All articles tagged with #large banks
The Federal Reserve announced final individual capital requirements for large banks, effective October 1, based on stress test results, with a proposed rule to average results over two years to reduce volatility. The requirements include a minimum of 4.5%, a stress capital buffer of at least 2.5%, and potential surcharges for the largest banks. Morgan Stanley's buffer is under review, with a decision expected by September 30, 2025.
Chair Jerome Powell opened a conference on the integrated review of the capital framework for large banks, emphasizing the importance of a cohesive approach to risk-based capital requirements, leverage, surcharges, and stress tests to ensure a safe, sound, and competitive banking system, while inviting feedback for improvements.
The Federal Reserve's annual stress test indicates that large banks are well-capitalized and resilient enough to withstand a severe recession, with all tested banks remaining above minimum capital requirements despite projected losses exceeding $550 billion. The scenario, less severe than previous years, includes a global recession with significant declines in real estate and rising unemployment, but improvements in bank performance and model adjustments have contributed to the positive outlook.
U.S. financial regulators, led by the Federal Reserve, proposed reducing the enhanced supplementary leverage ratio (eSLR) for large banks, aiming to ease capital requirements and support market conditions, despite opposition from some officials and advocates concerned about financial stability.
Federal financial regulators, including the Federal Reserve, FDIC, and Office of the Comptroller of the Currency, have proposed new rules for larger banks' "living wills" and long-term debt holdings in response to the recent regional banking crisis. One proposal requires banks with $100 billion or more in assets to maintain a layer of long-term debt to enhance financial stability and facilitate the resolution of potential failures. The second proposal revises guidance for bank holding companies and foreign banks with over $250 billion in assets, focusing on areas of vulnerability in capital, liquidity, and operational capabilities. The proposals have received mixed reviews from industry trade groups, with the American Bankers Association opposing the rules and the Independent Community Bankers Association supporting the long-term debt requirement. Public comments on the proposals are due by November 30, 2023.
The Federal Reserve Board has released the results of its annual bank stress test, revealing that large banks are well positioned to withstand a severe recession and continue lending to households and businesses. All 23 banks tested remained above their minimum capital requirements, despite projected losses of $541 billion. The stress test included a severe global recession scenario with a decline in commercial real estate prices, increase in office vacancies, and decline in house prices. While large banks would experience heavy losses, they would still be able to continue lending. The stress test also explored market shocks on trading books, which showed that the largest banks' trading activities were resilient.
The recent collapse of SVB highlights the systemic risks in the US banking system, particularly the maturity mismatch between assets and liabilities at major banks. Other risks include the poor quality of corporate loans, rising delinquencies in unsecured lending, and the unreliability of the Liquidity Coverage Ratio (LCR) in a crisis situation. Large US banks with significant exposure to unsecured retail lending could become insolvent if the sector deteriorates further. The quality of corporate credit portfolios also raises questions, and the recent Credit Suisse drama highlights the risks posed by tens of trillions of dollars in derivatives on the balance and off-balance sheets of US banks.
First Republic Bank's shares have fallen more than 47%, hitting an all-time low, and trading was halted numerous times throughout the day. The bank's customers have withdrawn around $70 billion in deposits since Silicon Valley Bank's collapse, or nearly 40% of its total holdings. Despite sweeping government measures to reassure bank depositors that their money is safe, small and regional banks are still uneasy, with First Republic at the highest risk of another lethal run. Large banks have had a huge influx of customer deposits in the past week as people grew nervous about small banks' ability to safeguard their money.