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Big banks are under pressure from higher capital buffers


Big bank executives may be less inclined to argue about regulation than they were in the recent past, but one particular government restriction now has their undivided attention.

On a recent earnings call, one prominent executive expressed frustration with the higher capital requirements that many large and regional banks are likely to have to meet following the Federal Reserve’s latest stress tests.

Commenting on the stressed capital buffer, an extra layer of cushion introduced in 2020, JPMorgan Chase CEO Jamie Dimon gave a typically scathing assessment.

“It’s a terrible way to run the financial system,” he said.

JPMorgan Chase CEO Jamie Dimon (left), Citigroup CEO Jane Fraser (top right) and Bank of America CEO Brian Moynihan (bottom right) recently discussed the implications of higher capital buffers for their banks.


JPMorgan and many other big banks are expected to increase their stressed capital buffers on October 1. The new standard will generally increase the amount of capital banks must hold to stay solvent and protect themselves against potential economic crises in the coming year.

Some banks have announced their expected capital buffers for stress. JPMorgan said it expects its buffer to rise from 3.2% to 4.0%. Other banks expect even bigger increases. The Fed is expected to release final numbers this summer.

Bankers and observers had expected higher capital requirements given that this year’s stress tests were tougher than those used in 2021. But the projected year-over-year changes at some of the big banks were bigger than some experts had expected. And they generated a lot of conversation during the bank’s earnings calls this month.

“One hundred basis points is a lot,” said Francisco Covas, head of research at the Banking Policy Institute, which represents big banks, before noting that some banks had suspended share buybacks to meet the new requirements.

“This highlights that the volatility of capital requirements has real economic consequences,” Kovas said.

The Fed develops new stress test scenarios every year. They are designed to be counter-cyclical, meaning they are less rigid during periods of economic hardship. But in general, the central bank has sought to make the tests more and more complex. The effort has become a point of frustration for banks, which are seeing capital requirements increase even as they pass the test with relative ease.

This year, all 33 banks tested survived the Fed’s scenario without coming close to their minimum capital ratios. However, many of them will have to increase their stressed capital next year. Banks’ concern is that these increases will continue until they become a mandatory limit.

When the stress capital buffer was introduced two years ago, most banks were “supportive” of it, partly because “it made some aspects of the regime less complex and more transparent,” said Sean Campbell, chief economist and head of research at the Financial Services Forum. a trade organization whose members are the CEOs of eight of the country’s largest banks.

But the buffer has been criticized for being too volatile and inconsistent with banks’ assessment of their own risks, Campbell said. He also noted that banks generally want more transparency around stress tests.

On Friday, one regional bank asked the Fed to review its capital buffer for stress. In a regulatory filing, Columbus, Ohio-based Huntington Bancshares said it has sent a request to the agency to reassess the “indicative” 3.3% buffer associated with the bank’s latest capital plan.

Huntington, whose stressed capital buffer currently stands at 2.5%, said he expects the Fed to make a decision sometime before Aug. 31.

Citigroup, which expects its capital buffer for stress to rise from 3% to 4%, has halted share buybacks for now. But during Citi’s latest earnings report, there was little indication that the megabank would do much with its balance sheet.

“Obviously we’re not in control of the regulatory capital system, but we’re not dealing with short-term shifts” in the stressed capital buffer, CEO Jane Fraser said July 15 at the $2.4 trillion-assets company. salary call.

“As you know, banks experience significant volatility [stress capital buffer] every year. It very much depends on the script chosen.’

Bank of America’s stressed capital buffer is expected to rise about 100 basis points above its current level of 2.5%. Plans are underway to raise capital to meet higher demands, CEO Brian Moynihan said during the company’s conference call in Charlotte, North Carolina, on July 18. salary call.

Goldman Sachs, meanwhile, expects its stressed capital buffer to decline this fall, apparently due to actions taken by the bank to comply. Goldman said in a June 27 press release that it expects the new buffer to be 6.3%, compared with the current 6.4%.

The New York bank has tried to reduce the size of its balance sheet over time by cutting some private equity investments to lower capital requirements.

“I think the step forward we’ve made in the stress test shows that we’ll hopefully make other steps forward in future tests as we continue to change that mix,” CEO David Solomon said during the company’s July 18 earnings call.

JPMorgan, the nation’s largest bank by assets, is already taking steps to raise capital and is considering more such moves.

The $3.8 billion-asset bank has temporarily suspended share buybacks. It cut risk-weighted assets in the second quarter and may take similar steps in the third quarter, Dimon said during salary call.

In addition, JPMorgan is likely to “reduce mortgages” and other loans that contributed to the buffer, he said.

“So we will manage the balance sheet, get good returns,” he said. “It doesn’t bother me. We just want to get there right away. I don’t want to sit and hang around.”

Dimon did not hold back in his assessment of the stress tests. He called them “contradictory”, “too volatile”, “mostly capricious” and “arbitrary”.

Kyle Campbell contributed to this report.

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