The Federal Reserve has announced new capital requirements for the largest banks in the United States, following its annual stress tests. These requirements dictate the minimum equity banks must maintain in order to absorb potential losses during economic downturns. Effective from October 1, 2023, the updated regulations consist of a 4.5% minimum equity requirement, a stress capital buffer of at least 2.5%, and additional surcharges for the most systemically important institutions.
In a statement, Michelle Bowman, the Fed’s Vice Chair for Supervision, noted that these new requirements come during a “period of transition” for the Fed’s stress testing framework. The central bank is finalizing a rule that would average test results over a two-year period to better calculate stress capital buffers.
Key Changes in Capital Requirements
The 2023 stress tests revealed a mix of stability and significant changes among various banks. Notably, the capital requirement for Deutsche Bank’s U.S. unit has decreased to 16%, down from 18.4% last year, yet remains higher than its 13.8% ratio in 2023. Similarly, Citigroup‘s requirement has softened slightly to 11.6% from 12.1% in 2024 and 12.3% in the previous year.
In contrast, JPMorgan Chase‘s requirement has remained consistent at 11.5% for 2025, similar to previous years. Goldman Sachs has seen a notable reduction in its common equity Tier 1 (CET1) requirement, which has dropped to 10.9% from 13.7% last year after adjustments to its stress capital buffer.
One significant aspect of this year’s testing process is the decision to withhold a final requirement for Morgan Stanley, which is currently seeking to reduce its stress capital buffer. A decision regarding this request is expected by September 30, 2023.
Performance Highlights of the Stress Tests
The annual stress tests subject banks with assets surpassing $100 billion to simulated recession scenarios. These tests estimate potential losses in revenue and the costs incurred, alongside assessing their capital levels under these adverse conditions. This year, U.S. banks achieved their best performance since the current testing protocols were established, with common equity Tier 1 capital projected to decline by only 1.8% in the most severe scenarios. This marks an improvement from a 2.8% drop recorded last year and represents the lowest loss rate since 2020. Notably, no banks failed under this year’s simulations.
Bowman emphasized the Fed’s commitment to enhancing the clarity and stability of capital requirements. She stated that finalizing the proposed rule from April would be crucial in reducing volatility in annual capital requirements. This move would facilitate the publication of updated stress capital buffer requirements based on averaged stress test results once the rule is finalized.
While some Fed governors, including Michael Barr, support reforming the stress tests, they express concerns about potentially weakening them. Barr advocates for maintaining rigorous testing standards while increasing minimum capital requirements and applying supervisory discretion to address risks unique to specific banks. He has cautioned that proposed changes could undermine the effectiveness of stress tests and hinder the Fed’s ability to evaluate the resilience of major financial institutions.
As the Federal Reserve navigates these updates, the impact on the banking sector and the broader economy will be closely monitored by regulators, investors, and industry stakeholders.
