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Fed States Capital Requirements for Banks Amid Coronavirus Scare

Published 08/12/2020, 02:53 AM
Updated 07/09/2023, 06:31 AM

On Monday, the Federal Reserve disclosed additional capital requirements for the 34 banks that underwent the 2020 stress test, with effect from Oct 1. Given the uncertainty of how coronavirus pandemic might unfold throughout the remaining 2020, the central bank expects to combat the impact of the outbreak by ordering banks to maintain sufficient levels of capital.

Fed has determined the total common equity tier 1 ratio for individual banks, taking into consideration three components. The first is the minimum capital requirement of 4.5%, which is consistent for all the banks.

The second component is the stress capital buffer (“SCB”), which was approved in March, of 2.5% or more, based on the bank’s performance in the stress test. Deutsche Bank’s DB U.S. subsidiary is required to maintain SCB of 7.8%, the highest among all, followed by Credit Suisse (SIX:CSGN) CS, which has a SCB of 6.9%.

The third component is applicable to eight global systemically important banks. Under this, JPMorgan Chase (NYSE:JPM) JPM is required to maintain a surcharge of 3.5%, while for Morgan Stanley (NYSE:MS) MS and Citigroup C a surcharge of 3% has been applied each.

Having considered all the three, Goldman Sachs GS is required to hold most capital with CET1 ratio of 13.7%, followed by Morgan Stanley with ratio of 13.4%. Notably, KeyCorp (NYSE:KEY) KEY and Huntington Bancshares HBAN are among the 11 banks that are required to maintain minimum capital levels.

The Federal Reserve also affirmed the stress test results for five firms — BMO Financial Corporation, Capital One Financial (NYSE:COF), Citizens Financial (NYSE:CFG), Goldman Sachs and Regions Financial (NYSE:RF) — which had requested a review. Under the reconsideration process, an independent group analyzed the results and checked for any error.

Though economic uncertainty lingers due to the coronavirus outbreak; at present, banks are actively responding to every legal and regulatory pressure. In fact, this positioned banks well to encounter impending challenges. Also, entering the new capital regime will significantly improve the industry’s long-term stability and security.

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