and continue lending to households and businesses.

Additionally, some banks may be required to conduct stress tests every other year, depending on their size and regulatory requirements. So, as we can see, this is not the FINAL RULE for Basel 3 guidelines in this country, and while the premise aligns with the Basel 3 framework, their actual legislation falls under the reforms post 2008 financial crisis, specifically, the Dodd-Frank Act of 2010. GOLDILOCKS is wrong again.

🟢 https://www.bis.org/fsi/fsisummaries/imp_basel3.htm

🟢 https://www.bis.org/bcbs/basel3.htm

🟢 https://www.wallstreetoasis.com/resources/skills/finance/bank-stress-test

🟢 https://www.brookings.edu/articles/understanding-the-effects-of-bank-stress-tests-a-qa/

🟢 https://www.federalregister.gov/documents/2019/10/10/2019-21843/amendments-to-the-stress-testing-rule-for-national-banks-and-federal-savings-associations